Attached files

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EX-32.2 - EXHIBIT 32.2 - REDtone Asia Incex322.htm
EX-32.1 - EXHIBIT 32.1 - REDtone Asia Incex321.htm
EX-31.2 - EXHIBIT 31.2 - REDtone Asia Incex312.htm
EX-31.1 - EXHIBIT 31.1 - REDtone Asia Incex311.htm


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

FORM 10-K

(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
For the fiscal year ended May 31, 2014
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
For the transition period from ______ to______
 
Commission file number 333-129388
 
REDTONE ASIA, INC
(Exact Name of registrant as specified in its charter)
     
Nevada
 
71-098116
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
   
     
Unit 15A, Plaza Sanhe, No. 121,Yanping Road, JingAn District, 200042 Shanghai, PRC
   
(Address of principal executive offices)
 
(Zip Code)
   
 

Registrant’s telephone number, including area code (86) 6103 2230

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

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

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

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

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

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

 
1

 
  
   
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
The issuer’s revenues for its most recent fiscal year were $6,176,820.

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of May 31, 2014 was $-0-.  Although listed on the OTCBB under the symbol RTAS, there is currently no active trading for the registrant’s common stock.  Therefore, the aggregate market value of the stock is deemed to be $-0-.  

At the date of this report, there were 282,315,356 outstanding shares of Redtone Asia, Inc. Common Stock, $0.0001 par value.

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

 
 
 
2

 
Note About Forward-Looking Statements

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

Historical Overview
 
As of May 31, 2014, details of the Company and its 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 holdings
             
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% (1)
 
Marketing and distribution of discounted call services to PRC consumer market
             
Shanghai Huitong Telecommunication Company Limited (“Huitong”)
 
The PRC
March, 26, 2007
 
100% (1)
 
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% (1)
 
Marketing and distribution of products on the Internet
             
Nantong Jiatong Investment Consultant Co., Ltd (“Nanjing Jiatong”)
 
The PRC
May 17, 2011
 
100% (1)
 
Investment holdings
             
Shanghai QianYue Business Administration Co., Ltd. ("QBA")
 
The PRC
December 12, 2008
 
100% (1)
 
Provision of prepaid shopping-card services in the PRC
             
Shanghai Xin Chang Information Technology Company Limited (“Xin Chang”)
 
The PRC
January 13, 2006
 
 56% (1)
 
Marketing and distribution of IP call and discounted call services in the PRC 
 
(1) - Variable interest entities.  See also Footnote 16 in the Notes to the audited financials.
 
 
Business of the Issuer
Corporate Structure



 
    Control through equity ownership
 
     Control through contractual binding (“VIE”)


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 control of Hongsheng by the Company 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.

Mr Mao Hong, the newly appointed Chief Operating Officer, is also a shareholder of Hongsheng and HuiTong.

On January 22, 2014, Hongsheng completed the acquisition of a 56% equity interest in Xin Chang from Diao Xi Rui (“DXR”), a non-affiliated person. The consideration of $245,655 was paid upon signing of the Acquisition Agreement; while another $489,900 to be paid to Xin Chang as an operating fund in batches based on Xin Chang’s financial needs as determined by the Company.  Pursuant to the agreement, the assets and liabilities of Xin Chang immediate before the acquisition was transferred to DXR. Therefore, the acquisition is in fact the purchase of operating concession.

Subsequent to the year-end date, on July 25, 2014, the Company entered into an agreement to dispose of its entire equity interest in Hongsheng, a VIE subsidiary, to Guotai Investment Holdings Limited at a total cash consideration of approximately $4.54 million.

Pursuant to the agreement, Hongsheng shall transfer all its operations, assets and liabilities other than investment in QBA prior to the completion of the above transaction. Therefore, the entire arrangement is to dispose of the shell of Hongsheng together with the entire interest in QBA.

The completion of disposal is subject to the transfer of the aforementioned operations, assets and liabilities, and also statutory approval by PRC local government.

Business Overview

We are principally involved in the business of offering discounted call services for end users and corporate segment and paperless reload services for prepaid mobile air-time reload for end user in Shanghai covering all three major telecommunication operators namely China Mobile, China Unicom and China Telecom.

Redtone China had on 25 July 2014 entered into a Share Sale Agreement (“SSA”) with Guotai Investment Holdings Limited (“GUOTAI”) for the divestment of Hongsheng for a total cash consideration of RMB28,000,000 for the purpose of GUOTAI acquiring the 3rd party payment license, held by its wholly owned subsidiary, QBA.

Hongsheng has been conducting all the telco related services in Shanghai. These telco related businesses shall be transferred to Huitong, a subsidiary of Redtone China from the Completion date. Therefore, all existing telco businesses of Hongsheng shall remain with the REDtone Group.

Upon completion of the Divestment, Hongsheng shall cease to be a subsidiary of Redtone China.

Products and Services

REDtone China offer the following services to customers:

1. Discounted call services for consumers (“EMS”)
2. Discounted call services for corporate customers
3. Reload services for prepaid mobile
4. Discontinued prepaid shopping-card services – revenue recognized is the commission earned.

Competition
 
The telecommunications industry in China is dominated by three state-run corporations: China Telecom Corporation Limited, China Mobile Communications Corporation and China United Network Communications Group Co., Ltd, all of whom have 3G licenses and engaged fixed-line and mobile business in China. 

We see competition from:
 

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

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

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

We believe our competitive advantage is derived from the following strengths:
 
(a)
Competitive Pricing

We, being one of the leading alternative voice service providers in Shanghai in terms of market share, could command the economies of scale to achieve lower minutes cost and lower operating cost per minute. Additional cost advantage is the low capital investment with self-developed technology.
By having advantage of longer market presence, credibility and dominant market share, we can afford to price its products and services competitively while maintaining healthy gross margins.
 
(b)
 
Superior Technology and Competent Technical Support
 
(c)
Innovation

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

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

(d)
Value Added Services

For the telecommunications services we provide, customers would also benefit from value added services in our convenient reload, customer care services and support, and e-billings.
 
Regulatory Matters

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

We do not anticipate having to expend significant resources to comply with any governmental regulations applicable to our operations. We are subject to the laws and regulations which are generally applicable to business operations, such as business licensing requirements, income taxes and payroll taxes.

However, the telecommunications industry is highly regulated in China. PRC laws and regulations will be modified and updated from time to time by the China government. In addition, many PRC laws and regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial uncertainty regarding the future interpretation and application of these laws or regulations.

