REDtone Asia (RTAS) 10-Q 2012 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: November 30, 2011

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

For the transition period from ____________ to _____________

Commission File No. 333-129388

REDTONE ASIA, INC.
(Exact name of small business issuer as specified in its charter)
Nevada	71-098116
(State or other jurisdiction of	(I.R.S. Tax. I.D. No.)
incorporation or organization)
Unit 15 A, 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  T     No       £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  £    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 £	Non-accelerated filer £
Accelerated filer  £ (do not check if smaller reporting company)	Smaller reporting company   T

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 30, 2011, are as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.0001 par value	282,315,356

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

REDtone Asia, Inc.

(Previously Hotgate Technology, Inc.)

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation or Plan of Operation	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4T.	Controls and Procedures	19
PART II -OTHER INFORMATION
Item 1.	Legal Proceedings.	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	[REMOVED AND RESERVED]	19
Item 5.	Other Information.	19
Item 6.	Exhibits	20
SIGNATURES		20

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REDtone Asia, Inc.

(Previously Hotgate Technology, Inc.)

As of Quarter Ended November 30, 2011 (unaudited)

Contents

Condensed Consolidated Balance Sheet as of November 30, 2011 (unaudited) and May 31, 2011 (Audited)	3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Six months ended November 30, 2011 and 2010 (unaudited)	4
Condensed Consolidated Statement of Cash Flows (unaudited) for the Six months ended November 30, 2011 and 2010	5
Notes to the Condensed Consolidated Financial Statements (unaudited)	6-14

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	November 30, 2011		May 31, 2011
	(Unaudited)		(Audited)
Assets
Current assets
Cash and cash equivalents	$	3,207,182	$	4,580,189
Inventories		6,609		6,679
Accounts receivable		125,690		644,642
Tax recoverable		45,791		107,308
Other receivables and deposits		345,935		441,351
Total current assets		3,731,207		5,780,169
Property, plant and equipment, net		2,673,554		2,936,979
Intangible assets, net		1,735,023		1,798,397
Goodwill		610,386		610,386
Available-for-sale investments		1,099,095		308,734
Amount due from a related company		2,715,388		1,182,200
Total assets	$	12,564,653	$	12,616,865
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Deferred income	$	1,866,301	$	1,841,152
Accounts payable		558,422		939,932
Accrued expenses and other payables		484,855		422,837
Amount due to a related company		76,867		101,818
Taxes payable		266,643		120,484
Total current liabilities		3,253,088		3,426,223
Deferred tax liabilities		39,083		47,927
Total liabilities		3,292,171		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		827,520		787,825
Accumulated other comprehensive income		689,837		599,765
Total stockholders’ equity		9,272,482		9,142,715
Total liabilities and stockholders’ equity	$	12,564,653	$	12,616,865

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 November 30,						Six months ended November 30,
	2011			2010			2011			2010
Revenue	$	3,032,897		$	1,277,922		$	4,186,589		$	2,614,538
Other income and gains		30,929			11,909			68,617			16,020
Service costs		(2,130,938	)		(592,451	)		(2,570,805	)		(1,166,349	)
Personnel cost		(264,951	)		(153,872	)		(524,176	)		(296,210	)
Depreciation expense		(163,353	)		(116,073	)		(324,686	)		(223,727	)
Amortization expense		(31,267	)		(30,615	)		(60,670	)		(58,227	)
Administrative and other expenses		(328,775	)		(177,989	)		(614,092	)		(314,529	)
Income before provision for income taxes		144,542			218,831			160,777			571,516
Provision for income taxes		(72,237	)		6,944			(121,082	)		(109,208	)
Net income	$	72,305		$	225,775		$	39,695		$	462,308
Other comprehensive income
Gain on foreign currency translation		6,674			173,306			90,072			162,802
Total comprehensive income	$	78,979		$	399,081		$	129,767		$	625,110
Net (loss)/income per share, basic and diluted	$	0.00		$	0.00		$	0.00		$	0.00
Weighted average number of shares		282,315,325			274,369,217			282,315,325			271,754,462

See accompanying notes to the condensed consolidated financial statements.

