XOTC:RTAS Redtone Asia, Inc. Quarterly Report 10-Q Filing - 10/10/2012

Effective Date 10/10/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: August 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 No. 333-129388

REDTONE ASIA, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
 
Nevada
(State or Other Jurisdiction of
Incorporation or Organization)
 
71-098116
(I.R.S. Tax I.D. No.)
Unit 15A, Plaza Sanhe, No. 121 Yanping Road, JingAn District 200042 Shanghai, PRC
(Address of Principal Executive Offices)
 
(86) 61032230
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 Non-accelerated filer  o
 
Accelerated filer  o
(do not check if smaller reporting company)
 Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 31, 2012, are as follows:
   
Class of Securities
Shares Outstanding
Common Stock, $0.0001 par value
282,315,325

Transitional Small Business Disclosure Format (check one): Yes o       No  x


 
 

 
 

REDtone Asia, Inc.
(Previously known as Hotgate Technology, Inc.)

TABLE OF CONTENTS
 
 

 
 

 

 
PART I – FINANCIAL INFORMATION

 
ITEM 1.   FINANCIAL STATEMENTS

REDtone Asia, Inc.
(Previously known as Hotgate Technology, Inc.)

As of Quarter Ended August 31, 2012 (unaudited)

TABLE OF CONTENTS

Condensed Consolidated Balance Sheet as of August 31, 2012 (unaudited) and May 31, 2012 (Audited)
3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three months ended August 31, 2012 and August 312011 (unaudited)
4
Condensed Consolidated Statement of Cash Flows (unaudited) for the Three months ended August 31, 2012 and August 312011
5
Notes to the Condensed Consolidated Financial Statements (unaudited)
6–13

 
 
2

 


REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


   
August 31, 2012
   
May 31, 2012
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
3,250,611
   
$
3,520,248
 
Inventories
   
22,627
     
18,385
 
Accounts receivable
   
938,225
     
633,009
 
Tax recoverable
   
22,754
     
22,755
 
Other receivables and deposits
   
437,399
     
383,443
 
Total current assets
   
4,671,616
     
4,577,840
 
                 
Property, plant and equipment, net
   
2,207,286
     
2,367,320
 
Intangible assets, net
   
1,652,737
     
1,680,972
 
Available-for-sale investment
   
315,676
     
315,689
 
Amount due from a related company
   
3,338,275
     
3,261,155
 
Goodwill
   
610,386
     
610,386
 
                 
Total assets
 
$
12,795,976
   
$
12,813,362
 
                 
Liabilities and stockholders’ equity
               
Liabilities
               
Current Liabilities
               
Deferred income
 
$
1,054,510
   
$
1,423,566
 
Accounts payable
   
1,121,512
     
715,078
 
Accrued expenses and other payables
   
571,158
     
576,331
 
Amount due to a related company
   
77,181
     
77,128
 
Taxes payable
   
490,001
     
450,700
 
Total current liabilities
   
3,314,362
     
3,242,803
 
                 
Deferred tax liabilities
   
30,016
     
33,604
 
 
               
Total liabilities
   
3,344,378
     
3,276,407
 
                 
Stockholders’ equity
               
Common stock, US$0.0001 par value , 300,000,000 shares authorized; 282,315,325 shares issued and outstanding
   
28,232
     
28,232
 
Additional paid in capital
   
7,726,893
     
7,726,893
 
Retained earnings
   
958,131
     
1,045,811
 
Accumulated other comprehensive income
   
738,342
     
736,019
 
                 
Total stockholders’ equity
   
9,451,598
     
9,536,955
 
                 
Total liabilities and stockholders’ equity
 
$
12,795,976
   
$
12,813,362
 
                 

See accompanying notes to the condensed consolidated financial statements.
 