Shanghai Hongsheng Net Telecommunication Co., Ltd. (“Hongsheng”), the subsidiary that carries out the telecommunication distribution services currently has a business license in connection with these services.  The business license is valid until November 28, 2026, and the Telecommunication Value-Adding Business Operating Permit is valid until October 7, 2018.  Both are subject to annual filings; however, the Company does not foresee any issue regarding renewal or material fees involved in the renewal.


Costs of Compliance with Environmental Laws

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

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

Intellectual Property and Research and Development

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

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

The “REDtone” logo in Chinese is registered trademarks in China valid until October 13, 2020.

The Company did not incur any research and development expenses in the fiscal year ended May 31, 2014.

Number of Employees
 
Currently, we have our Chief Executive Officer to manage the Company. With the acquisition of REDtone China, as of May 31, 2014, we had thirty nine (39) employees including eleven (11) in the Management team, twenty (20) in Research & Development, Customer Care, Sales and Marketing as well as Finance and Administrative, and balance of eight (8) in Technical supports. None of our employees are represented by labor unions or subject to collective bargaining agreements. We believe our employee relations are good and have no employee related dispute recorded over the years.
 
ITEM 1A. RISK FACTORS

Risks Related to Our Business
 
Operational/Business Risk

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


Competition

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

Dependence on key personnel

The technology industry is a growing and fast-changing sector and management and operation of the business requires the employment of highly-skilled knowledge workers, whether in technology or non-technology related fields. Our management recognizes and believes that our continuing success depends to a significant extent on the abilities and continuing efforts of its existing Executive Directors, Chief Executive Officers and key personnel. The labor market for skilled personnel in this field is highly competitive. We recognize that our success depends to a significant extent upon, amongst others, our ability to attract new personnel and retain its existing skilled personnel. We seek to mitigate this risk factor by offering its employees competitive salary/remuneration and benefits packages. There can be no assurance that the measures taken will be successful and that any change in our existing skilled personnel will not have a material effect on our business and operations.
 
Adverse Changes to the terms of business collaboration agreement with China TieTong
 
We currently have business collaboration agreements with China TieTong. The agreement provides for renewability and is subject to changes in the terms of the agreements on renewal. We will endeavour to seek and renew the agreement on terms favourable to us. There can be no assurance that any adverse changes to the terms of the agreement (for example, from failure to reach commercially acceptable terms) would not result in higher interconnection expenses. However, as we have emerged as a significant service provider, China TieTong may views this as a business opportunity to continue and further strengthen their working relationship with us.
 
Although individual members of our management team have experience as officers of publicly-traded companies, much of that experience came prior to the adoption of the Sarbanes-Oxley Act.
 
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.

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

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

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

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

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

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

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

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

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

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

Risks Associated With Doing Business in China and Asia

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

(i)
While each agreement under the Contractual Arrangements as governed by PRC laws is valid, biding, and enforceable, there is the possibility that these Contractual Arrangements will not be deemed by the relevant government authorities to be in compliance with PRC laws and regulation; or, that other government authorities will not in the future interpret existing laws, regulations or policies, or issue new laws, regulations or policies, with the result that all or some of these Contractual Arrangements would be deemed to be in violation of PRC laws.
 
(ii)
 
The PRC laws referred to herein are laws currently in force.  There is the possibility that any of such laws, or the interpretation thereof or enforcement thereof, will be changed, amended or replaced in the immediate future or in the long-term with or without retrospective effect.

(iii)
Under the current Contractual Arrangements, if the PRC Entities, and/or any of their individual shareholders fails to perform its/his/her respective obligations under these Contractual Arrangements, the Company may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC laws, including, but not limited to, seeking specific performance or injunctive relief, and claiming damages, which we cannot assure the Company would achieve the full remedy therefrom.
 

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

The Company’s principal executive offices are located at Suites 15A, E,F, Plaza Sanhe, No. 121 Yanping Road, Jing An District, Shanghai, PRC.  The Company’s management believes that all facilities occupied by the Company are adequate for present requirements, and that the Company’s current equipment is in good condition and is suitable for the operations involved.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are not a party to and none of our property is subject to any material pending or threatened legal, governmental, administrative or judicial proceedings.

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

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

PART II

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

The Company’s Articles of Incorporation provide that the Company has the authority to issue 300,000,000 shares of common stock at par value of $0.0001 per share. As of May 31, 2014, we had 282,315,356 outstanding shares of Common Stock.

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

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

As of May 31, 2014, we had approximately 49 shareholders of record.

Equity Compensation Plans
 

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

Sales of Unregistered Securities

For the period from June 1, 2013 to the date of this report, there is no sale of  unregistered securities.

ITEM 6.  SELECTED FINANCIAL DATA

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

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

Overview

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

Results of Operations

Financial Presentation

The following sets forth a discussion and analysis of the Company’s financial condition and results of operations for the two years ended May 31, 2014 and 2013. This discussion and analysis should be read in conjunction with our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors” of this Annual Report on Form 10-K.

Continuing operations

Results of continuing operations for year ended May 31, 2014 compared to year ended May 31, 2013

   
Year ended
       
   
May 31, 2014
   
May 31, 2013
   
Increase/(Decrease) from previous year
 
 Revenue
    6,176,820       6,487,707       (310,887 )     -5 %
 Other income and gains
    149,588       97,588       52,000       53 %
 Service costs
    (2,955,367 )     (4,030,075 )     1,074,708       -27 %
 Personnel cost
    (752,868 )     (619,800 )     (133,068 )     21 %
 Depreciation expense
    (484,432 )     (459,122 )     (25,310 )     6 %
 Amortization expense
    (137,452 )     (121,632 )     (15,820 )     13 %
 Administrative and other expenses
    (806,221 )     (669,568 )     (136,653 )     20 %
                                 
 Income before provision for income taxes
    1,190,068       685,098       504,970       74 %
 Provision for income taxes
    104,362       (284,680 )     389,042       137 %
                                 
 Net income before non-controlling interest
    1,294,430       400,418       894,012       223 %
                                 

Revenues. The Company generated revenue of $6,176,820 in the fiscal year ended May 31, 2014, representing a 5% decrease as compared with the fiscal year ended May 31, 2013. The decrease in revenues was mainly due to the decrease in call traffics in consumer voice business by $0.31 million, an intense price competition in telecommunication market.
 

