UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(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, 2013
£ 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Non-accelerated filer o |
Accelerated filer (do not check if soaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 30, 2013, 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
EXPLANATORY NOTE
This Amendment No. 1 to REDtone Asia Inc.’s (the “Company”) Quarterly Report on Form 10-Q/A for the quarter ended November 30, 2013 (the “Amended 10-Q”) is being made as a result of the Company’s recent discovery of inadequate disclosures in our previously reported financial statements for the quarter ended November 30, 2013 relating to the organization and principal activities, and the controls and procedures. We have also made minor revisions to various other sections of the Company’s original Quarterly Report on Form 10-Q for the quarter ended November 30, 2013 (the “Original 10-Q”).
For convenience and ease of reference, the Company is filing the Quarterly report in its entirety with applicable changes. Unless otherwise stated, all information contained in this Amended 10-Q is as of January 15, 2014, the filing date of the Original 10-Q. Except as stated herein, this Amended 10-Q does not reflect events or transactions occurring after such filing date and does not contain any modification or updates to the disclosure in the Quarterly Report that may have been affected by events or transactions occurring subsequent to such filing date. No information in the Original 10-Q other than as set forth above is amended hereby.
REDtone Asia, Inc.
REDtone Asia, Inc.
As of Quarter Ended November 30, 2013 (unaudited)
TABLE OF CONTENTS
REDTONE ASIA, INC. AND SUBSIDIARIES
At November 30, 2013 and May 31, 2013
| | | November 30, 2013 | | | May 31, 2013 | |
| | | (Unaudited) | | | (Audited) | |
| | | | | | | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 5,496,499 | | | $ | 5,479,091 | |
| Inventories | | | 10,717 | | | | 10,621 | |
| Accounts receivable | | | 599,663 | | | | 2,398,488 | |
| Tax recoverable | | | 23,533 | | | | 23,323 | |
| Other receivables and deposits | | | 922,440 | | | | 434,606 | |
| Total current assets | | | 7,052,852 | | | | 8,346,129 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 1,598,472 | | | | 1,900,561 | |
| Intangible assets, net | | | 1,503,417 | | | | 1,559,471 | |
| Goodwill | | | 610,386 | | | | 610,386 | |
| Amount due from a related company | | | 3,314,016 | | | | 3,302,301 | |
| | | | | | | | | |
| Total assets | | $ | 14,079,143 | | | $ | 15,718,848 | |
| | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities | | | | | | | | |
| Deferred income | | $ | 1,020,382 | | | $ | 840,740 | |
| Accounts payable | | | 1,157,048 | | | | 3,751,360 | |
| Accrued expenses and other payables | | | 556,153 | | | | 534,375 | |
| Amount due to a related company | | | 131,971 | | | | 116,318 | |
| Taxes payable | | | 849,062 | | | | 718,042 | |
| Total current liabilities | | | 3,714,616 | | | | 5,960,835 | |
| | | | | | | | | |
| Deferred tax liabilities | | | 12,498 | | | | 19,739 | |
| | | | | | | | | |
| Total liabilities | | | 3,727,114 | | | | 5,980,574 | |
| | | | | | | | | |
| Stockholders’ equity | | | | | | | | |
| Common stock, US$0.0001 par value , 300,000,000 shares authorized; 282,315,325 shares issued and outstanding, respectively | | | 28,232 | | | | 28,232 | |
| Additional paid in capital | | | 7,726,893 | | | | 7,726,893 | |
| Retained earnings | | | 1,719,440 | | | | 1,095,216 | |
| Accumulated other comprehensive income | | | 877,464 | | | | 887,933 | |
| Total stockholders’ equity | | | 10,352,029 | | | | 9,738,274 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 14,079,143 | | | $ | 15,718,848 | |
| | | | | | | | | |
| | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
REDTONE ASIA, INC. AND SUBSIDIARIES
AND COMPREHENSIVE INCOME (UNAUDITED)
Three months and six months ended November 30, 2013 and 2012
| | | Three months ended November 30, | | | Six months ended November 30, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | |
| Revenue | | $ | 1,410,600 | | | $ | 1,511,465 | | | $ | 2,905,479 | | | $ | 3,612,860 | |
| | | | | | | | | | | | | | | | | |
| Other income and gains | | | 103,920 | | | | 60,714 | | | | 146,302 | | | | 78,296 | |
| | | | | | | | | | | | | | | | | |
| Service costs | | | (415,971 | ) | | | (946,135 | ) | | | (1,232,276 | ) | | | (2,407,744 | ) |
| | | | | | | | | | | | | | | | | |
| Personnel cost | | | (189,468 | ) | | | (204,861 | ) | | | (405,298 | ) | | | (429,211 | ) |
| | | | | | | | | | | | | | | | | |
| Depreciation expense | | | (169,497 | ) | | | (161,343 | ) | | | (336,915 | ) | | | (322,397 | ) |
| | | | | | | | | | | | | | | | | |
| Amortization expense | | | (27,782 | ) | | | (31,340 | ) | | | (58,210 | ) | | | (60,884 | ) |
| | | | | | | | | | | | | | | | | |
| Administrative and other expenses | | | (135,123 | ) | | | (143,354 | ) | | | (323,263 | ) | | | (459,206 | ) |
| | | | | | | | | | | | | | | | | |
| Income before provision for income taxes | | | 576,679 | | | | 85,146 | | | | 695,819 | | | | 11,714 | |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | | | (75,982 | ) | | | (74,677 | ) | | | (71,593 | ) | | | (88,925 | ) |
| | | | | | | | | | | | | | | | | |
| Net income/(loss) | | $ | 500,697 | | | $ | 10,469 | | | $ | 624,226 | | | $ | (77,211 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | | | | | | | | | | | | | | |
| Gain/(loss) on foreign currency translation | | | (27,365 | ) | | | 57,322 | | | | (10,471 | ) | | | 59,645 | |
| | | | | | | | | | | | | | | | | |
| Total comprehensive income/(loss) | | $ | 473,332 | | | $ | 67,791 | | | $ | 613,755 | | | $ | (17,566 | ) |
| | | | | | | | | | | | | | | | | |
| Net income/(loss) per share, basic and diluted | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | (0.00 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of shares | | | 282,315,325 | | | | 282,315,325 | | | | 282,315,325 | | | | 282,315,325 | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
REDTONE ASIA, INC. AND SUBSIDIARIES
Six months ended November 30, 2013 and 2012
| | | | | | | |
| | | Six months ended November 30, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Cash flows from operating activities | | | | | | |
| Net income/(loss) | | $ | 624,226 | | | $ | (77,211 | ) |
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | | | | | | |
| Amortization expense | | | 58,210 | | | | 60,884 | |
| Depreciation expense | | | 336,915 | | | | 322,397 | |
| Deferred tax | | | (7,388 | ) | | | (7,204 | ) |
| Loss on disposal of property, plant and equipment | | | - | | | | 5,807 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Decrease/(increase) in accounts receivable | | | 1,798,825 | | | | (26,122 | ) |
| (Increase)/decrease in inventories | | | (96 | ) | | | 7,923 | |
| (Increase) in other receivables and deposits | | | (487,834 | ) | | | (654,914 | ) |
| (Increase) in tax recoverable | | | (210 | ) | | | (219 | ) |
| Increase/(decrease) in deferred income | | | 179,642 | | | | (279,052 | ) |
| (Decrease)/increase in accounts payable | | | (2,594,312 | ) | | | 472,995 | |
| Increase in tax payables | | | 131,020 | | | | 117,258 | |
| Increase/(decrease) in accrued liabilities and other payables | | | 21,778 | | | | (29,927 | ) |
| | | | | | | | | |
| Net cash provided by/(used in) operating activities | | $ | 60,776 | | | $ | (87,385 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Purchase of property, plant and equipment | | | (19,126 | ) | | | (742 | ) |
| Proceeds from disposal of property, plant and equipment | | | - | | | | 12,599 | |
| Increase in amount due from a related company | | | (11,715 | ) | | | (95,321 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | $ | (30,841 | ) | | $ | (83,464 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Increase in amount due to related companies | | | 15,653 | | | | 15,198 | |
| | | | | | | | | |
| Net cash provided by financing activities | | $ | 15,653 | | | $ | 15,198 | |
| | | | | | | | | |
| Net increase/(decrease) in cash and cash equivalents | | | 45,588 | | | | (155,651 | ) |
| | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | (28,180 | ) | | | 21,777 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 5,479,091 | | | | 3,520,248 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 5,496,499 | | | $ | 3,386,374 | |
| | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | |
| | | | | | | | | |
| Cash paid for income taxes | | $ | 3,233 | | | $ | - | |
| | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
REDTONE ASIA, INC. AND SUBSIDIARIES
November 30, 2013
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
REDtone Asia, Inc. and subsidiaries (the “Company”) are a group of companies in The People’s Republic of China (“PRC”). The principal activities of the Company are that of a Telecommunications provider for mobile, fixed and international gateway services. REDtone provides a wide range of telecommunication services, including prepaid and postpaid discounted call services to corporate customers and consumers as well as prepaid mobile air-time top-up. The Company also offers prepaid shopping card services.
The Company’s major subsidiaries as of the balance sheet dates are illustrated as follows:
| Name | Domicile and date of incorporation | | Effective ownership | | Principal activities |
| | | | | | |
| Redtone Telecommunication (China) Limited (“Redtone China”) | Hong Kong May 26, 2005 | | | 100% | | Investment holding |
| | | | | | | |
| Redtone Telecommunications (Shanghai) Limited (“Redtone Shanghai”) | The PRC July, 26, 2005 | | | 100% | | Provides technical support services to group companies |
| | | | | | | |
| Shanghai Hongsheng Net Telecommunication Company Limited (“Hongsheng”) | The PRC November 29, 2006 | | | 100%# | | Marketing and distribution of discounted call services to PRC consumer market |
| | | | | | | |
| Shanghai Huitong Telecommunication Company Limited (“Huitong”) | The PRC March, 26, 2007 | | | 100%# | | Marketing and distribution of IP call and discounted call services in the PRC |
| | | | | | | |
| Shanghai Jiamao E-Commerce Company Limited (“Jiamao”) | The PRC March 21, 2008 | | | 100%# | | Marketing and distribution of products on the internet |
| | | | | | | |
| Nantong Jiatong Investment Consultant Co., Ltd (“Nanjing Jiatong”) | The PRC May 17, 2011 | | | 100%# | | Investment holding |
| | | | | | | |
| Shanghai QianYue Business Administration Co., Ltd. ("QBA") | The PRC December 12, 2008 | | | 100%# | | Provision of prepaid shopping-card services in the PRC |
| | | | | | | |
| # - Variable interest entities. See also Footnote 14. | | | | | | |
Jiamao is not reported as distinct operating segments as the revenue, profit or loss and total assets in association with the ecommerce business are immaterial to the Company’s revenue, reported profit or loss and total assets.
