REDTONE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2016
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 airtime top-up. The Company also offers prepaid shopping card services.
The Company
'
s major subsidiaries during the years 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 Huitong Telecommunication Company Limited (
"
Huitong
"
)
1
|
|
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
"
)
1
|
|
The PRC
March 21, 2008
|
|
100%
|
|
Marketing and distribution of
IP call and discounted call services in the PRC
|
|
|
|
|
|
|
|
Shanghai Xin Chang Information Technology Company Limited (
"
Xin Chang
"
)
1
|
|
The PRC
January 13, 2006
|
|
56%
|
|
Marketing and distribution of IP call and discounted call services in the PRC
|
|
|
|
|
|
|
|
VMS Technology Limited
|
|
Hong Kong
September 14, 1998
|
|
100%
|
|
Trading of discounted call related equipment and provision of related services
|
|
|
|
|
|
|
|
RT Communications Ltd
|
|
BVI
February 24, 2010
|
|
100%
|
|
Investment holding
|
|
|
|
|
|
|
|
Shanghai YuZhong Financial Information Service Co., Ltd (
"
YuZhong
"
)
1
|
|
The PRC
July 16, 2014
|
|
49.8%
|
|
Investment holding
|
|
|
|
|
|
|
|
Shanghai YuGuang Automobile Inspection Technology Co., Ltd (
"
YuGuang
"
)
1
|
|
The PRC
July 17, 2014
|
|
59.8%
|
|
Investment holding
|
|
|
|
|
|
|
|
Taizhou Haitai Motor Vehicle Inspection Co, Ltd. (
"
Haitai
"
)
1
|
|
The PRC
October 31, 2013
|
|
30.5%
|
|
Investment holding
|
|
|
|
|
|
|
|
Feng Cheng Motor Vehicle Inspection Co., Ltd. (
"
FengCheng
"
)
1
|
|
The PRC
November 30, 2012
|
|
30.5%
|
|
Dormant
|
|
|
|
|
|
|
|
1
- Variable interest entities
Nantong Jiatong, Hongsheng and QBA were disposed of
July 25, 2014
. The corresponding results for years ended May 31, 2015 (up to disposal date) was 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 in previous financial year. See also Footnote 5.
NOTE 2 – PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the period ended April 30, 2016 and year ended May 31, 2015 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.
Impairment on allowance for debts
for the period ended April 30, 2016 and year ended May 31, 2015 amounted to $1
96
,
138
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 period ended April 30, 2016 and year ended May 31, 2015 amounted to $379,941 and $541,142, respectively. Depreciation expense attributable to discontinued operations for the period ended April 30, 2016 and year ended May 31, 2015 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 period ended April 30, 2016 and year ended May 31, 2015 amounted to $145,051 and $321,033, 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 $2,591,832 (2015: Nil) impairment loss recognized during the period ended April 30, 2016 and year ended May 31, 2015 respectively.
(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:
-
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 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 the consumer utilizes airtime 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:
|
☐
|
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.
|
3.
|
Reload services for prepaid mobile – revenue recognized is the commission earned.
|
4.
|
Collaboration with Shanghai Huili Telecommunications Co., Ltd (
"Huili
") – Huili will act as
"intermediary agent
" to resell the call traffic termination by Redtone China. Huili will pay Redtone China the termination costs on the books of Redtone China.
|
(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 April 30, 2016 and May 31, 2015, 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:
|
|
April 30, 2016
|
|
|
May 31, 2015
|
|
Year end RMB : US$ exchange rate
|
|
|
0.1541
|
|
|
|
0.1612
|
|
Average yearly RMB : US$ exchange rate
|
|
|
0.1570
|
|
|
|
0.1614
|
|
Year end HK$ : US$ exchange rate
|
|
|
0.1286
|
|
|
|
0.1290
|
|
Average yearly HK$ : US$ exchange rate
|
|
|
0.1289
|
|
|
|
0.1290
|
|
On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC's government.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(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
April 30, 2016 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:
|
|
July 25, 2014
|
|
Assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,969,661
|
|
Inventories
|
|
|
6,708
|
|
Accounts receivable
|
|
|
525
|
|
Other receivables and deposits
|
|
|
8,892
|
|
Property, plant and equipment, net
|
|
|
5,937
|
|
Total assets
|
|
|
2,991,723
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
|
29,699
|
|
Accrued expenses and other payables
|
|
|
17,462
|
|
Total current liabilities
|
|
|
47,161
|
|
|
|
|
|
|
Net assets of QBA
|
|
|
2,944,562
|
|
|
|
|
|
|
The assets of QBA as of May 31, 2014 are classified as assets held for sale and liabilities in the consolidated balance sheet.