 
 
3

 


REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)


   
Three months ended
August 31, 2012
   
Three months ended
August 31,
2011
 
             
Revenue
 
$
2,101,395
   
$
1,153,692
 
Other income and gains
   
17,582
     
37,688
 
Service costs
   
(1,461,609)
     
(439,867)
 
Administrative expenses
   
(315,852)
     
(285,317)
 
Personnel cost
   
(224,350)
     
(259,225)
 
Depreciation expense
   
(161,054)
     
(161,333)
 
Amortization expense
   
(29,544)
     
(29,403)
 
 
               
(Loss)/income before provision for income taxes
   
(73,432)
     
16,235
 
                 
Provision for income taxes
   
(14,248)
     
(48,845)
 
                 
Net loss for the period
 
$
(87,680)
   
$
(32,610)
 
                 
Other comprehensive income
               
Gain on foreign currency translation
   
2,323
     
83,398
 
                 
Total comprehensive (loss)/ income
 
$
(85,357)
   
$
50,788
 
                 
Net income per share, basic and diluted
 
$
0.00
   
$
0.00
 
                 
Weighted average number of shares
   
282,315,325
     
282,315,325
 
                 

See accompanying notes to the condensed consolidated financial statements.


 
4

 


REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


             
   
Three months ended August 31, 2012
   
Three months ended August 31, 2011
 
             
Cash flows from operating activities
           
Net loss for the period
 
$
(87,680)
   
$
(32,610)
 
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
               
Deferred tax
   
(3,598)
     
  (3,281)
 
Amortization expense
   
29,544
     
29,403
 
Depreciation expense
   
161,054
     
161,333
 
Loss on property, plant & equipment written-off
   
154
     
-
 
                 
Changes in operating assets and liabilities:
               
(Increase)/decrease in accounts receivable
   
(305,216)
     
453,382
 
                 
Increase in inventories
   
(4,242)
     
(21)
 
(Increase)/decrease in other receivables and deposits
   
(53,956)
     
136,708
 
Decrease in tax recoverable
   
1
     
61,532
 
(Decrease)/increase in deferred income
   
(369,056)
     
526,727
 
Increase/(decrease) in accounts payable
   
406,434
     
(767,142)
 
Increase in taxes payable
   
39,301
     
38,497
 
Decrease in accrued liabilities and other payables
   
(5,173)
     
(243,434)
 
 
               
Net cash (used in)/provided by operating activities
 
$
(192,433)
     
361,094
 
 
               
Cash flows from investing activities
               
Purchase of property, plant and equipment
   
(742)
     
(61,876)
 
Purchase of available-for-sale investment
   
-
     
(319,115)
 
Increase in amount due from a related company
   
(77,120)
     
(580,174)
 
                 
Net cash used in investing activities
 
$
(77,862)
     
(961,165)
 
 
               
Cash flows from financing activities
               
Increase/(decrease) in amount due to related companies
   
53
     
(34,826)
 
                 
Net cash provided by/(used in) financing activities
 
$
53
     
(34,826)
 
                 
Net decrease in cash and cash equivalents
   
(270,242)
     
(634,897)
 
 
               
Effect of exchange rate changes on cash and cash equivalents
   
605
     
95,373
 
 
               
Cash and cash equivalents at beginning of period
   
3,520,248
     
4,580,189
 
 
               
Cash and cash equivalents at end of period
 
$
3,250,611
     
4,040,665
 
 
               
Cash paid for interest
 
$
--
     
--
 
Cash paid for income taxes
   
1,590
     
2,217
 
 
               


See accompanying notes to the condensed consolidated financial statements.


 
5

 

REDTONE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 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.

On March 25, 2011, Hotgate Technology, Inc. changed its name from Hotgate Technology, Inc. to REDtone Asia, Inc. and has a trading symbol on the OTCBB as “RTAS.”