4

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	��	Six months ended November 30,
		2011			2010
Cash flows from operating activities
Net income		$	39,695		$	462,308
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax			(9,700	)		-
Amortization expense			60,670			58,227
Depreciation expense			324,686			223,727
Changes in operating assets and liabilities:
Decrease in accounts receivable			518,952			126,345
Decrease/(increase) in inventories			70			(18	)
Decrease in other receivables and deposits			95,416			112,512
Decrease/(increase) in tax recoverable			61,517			(192,852	)
Increase/(decrease) in deferred income			25,149			(132,210	)
Decrease in accounts payable			(381,510	)		(138,684	)
Increase in tax payables			146,159			68,951
Increase in accrued liabilities and other payables			62,018			126,944
Net cash provided by operating activities		$	943,122		$	715,250
Cash flows from investing activities
Purchase of property, plant and equipment			(69,064	)		(153,322	)
Acquisition of RedTone			-			21,144
(Increase)/decrease in amount due from a related company			(1,533,188	)		81,721
Purchase of available-for-sale investment			(790,361	)		-
Net cash used in investing activities		$	(2,392,613	)	$	(50,457	)
Cash flows from financing activities
(Decrease)/increase in amount due to related companies			(24,951	)		(58,104	)
Net cash used in financing activities		$	(24,951	)	$	(58,104	)
Net (decrease)/increase in cash and cash equivalents			(1,474,442	)		606,689
Effect of exchange rate changes on cash and cash equivalents			101,435			163,050
Cash and cash equivalents at beginning of period			4,580,189			4,319,834
Cash and cash equivalents at end of period		$	3,207,182		$	5,089,573
Cash paid for interest		$	-		$	-
Cash paid for income taxes		$	8,772		$	40,257

See accompanying notes to the condensed consolidated financial statements.

5

REDTONE ASIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

November 30, 2011

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

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

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

As of November 30, 2011, details of the Company’s major subsidiaries are as follows:

Name	Domicile and date of incorporation	Effective ownership	Principal activities
Redtone Telecommunication (China) Limited (“Redtone China”)	Hong Kong May 26, 2005	100%	Investment holding
Redtone Telecommunications (Shanghai) Limited (“Redtone Shanghai”)	The PRC July, 26, 2005	100%	Provides technical support services to group companies
Shanghai Hongsheng Net Telecommunication Company Limited (“Hongsheng”)	The PRC November 29, 2006	100%#	Marketing and distribution of discounted call services to PRC consumer market
Shanghai Huitong Telecommunication Company Limited (“Huitong”)	The PRC March, 26, 2007	100%#	Marketing and distribution of IP call and discounted call services in the PRC
Shanghai Jiamao E-Commerce Company Limited (“Jiamao”)	The PRC March 21, 2008	100%#	Marketing and distribution of products on the internet
Nantong Jiatong Investment Consultant Co., Ltd (“Nanjing Jiatong”)	The PRC May 17, 2011	100%#	Investment holding
Shanghai QianYue Business Administration Co., Ltd. ("QBA")	The PRC December 12, 2008	100%#	Provides prepaid shopping-card services in the PRC

# - Variable interest entities.  See also Footnote 15.

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.

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NOTE 2 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the three months and six months ended November 30, 2011 and 2010 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the following disclosures are adequate to make the information presented not misleading.  All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is in Chinese Renminbi (“RMB”), while the reporting currency is US Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position as of November 30, 2011, the results of its operations and cash flows for the three months and six months ended November 30, 2011.

The results of operations for the three months and six months ended November 30, 2011 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

7

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

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

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

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

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

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

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

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

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

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

(d) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of November 30, 2011 and 2010, there were no dilutive securities outstanding.

(e) Foreign currency translation

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

	November 30, 2011	May 31, 2011	November 30, 2010
Year end RMB : US$ exchange rate	0.1570	0.1542	0.1508
Average yearly RMB : US$ exchange rate	0.1576	0.1544	0.1505
Year end HK$ : US$ exchange rate	0.1283	0.1285	0.1291
Average yearly HK$ : US$ exchange rate	0.1285	0.1287	0.1289

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.