Other income and gains.  During the fiscal year ended May 31, 2014, the Company recorded other income and gains of $149,588, an increase of $52,000 or 53% compared with last year.  The increase was due to an increase in interest income from time deposits.

Service cost. Service costs from operations for the year ended May 31, 2014 of $2,955,367 reflected a decrease of $1,074,708 over the fiscal year ended May 31, 2013. The decrease was mainly due to improvement in operating efficiency by reducing the use of unnecessary data..

Personnel expenses.  The personnel expenses have increased 21% or $133,068 to $752,868 for the year ended May 31, 2014. This is mainly contributed by annual increment in payroll and additional headcount due to the inclusion of the newly acquired Xin Chang operation.

Depreciation and amortization expenses.  Depreciation is generally comparable to last year. The increase in amortization expense was mainly attributable to the amortization of the newly acquired customer base and the operating concession during the year.

Administrative and other operating expenses.  The general and administrative expenses have increased $136,653 or 20% to $806,221. This is mainly due to the inclusion of the newly acquired Xin Chang operation.

Income before provision for income taxes.  For the financial year under review, the dropped in service costs has caused the net income before provision for income taxes stood at $1,190,068 as compared to $685,098 over the financial year 2013.

Provision for income taxes.  For the financial year under review, there is a income tax income of $104,362 compared to income tax expense of $284,680 over the financial year 2013. This was mainly due to a reversal of overprovided tax expense in last financial year as Redtone Shanghai has obtained its 2 years full-tax exemption, starting from January 1, 2013, and 3 years 50%-tax exemption from the local tax authority.

Net income before non-controlling interest.  For the financial year under review, the dropped in service costs and income tax income has caused the net income before non-controlling interest stood at $1,294,430 as compared to $400,418 over the financial year 2013.
 
Liquidity and Capital Resources.

Cash
 
Our cash balance at May 31, 2014, was $2,991,276, representing a reduction of $2,487,815, from previous cash balance of $5,479,091 as of May 31, 2013.

Cash Flow (before effect of exchange rate changes).

   
May 31, 2014
   
May 31, 2013
      +/-    
% Changes
 
Net cash provided by/ (used in) operating activities
  $ (196,758 )   $ 1,782,442       (1,979,200 )     -111 %
Net cash provided by/(used in) investing activities
  $ (518,807 )   $ 151,079       (669,886 )     -443 %
Net cash provided by financing activities
  $ 32,473     $ 39,190       (6,717 )     -17 %
Net (decrease)/increase in cash and cash equivalents
    (683,092 )     1,972,711       (2,655,803 )     -135 %
                                 

Net cash used in operations during the fiscal year ended May 31, 2014 amounted to $196,758 as compared to net cash provided by operations of $1,782,442 in the same period of FY2013, the change was mainly due to more settlement of account payable during the year.

Net cash flow used in investing activities for the fiscal year ended May 31, 2014 amounted to $518,807 mainly represents consideration paid for the acquisition of Xinchang during the year, and also cash paid in purchase of new property, plant and equipment.

There was net cash provided in financing activities for the year ended May 31, 2014 total $32,473 aroused from intercompany advances.


Working Capital
 
Our working capital was a positive of $3,712,695 at May 31, 2014, an increase of 56% year on year. The increased in working capital is mainly due to non-inclusion of the cash and cash equivalent in our discontinued operation, i.e. QBA.

At May 31, 2014, we had stockholders’ equity of $7,546,038; total assets of $12,715,771 and total current liabilities of $5,005,963.

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

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

We have no off balance sheet arrangements.

Discontinued Operations

Results of discontinued operations for year ended May 31, 2014 compared to year ended May 31, 2013

   
Year ended
       
   
May 31, 2014
   
May 31, 2013
   
Increase/(Decrease) from previous year
 
 Revenue
    63,849       733,133       (669,284 )     -91 %
 Other income and gains
    97,390       43,972       53,418       121 %
 Service costs
    14,354       699,846       (685,492 )     -98 %
 Personnel cost
    157,777       198,913       (41,136 )     -21 %
 Depreciation expense
    182,797       192,409       (9,612 )     -5 %
 Administrative and other expenses
    50,548       36,950       13,598       37 %
                                 
 Loss before provision for income taxes
    (244,237 )     (351,013 )     106,776       30 %
 Provision for income taxes
    -       -       -       N/A  
                                 
 Net loss before non-controlling interest
    (244,237 )     (351,013 )     106,776       30 %
                                 

Revenues. The Company generated revenue of $63,849 in the fiscal year ended May 31, 2014, representing a 91% decrease as compared with the fiscal year ended May 31, 2013. The decrease was mainly due to one-off project in previous year which have not recurring in this financial year.

Other income and gains.  During the fiscal year ended May 31, 2014, the Company recorded other income and gains of $97,390, an increase of $53,418 or 121% compared with last year.  The increase was due to an increase in interest income from time deposits.

Service cost. Service costs from operations for the year ended May 31, 2014 of $14,354 reflected a decrease of $685,492 over the fiscal year ended May 31, 2013. The decrease was consistent with the lower revenue generated during the year.

Personnel expenses.  The personnel expenses have decreased 21% or $41,136 to $157,777 for the year ended May 31, 2014. This is mainly due to lay-off some of the manpower to optimize the cost of the company.
 
Loss before provision for income taxes.   The net loss before provision for income taxes stood at $244,237 as compared to $351,013 over the financial year 2013 mainly due to lower personnel expenses compared to last year.
 
Liquidity and Capital Resources.

Cash
 
 
Our discontinued cash balance at May 31, 2014 (included in asset held for sale in the Consolidated Balance Sheets) was $1,687,392 as compared to previous cash balance of $1,797,240 as of May 31, 2013.
 
Cash Flow from Discontinued Operations (before effect of exchange rate changes).

   
May 31, 2014
   
May 31, 2013
      +/-    
% Changes
 
Net cash provided by/ (used in) operating activities
  $ (114,149 )   $ (99,105 )     (15,044 )     -15 %
                                 
Net (decrease)/increase in cash and cash equivalents
    (114,149 )     (99,105 )     (15,044 )     -15 %
                                 
Net cash used in operations during the fiscal year ended May 31, 2014 amounted to $114,149 as compared to net cash provided by operations of $99,105 in the same period of FY2013, an reduction of 15% as a result of a decrease in operating expenses.