The results of QBA during the year (up to date of disposal) are summarized as follows:
|
|
From June 1 2014 to July 25, 2014
|
|
|
|
|
|
Revenue
|
|
$
|
3
|
|
Other income and gains
|
|
|
164
|
|
Service costs
|
|
|
-
|
|
Personnel cost
|
|
|
(93,580
|
)
|
Depreciation expense
|
|
|
(3,689
|
)
|
Administrative and other expenses
|
|
|
(6,916
|
)
|
|
|
|
|
|
Net loss
|
|
|
(104,018
|
)
|
|
|
|
|
|
The results of QBA for the year ended 31 May, 2015 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:
Consideration received
|
|
|
4,565,936
|
|
Less: Net assets of QBA
|
|
|
(2,944,563
|
)
|
Less: Goodwill arising in the acquisition of QBA
|
|
|
(610,386
|
)
|
|
|
|
|
|
Gain on disposal
|
|
|
1,010,987
|
|
|
|
|
|
|
NOTE 5 – ACQUISITION OF A SUBSIDIARY
On July 16, 2014, Huitong, Mao Hong, a director and nominee shareholder of certain VIEs, and Wei Gang, an independent third party jointly incorporated YuZhong and the founders owned 49.8%, 25.1% and 25.1% of equity interests in YuZhong, respectively.
On July 17, 2014, Huitong and YuZhong jointly incorporated YuGuang. Huitong and YuZhong own 20% and 80% of equity interests in YuGuang, respectively.
On September 11, 2014, YuGuang entered into an agreement with Zhou Jin Shan and Chen Xiu Lan to acquire 51% equity interest in Taizhou Haitai Motor Vehicle Inspection Co, Ltd. ("Haitai") from Zhou Jin Shan at a consideration of RMB652,800. Haitai is principally engaged in the provision of motor vehicle inspection service in the PRC. The acquisition was completed in January 2015.
As of the date of acquisition, Haitai has 51% equity interest in FengCheng. FengCheng is principally engaged in
the provision of services for motor vehicle technical and emission inspection. Haitai and FengCheng was collectively known as "Haitai Group".
Management has assessed the fair value of the assets and liabilities of Haitai Group as of the acquisition date, and is analyzed as follows:
Assets
|
|
|
|
Construction in progress
|
|
$
|
1,100,243
|
|
Other receivables and deposits
|
|
|
101,036
|
|
Cash and cash equivalents
|
|
|
1,132
|
|
|
|
|
1,202,411
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accrued expenses and other payables
|
|
|
1,736,068
|
|
|
|
|
1,736,068
|
|
Net assets acquired
|
|
|
(533,657
|
)
|
Net assets shared by YuGuang
|
|
|
(272,165
|
)
|
|
|
|
|
|
Cash consideration
|
|
|
105,006
|
|
Goodwill
|
|
|
377,171
|
|
Reconciliation of net cash used in acquisition
|
|
|
|
|
Cash consideration paid
|
|
|
105,006
|
|
Less: cash acquired from the transaction
|
|
|
(1,132
|
)
|
Net cash used in acquisition
|
|
|
103,874
|
|
NOTE 6 - CASH & CASH EQUIVALENTS
As of the balance sheet dates, cash & cash equivalents are summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash and bank
|
|
$
|
345,315
|
|
|
$
|
800,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
345,315
|
|
|
$
|