As of August 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 (“Nantong Jiatong”)
 
 
The PRC
May 17, 2011
 
100%#
 
Investment holding
             
Shanghai QianYue Business Administration Co., Ltd. (“QBA”)
 
The PRC
December 12, 2008
 
100%#
 
Provides prepaid shopping-card services in the PRC
             

# - Variable interest entities. See also Footnote 14.


 
6

 
 
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the three months ended August 31, 2012 and August 31, 2011 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the following disclosures are adequate to make the information presented not misleading. All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is in Chinese Renminbi (“RMB”), while the reporting currency is U.S. Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position as of August 31, 2012, the results of its operations and cash flows for the three months ended August 31, 2012 and August 31, 2011.



The results of operations for the three months ended August 31, 2012 are not necessarily indicative of the results for a full year period.


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash and Cash Equivalents

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

(b) Fair Value of Financial Instruments

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

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

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

(c) Revenue recognition

The Company has adopted a revenue recognition policy for each type of operation according to ASC 605-45.

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

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


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

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

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

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

 
 
7

 


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


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

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

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


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


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


(d) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of August 31, 2012 and August 31, 2011, there were no dilutive securities outstanding.

(e) Foreign currency translation

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


 
August 31, 2012
 
May 31, 2012
 
August 31, 2011
Year end RMB : US$ exchange rate
0.1578
 
0.1578
 
0.1544
Average yearly RMB : US$ exchange rate
0.1584
 
0.1585
 
0.1567
Year end HK$ : US$ exchange rate
0.1289
 
0.1288
 
0.1283
Average yearly HK$ : US$ exchange rate
0.1289
 
0.1288
 
0.1283

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.


 
8

 

 
(f) Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

 
-
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
 
-
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
-
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.


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

(g) Recent Accounting Pronouncements

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

 
NOTE 4 – CASH & CASH EQUIVALENTS

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

   
August 31, 2012
   
May 31, 2012
 
             
Cash and bank
 
$
931,970
   
$
868,462
 
Fixed deposits
   
2,318,641
     
2,651,786
 
Total
 
$
3,250,611
   
$
3,520,248
 
                 
As of the balance sheet dates, the fixed 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:

   
August 31,2012
   
May 31, 2012
 
             
Investment in trust funds
 
$
315,676
   
$
315,689
 
Total
 
$
315,676
   
$
315,689
 
                 

 
 
9

 

 
NOTE 6 –OTHER RECEIVABLES AND DEPOSITS

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

   
August 31,2012
   
May 31, 2012
 
             
Deposits
 
$
181,503
   
$
117,718
 
Other receivables
   
255,896
     
265,725
 
Total
 
$
437,399
   
$
383,443
 
                 
 
 
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

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

   
August 31, 2012
   
May 31, 2012
 
At cost:
           
Computer and software
 
$
553,658
   
$
553,680
 
Telecommunication equipment
   
4,895,410
     
4,895,607
 
Furniture, fixtures and equipment
   
212,905
     
213,144
 
Motor vehicles
   
32,515
     
32,516
 
Leasehold improvement
   
34,660
     
33,912
 
     
5,729,148
     
5,728,859
 
                 
Less: Accumulated depreciation
   
(3,521,862)
     
(3,361,539)
 
Property, plant and equipment, net
 
$
2,207,286
   
$
2,367,320
 
                 
Depreciation expense for the three months ended August 31, 2012 and August 31, 2011 amounted to $161,054 and $161,333, 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:

   
August 31, 2012
   
May 31, 2012
 
At cost:
           
Licenses and software
 
$
2,280,194
   
$
2,278,425
 
Less: Accumulated amortization
   
(627,457)
     
(597,453)
 
Intangible assets, net
 
$
1,652,737
   
$
1,680,972
 
                 
Amortization expense for the three months ended August 31, 2012 and August 31, 2011 amounted to $29,544 and $29,403, 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 reverse acquisition by Redtone Asia, Inc., Redtone Technology Sdn. Bhd. is now a related company of Redtone Asia, both of which are subsidiaries of penultimate holding company by the name of Redtone International Berhad.

 
 
10

 

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

   
August 31, 2012
   
May 31, 2012
 
Fellow subsidiary:
           
REDtone Technology Sdn. Bhd.
 