Critical Accounting Policies and Estimates

Revenue Recognition

The Company assesses appropriate revenue recognition policy for each type of operation according to ASC 605-45

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

 
·
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 follow:
 
 
 
· Collaboration with CTT – Redtone China is appointed as the sole distributor for EMS and we will recognize the revenue when airtime is utilize by the consumer and it is on net basis which is computed based on a fixed sharing ratio of the total airtime utilize by consumers after netting of direct traffic termination cost and incidental expenses as per the collaboration agreement with CTT. Redtone China’s role for Business Collaboration with China TieTong Telecommunications (CTT) would be as “Agent” as Redtone China is the sole distributor for EMS brand owned and controlled by CTT;  and
 
· Collaboration with other telecommunication providers – Redtone China will act as discounted consumer call Reseller whereby Redtone China will decide on service and package specification, pricing policy while China Unicom merely acts as passive termination partner for call traffic.  Redtone China will pay China Unicom solely based on call traffic termination by China Unicom at prescribed rate (defined as traffic termination cost in the book of Redtone China).  In this regard, Redtone China will recognize the revenue when airtime is utilized by the consumer and the value recognize is the call charges gross value.    Redtone China role for Business Collaboration with China Unicom would be as “Principal” as China Unicom is playing passive role as traffic termination partner while Redtone China is fully responsible for the entire management of discounted call services.
 
As this is a prepaid product, there is an expiry date for the product sold. If the airtime is not utilize by the expiry date, which is currently one year from the activation date, it will be deemed expired and recognize as revenue based on the remaining gross value of the expired prepaid product
 
2.     Discounted call services for corporate as follow:
.
 
· Collaboration with CTT – the revenue recognize is the commission earn from distributing the discounted call services to corporate customer; and
 
· Collaboration with other telecommunication providers –the revenue recognize is the commission earn from distributing the discounted call services to corporate customer.
 
3.
Reload services for prepaid mobile – revenue recognize is the commission earn.

4.
Discontinued prepaid shopping-card services – revenue recognized is the commission earned.
 
Recent Accounting Pronouncements.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None
 

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this annual report.
 
(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the fiscal year ended May 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
(c) Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

·  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
 
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, 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.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of May 31, 2014. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992).

Based on the Company’s processes and assessment, as described above, management has concluded that, as of May 31, 2014, the Company’s internal control over financial reporting was effective.

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K for the year ended May 31, 2014.
 
ITEM 9B. OTHER INFORMATION

There were no items required to be disclosed in a report on Form 8-K during the fourth quarter of the fiscal year ended May 31, 2014 that have not been already disclosed on a Form 8-K filed with the SEC.
 
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

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

       
Name
Age
Position
Period
       
Chuan Beng Wei
49
 
Director
CEO
 
July 2008 - Present
October 2010- Present
Lau Bik Soon
 
44
Director
October 2010-Present
Ng Hui Nooi
41
CFO
March 2012-Present

 
Mr Chuan Beng Wei, age 49, is now the Chief Executive Officer of the Company.  Mr Wei has been and will continue serving on the Board of Directors of the Company. He obtained his Bachelor’s Degree in Electrical Engineering from University of Technology Malaysia in 1989 and Diploma in Management (Gold Medalist Award Winner) from the Malaysian Institute of Management, Kuala Lumpur in 1995.  He also completed an Entrepreneur Development Program from the renowned MIT Sloan School of Management in USA in January 2006.

He began his career with Hewlett Packard Sales Malaysia Sdn Bhd in 1989 as a Systems Engineer responsible for information technology (“IT”) technical and customer relations, and was subsequently promoted to Major Account Manager. Having gained wide exposure in IT, electronics and the telecommunications industry, he began his entrepreneur pursuit. He started Redtone Telecommunications Sdn Bhd in 1996 with two other partners. As one of the founding members of the Redtone Group, he is instrumental in shaping the Group’s business relations and policies. His main responsibilities include management of the Group’s overall business, expanding its overseas markets and financial-related matters. Mr Wei also serves as the Managing Director of the Redtone Group, which was listed in January 2004 in the ACE Market of Bursa Malaysia. In addition, in 2007, Mr Wei started Redtone China where he played a significant role in developing business strategy in China. He was the past Chairman for The Association of Computer and Multimedia Malaysia and the past Deputy Chapter Chairperson for the exclusive Young Presidents’ Organization (YPO).   
 
Mr. Bik Soon Lau, age 44, obtained his first-class honors degree in electrical engineering from the University of Technology in Malaysia. He joined REDtone in 2008, as an executive director responsible for expanding the Group’s Malaysia business which includes data, broadband, Wifi and discounted call services.  Prior to joining REDtone, he was the Country Manager for Hitachi Data Systems Malaysia from year 2005 to 2008. Under his leadership in Hitachi, he strengthened the organisation and company’s channel partner, and helped the company grow its business in Malaysia.

Mr. Lau’s 16 years of experience as Sales Director in the ICT and telecommunications industry provides expertise in corporate leadership and strategic marketing planning. In his career, he has held numerous other positions, including sales director, partner sales manager, enterprise division account manager, business development manager, systems engineer, and research and design engineer.  He has held these positions with organizations such as Cisco Systems, Sun Microsystems, Compaq Computer, TQC Consultant (IT Division) Sdn Bhd, and Motorola Penang. During his tenure with these organizations, he received various Partner Management Excellence awards as well as many accolades as a high achiever in sales.  
 
Ms. Hui Nooi Ng, age 41, a Malaysian Chartered Accountant, obtained her Professional Degree from The Association of Chartered Certified Accountants in 2004.   Ms. Ng has more than eighteen years of working experience in accountancy and has held various positions from accountant to finance manager with companies in Malaysia and Vietnam. In 1999, she joined ChemQuest Sdn Bhd, as an accountant, fully responsible for the finance and accounting operations for the company. In 2010, she joined Poh Huat Furniture Ind. Vietnam Joint Stock Co, a Malaysian manufacturing company based in Vietnam as the Finance Manager.  In this position, her main responsibilities included financial review and reporting, budgeting, business planning and risk management and treasury functions.


Number and Terms of Office of Directors

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

Code of Ethics

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

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and changes in ownership of the Company’s Common Stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended May 31, 2014, all Reporting Persons complied with all applicable filing requirements.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth, for the fiscal years ended May 31, 2014 and 2013, certain information regarding the compensation earned by the Company’s named executive officers. Where columns have been omitted from the Summary Compensation Table below, it is because no such compensation was paid to the named executive officer during the 2014 or 2013 fiscal years.
 