8

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

(f) Fair Value of Financial Instruments

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

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

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

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

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

(g) Recent Accounting Pronouncements

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

NOTE 4 – CASH & CASH EQUIVALENTS

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

	November 30, 2011		May 31, 2011
Cash and bank	$	3,207,182	$	4,181,973
Fixed deposits		-		398,216
Total	$	3,207,182	$	4,580,189

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

NOTE 5 – AVAILABLE-FOR-SALE INVESTMENTS

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

	November 30, 2011		May 31, 2011
Investment in trust funds	$	1,099,095	$	308,734
Shanghai Hai He Computing Technology Company Limited (“Hai He”)		-		390,603
		1,099,095		699,337
Less: Impairment of investments in Hai He		-		(390,603	)
Total	$	1,099,095	$	308,734

During the six months ended November 30, 2011, the Company fully impaired the investment in Shanghai Hai He.

9

NOTE 6 –OTHER RECEIVABLES AND DEPOSITS

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

	November 30, 2011		May 31, 2011
Deposits	$	72,436	$	68,775
Other receivables		273,499		372,576
Total	$	345,935	$	441,351

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

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

	November 30, 2011			May 31, 2011
At cost:
Computer and software	$	572,766		$	553,328
Telecommunication equipment		4,867,862			4,784,536
Furniture, fixtures and equipment		241,610			219,869
Motor vehicles		32,345			31,800
Leasehold improvement		10,657			29,907
		5,725,240			5,619,440
Less: Accumulated depreciation		(3,051,686	)		(2,682,461	)
Property, plant and equipment, net	$	2,673,554		$	2,936,979

Depreciation expense for the six months ended November 30, 2011 and 2010 amounted to $324,686 and $223,727, 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:

	November 30, 2011			May 31, 2011
At cost:
Licenses and software	$	2,269,581		$	2,273,118
Less: Accumulated amortization		(534,558	)		(474,721	)
Intangible assets, net	$	1,735,023		$	1,798,397

Amortization expense for the six months ended November 30, 2011 and 2010 amounted to $60,670 and $58,227, respectively.

10

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.

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

	November 30, 2011		May 31, 2011
Fellow subsidiary:
REDtone Technology Sdn. Bhd.	$	2,715,388	$	1,182,200
	$	2,715,388	$	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 are summarized as follows:

	November 30, 2011		May 31, 2011
Fellow subsidiary:
Redtone Telecommunications Sdn Bhd	$	76,867	$	101,818
	$	76,867	$	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 are summarized as follows:

	November 30, 2011		May 31, 2011
Accrued expenses	$	352,721	$	62,811
Other payables		132,134		360,026
Total	$	484,855	$	422,837

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:

	November 30, 2011		May 31, 2011
Business tax payable	$	138,882	$	120,449
Income tax payable		122,045		35
Others		5,716		-
Total	$	266,643	$	120,484

11

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 six months ended November 30, 2011 and 2010 are summarized as follows:

	Six months ended November 30,
	2011			2010
Current – PRC income tax provision	$	130,782		$	109,208
Deferred income tax income		(9,700	)		-
Total	$	121,082		$	109,208

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

	Six months ended November 30,
	2011					2010
	Amount			%		Amount			%
Income before provision for income taxes	$	160,777				$	571,516
Expected PRC income tax expense at statutory tax rate of 25%		40,194		25.0			142,879			25.0
Different tax rate for PRC/Hong Kong local authority		(11,754	)	(7.3	)		(19,795	)		(3.5	)
Expenses not deductible for tax		15,468		9.6			5,659			1.0
Income not subject to tax		-					(16,648	)		(2.9	)
Utilization of tax loss brought forward		(9,380	)	(5.8	)		(2,887	)		(0.5	)
Tax loss not provided for deferred tax		86,554		53.8			-			-
Actual tax expense	$	121,082		75.3		$	109,208			19.1

(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”)

During the six months ended November 30, 2010, Hongsheng, Huitong and Jiamao were  VIEs of the Company. The status of these VIEs has not changed since the date of the combination. During six months ended November 30, 2011, Nantong Jiatong, Hongsheng, Huitong, QBA and Jiamao were VIEs of the Company.  Nantong Jiatong and QBA were acquired during the fourth quarter of fiscal year 2011.