$
3,338,275
   
$
3,261,155
 
   
$
3,338,275
   
$
3,261,155
 
                 

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 are summarized as follows:

   
August 31, 2012
   
May 31, 2012
 
Fellow subsidiary:
           
Redtone Telecommunications Sdn Bhd
 
$
77,181
   
$
77,128
 
   
$
77,181
   
$
77,128
 
                 

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 are summarized as follows:

   
August 31,2012
   
May 31, 2012
 
Accrued expenses
 
$
346,883
   
$
373,129
 
Other payables
   
224,275
     
203,202
 
Total
 
$
571,158
   
$
576,331
 
                 
                 
 
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 and recorded as revenue in 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:

   
August 31, 2012
   
May 31, 2012
 
             
Business tax payable
 
$
170,184
   
$
166,612
 
Income tax payable
   
300,072
     
283,880
 
Others
   
19,745
     
208
 
Total
 
$
490,001
   
$
450,700
 
                 
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.


 
11

 
 
 
NOTE 13 – PROVISION FOR INCOME TAXES

Income tax expense for the three months ended August 31, 2012 and August 31, 2011 are summarized as follows:

   
Three months ended August 31, 2012
   
Three months ended August 31, 2011
 
             
                 
                 
                 
                 
                 
Current – PRC income tax provision
   
17,846
     
52,126
 
Deferred income tax (income)/ provision
 
$
(3,598)
   
$
(3,281)
 
                 
                 
                 
Total
 
$
14,248
   
$
48,845
 
                 

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

   
Three months ended August 31, 2012
   
Three months ended August 31, 2011
 
             
             
                 
                 
                 
                 
                 
Income before provision for income taxes
   
(73,432)
     
16,235
 
                 
Expected PRC income tax expense at statutory tax rate of 25%
 
$
(18,358)
   
$
4,059
 
Different tax rate for PRC/Hong Kong local authority
   
1,708
     
(11,995)
 
Expenses not deductible for tax
   
1,653
     
12,931
 
Utilization of tax loss brought forward
   
-
     
(15,388)
 
Tax loss not provided for deferred tax
   
29,245
     
 59,238
 
                 
                 
                 
Total
 
$
14,248
   
$
48,845
 
                 
 (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.
 
 
 
12

 

 
NOTE 14 – VARIABLE INTEREST ENTITIES (“VIEs”)

During three months ended August 31, 2012, Nantong Jiatong, Hongsheng, Huitong, QBA and Jiamao were VIEs of the Company.

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

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

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

   
August 31, 2012
   
May 31, 2012
 
Assets
           
Cash and cash equivalents
 
$
2,197,038
   
$
3,466,743
 
Inventories
   
22,627
     
18,385
 
Accounts receivable
   
938,225
     
633,009
 
Tax recoverable
   
22,754
     
22,755
 
Other receivables and deposits
   
289,714
     
237,490
 
Goodwill
   
610,386
     
610,386
 
Property, plant and equipment, net
   
400,547
     
454,875
 
Total assets (not include amount due from intra-group companies)
 
$
4,481,291
   
$
5,443,643
 
                 
 
 
Liabilities
               
Deferred income
 
$
1,072,169
   
$
1,441,347
 
Accounts payable
   
1,101,045
     
694,626
 
Accrued expenses and other payables
   
454,989
     
467,2465
 
Tax payables
   
59,553
     
44,424
 
Total liabilities
 
$
2,686,756
   
$
2,647,643
 
                 

The statements of income of the consolidated VIEs for the three months ended August 31, 2012 and August 31, 2011 are as follows, and are included in the consolidated statements of income of the Company:

   
Three months ended August 31, 2012
   
Three months ended August 31, 2011
 
             
Revenue
 
$
1,961,932
   
$
963,045
 
Other income and gains
   
(3,071)
     
19,663
 
Service costs
   
(1,460,892)
     
(365,126)
 
Administrative and other expenses
   
(134,617)
     
(234,347)
 
Personnel cost
   
(181,555)
     