SUMMARY COMPENSATION TABLE
 
                           
     
Annual Compensation
       
                 
Other
   
All Other
 
Name and
Year
             
Annual
   
Compen-
 
Principal
Ended
 
Salary
   
Bonus
   
Compen-
   
Sation
 
Position
May 31
 
($)
   
($)
   
sation ($)
   
($)
 
Chuan Beng Wei,
2014
   
-0-
     
-0-
     
-0-
     
-0-
 
Director, CEO
2013
   
-0-
     
-0-
     
-0-
     
-0-
 
                                   
Bik Soon, Lau
2014
   
-0-
     
-0-
     
-0-
     
-0-
 
Director
2013
   
-0-
     
-0-
     
-0-
     
-0-
 
                                   
Hui Nooi, Ng
2014
   
15,638
     
-0- 
     
-0- 
     
-0- 
 
CFO
2013
   
17,649
     
-0- 
     
-0- 
     
-0- 
 

Director Compensation

Members of the Board of Directors did not receive any cash or non-cash compensation for their service as Directors during our 2014 and 2013 fiscal years.
 
Compensation Committee Interlocks and Insider Participation

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

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth beneficial ownership information as of May 31, 2014: (i) each of the Company’s officers and directors, (ii) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of common stock, and (iii) all of the Company’s officers and directors as a group. As of the date of this report, the Company had  282,315,356  shares of common stock outstanding.

 
(i)
Security Ownership of directors and executive officers: None
 
 
(ii)
Security ownership of certain beneficial owners:
 
       
Title of Class
Name and Address
Amount &
Nature of
 Beneficial
 Ownership
Percentage
 of Class
       
 
Common shares
REDtone International Bhd,
Suites 22-28, 5th Floor,
IOI Business Park, 47100 Puchong,
Malaysia.
260,619,364  92.3%  
       
 
 
(iii)
Security ownership of officers and directors as a group:  None.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

During the fiscal year ended May 31, 2014 and 2013, there were no related transactions between the Company and the directors except the followings:
 
Amount due from a related company
 
   
2014
   
2013
 
Fellow subsidiary:
           
REDtone Technology Sdn. Bhd.
  $ 3,272,950     $ 3,302,301  

 Amount due to a related company
   
2014
   
2013
 
Fellow subsidiary:
           
Redtone Telecommunications Sdn Bhd
  $ 148,791     $ 116,318  
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Albert Wong & Co, has served as the Company’s principal accountant since April 5, 2013. Their fees billed to the Company for the past two fiscal years are set forth below:

   
Fiscal Year ended May 31,
 
   
2014
   
2013
 
Audit Fees
 
$
48,000
     
42,000
 
                 
Audit Related Fees
   
-
     
-
 
                 
All Other Fees
   
0
     
0
 
                 
Total Fees
   
48,000
     
42,000
 
 
Audit Fees.
   
 
-Including fees for professional services for the audit of our annual financial statements and for the reviews of the financial statements included in each of our quarterly reports on Form 10-Q.
   
Audit Related Fees
   
 
-Consists of assurance related services by the independent auditors that are reasonably related to the performance of the audit and review of our financial statements and are not included under audit fees.
   
Tax Fees
   
 
- These services included assistance regarding federal, state and local tax compliance and return preparation.
   
All Other Fees
   
 
-Includes time and procedures related to change in independent accountants and research and assistance provided to the Company.

During its fiscal year ended May 31, 2014, the Company did not have an Audit Committee and the Company’s director pre-approved all fees of the principal accountant.


PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this Report:

CERTIFIED PUBLIC ACCOUNTANTS
7th Floor, Nan Dao Commercial Building
359-361 Queen’s Road Central
Hong Kong
Tel : 2851 7954
Fax: 2545 4086
ALBERT WONG
B.Soc., Sc., ACA., LL.B.,
C.P.A.(Practising)
 
To:
 
The board of directors and stockholders of
REDtone Asia, Inc.
 
Report of Independent Registered Public Accounting Firm


We have audited the accompanying consolidated balance sheets of REDtone Asia, Inc. and its subsidiaries (“the Group”) as of May 31, 2014 and 2013 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of the Group’s internal control over financial reporting as of May 31, 2014 and 2013 included in the Group’s Item 9A “Controls and Procedures” in the Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of REDtone Asia, Inc. and its subsidiaries as of May 31, 2014 and 2013 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 

/s/ Albert Wong & Co.

Albert Wong & Co.
Hong Kong, China
August 29, 2014
 
CONSOLIDATED BALANCE SHEETS
At May 31, 2014 and 2013
 

   
2014
   
2013
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 2,991,276     $ 5,479,091  
Inventories
    3,974       10,621  
Accounts receivable
    2,898,976       2,398,488  
Tax recoverable
    23,372       23,323  
Other receivables and deposits
    1,083,269       434,606  
Assets held for sale
    1,713,011       -  
Total current assets
    8,713,878       8,346,129  
                 
Property, plant and equipment, net
    1,451,894       1,900,561  
Intangible assets, net
    1,939,613       1,559,471  
Goodwill
    610,386       610,386  
Amount due from a related company
    -       3,302,301  
                 
Total assets
    12,715,771       15,718,848  
                 
Liabilities and stockholders’ equity
               
Liabilities
               
Current liabilities
               
Deferred income
    743,793       840,740  
Accounts payable
    2,798,373       3,751,360  
Accrued expenses and other payables
    582,240       534,375  
Amount due to a related company
    148,791       116,318  
Taxes payable
    671,125       718,042  
Liabilities related to assets held for sale
    56,861       -  
Total current liabilities
    5,001,183       5,960,835  
                 
Deferred tax liabilities
    4,780       19,739  
                 
Total liabilities
    5,005,963       5,980,574  
                 
Equity
               
Common stock, US$0.0001 par value , 300,000,000 shares authorized; 282,315,356 shares issued and outstanding, respectively
    28,232       28,232  
Additional paid in capital
    7,726,893       7,726,893  
Less: Amount due from a related company
    (3,272,950 )     -  
Retained earnings
    2,172,842       1,095,216  
Accumulated other comprehensive income
    891,021       887,933  
Total stockholders’ equity
    7,546,038       9,738,274  
Non-controlling interests
    163,770       -  
Total equity
    7,709,808       9,738,274  
                 