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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:

	November 30, 2011		May 31, 2011
Assets
Cash and cash equivalents	$	2,394,242	$	4,003,765
Inventories		6,609		6,679
Accounts receivable		122,098		642,843
Tax recoverable		19,120		81,086
Other receivables and deposits		334,811		363,823
Goodwill		610,386		610,386
Property, plant and equipment, net		559,104		646,972
Total assets (not include amount due from intra-group companies)	$	4,046,370	$	6,355,554
Liabilities
Deferred income	$	1,866,301	$	1,857,752
Accounts payable		537,280		913,504
Accrued expenses and other payables		352,474		314,925
Tax payables		31,100		15,560
Total liabilities	$	2,787,155	$	3,101,741

The statements of income of the consolidated VIEs for the six months ended November 30, 2011 and 2010 are as follows, and are included in the consolidated statements of income of the Company:

	Six months ended November 30,
	2011			2010
Revenue	$	3,827,643		$	2,311,550
Other income and gains		45,321			1,981
Service costs		(2,484,147	)		(1,101,201	)
Administrative and other expenses		(425,885	)		(177,189	)
Personnel cost		(458,475	)		(238,469	)
Depreciation expense		(109,678	)		(10,720	)
Income before provision for income taxes (Not including service costs payable to intra-group companies)		394,779			785,952
Provision for income taxes		(14,366	)		(31,631	)
Net income	$	380,413		$	754,321

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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

The weighted average number of shares for the three months and six months ended November 30, 2011 is 282,315,325 shares.

The calculation of weighted average number of shares for the three months and six months ended November 30, 2010 is illustrated as follows:

			Weighted average number of shares
	Number of shares		Three months ended November 30, 2010		Six months ended November 30, 2010
At June 1, 2010 and September 1, 2010		269,168,128		269,168,128		269,168,128
Issuance of shares on October 25, 2010 to satisfied debts to Redtone International Berhad		13,147,197		5,201,089		2,586,334
At November 30, 2010		282,315,325		274,369,217		271,754,462

NOTE 16 – CONTINGENCIES AND COMMITMENTS

Operating lease commitments

As of November 30, 2011, two PRC subsidiaries had arranged non-cancelable operating leases with third parties for their office premises.  The expected annual lease payments under these operating leases are as follows:

Within 1 year		$	58,785
Total	��	$	58,785

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

Business Overview

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

Critical Accounting Policies and Estimates

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

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

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

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

Recent Accounting Pronouncements

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

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Results of Operations

Six months ended November 30, 2011 as Compared to Six months ended November 30, 2010

The following table summarizes the results of our operations during the six month periods ended November 30, 2011 and 2010, and associated percentage changes for comparisons purposes.

	Six months ended November 30,
	2011			2010			+/-		% changes
Revenue	$	4,186,589		$	2,614,538		1,572,051			60	%
Other income and gains		68,617			16,020		52,597			328	%
Service costs		(2,570,805	)		(1,166,349	)	(1,404,456	)		120	%
Personnel cost		(524,176	)		(296,210	)	(227,966	)		77	%
Depreciation expense		(324,686	)		(223,727	)	(100,959	)		45	%
Amortization expense		(60,670	)		(58,227	)	(2,443	)		4	%
Administrative and other expenses		(614,092	)		(314,529	)	(299,563	)		95	%
Income before provision for income taxes		160,777			571,516		(410,739	)		-72	%
Provision for income taxes		(121,082	)		(109,208	)	(11,874	)		11	%
Net (loss)/income	$	39,695		$	462,308		(422,613	)		-91	%

Revenues

The Company generated revenue of US$4,186,589 in the first 6 months of the fiscal year ending May 31, 2012 representing a 60% 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.