800,821
|
|
NOTE 7 – OTHER RECEIVABLES AND DEPOSITS
Other receivables and deposits as of the year-end dates were summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
264,982
|
|
|
$
|
292,985
|
|
Other receivables
|
|
|
-
|
|
|
|
68,795
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,982
|
|
|
$
|
361,780
|
|
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of the balance sheet dates are summarized as follows:
|
|
2016
|
|
|
2015
|
|
At cost:
|
|
|
|
|
|
|
Computer and software
|
|
$
|
165,435
|
|
|
$
|
147,213
|
|
Telecommunication equipment
|
|
|
5,303,150
|
|
|
|
5,473,624
|
|
Furniture, fixtures and equipment
|
|
|
54,628
|
|
|
|
57,976
|
|
Motor vehicles
|
|
|
119,870
|
|
|
|
167,175
|
|
Leasehold improvement
|
|
|
115,657
|
|
|
|
32,556
|
|
Construction in progress
|
|
|
-
|
|
|
|
2,502,332
|
|
|
|
|
5,758,740
|
|
|
|
8,380,876
|
|
Less: Accumulated depreciation
|
|
|
(4,744,180
|
)
|
|
|
(4,577,472
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,014,560
|
|
|
$
|
3,803,404
|
|
Depreciation expense attributable to continuing operations for the period ended April 30, 2016 and for the year ended May 31, 2015 amounted to $379,941 and $541,142, respectively. Depreciation expense attributable to discontinued operations for the period ended April 30, 2016 and for the year ended May 31, 2015 amounted to $nil and $3,689, respectively.
NOTE 9 – INTANGIBLE ASSETS
Intangible assets as of the balance sheet dates are summarized as follows:
|
|
2016
|
|
|
2015
|
|
At cost:
|
|
|
|
|
|
|
Operating concession
|
|
$
|
566,773
|
|
|
$
|
592,934
|
|
Customer base
|
|
|
77,037
|
|
|
|
80,593
|
|
IT license and software
|
|
|
2,275,419
|
|
|
|
2,281,786
|
|
|
|
|
2,919,229
|
|
|
|
2,955,313
|
|
Less: Accumulated depreciation
|
|
|
(1,309,388
|
)
|
|
|
(1,178,142
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
1,609,841
|
|
|
$
|
1,777,171
|
|
Amortization expense attributable to continuing operations for the period ended April 30, 2016 and for the year ended May 31, 2015 amounted to $145,051 and $321,033, respectively.
NOTE 10 – GOODWILL
Goodwill as of the balance sheet dates were summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Arising from the acquisition of Haitai Group
|
|
$
|
377,171
|
|
|
$
|
377,171
|
|
Less: Impairment
|
|
|
(377,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
377,171
|
|
Haitai Group was acquired in previous financial year, See also Footnote 5.
NOTE 11 – AMOUNT DUE FROM/(TO) RELATED PARTIES
Amount due from a related company as of the balance sheet dates were summarized as follows:
|
|
2016
|
|
|
2015
|
|
Fellow subsidiary:
|
|
|
|
|
|
|
REDtone Technology Sdn. Bhd.
|
|
$
|
3,235,344
|
|
|
$
|
3,289,447
|
|
The amount represents advances to the related company. As of the balance sheet dates, the amount is unsecured, non-interest bearing and is no fixed term of repayment.