Total liabilities and stockholders’ equity
    12,715,771       15,718,848  
                 

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended May 31, 2014 and 2013
 
   
2014
   
2013
 
Continuing operations
           
Revenue
    6,176,820       6,487,707  
Other income and gains
    149,588       97,588  
Service costs
    (2,955,367 )     (4,030,075 )
Personnel cost
    (752,868 )     (619,800 )
Depreciation expense
    (484,432 )     (459,122 )
Amortization expense
    (137,452 )     (121,632 )
Administrative and other expenses
    (806,221 )     (669,568 )
                 
Income before provision for income taxes
    1,190,068       685,098  
Income tax income/(Provision for income taxes)
    104,362       (284,680 )
                 
Net income before non-controlling interest
    1,294,430       400,418  
Share of loss by non-controlling interest
    27,435       -  
                 
Net income from continuing operations
    1,321,865       400,418  
                 
Discontinued operations
               
Net loss
    (244,237 )     (351,013 )
                 
Net loss from discontinued operations
    (244,237 )     (351,013 )
                 
Net income for the year
               
Net income before non-controlling interest
    1,050,193       49,405  
Share of loss by non-controlling interest
    27,435       -  
Net income for the year
    1,077,628       49,405  
                 
Other comprehensive income
               
Gain/(loss) on foreign currency translation of continuing operations
    (4,876 )     72,312  
Share of other comprehensive income by non-controlling interest
    (1,810 )     -  
Other comprehensive income attributable to shareholders of the Company
    (6,686 )     72,312  
Gain/(loss) on foreign currency translation of discontinued operations
    7,962       79,602  
Total other comprehensive income
    1,276       151,914  
                 
Total comprehensive income
               
- Attributable to continuing operations
    1,315,179       472,730  
- Attributable to discontinued operations
    (236,275 )     (271,411 )
                 
Total comprehensive income
    1,078,904       201,319  
                 
Earnings per share, basic and diluted
               
– continuing operations
    0.00       0.00  
– discontinued operations
    (0.00 )     (0.00 )
Weighted average number of shares
    282,315,356       282,315,356  
                 

See accompanying notes to the consolidated financial statements.

 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years ended May 31, 2014 and 2013

   
Issued common shares
   
Common stock
   
Additional paid in capital
   
Amount due from a related company
   
Retained earnings
   
Other comprehensive income
   
Total stock-
holders’ equity
   
Non-
controlling
interests
   
Total equity
 
                                                       
Balance at June 1, 2012
    282,315,356     $ 28,232     $ 7,726,893     $ -     $ 1,045,811     $ 736,019     $ 9,536,955     $ -     $ 9,536,955  
Net income for the year
    -       -       -       -       49,405       -       49,405       -       49,405  
Foreign currency translation adjustments
    -       -       -       -       -       151,914       151,914       -       151,914  
                                                                         
Balance at May 31, 2013
    282,315,356       28,232       7,726,893       -       1,095,216       887,933       9,738,274       -       9,738,274  
Non-controlling interest arising from acquisition of subsidiary
    -       -       -       -       -       -       -       193,015       193,015  
Amount due from a related party recognized as an offset against equity
                            (3,272,950 )     -       -       (3,272,950 )             (3,272,950 )
Net income for the year
    -       -       -       -       1,077,628       -       1,077,628       (27,435 )     1,050,193  
Foreign currency translation adjustments
    -       -       -       -       -       3,086       3,086       (1,810 )     1,276  
                                                                         
Balance at May 31, 2014
    282,315,356     $ 28,232     $ 7,726,893     $ (3,272,950 )   $ 2,172,842     $ 891,021     $ 7,546,038     $ 163,770     $ 7,709,808  
                                                                         

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 2014 and 2013
 
   
2014
   
2013
 
Cash flows from operating activities
           
Cash flows from continuing operating activities
           
Net income before non-controlling interest
    1,294,430       400,418  
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
               
Amortization expense
    137,452       121,632  
Depreciation expense
    484,432       459,122  
Deferred tax
    (15,071 )     (14,452 )
Loss on disposal of property, plant and equipment
    -       5,825  
Provision for doubtful accounts
    141,289       -  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (501,009 )     (1,764,958 )
(Increase)/decrease in inventories
    (9 )     7,927  
Increase in other receivables and deposits
    (795,539 )     (53,958 )
Increase in tax recoverable
    (49 )     (568 )
Decrease in deferred income
    (96,947 )     (582,826 )
(Decrease)/increase in accounts payable
    (887,585 )     3,036,282  
(Decrease)/increase in tax payables
    (46,959 )     250,073  
Increase/(decrease) in accrued liabilities and other payables
    88,807       (82,075 )
                 
Net cash (used in)/provided by continuing operating activities
    (196,758 )     1,782,442  
Net cash used in discontinued operating activities
    (114,149 )     (99,105 )
      (310,907 )     1,683,337  
                 
Cash flows from investing activities
               
Cash flows from investing activities – continuing operations
               
Purchase of property, plant and equipment
    (221,053 )     (131,351 )
Purchases of intangible assets
    (81,450 )     -  
Decrease/(increase) in amount due from a related company
    29,351       (41,146 )
Sale of available-for-sale investment
    -       323,576  
Acquisition of subsidiary
    (245,655 )     -  
                 
Net cash (used in)/provided by continuing investing activities
    (518,807 )     151,079  
Net cash flows from discontinued investing activities
    -       -  
      (518,807 )     151,079  
                 
Cash flows from financing activities
               
Cash flows from continuing financing activities
               
Increase in amount due to related companies
    32,473       39,190  
                 
Net cash provided by continuing financing activities
    32,473       39,190  
Net cash flows from discontinued financing activities
    -       -  
      32,473       39,190  
                 
Net increase/(decrease) in cash and cash equivalents
               
Continuing operations
    (683,092 )     1,972,711  
Discontinued operations
    (114,149 )     (99,105 )
      (797,241 )     1,873,606  
                 
Effect of exchange rate changes on cash and cash equivalents
               
Continuing operations
    (7,483 )     184,306  
Discontinued operations
    4,301       (99,069 )
      (3,182 )     85,237  
                 
Cash and cash equivalents at beginning of year
               
Continuing operations
    3,681,851       1,524,834  
Discontinued operations
    1,797,240       1,995,414  
      5,479,091       3,520,248  
                 
Cash and cash equivalents at end of year
               
Continuing operations
    2,991,276       3,681,851  
Discontinued operations
    1,687,392       1,797,240  
      4,678,668       5,479,091  
Less: Cash and cash equivalents of discontinued operations at end of year
    (1,687,392 )     -  
Cash and cash equivalents of continuing operations at end of year
    2,991,276       5,479,091  
                 
Supplementary information – continuing operations
               
Cash paid for income taxes
    -       -  
Cash paid for interest
    -       -  
                 
 
See accompanying notes to the consolidated financial statements.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2014

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

REDtone Asia, Inc. and subsidiaries (the “Company”) are a group of companies in The People’s Republic of China (“PRC”). The principal activities of the Company are that of a Telecommunications provider for mobile, fixed and international gateway services. REDtone provides a wide range of telecommunication services, including prepaid and postpaid discounted call services to corporate customers and consumers as well as prepaid mobile air-time top-up. The Company also offers prepaid shopping card services.