NOTE 2 – PRINCIPLES OF CONSOLIDATION
The 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, 2013 and November 30, 2012 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 November 30, 2013, the results of its operations and cash flows for the three months and six months ended November 30, 2013 and November 30, 2012.
The results of operations for the three months and six months ended November 30, 2013 are not necessarily indicative of the results for a full year period.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in mainland China and Hong Kong.
(b) Fair Value of Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables and deposits, tax recoverable, amount due from/(to) related parties, accounts payable, accrued expenses and other payables, and taxes payable.
The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented, due to the short maturities of these instruments.
(c) Revenue recognition
The Company has adopted a revenue recognition policy for each type of operation according to ASC 605-45.
Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collectability is reasonably assured.
Revenue recognition policy for each of the major products and services:
1. Discounted call services for consumer (EMS) as follows:
● Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. Redtone China’s role for Business Collaboration with CTT is as an “Agent” as Redtone China is the sole distributor for the EMS brand owned and controlled by CTT; and
● Collaboration with other telecommunication providers – Redtone China will act as a discounted consumer call Reseller whereby Redtone China determines the service and package specification and the pricing policy whereas China Unicom acts as a passive termination partner for call traffic. Redtone China will pay China Unicom solely based on call traffic termination by China Unicom at a prescribed rate (defined as traffic termination cost on the books of Redtone China). In this regard, Redtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges. Redtone China’s role for Business Collaboration with China Unicom is that of “Principal” as China Unicom is playing a passive role as the traffic termination partner while Redtone China is fully responsible for the entire management of the discounted call services.
As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is the remaining gross value of the expired prepaid product.
2. Discounted call services for corporate consumers is as follows:
● Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and
● Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers.
3. Reload services for prepaid mobile services – revenue recognized is the commission earned.
4. Prepaid shopping-card services – revenue recognized is the commission earned.
(d) Earnings per share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of November 30, 2013 and November 30, 2012, 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, 2013 | | | May 31, 2013 | | | November 30, 2012 | |
| Period/year end RMB : US$ exchange rate | | | 0.1632 | | | | 0.1618 | | | | 0.1594 | |
| Average period/yearly RMB : US$ exchange rate | | | 0.1626 | | | | 0.1590 | | | | 0.1585 | |
| Period/year end HK$ : US$ exchange rate | | | 0.1290 | | | | 0.1288 | | | | 0.1290 | |
| Average period/yearly HK$ : US$ exchange rate | | | 0.1289 | | | | 0.1288 | | | | 0.1290 | |
On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(f) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
- Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
- Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
- Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.
(g) Recent Accounting Pronouncements
In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-04, Technical Corrections and Improvements. This ASU make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013.
In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-05, Statement of Cash Flows (Topic 230). This ASU addresses how cash receipts arising from the sale of certain donated financial assets, such as securities, should be classified in the statement of cash flows of not-for-profit entities (NFPs). Some NFPs classify those cash receipts as investing cash inflows, while other entities classify them as either operating cash inflows or financing cash inflows, consistent with their treatment of inflows arising from cash contributions. The objective of this Update is for an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without the NFP imposing any limitations for sale and were converted nearly immediately into cash. The amendments in the ASU are effective prospectively for fiscal years, and interim fiscal periods within those years, beginning after June 15, 2013. Retrospective application to all periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted.
In January 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification) or subject to a master netting arrangement or similar agreement. The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11.
In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.
The new amendments will require an organization to:
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). A private company is required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated other comprehensive income for both interim and annual reporting periods. However, private companies are only required to provide the information about the effect of reclassifications on line items of net income for annual reporting periods, not for interim reporting periods. The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted.
In March 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights)within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This ASU is the final version of Proposed Accounting Standards Update EITF11Ar—Foreign Currency Matters (Topic 830), which has been deleted. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption.
In July 2013, The FASB has published Accounting Standards Update 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. This ASU defers indefinitely certain disclosures about investments held by nonpublic employee benefit plans in their plan sponsors’ own nonpublic equity securities. The ASU was approved by the FASB on June 12, 2013. ASU No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, applies to disclosures of certain quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for investments held by certain employee benefit plans.
In July 2013, The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).
U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.
This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.
NOTE 4 – CASH & CASH EQUIVALENTS
As of the balance sheet dates, cash & cash equivalents are summarized as follows:
| | | November 30, 2013 | | | May 31, 2013 | |
| Cash and bank | | $ | 622,054 | | | $ | 1,086,549 | |
| Time deposits | | | 4,874,445 | | | | 4,392,542 | |
| | | | | | | | | |
| Total | | $ | 5,496,499 | | | $ | 5,479,091 | |
| | | | | | | | | |
As of the balance sheet dates, the time deposits had a maturity term of less than three months.