Amount due to a related company as of the balance sheet dates were summarized as follows:
|
|
2016
|
|
|
2015
|
|
Fellow subsidiary:
|
|
|
|
|
|
|
REDtone Telecommunications Sdn Bhd
|
|
$
|
173,409
|
|
|
$
|
160,420
|
|
Related party:
|
|
|
|
|
|
|
|
|
Shanghai Huili Telecommunications Co., Ltd
|
|
|
28,771
|
|
|
|
54,792
|
|
Non-controlling interests
|
|
|
1,798,633
|
|
|
|
1,873,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,813
|
|
|
|
2,088,644
|
|
The amounts due to the related parties are 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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
379,165
|
|
|
$
|
344,094
|
|
Other payables
|
|
|
450,330
|
|
|
|
539,365
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
829,495
|
|
|
$
|
883,459
|
|
NOTE 13 – DEFERRED INCOME
Deferred income consists of prepaid airtime 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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
992,222
|
|
|
$
|
487,044
|
|
Business tax and other tax payables
|
|
|
(19,995
|
)
|
|
|
169,198
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
972,227
|
|
|
$
|
656,242
|
|
Business tax represents PRC sales tax imposed upon the Company's services provided in the PRC. Tax rates range from 3% to 6% 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)/PROVISION FOR INCOME TAXES
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current income tax in PRC and Hong Kong
|
|
$
|
94,555
|
|
|
$
|
72,761
|
|
Under-provision in prior year
|
|
|
445,232
|
|
|
|
-
|
|
Deferred income tax income
|
|
|
-
|
|
|
|
(4,759
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
539,787
|
|
|
$
|
68,002
|
|
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. Accordingly, provision for income tax of $112,110 for the period from January 1, 2013 to May 31, 2013 that included in last year's income tax expenses was reversed as an income tax income during the year.
A reconciliation of the expected tax with the actual tax expense is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
(4,151,259
|
)
|
|
$
|
(1,222,542
|
)
|
|
|
|
|
|
|
|
|
|
Expected PRC income tax expense at statutory tax rate of 25%
|
|
|
(1,037,815
|
)
|
|
|
(305,636
|
)
|
Different tax rate for PRC/Hong Kong local authority
|
|
|
(1,054
|
)
|
|
|
9,649
|
|
Expenses not deductible for tax
|
|
|
272,054
|
|
|
|
241,114
|
|
Income not subject to tax
|
|
|
-
|
|
|
|
(34,449
|
)
|
Under provision in prior year
|
|
|
445,232
|
|
|
|
-
|
|
Utilization of tax loss brought forward
|
|
|
|
|
|
|
(105
|
)
|
Tax loss not provided for deferred tax
|
|
|
861,370
|
|
|
|
157,429
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
539,787
|
|
|
$
|
68,002
|
|
(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")
On April 30, 2007, the Company entered into the loan agreements with Mao Junbao ("MJ") and Mao Hong ("MH") for the establishment of Huitong and on April 30, 2007, an equity pledge agreement which provides that MJ and MH would pledge all their equities in Huitong to Redtone Shanghai.
During the year, Huitong acquired YuZhong, YuGuang, Haitai and FengCheng, as subsidiaries of the Company. See also Footnote 5.
On November 30, 2006, the Company entered into loan agreements with Huang Bin ("HB") and MH for the establishment of Hongsheng and on November 30, 2006, an equity pledge agreement which provides that HB and MH will pledge all their equities in Hongsheng to the Company and Redtone Shanghai. The agreement also provides that control of Hongsheng by the Company shall take effect from June 1, 2007.
On May 24, 2011, Hongsheng had entered into the Nominee Agreement among Wang Jianping and Xu Lanying, which provided that Hongsheng would commission Wang Jianping and Xu Lanying to establish Nantong Jiatong and the nominee shareholders of Nantong Jiatong is Wang Jianping and Xu Lanying.
On May 24, 2011, the Company entered into the loan Agreement with Nantong Jiatong to extend a loan of RMB22,000,000 for the additional capital injection into Hongsheng for establishment of QBA, an equity pledge agreement entered by and amongst the Company, Nantong Jiatong and Hongsheng, provided that Nantong Jiatong would pledge all its equities in Hongsheng to the Company.
Hongsheng and QBA were disposed on July 25, 2014. All equity interests in subsidiaries held by these companies were transferred to Huitong before disposal. All related loans under the above arrangements were settled before disposal.
Although the Company is not the shareholder of the above VIE subsidiaries, the Company has determined that it is the primary beneficiary of these entities, as the Company has controlling voting powers and entitled to receive the benefit from operations of these entities. Hence, these companies are identified as VIEs and are consolidated as if subsidiaries of the Company.
We did not identify any additional VIEs in which we hold a significant interest.
