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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended: November 30, 2015

For the transition period from ____________ to _____________

Commission File No. 333-129388

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

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

State the number of shares outstanding of each of the issuer's classes of common equity, as of November 30, 2015, are as follows:

Transitional Small Business Disclosure Format (check one): Yes  £       No  ☒

REDtone Asia, Inc.

 

 

PART I – FINANCIAL INFORMATION	2
ITEM 1.   FINANCIAL STATEMENTS	2
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	17
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4T.CONTROL AND PROCEDURES	24
PART II - OTHER INFORMATION	25
ITEM 1.  LEGAL PROCEEDINGS	25
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES	25
ITEM 4.  [REMOVED AND RESERVED]	25
ITEM 5.  OTHER INFORMATION	25
ITEM 6. EXHIBITS	25
SIGNATURES	26

PART I – FINANCIAL INFORMATION

REDtone Asia, Inc.

As of Quarter Ended November 30, 2015 (unaudited)

TABLE OF CONTENTS

 

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

At November 30, 2015 and May 31, 2015

 

See accompanying notes to the condensed consolidated financial statements.

 

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Six months and Three months ended November 31, 2015 and 2014

See accompanying notes to the condensed consolidated financial statements.

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended November 30, 2015 and 2014

See accompanying notes to the condensed consolidated financial statements.

 

REDTONE ASIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 31, 2015 (Unaudited)

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 during the period under review are illustrated as follows:

(1)	Disposed of during the fiscal year ended May 31, 2015

(2)	Variable interest entities

(3)	Deregistered during the fiscal year ended May 31, 2015

(4)	Acquired/incorporated during the fiscal year ended May 31, 2015

 

Nantong Jiatong, Hongsheng and QBA were disposed of July 25, 2014. The related assets held for sale and liabilities as of May 31, 2014 are reclassified in the consolidated balance sheet, while the corresponding results for years ended May 31, 2015 (up to disposal date) and 2014, respectively, are reported as discontinued operations. See also Footnote 4.

Prior to disposal of Hongsheng, the Company transferred its equity interest in Xin Chang to Huitong. The statutory registration was completed in September 2014.

YuZhong, YuGuang, Haitai and FengCheng are new subsidiaries during the fiscal year ended May 31, 2015. See also Footnote 5.

NOTE 2 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company's subsidiaries (see Note 1) for the three months and six months ended November 30, 2015 and 2014 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the following disclosures are adequate to make the information presented not misleading. All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company's operations is in Chinese Renminbi ("RMB"), while the reporting currency is U.S. Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company's financial position as of November 30, 2015, the results of its operations and cash flows for the three months and six months ended November 30, 2015 and 2014.

The results of operations for the three months and six months ended November 30, 2015 are not necessarily indicative of the results for a full year period.

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 six 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.

(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:

Depreciation expense attributable to continuing operations for the six months period ended November 30, 2015 and 2014 amounted to $279,940 and $257,974, respectively. Depreciation expense attributable to discontinued operations for the six months period ended November 30, 2015 and 2014 amounted to $nil and $3,689, 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 six months period ended November 30, 2015 and 2014 amounted to $72,924 and $73,215, respectively. There is no amortization expense attributable to discontinued operations for both periods.

(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 six months ended November 30, 2015 and 2014.

(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:

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:

·	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:

·

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

·

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.

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

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

(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 November 30, 2015 and 2014, 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:

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

The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during the period.  Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company's reported financial position or operations in the near term.

The Company reviews new accounting standards as issued. No new standards had any material effect on these financial statements. The accounting pronouncements issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these consolidated financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these consolidated financial statements as presented and does not anticipate the need for any future restatement of these consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to November 30, 2015 through the date these financial statements were issued.

NOTE 4 – DISPOSAL OF SUBSIDIARIES AND DISCONTINUED OPERATION

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.

As of the disposal date, QBA's assets and liabilities are summarized as follows:

The results of QBA during the period (up to date of disposal) are summarized as follows:

The results of QBA for the six months years ended November 30, 2014 is reported as discontinued operations in the condensed consolidated statement of income and comprehensive income.

The gain on disposal of QBA is analyzed as follows:

NOTE 5 – ACQUISITION OF A SUBSIDIARY

Expenses incurred by the newly acquired subsidiaries for the six months ended November 30, 2015 and 2014 were $24,863 and $nil respectively.

NOTE 6 - CASH AND CASH EQUIVALENTS

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

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:

NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

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

Depreciation expense attributable to continuing operations for the six months ended November 30, 2015 and 2014 amounted to $279,940 and $257,974, respectively. Depreciation expense attributable to discontinued operations for the six months period ended November 30, 2015 and 2014 amounted to $nil and $3,689, respectively.