NOTE 5 –OTHER RECEIVABLES AND DEPOSITS
Other receivables and deposits as of the dates were summarized as follows:
| | | November 30, 2013 | | | May 31, 2013 | |
| | | | | | | |
| Deposits | | $ | 71,735 | | | $ | 176,191 | |
| Other receivables | | | 850,705 | | | | 258,415 | |
| Total | | $ | 922,440 | | | $ | 434,606 | |
| | | | | | | | | |
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of the balance sheet dates are summarized as follows:
| | | November 30, 2013 | | | May 31, 2013 | |
| At cost: | | | | | | |
| Computer and software | | $ | 574,457 | | | $ | 587,392 | |
| Telecommunication equipment | | | 5,131,649 | | | | 5,048,888 | |
| Furniture, fixtures and equipment | | | 207,116 | | | | 205,308 | |
| Motor vehicles | | | 127,003 | | | | 125,871 | |
| Leasehold improvement | | | 35,489 | | | | 35,253 | |
| | | | 6,075,714 | | | | 6,002,712 | |
| | | | | | | | | |
| Less: Accumulated depreciation | | | (4,477,242) | | | | (4,102,151) | |
| Property, plant and equipment, net | | $ | 1,598,472 | | | $ | 1,900,561 | |
Depreciation expense for the six months ended November 30, 2013 and 2012 amounted to $336,915 and $322,397, respectively.
NOTE 7 – 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, 2013 | | | May 31, 2013 | |
| At cost: | | | | | | |
| Licenses and software | | $ | 2,281,786 | | | $ | 2,278,603 | |
| | | | | | | | | |
| Less: Accumulated amortization | | | (778,369) | | | | (719,132) | |
| | | | | | | | | |
| Intangible assets, net | | $ | 1,503,417 | | | $ | 1,559,471 | |
Amortization expense for the six months ended November 30, 2013 and 2012 amounted to $58,210 and $60,884, respectively.
NOTE 8 – AMOUNT DUE FROM/(TO) RELATED COMPANIES
Redtone Technology Sdn. Bhd. was previously the holding company of Redtone Telecommunications (China) Ltd. Pursuant to the reversed take-over by Redtone Asia, Inc., Redtone Technology Sdn. Bhd. is now the related company of Redtone Asia, both of which are subsidiaries of penultimate holding company namely Redtone International Berhad.
Amount due from a related company as of the balance sheet dates were summarized as follows:
| | | | | | | |
| | | November 30, 2013 | | | May 31, 2013 | |
| Fellow subsidiary: | | | | | | |
| REDtone Technology Sdn. Bhd. | | $ | 3,314,016 | | | $ | 3,302,301 | |
The amount represents advances to the related company. As of the balance sheet dates, the amount is unsecured, non-interest bearing and is expected to be repaid within Year 2015.
Amount due to a related company as of the balance sheet dates were summarized as follows:
| | | | | | | |
| | | November 30, 2013 | | | May 31, 2013 | |
| Fellow subsidiary: | | | | | | |
| Redtone Telecommunications Sdn Bhd | | $ | 131,971 | | | $ | 116,318 | |
The amount due to the related company is unsecured, non-interest bearing and has no fixed repayment date.
NOTE 9 – ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of the balance sheet dates were summarized as follows:
| | | | | | | |
| | | November 30, 2013 | | | May 31, 2013 | |
| | | | | | | |
| Accrued expenses | | $ | 390,497 | | | $ | 336,609 | |
| Other payables | | | 165,656 | | | | 197,766 | |
| Total | | $ | 556,153 | | | $ | 534,375 | |
| | | | | | | | | |
NOTE 10 – DEFERRED INCOME
Deferred income consists of prepaid air-time sold which is yet to be utilized. The basis of revenue recognition for discounted call services is based on actual call charges made by end users. When calls are being made, the amount will be deducted from deferred income to the statement of income, net of call costs and expenses.
NOTE 11 – TAXES PAYABLE
Taxes payable at the balance sheet dates are summarized as follows:
| | | | | | | |
| | | November 30, 2013 | | | May 31, 2013 | |
| | | | | | | |
| Business tax payable | | $ | 200,478 | | | $ | 152,131 | |
| Income tax payable | | | 648,584 | | | | 563,497 | |
| Others | | | - | | | | 2,414 | |
| Total | | $ | 849,062 | | | $ | 718,042 | |
Business tax represents PRC sales tax imposed upon the Company’s services provided in the PRC. Tax rates range from 3% to 5% depending on the nature of the taxable activities.
Income tax represents PRC income tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.