The total consolidated VIE assets and liabilities reflected on the Company's balance sheet are as follows:
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
161,340
|
|
|
$
|
482,559
|
|
Inventories
|
|
|
-
|
|
|
|
3,951
|
|
Accounts receivable
|
|
|
640,656
|
|
|
|
825,790
|
|
Tax recoverable
|
|
|
-
|
|
|
|
-
|
|
Other receivables and deposits
|
|
|
185,144
|
|
|
|
332,497
|
|
Goodwill
|
|
|
-
|
|
|
|
372,019
|
|
Property, plant and equipment, net
|
|
|
413,072
|
|
|
|
2,845,078
|
|
Intangible assets, net
|
|
|
381,670
|
|
|
|
443,700
|
|
|
|
|
|
|
|
|
|
|
Total assets
(not include amount due from intra-group companies)
|
|
|
1,781,882
|
|
|
|
5,305,594
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred income
|
|
|
1,145,770
|
|
|
|
1,138,911
|
|
Accounts payable
|
|
|
755,461
|
|
|
|
361,141
|
|
Accrued expenses and other payables
|
|
|
2,081,052
|
|
|
|
3,036,788
|
|
Taxes payable
|
|
|
18,332
|
|
|
|
23,005
|
|
Total current liabilities
|
|
|
4,000,615
|
|
|
|
4,559,845
|
|
|
|
|
|
|
|
|
|
|
The results of VIEs are as follows, and are included in the consolidated statements of income of the Company:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,971,566
|
|
|
$
|
7,343,342
|
|
Other income and gains
|
|
|
5,753
|
|
|
|
969,671
|
|
Service costs
(Not including service costs payable to intra-group companies)
|
|
|
(3,980,948
|
)
|
|
|
(6,889,162
|
)
|
Personnel cost
|
|
|
(276,152
|
)
|
|
|
(519,808
|
)
|
Depreciation expense
|
|
|
(57,762
|
)
|
|
|
(65,088
|
)
|
Amortization expense
|
|
|
(43,264
|
)
|
|
|
(209,926
|
)
|
Administrative and other expenses
|
|
|
(447,258
|
)
|
|
|
(684,006
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes (Not including service costs payable to intra-group companies)
|
|
|
(4,078,739
|
)
|
|
|
(54,977
|
)
|
Income tax income/(provision for income taxes)
|
|
|
-
|
|
|
|
(40,002
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(4,078,739
|
)
|
|
|
(94,979
|
)
|
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 April 30, 2016 and May 31, 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 – SEGMENTAL ANALYSIS
Information of the Company's business segment is as follows:-
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue from:
|
|
|
|
|
|
|
Telecommunications
|
|
$
|
5,100,897
|
|
|
$
|
8,423,788
|
|
|
|
|
|
|
|
|
|
|
Segment loss from:
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
$
|
(1,500,484
|
)
|
|
$
|
(923,817
|
)
|
Motor vehicle technical & emission inspection
|
|
|
(2,650,775
|
)
|
|
|
(298,725
|
)
|
|
|
|
(4,151,259
|
)
|
|
|
(1,222,542
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization expenses:
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
$
|
524,802
|
|
|
$
|
862,175
|
|
Motor vehicle technical & emission inspection
|
|
|
190
|
|
|
|
-
|
|
|
|
|
524,992
|
|
|
|
862,175
|
|
|
|
|
|
|
|
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
$
|
7,871,107
|
|
|
$
|
9,573,796
|
|
Motor vehicle technical & emission inspection
|
|
|
30,972
|
|
|
|
2,638,047
|
|
|
|
|
7,902,079
|
|
|
|
12,211,843
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure:
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
$
|
-
|
|
|
$
|
246,575
|
|
Motor vehicle technical & emission inspection
|
|
|
-
|
|
|
|
(1,415
|
)
|
|
|
|
-
|
|
|
|
245,160
|
|
NOTE 18 – CAPITAL COMMITMENTS
Capital commitment that related to the Company's car inspection business is as follows:-
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Contracted but not provided for property, plant and equipment
- within 1 year
|
|
$
|
-
|
|
|
$
|
2,785,647
|
|
NOTE 19 – RELATED PARTY TRANSACTION