The Company’s major subsidiaries as of the balance sheet dates are illustrated as follows:

Name
 
Domicile and date of incorporation
 
Effective ownership
 
Principal activities
Redtone Telecommunication (China) Limited (“Redtone China”)
 
Hong Kong
May 26, 2005
 
100%
 
Investment holding
             
Redtone Telecommunications (Shanghai) Limited (“Redtone Shanghai”)
 
The PRC
July, 26, 2005
 
100%
 
Provides technical support services to group companies
             
Shanghai Hongsheng Net Telecommunication Company Limited (“Hongsheng”) #
 
The PRC
November 29, 2006
 
100%
 
Marketing and distribution of discounted call services to PRC consumer market
             
Shanghai Huitong Telecommunication Company Limited (“Huitong”) #
 
The PRC
March, 26, 2007
 
100%
 
Marketing and distribution of IP call and discounted call services in the PRC
             
Shanghai Jiamao E-Commerce Company Limited (“Jiamao”) #
 
The PRC
March 21, 2008
 
100%
 
Marketing and distribution of products on the internet
             
Nantong Jiatong Investment Consultant Co., Ltd (“Nantong Jiatong”) #
 
The PRC
May 17, 2011
 
100%
 
Investment holding
             
Shanghai QianYue Business Administration Co., Ltd. ("QBA") #
 
The PRC
December 12, 2008
 
100%
 
Provision of prepaid shopping-card services in the PRC
             
Shanghai Xin Chang Information Technology Company Limited (“Xin Chang”) #
 
The PRC
January 13, 2006
 
56%
 
Marketing and distribution of IP call and discounted call services in the PRC
             
    # - Variable interest entities

QBA was disposed of subsequent to the year-end date.  The related assets held for sale and liabilities as of May 31, 2014 are reclassified in the consolidated balance sheet, while the results of QBA for years ended May 31, 2014 and 2013, respectively, are reported as discontinued operations. See also Footnote 4.

For continuing operations, segment reporting is not required as the revenue, profit or loss and total assets in association with the e-commerce business are immaterial to the Company’s revenue, reported profit or loss and total assets.
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements for the years ended May 31, 2014 and 2013 include the accounts of the Company, the Company’s subsidiaries and VIEs (see Note 1). The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America, and all significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”), while the reporting currency is the US Dollar.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Economic and political risk

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

The Company’s major operations in the PRC are subject to considerations and significant risks typically associated with companies in

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

(b) Cash and cash equivalents

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

(c) Accounts receivable and other receivables

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

Provision for doubtful accounts for the years ended May 31, 2014 and 2013 amounted to $141,289 and $nil, respectively.

(d) Property, plant and equipment

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

The Company provides for depreciation of property, plant and equipment principally by use of the straight-line method for financial reporting purposes. Plant and equipment are depreciated over the following estimated useful lives:
                                     
Computer and software
 5 years
Furniture, fixtures and equipment
 5 years
Motor vehicles
 5 years
Leasehold improvements
 5 years
Telecommunication equipment
 10 years
 
Depreciation expense attributable to continuing operations for the years ended May 31, 2014 and 2013 amounted to $484,432 and $459,122, respectively. Depreciation expense attributable to discontinued operations for the years ended May 31, 2014 and 2013 amounted to $182,797 and $192,409, respectively.

(e) Intangible assets

IT license and software and operating license and are generally amortized on a straight-line basis over the expected periods of benefit, in 20 years. Customer base are amortized on a straight-line basis over 3 years.

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

Amortization expense attributable to continuing operations for the years ended May 31, 2014 and 2013 amounted to $137,452 and $121,632, respectively. Amortization expense attributable to discontinued operations for the years ended May 31, 2014 and 2013 amounted to $nil and $nil, respectively.

(f) Available-for-sale investments

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

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

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

There is no impairment loss recognized during the years ended May 31, 2014 and 2013.


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

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

(i) Fair value of financial instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
 
 
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
 
 
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
 
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

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

(j) Revenue recognition

The Company assesses appropriate revenue recognition policy for each type of operation according to ASC 605-45

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

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

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

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

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

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

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

 
2.  
Discounted call services for corporate as follow:

o
Collaboration with CTT – the revenue recognize is the commission earned from distributing the discounted call services to corporate customer; and

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

3.  
Reload services for prepaid mobile – revenue recognized is the commission earned.
 
4.  
Discontinued prepaid shopping-card services – revenue recognized is the commission earned.
 
(k) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of May 31, 2011 and 2010, there were no dilutive securities outstanding.

(l) Use of estimates

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

(m) Retirement benefits

PRC mandates companies to contribute funds into the national retirement system, which benefits qualified employees based on where they were born within the country. The Company pays the required payment for qualified employees of the Company.

(n) Foreign currency translation

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

   
May 31, 2014
   
May 31, 2013
 
Year end RMB : US$ exchange rate
    0.1621       0.1618  
Average yearly RMB : US$ exchange rate
    0.1629       0.1590  
Year end HK$ : US$ exchange rate
    0.1290       0.1288  
Average yearly HK$ : US$ exchange rate
    0.1290       0.1288  

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.

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

(o) Recent Accounting Pronouncements

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

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

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

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

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

1. Deletion of Master Glossary Terms (Section A) arising because of terms that were carried forward from source literature (e.g., FASB Statements, EITF Issues, and so forth) to the Codification but were not utilized in the Codification.

2. Addition of Master Glossary Term Links (Section B) arising from Master Glossary terms whose links did not carry forward to the Codification.