NOTE 12 – (INCOME TAX INCOME)/PROVISION FOR INCOME TAXES
Income tax for six months ended November 30, 2013 and 2012 are summarized as follows:
| | | Six months ended November 30, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Current – PRC income tax | | $ | 78,981 | | | $ | 96,129 | |
| Deferred income tax income | | | (7,388) | | | | (7,204) | |
| Total | | $ | 71,593 | | | $ | 88,925 | |
| | | | | | | | | |
A reconciliation of the expected tax with the actual tax expense is as follows:
| | | Six months ended November 30, 2013 | | | Six months ended November 30, 2012 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Income before provision for income taxes | | | 695,819 | | | | 11,714 | |
| | | | | | | | | |
| Expected PRC income tax expense at statutory tax rate of 25% | | $ | 173,955 | | | $ | 2,929 | |
| Different tax rate for PRC/Hong Kong local authority | | | 7,344 | | | | 5,682 | |
| Expenses not deductible for tax | | | 10,529 | | | | 1,317 | |
| Utilization of tax loss brought forward | | | (159,240) | | | | - | |
| Tax loss not provided for deferred tax | | | 39,005 | | | | 78,997 | |
| | | | | | | | | |
| Total | | $ | 71,593 | | | $ | 88,925 | |
(i) All PRC subsidiaries are subject to PRC tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.
(ii) All Hong Kong subsidiaries did not generate any assessable profits in Hong Kong and therefore are not subject to Hong Kong tax.
NOTE 13 – VARIABLE INTEREST ENTITIES (“VIEs”)
On November 30, 2006, the Company entered into loan agreements with Huang Bin (“HB”) and Mao Hong (“MH”) for the establishment of Shanghai Hongsheng Net Telecommunications Co., Ltd (“Hongsheng”). On November 30, 2006, the Company entered into an equity pledge agreement which provides that HB and MH will pledge all their equities in Hongsheng to the Company and REDtone Telecommunications (Shanghai) Limited (“REDtone Shanghai”). The agreement also provides that the Company’s control of Hongsheng shall take effect from June 1, 2007.
On April 30, 2007, the Company entered into loan agreements with Mao Junbao (“MJ”) and MH for the establishment of Shanghai Huitong Telecommunications Co., Ltd (“Huitong”). On April 30, 2007, the Company entered into an equity pledge agreement, which provides that MJ and MH would pledge all their equities in Huitong to the Company and REDtone Shanghai.
On May 24, 2011, Hongsheng entered into a nominee agreement between Wang Jianping and Xu Lanying. The nominee agreement provided that Hongsheng would commission Wang Jianping and Xu Lanying to establish Nantong Jiatong Investment Consultant Co., Ltd (“Nantong Jiatong”). The nominee shareholders of Nantong Jiatong are Wang Jianping and Xu Lanying.
On May 24, 2011, the Company entered into a loan Agreement with Nantong Jiatong to extend a loan of RMB22,000,000 (RMB22 million) for the additional capital injection into Hongsheng for the establishment of Shanghai Qianyue Business Administration Co., Ltd (“QBA”). An equity pledge agreement entered into by and amongst the Company, Nantong Jiatong and Hongsheng, provided that Nantong Jiatong would pledge all its equities in Hongsheng to the Company.
Although the Company is not the shareholder of Hongsheng, Huitong, Nantong Jiatong and QBA, the Company has determined that it is the primary beneficiary of these four entities, as the Company has 100% voting powers and is entitled to receive all the benefits from the operations of these four entities. Hence, Hongsheng, Huitong, Nantong Jiatong and QBA are identified as VIEs and are consolidated as if wholly-owned subsidiaries of the Company.
The status of Hongsheng, Huitong, Nantong Jiatong and QBA as VIEs has not changed since the date of the combination. In addition, the Company did not identify any additional VIEs in which we hold a significant interest.
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, 2013 | | | May 31, 2013 | |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 1,892,128 | | | $ | 1,945,614 | |
| Inventories | | | 10,717 | | | | 10,621 | |
| Accounts receivable | | | 599,663 | | | | 2,392,819 | |
| Tax recoverable | | | 23,533 | | | | 23,323 | |
| Other receivables and deposits | | | 771,226 | | | | 283,603 | |
| Goodwill | | | 610,386 | | | | 610,386 | |
| Property, plant and equipment, net | | | 159,807 | | | | 285,823 | |
| Available-for-sale investment | | | | | | | | |
| Total assets (not include amount due from intra-group companies) | | $ | 4,067,460 | | | $ | 5,552,189 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Deferred income | | $ | 1,047,241 | | | $ | 867,804 | |
| Accounts payable | | | 1,136,566 | | | | 3,730,907 | |
| Accrued expenses and other payables | | | 392,247 | | | | 379,035 | |
| Tax payables | | | 33,304 | | | | 31,188 | |
| Total liabilities | | $ | 2,609,358 | | | $ | 5,008,934 | |
The statements of income of the consolidated VIEs for six months ended November 30, 2013 and 2012 are as follows, and are included in the consolidated statements of income of the Company:
| | | Six months ended November 30, 2013 | | | Six months ended November 30, 2012 | |
| | | | | | | |
| Revenue | | $ | 2,703,230 | | | $ | 3,333,155 | |
| Other income and gains | | | 61,259 | | | | 45,359 | |
| Service costs (Not including service costs payable to intra-group companies) | | | (1,222,529) | | | | (2,391,397) | |
| Administrative and other expenses | | | (211,256) | | | | (195,650) | |
| Personnel cost | | | (324,531) | | | | (353,123) | |
| Depreciation expense | | | (109,874) | | | | (110,273) | |
| | | | | | | | | |
| Income before provision for income taxes (Not including service costs payable to intra-group companies) | | | 896,299 | | | | 328,071 | |
| Income tax income/(provision for income taxes) | | | 720 | | | | (53,238) | |
| Net income | | $ | 897,019 | | | $ | 274,833 | |
NOTE 14 – SEGMENTAL ANALYSIS
Information of the Company’s business segment is as follows:-