NOTE 9 – INTANGIBLE ASSETS

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

Amortization expense attributable to continuing operations for the six months ended November 30, 2015 and 2014 amounted to $72,924 and $73,215, respectively. There is no amortization expense attributable to discontinued operations for both periods.

 

NOTE 10 – GOODWILL

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

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

As of the balance sheet dates, amount due from a related company that included in the Company's equity accounts were analyzed as follows:

The amount represents advances to the related company. As of the balance sheet dates, the amount is unsecured, non-interest bearing and is expected to be repaid within 2016.  

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

The amount due to the related company is unsecured, non-interest bearing and has no fixed repayment date.

NOTE 12 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of the balance sheet dates were summarized as follows:

NOTE 13 – DEFERRED INCOME

Deferred income consists of prepaid air-time sold which is yet to be utilized. The basis of revenue recognition for discounted call services is based on actual call charges made by end users. When calls are being made, the amount will be deducted from deferred income to the statement of income, net of call costs and expenses.

 

NOTE 14 – TAXES PAYABLE

Taxes payable at the balance sheet dates are summarized as follows:

Business tax represents PRC sales tax imposed upon the Company's services provided in the PRC.  Tax rates range from 3% to 5% depending on the nature of the taxable activities.

Income tax represents PRC income tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

 

NOTE 15 – INCOME TAX INCOME

On April 29, 2014, RTSH obtained a tax benefit which the income tax for 2013 and 2014 calendar year is exempt and the income tax for 2015, 2016 and 2017 calendar year will be subject to half rate deduction.

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

 (i) All PRC subsidiaries are subject to PRC tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

(ii) Hong Kong subsidiaries are subject to Hong Kong profits tax. The provision for Hong Kong profits tax is based on a statutory rate of 16.5% of assessable profits in Hong Kong.

(iii) BVI subsidiaries are not subject to profits tax.

NOTE 16 – VARIABLE INTEREST ENTITIES ("VIEs")

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

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

 

The results of VIEs (QBA is included in comparative figures) are as follows, and are included in the consolidated statements of income of the Company:

Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred freely out of the VIEs without restrictions. Therefore, the Company considers that there is no asset of VIEs that can only be used to settle obligations of the respective VIEs, except for registered capital and PRC statutory reserves of VIEs as of November 30, 2015. Since the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. As the Company is conducting certain businesses mainly through its VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

NOTE 17 – CAPITAL COMMITMENTS

Capital commitment that related to the Company's car inspection business is as follows:

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

Business Overview

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

On July 25, 2014, REDtone China 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 third party payment license, held by its wholly owned subsidiary, QBA.

Hongsheng is conducting telco related services in Shanghai. These telco related businesses is transferred to Huitong, a subsidiary of REDtone China from the Completion date. Therefore, all existing telco businesses of Hongsheng is still remain within the REDtone Group.

Critical Accounting Policies and Estimates

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

 

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

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

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

·	Persuasive evidence an arrangement exists;

·	Delivery has occurred or services have been rendered;

·	The seller's price to the buyer is fixed or determinable; and

·	Collectability is reasonably assured.

 

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

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

 

Recent Accounting Pronouncements

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

Year-to-date Results of Operations

Year-to-date Results for Six-month period ended November 30, 2015 as Compared to period ended November 30, 2014

The following table summarizes the results of our operations during the six-month periods ended November 30, 2015 and November 30, 2014, and associated percentage changes for comparisons purposes.

Continuing operations

Three-month period Results of Operations

Three-month period results ended November 30, 2015 as Compared to period ended November 30, 2014

The following table summarizes the results of our operations during the three-month periods ended November 30, 2015 and November 30, 2014, and associated percentage changes for comparisons purposes.

 

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

 

Foreign Currency Exchange Rate Risk

 

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

Interest Rate Risk

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

 

Inflation

 

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

 

Currency Exchange Fluctuations

 

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

 

Concentration of Credit Risk

 

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

 

1. The Company's business is characterized by new product and service development and evolving industry standards and regulations. Inherent in the Company's business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.

2. The Company's revenue is deriving from China and Hong Kong. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.

 

3. If the Company is unable to derive any revenues from these countries, it would have a significant, financially disruptive effect on the normal operations of the Company.

(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 period ended November 30, 2015 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 November 30, 2015. 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 November 30, 2015, the Company's internal control over financial reporting was effective.

PART II - OTHER INFORMATION

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

There have been no unregistered sales of equity for the quarter ended November 30, 2015.

There have been no material defaults for the quarter ended November 30, 2015.

 

The Company has evaluated for disclosure all subsequent events occurring through January 8, 2016, the date the financial statements were issued.

 

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

SIGNATURES

 

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