(229,031)
 
Depreciation expense
   
(55,049)
     
(54,429)
 
                 
Income before provision for income taxes (Not including service costs payable to intra-group companies)
   
126,748
     
99,775
 
Provision for income taxes
   
(3,303)
     
(2,266)
 
Net income
 
$
123,445
   
$
97,509
 
                 


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. As of the balance sheet dates, 282,315,325 shares were issued and outstanding, respectively

 
 
13

 

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

 
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “REDtone believes,” “management believes” and similar language. The forward-looking statements are based on the current expectations of RTAS and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
 
Investors are also advised to refer to the information in our filings with the Securities and Exchange Commission, specifically Forms 10-KSB, 10-QSB and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.
 
Except as otherwise indicated by the context, references in this Form 10-Q to “RTAS,” “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to REDtone Asia, Inc., a Nevada corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “RM” are to Malaysian Ringgit; (vi) “Securities Act” are to the Securities Act of 1933, as amended; and (vii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.
 

Business Overview

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


 
14

 
 
 
Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“US GAAP”). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company has adopted a revenue recognition policy for each type of operation according to ASC 605-45.

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

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


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

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

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

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

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


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

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

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

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

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


Recent Accounting Pronouncements

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

 
 
15

 


Year-to-date Results of Operations

Year-to-date Results for Three-month period ended August 31, 2012 as Compared to period ended August 31, 2011

The following table summarizes the results of our operations during the three-month periods ended August 31, 2012 and August 312011, and associated percentage changes for comparisons purposes.

   
Three months ended
             
 
 
August 31, 2012
   
August 31, 2011
      +/-    
% changes
 
                           
Revenue
  $ 2,101,395     $ 1,153,692       947,703       82 %
                                 
Other income and gains
    17,582       37,688       (20,106 )     (53 %)
                                 
Service costs
    (1,461,609 )     (439,867 )     1,021,742       232 %
                                 
Personnel cost
    (224,350 )     (259,225 )     (34,875 )     (13 %)
                                 
Depreciation expense
    (161,054 )     (161,333 )     (279 )     0 %
                                 
Amortization expense
    (29,544 )     (29,403 )     141       3 %
                                 
Administrative and other expenses
    (315,852 )     (285,317 )     30,535       11 %
   
 
   
 
                 
(Loss)/ Income before provision for income taxes
    (73,432 )     16,235       (89,667 )     (552 %)
                                 
Provision for income taxes
    (14,248 )     (48,845 )     (34,597 )     (71 %)
                                 
Net loss
  $ (87,680 )   $ (32,610 )     55,070       169 %


Revenues

The Company generated revenue of $2,101,395 in the first 3 months of the fiscal year ending May 31, 2013, representing an 82% increase as compared with the preceding year’s corresponding quarters. The increase is mainly due to new settlement basis with key partner China Tie Tong (“CTT”) in the consumer call business.  With the new settlement basis, the Company is further charging server equipment rental cost and commission to CTT.


Service Costs
 
Service costs increased by $1,021,742 or 232% in the first three months in fiscal year 2013. The increase margin is higher due to we have not optimized our cost structures, we therefore have to incur some sunk costs which cannot be avoided.


 
16

 

 
Personnel costs
 
Personnel expenses totaled $224,350, representing a 13% reduced or $34,875 as compared to the preceding year’s corresponding quarters.  The reduced is mainly due to exclusion of headcount in JiaMao. The said company has ceased its operation in May 2012.


Amortization and depreciation expenses
 
Amortization and depreciation expenses totaled $190,598, consistent to the preceding year’s corresponding quarter.


Administrative and other expenses
 
General and administrative expenses totaled $315,852 representing an increase of 11% or $30,535 as compared to the preceding year’s corresponding quarters. The increase is mainly due to higher entertainment and business development expenses in order to secure the newly developed business.  


 Income before provision for income tax
 
Loss before provision for income tax totaled $73,432, representing a 552% decreased as compared to the preceding year’s corresponding quarters. This decrease is mainly due to an increase in service costs and higher operating expenses in the current quarter.