| | | Six months ended November 30, 2013 | | | Six months ended November 30, 2012 | |
| Revenues from: | | | | | | |
| Telecommunications | | $ | 2,905,070 | | | $ | 3,588,362 | |
| Prepaid business solution | | | 409 | | | | 24,498 | |
| | | | 2,905,479 | | | | 3,612,860 | |
| | | | | | | | | |
| Segment profit/(loss) from: | | | | | | | | |
| Telecommunications | | $ | 849,046 | | | $ | 225,851 | |
| Prepaid business solution | | | (153,227) | | | | (214,137) | |
| | | | 695,819 | | | | 11,714 | |
| | | | | | | | | |
| Depreciation and amortization expenses: | | | | | | | | |
| Telecommunications | | $ | 297,808 | | | $ | 286,381 | |
| Prepaid business solution | | | 97,317 | | | | 96,900 | |
| | | | 395,125 | | | | 383,281 | |
| | | | | | | | | |
| Segment assets: | | | | | | | | |
| Telecommunications | | $ | 12,220,331 | | | $ | 10,952,026 | |
| Prepaid business solution | | | 3,199,448 | | | | 3,442,122 | |
| Eliminations | | | (1,340,636) | | | | (1,308,798) | |
| | | | 14,079,143 | | | | 13,085,350 | |
| | | | | | | | | |
| Capital expenditure | | | | | | | | |
| Telecommunications | | $ | 19,126 | | | $ | 742 | |
| Prepaid business solution | | | - | | | | | |
| | | | 19,126 | | | | 742 | |
| | | | | | | | | |
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 has adopted a revenue recognition policy for each type of operation according to ASC 605-45.
Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:
| | - | Persuasive evidence an arrangement exists; |
| | - | Delivery has occurred or services have been rendered; |
| | - | The seller’s price to the buyer is fixed or determinable; and |
| | - | Collectability is reasonably assured. |
Revenue recognition policy for each of the major products and services:
| 1. | Discounted call services for consumer (EMS) as follows: |
| ● | Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. Redtone China’s role for Business Collaboration with CTT is as an “Agent” as Redtone China is the sole distributor for the EMS brand owned and controlled by CTT; and |
| ● | Collaboration with other telecommunication providers – Redtone China will act as a discounted consumer call Reseller whereby Redtone China determines the service and package specification and the pricing policy whereas China Unicom acts as a passive termination partner for call traffic. Redtone China will pay China Unicom solely based on call traffic termination by China Unicom at a prescribed rate (defined as traffic termination cost on the books of Redtone China). In this regard, Redtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges. Redtone China’s role for Business Collaboration with China Unicom is that of “Principal” as China Unicom is playing a passive role as the traffic termination partner while Redtone China is fully responsible for the entire management of the discounted call services |
As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is the remaining gross value of the expired prepaid product.
| 2. | Discounted call services for corporate consumers is as follows: |
| ● | Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and |
| ● | Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers. |
| 3. | Reload services for prepaid mobile services – revenue recognized is the commission earned. |
| 4. | Prepaid shopping-card services – revenue recognized is the commission earned. |
Recent Accounting Pronouncements
The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.
Year-to-date Results of Operations
Year-to-date Results for Six-month period ended November 30, 2013 as Compared to period ended November 30, 2012
The following table summarizes the results of our operations during the six-month periods ended November 30, 2013 and November 30，2012, and associated percentage changes for comparisons purposes.
| | | 6-month ended | | | | | | | |
| | | Nov 30, 2013 | | | Nov 30, 2012 | | | | +/- | | | % changes | |
| | | | | | | | | | | | | | |
| Revenue | | $ | 2,905,479 | | | $ | 3,612,860 | | | | (707,381 | ) | | | -20 | % |
| | | | | | | | | | | | | | | | | |
| Other income and gains | | | 146,302 | | | | 78,296 | | | | 68,006 | | | | 87 | % |
| | | | | | | | | | | | | | | | | |
| Service costs | | | (1,232,276 | ) | | | (2,407,744 | ) | | | (1,175,468 | ) | | | -49 | % |
| | | | | | | | | | | | | | | | | |
| Personnel cost | | | (405,298 | ) | | | (429,211 | ) | | | (23,913 | ) | | | -6 | % |
| | | | | | | | | | | | | | | | | |
| Depreciation expense | | | (336,915 | ) | | | (322,397 | ) | | | 14,518 | | | | 5 | % |
| | | | | | | | | | | | | | | | | |
| Amortization expense | | | (58,210 | ) | | | (60,884 | ) | | | (2,674 | ) | | | -4 | % |
| | | | | | | | | | | | | | | | | |
| Administrative and other expenses | | | (323,263 | ) | | | (459,206 | ) | | | (135,943 | ) | | | -30 | % |
| | | | | | | | | | | | | | | | | |
| Income before provision for income taxes | | | 695,819 | | | | 11,714 | | | | 684,105 | | | | 5840 | % |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | | | (71,593 | ) | | | (88,925 | ) | | | (17,332 | ) | | | -19 | % |
| | | | | | | | | | | | | | | | | |
| Net gain | | $ | 624,226 | | | $ | (77,211 | ) | | | 701,437 | | | | N/A | |
| | | | | | | | | | | | | | | | | |
Revenues
Information of the Company’s segmental revenue as follows:
| | | Six months ended | | | Six months ended | |
| | | November 30, 2013 | | | November 30, 2012 | |
| Revenue from: | | | | | | |
| Telecommunications | | $ | 2,905,070 | | | $ | 3,588,362 | |
| Prepaid business solutions | | | 409 | | | | 24,498 | |
| | | | 2,905,479 | | | | 3,612,860 | |
The Company generated revenue of $2,905,479 in the first 6 months of the fiscal year ending May 31, 2014, representing a 20% decrease as compared with the preceding year’s corresponding quarters. The decrease in revenues was mainly due to the decrease in revenue from telecommunication segment by $0.68 million and the decrease in revenue from prepaid business solution segment by $0.02 million.