3. Duplicate Master Glossary Terms (Section C) arising from Master Glossary terms that appear multiple times in the Master Glossary with similar, but not identical, definitions.

4. Other Technical Corrections Related to Glossary Terms (Section D) arising from miscellaneous changes to update Master Glossary terms.

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

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

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

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

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

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

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

The FASB has issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the IASB has issued IFRS 15, Revenue from Contracts with Customers. The issuance of these documents completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.

This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most

 
industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

-Step 1: Identify the contract(s) with a customer.
-Step 2: Identify the performance obligations in the contract.
-Step 3: Determine the transaction price.
-Step 4: Allocate the transaction price to the performance obligations in the contract.
-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as of the following:

-An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period (public entity effective date);
-An annual reporting period beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017; or
-An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period.

An entity should apply the amendments in this ASU using one of the following two methods:

1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

-For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
-For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
-For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method, it also should provide the additional disclosures in reporting periods that include the date of initial application of:

-The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.
-An explanation of the reasons for significant changes.

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

NOTE 4 – DISPOSAL OF SUBSIDIARIES AND DISCONTINUED OPERATION

Subsequent to the year-end date, on July 25, 2014, the Company entered into an agreement to dispose of its entire equity interest in Hongsheng, a VIE subsidiary, to Guotai Investment Holdings Limited at a total cash consideration of approximately $4.54 million.

Pursuant to the agreement, Hongsheng shall transfer all its operations, assets and liabilities other than investment in QBA prior to the completion of the above transaction. Therefore, the entire arrangement is to dispose of the shell of Hongsheng together with the entire interest in QBA.

The completion of disposal is subject to the transfer of the aforementioned operations, assets and liabilities, and also statutory approval by PRC local government.

As of the May 31, 2014, QBA’s assets held for sale and related liabilities are summarized as follows:
 

   
2014
   
2013
 
Assets
           
Cash and cash equivalents
  $ 1,687,392     $ 1,797,240  
Inventories
    6,669       6,656  
Accounts receivable
    522       521  
Other receivables and deposits
    8,841       5,587  
Property, plant and equipment, net
    9,587       191,117  
                 
Total assets
    1,713,011       3,329,804  
                 
Liabilities
               
Accounts payable
    32,701       -  
Accrued expenses and other payables
    24,160       62,069  
Taxes payable
    -       42  
Total current liabilities
    56,861       62,111  
                 
 
The results of QBA are summarized as follows:

   
2014
   
2013
 
             
Revenue
  $ 63,849     $ 733,133  
Other income and gains
    97,390       43,972  
Service costs
    (14,354 )     (699,846 )
Personnel cost
    (157,777 )     (198,913 )
Depreciation expense
    (182,797 )     (192,409 )
Administrative and other expenses
    (50,548 )     (36,950 )
                 
Net loss
    (244,237 )     (351,013 )
                 
 
QBA was reported as a separate operating segment in last year’s financial statements and is now reported as a discontinued operation in the consolidated statement of income and comprehensive income.

NOTE 5 – ACQUISITION OF A SUBSIDIARY

On January 22, 2014, Hongsheng completed the acquisition of a 56% equity interest in Xin Chang from Diao Xi Rui (“DXR”), a non-affiliated person. The consideration of $245,655 was paid upon signing of the Acquisition Agreement; while another $489,900 to be paid to Xin Chang as an operating fund in batches based on Xin Chang’s financial needs as determined by the Company.  Pursuant to the agreement, the assets and liabilities of Xin Chang immediate before the acquisition was transferred to DXR. Therefore, the acquisition is in fact the purchase of operating concession.

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

   
2014
 
Assets
     
Intangible assets – operating concession
  $ 438,670  
         
Liabilities
    -  
         
Net assets acquired
    438,670  
Shared by non-controlling interest
    (193,015 )
Purchase consideration
    245,655  
         

NOTE 6 - CASH & CASH EQUIVALENTS

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

   
2014
   
2013
 
             
Cash and bank
  $ 494,552     $ 1,086,549  
Time deposits
    2,496,724       4,392,542  
                 
Total
  $ 2,991,276     $ 5,479,091  

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

NOTE 7 – OTHER RECEIVABLES AND DEPOSITS

Other receivables and deposits as of the dates were summarized as follows:
 

   
2014
   
2013
 
             
Deposits
  $ 119,400     $ 176,191  
Temporary advance
    810,625       -  
Other receivables
    153,244       258,415  
                 
Total
  $ 1,083,269     $ 434,606  
 
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

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

   
2014
   
2013
 
At cost:
           
   Computer and software
  $ 102,023     $ 587,392  
   Telecommunication equipment
    5,297,796       5,048,888  
   Furniture, fixtures and equipment
    61,887       205,308  
   Motor vehicles
    126,133       125,871  
   Leasehold improvement
    35,319       35,253  
      5,623,158       6,002,712  
Less: Accumulated depreciation
    (4,171,264 )     (4,102,151 )
                 
Property, plant and equipment, net
  $ 1,451,894     $ 1,900,561  

Depreciation expense attributable to continuing operations for the years ended May 31, 2014 and 2013 amounted to $484,432 and $459,122, respectively. Depreciation expense attributable to discontinued operations for the years ended May 31, 2014 and 2013 amounted to $182,797 and $192,409, respectively.

NOTE 9 – INTANGIBLE ASSETS

Intangible assets as of the balance sheet dates are summarized as follows:

   
2014
   
2013
 
At cost:
           
   Operating concession
  $ 438,670     $ -  
   Customer base
    81,450       -  
   IT license and software
    2,276,992       2,278,603  
      2,797,112       2,278,603  
Less: Accumulated depreciation
    (857,499 )     (719,132 )
                 
Intangible assets, net
  $ 1,939,613     $ 1,559,471  

Amortization expense attributable to continuing operations for the years ended May 31, 2014 and 2013 amounted to $137,452 and $121,632, respectively. Amortization expense attributable to discontinued operations for the years ended May 31, 2014 and 2013 amounted to $nil and $nil, respectively.
 
NOTE 10 – GOODWILL

Goodwill as of the balance sheet dates were summarized as follows:

   
2014
   
2013
 
             
Arising from the acquisition of QBA
  $ 610,386     $ 610,386  

QBA was disposed of subsequent to the year-end date.

NOTE 11 – AMOUNT DUE FROM/(TO) RELATED COMPANIES

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