Provision for taxes

Provision for taxes made for the first three months was $14,248 due to lower operating profit for the current quarter.

 
 
17

 

 
Liquidity and Capital Resources
 
Cash
 
Our cash balance at August 31, 2012 was $3,250,611, representing a decrease of $269,637 compared to our cash balance of $3,520,248 at May 31, 2012.

Cash Flow

   
Three months ended August 31,
             
 
 
August 31, 2012
   
August 31, 2011
      +/-    
% Changes
 
Net cash provided by operating activities
  $ (192,433 )   $ 361,094       (553,527 )     N/A  
Net cash used in investing activities
  $ (77,862 )   $ (961,165 )     883,303       92 %
Net cash used in financing activities
  $ 53     $ (34,826 )     34,879       N/A  
Net (decrease)/increase in cash and cash equivalents
    (270,242 )     (634,897 )     364,655       57 %
       
             

Cash outflows from operations during the three months ended August 31, 2012 amounted to $192,433 as compared to cash inflow of $361,094 in the same period of 2011.
 
Our cash outflows in investing activities during the three months ended August 31, 2012 amounted to $77,862 as compared to cash outflows of $961,165 for the same period in 2011. The increase in cash outflow in the investing activities for the first three months in the preceding current quarter was primarily due to higher advances made to the holding company as well as higher investment in trust Fund in the preceding current quarter
 
The Company has cash outflows of $34,826 from financing activities for the three months ended August 31, 2011.   The cash flow changes for these two periods are mainly due to the repayment of amount due to related parties in the preceding current quarter. The Company inter-company transactions is maintained at a very minimum level in this current quarter.


Working Capital
 
Our working capital recorded a surplus of $1,357,254 as of August 31, 2012.  This marginal increase in working capital is mainly due to the increase in accounts receivable and decrease in cash and cash equivalents.


Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 
 
18

 

 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.
 

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

Interest Rate Risk

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

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

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

 
 
19

 

 
Concentration of Credit Risk
 
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:
 
1. The Company’s business is characterized by new product and service development and evolving industry standards and regulations. Inherent in the Company’s business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.
 

2. The Company’s revenue is deriving from China and Hong Kong. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.
 
3. If the Company is unable to derive any revenues from these countries, it would have a significant, financially disruptive effect on the normal operations of the Company.


 
ITEM 4T. CONTROL AND PROCEDURES
 
Evaluation of disclosure controls and procedures
 
 
As of August 31, 2012, the end of the period covered by this Form 10-Q, our management performed, under the supervision and with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of August 31, 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.
 
 
 
20

 

 
PART II - OTHER INFORMATION

 
ITEM 1.   LEGAL PROCEEDINGS

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


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

There have been no unregistered sales of equity for the quarter ended August 31, 2012.


 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults for the quarter ended August 31, 2012.


 
ITEM 4.    [REMOVED AND RESERVED]


 
ITEM 5.    OTHER INFORMATION
 
The Company has evaluated for disclosure all subsequent events occurring through October 9, 2012, the date the financial statements were issued.


 
ITEM 6.    EXHIBITS
 
The following exhibits are furnished as part of the Quarterly Report on Form 10-Q:

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

 
 
21

 

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

Dated:  October 11, 2012
REDtone Asia, Inc.
Dated:  October 11, 2012
REDtone Asia, Inc.
 
By:
/s/
By:
/s/
Name:
Chuan Beng Wei
Name:
Hui Nooi Ng
Title:
Chief Executive Officer
Title:
Chief Financial Officer
 
(Principal Executive Officer)
 
(Principal Financial Officer)

 
 
22

 

XOTC:RTAS Redtone Asia, Inc. Quarterly Report 10-Q Filling

Redtone Asia, Inc. XOTC:RTAS Stock - Get Quarterly Report SEC Filing of Redtone Asia, Inc. XOTC:RTAS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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