The decrease in revenue from telecommunication segment by $0.68 million was mainly due to lower consumption from the competitive market.
There are no any seasonal aspects to our revenue in prepaid business solutions.
Service Costs
Service costs reduce by $1,175,468 or 49% in the first six months in fiscal year 2014. The decrease margin is higher than revenue due to our diversification cost structures to various vendors which can provide better rate with better quality.
Personnel costs
Personnel expenses totaled $405,298, representing a marginal reduce of 6% or $23,913 as compared to the preceding year’s corresponding quarters.
Amortization and depreciation expenses
Amortization and depreciation expenses totaled $395,125, representing a marginal increase of 3.1% or $11,844 as compared to the preceding year’s corresponding quarter.
Administrative and other expenses
General and administrative expenses totaled $323,263 representing a decrease of 30% or $135,943 as compared to the preceding year’s corresponding quarters. The decrease is mainly due to the lower expenditure in business development.
Income before provision for income tax
Profit before provision for income tax totaled $695,819, as compared to $11,714 for the preceding year’s corresponding quarters. This change is mainly due to lower service costs as well as lower operating expenses in the current quarter.
2nd Quarter Results for period ended November 30, 2013 as Compared to period ended November 30, 2012
The following table summarizes the 2nd quarter results of our operations during the three month periods ended November 30, 2013 and November 30，2012, and associated percentage changes for comparisons purposes.
| | | Three months ended | | | | | | | |
| | | Nov 30, 2013 | | | Nov 30, 2012 | | | | +/- | | | % changes | |
| | | | | | | | | | | | | | |
| Revenue | | $ | 1,410,600 | | | $ | 1,511,465 | | | $ | (100,865 | ) | | | -7 | % |
| | | | | | | | | | | | | | | | | |
| Other income and gains | | | 103,920 | | | $ | 60,714 | | | | 43,206 | | | | 71 | % |
| | | | | | | | | | | | | | | | | |
| Service costs | | | (415,971 | ) | | $ | (946,135 | ) | | | (530,164 | ) | | | -56 | % |
| | | | | | | | | | | | | | | | | |
| Personnel cost | | | (189,468 | ) | | $ | (204,861 | ) | | | (15,393 | ) | | | -8 | % |
| | | | | | | | | | | | | | | | | |
| Depreciation expense | | | (169,497 | ) | | $ | (161,343 | ) | | | 8,154 | | | | 5 | % |
| | | | | | | | | | | | | | | | | |
| Amortization expense | | | (27,782 | ) | | $ | (31,340 | ) | | | (3,558 | ) | | | -11 | % |
| | | | | | | | | | | | | | | | | |
| Administrative and other expenses | | | (135,123 | ) | | $ | (143,354 | ) | | | (8,231 | ) | | | -6 | % |
| | | | | | | | | | | | | | | | | |
| Income before provision for income taxes | | | 576,679 | | | | 85,146 | | | | 491,533 | | | | 577 | % |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | | | (75,982 | ) | | $ | (74,677 | ) | | | 1,305 | | | | 2 | % |
| | | | | | | | | | | | | | | | | |
| Net gain | | $ | 500,697 | | | $ | 10,469 | | | $ | 490,228 | | | | 4683 | % |
| | | | | | | | | | | | | | | | | |
Revenues
Information of the Company’s segmental revenue as follows:
| | | Three months ended | | | Three months ended | |
| | | November 30, 2013 | | | November 30, 2012 | |
| Revenue from: | | | | | | |
| Telecommunications | | $ | 1,410,803 | | | $ | 1,493,240 | |
| Prepaid business solutions | | | (203 | ) | | | 18,225 | |
| | | | 1,410,600 | | | | 1,511,465 | |
| | | | | | | | | |
The Company generated revenue of $1,410,600 in the second quarter of the fiscal year ending May 31, 2014, representing a 7% marginal decrease as compared with the preceding year’s corresponding quarters. The decrease in revenues was mainly due to the decrease in revenue from telecommunication segment by $0.08 million.
