Note 14 - Variable Interest Entities ("vies")

9 Months Ended

Feb. 28, 2014

Notes

Note 14 - Variable Interest Entities ("vies")

NOTE 14 – VARIABLE INTEREST ENTITIES (“VIEs”)

On November 30, 2006, the Company entered into loan agreements with Huang Bin (“HB”) and Mao Hong (“MH”) for the establishment of Shanghai Hongsheng Net Telecommunications Co., Ltd (“Hongsheng”) 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 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 the loan agreements with Mao Junbao (“MJ”) and MH for the establishment of Shanghai Huitong Telecommunications Co., Ltd (“Huitong”) and on April 30, 2007, 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 had entered into the Nominee Agreement among Wang Jianping and Xu Lanying provided that Hongsheng would commission Wang Jianping and Xu Lanying to establish Nantong Jiatong Investment Consultant Co., Ltd (“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 RMB22,000,000for 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.

On January 22, 2014, Hongsheng completed the acquisition of a 56% equity interest in Xin Chang, as a direct subsidiary.

Although the Company is not the shareholder of Hongsheng, Huitong, Nantong Jiatong, QBA, Jiamao and Xin Chang, the Company has determined that it is the primary beneficiary of these entities, as the Company has 100% voting powers and entitled to receive all the benefit from operations of these four entities. Hence, Hongsheng, Huitong, Nantong Jiatong, QBA, Jiamao and Xin Chang are identified as VIEs and are consolidated as if wholly-owned 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:

	February 28, 2014	May 31, 2013
Assets
Cash and cash equivalents	$1,899,619	$1,945,614
Inventories	12,533	10,621
Accounts receivable	1,154,909	2,392,819
Tax recoverable	23,539	23,323
Other receivables and deposits	1,229,669	283,603
Goodwill	676,274	610,386
Property, plant and equipment, net	117,481	285,823
Intangible asset, net	244,924	-
Total assets (not include amount due from intra-group companies)	$5,358,948	$5,552,189
Liabilities
Deferred income	$887,308	$867,804
Accounts payable	1,891,969	3,730,907
Accrued expenses and other payables	601,123	379,035
Tax payables	30,962	31,188
Total liabilities	$3,411,362	$5,008,934

The statements of income of the consolidated VIEs for nine months ended February 28, 2014 and 2013 are as follows, and are included in the consolidated statements of income of the Company:

	Nine months ended February 28, 2014	Nine months ended February 28, 2013
Revenue	$4,093,086	$5,347,191
Other income and gains	34,397	32,949
Service costs (Not including service costs payable to intra-group companies)	(1,852,309	(3,875,423)
Administrative and other expenses	(290,799)	(280,298)
Personnel cost	(550,068)	(538,180)
Depreciation expense	(165,056)	(164,736)
Other operating expenses	(37,590)	-
Income before provision for income taxes (Not including service costs payable to other intra-group companies)	1,231,661	521,503
Income tax	(17,032)	(28,136)
Net income	$1,214,629	$493,367