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REDTONE ASIA INC - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 02, 2014]

REDTONE ASIA INC - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) 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 Increase/(Decrease) from previous May 31, 2014 May 31, 2013 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.


13-------------------------------------------------------------------------------- Table Of Contents 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.

14-------------------------------------------------------------------------------- Table Of Contents 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 Increase/(Decrease) from previous May 31, 2014 May 31, 2013 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 15-------------------------------------------------------------------------------- Table Of Contents 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 16-------------------------------------------------------------------------------- Table Of Contents 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.

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