Service Costs
Service costs reduce by $530,164 or 56% in the second quarter of the fiscal year 2014. The decrease margin is higher than revenue due to our diversification cost structures to various vendors which can provide better rate with better quality.
Personnel costs
Personnel expenses totaled $189,468, representing a marginal reduce of 8% or $15,393 as compared to the preceding year’s corresponding quarters.
Amortization and depreciation expenses
Amortization and depreciation expenses totaled $197,279, representing a marginal increase of 2.4% or $4,596 as compared to the preceding year’s corresponding quarter.
Administrative and other expenses
General and administrative expenses totaled $135,123 representing a decrease of 6% or $8,231 as compared to the preceding year’s corresponding quarters. The decrease is mainly due to the lower expenditure in business development.
Income before provision for income tax
Profit before provision for income tax totaled $576,679, as compared to $85,146 for the preceding year’s corresponding quarters. This change is mainly due to lower service costs as well as lower operating expenses in the current quarter.
Liquidity and Capital Resources
Cash
Our cash balance at November 30, 2013 was $5,496,499, representing an increase of $17,408 compared to our cash balance of $5,479,091 at May 31, 2013.
Cash Flow
| | | Six months ended | | | | | | | |
| | | Nov, 30 2013 | | | Nov, 30 2012 | | | | +/- | | | % Changes | |
| Net cash provided by operating activities | | $ | 60,776 | | | $ | (87,385 | ) | | | 148,161 | | | | N/A | |
| Net cash used in investing activities | | $ | (30,841 | ) | | $ | (83,464 | ) | | | 52,623 | | | | -63 | % |
| Net cash used in financing activities | | $ | 15,653 | | | $ | 15,198 | | | | 455 | | | | 3 | % |
| Net (decrease)/increase in cash and cash equivalents (before effects of exchange rate changes) | | | 45,588 | | | | (155,651 | ) | | | 201,239 | | | | N/A | |
| | | | | | | | | | | | | | | | | |
Cash inflows from operations during the six months ended November 30, 2013 amounted to $60,776 as compared to cash outflow of $87,385 in the same period of 2012. The increase in cash inflow from operation is mainly due to higher profit incurred during the period.
Our cash outflows in investing activities during the six months ended November 30, 2013 amounted to $30,841 as compared to cash outflows of $83,464 for the same period in 2012. The decrease in cash outflow in the investing activities for the first six months in the preceding current quarter was primarily due to fewer advances made to the holding company during the period.
The Company has cash inflows of $15,653 from financing activities for the six months ended November 30, 2013, an increase of $455 as compared to cash inflow of $15,198 for the same period in 2012. The Company inter-company transactions are maintained at a very minimum level in this current quarter.
Working Capital
Our working capital recorded a surplus of $3,338,236 as of November 30, 2013. This increase in working capital is mainly due to the decrease in our accounts payable.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies in Chinese Renminbi (“RMB”), Malaysian Ringgit (“RM”) and Hong Kong Dollar (“HK$”) could adversely affect our financial results. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency. All of our sales and expenses denominated in foreign currencies are denominated in the RMB, RM and HK$. Our principal exchange rate risk therefore exists between the U.S. dollar and these currencies. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other (income) expense, net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.
Interest Rate Risk
Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.
Inflation
Inflation has not had a material impact on the Company’s business in recent years.
Currency Exchange Fluctuations
The Company’s revenues and its expenses are denominated in RMB, RM and HK$. The value of these foreign currency-to-U.S. dollars may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of RMB to U.S. dollars had generally been stable and RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the RMB from the United States dollar. At the recent quarterly regular meeting of People’s Bank of China, its Currency Policy Committee affirmed the effects of the reform on RMB exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of RMB has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so.
Concentration of Credit Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:
1. The Company’s business is characterized by new product and service development and evolving industry standards and regulations. Inherent in the Company’s business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.
2. The Company’s revenue is deriving from China and Hong Kong. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.
3. If the Company is unable to derive any revenues from these countries, it would have a significant, financially disruptive effect on the normal operations of the Company.
Controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer to allow for timely decisions regarding required disclosure.
As of November 30, 2013, the end of our second quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our principal executive officer and our principal financial and accounting officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance in the reliability of our financial reports as of the end of the period covered by this yearly report.
Inherent limitations on effectiveness of controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in internal controls
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended November 30, 2013, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
The Company may from time to time be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of its business. The Company is not currently involved in any such litigation that it believes could have a materially adverse effect on its financial condition or results of operations.
There have been no unregistered sales of equity for the quarter ended November 30, 2013.
There have been no material defaults for the quarter ended November 30, 2013.
The Company has evaluated for disclosure all subsequent events occurring through January 13, 2014, the date the financial statements were issued.
The following exhibits are furnished as part of the Quarterly Report on Form 10-Q:
Exhibit Number | Description |
| 31.1 | | Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: January 14, 2014 | REDtone Asia, Inc. | Dated: Janaury 14, 2014 | REDtone Asia, Inc. |
| By: | /s/ Chuan Beng Wei | By: | /s/ Hui Nooi Ng |
| Name: | Chuan Beng Wei | Name: | Hui Nooi Ng |
| Title: | Chief Executive Officer | Title: | Chief Financial Officer |
| | (Principal Executive Officer) | | (Principal Financial Officer) |