Other income and gains:  

Other income comprises mainly of interest income from bank deposits.  The increase in interest income of US$68,617 is mainly due to high cash reserve recorded for the current quarters and higher return from the investment of idle funds in short term financial planning products managed by commercial banks in China.

Service Costs

Service costs also increased by US$1404,456 or 120% in the first six months in corresponding to the new settlement basis with CTT whereas the Company will record corresponding increase in service cost.

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Personnel costs

Personnel expenses totaled US$524,176, representing a 77% increase or US$227,966 as compared to the preceding year’s corresponding quarters.  The increase is mainly due to inclusion of QBA operations for the current year quarters and increase to the Company’s existing staff.

Amortization and depreciation expenses

Amortization and depreciation expenses totaled US$385,356, representing an increase of 37% as compared to the preceding year’s corresponding quarters.  The increase is mainly due to inclusion of QBA operations for the current quarters.

Administrative and other expenses

General and administrative expenses totaled US$614,092 representing an increase of 95% or US$299,563 as compared to the preceding year’s corresponding quarters.  The increase is mainly due to inclusion of QBA operations for the current quarters.

Income before provision for income tax

Income before provision for income tax totaled US$160,777, representing a 72% decrease as compared to the preceding year’s corresponding quarters. This decrease is mainly due to an increase in service costs and higher operating expenses after the consolidation of QBA operations.

Provision for taxes

Provision for taxes made for the first six months was marginally higher by US$11,874 due to higher income tax provision for profit making subsidiaries could not be offsetted by losses of other subsidiaries.

Liquidity and Capital Resources

Cash

Our cash balance at November 30, 2011, was US$3,207,182, representing a decrease of US$1,373,007 compared to our cash balance of US$4,580,189 at May 31, 2011.

Cash Flow

	Six months ended November 30,
	2011			2010			+/-		% Changes
Net cash provided by operating activities	$	943,122		$	715,250		227,872			32	%
Net cash used in investing activities	$	(2,392,613	)	$	(50,457	)	(2,342,156	)		4642	%
Net cash used in financing activities	$	(24,951	)	$	(58,104	)	33,153			-57	%
Net (decrease)/increase in cash and cash equivalents		(1,474,442	)		606,689		(2,081,131	)		-343	%

Cash inflows from operations during the six months ended November 30, 2011 amounted to US$943,122 as compared to US$715,250 in the same period of 2010. This is mainly due to an increase in revenue.

Our cash outflows in investing activities during the six months ended November 30, 2011 amounted to US$2,392,613 as compared to cash outflows of US$50,457 for the same period in 2010. The cash outflow in the investing activities for the first six months is primarily due to advances made to the holding company and the purchase of available-for-sale investments.  

The Company has cash outflows of US$24,951 from financing activities for the period ended November 30, 2011 as compared to cash inflow of US$58,104 in same period last year.   The cash flow changes for these two periods are mainly due to the repayment of amount due to related parties.

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Working Capital

Our working capital recorded a surplus of US$478,119 as of November 30, 2011.  This decrease in working capital is mainly due to increase in advances made to the holding company which is classified as non-current asset.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency Exchange Rate Risk

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

Interest Rate Risk

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

Inflation

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

Currency Exchange Fluctuations

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

Concentration of Credit Risk

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

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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 November 30, 2011, the end of the period covered by this Form 10-Q, our management performed, under the supervision and with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of November 30, 2011, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

Changes in internal controls

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

Sarbanes - Oxley Act 404 compliance

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

There have been no unregistered sales of equity for the quarter ended November 30, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults for the quarter ended November 30, 2011.

ITEM 4. [REMOVED AND RESERVED]

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ITEM 5. OTHER INFORMATION

The Company has evaluated for disclosure all subsequent events occurring through January 9, 2012, the date of the financial statements were issued.

ITEM 6 - EXHIBITS

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

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

SIGNATURES

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

Dated:  January 9, 2012	REDtone Asia, Inc.
	By:
		/s/ Chan Beng Wei
		Name: Chuan Beng Wei
		Title: Chief Executive Officer
	By:
		/s/  Chee Keong Lee
		Name: Chee Keong Lee
		Title:  Chief Financial Officer

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