Note 16 - Variable Interest Entities ("vies")

12 Months Ended

May. 31, 2015

Notes

Note 16 - Variable Interest Entities ("vies")

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 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 (QBA included in comparative amounts):

	2015	2014
Assets
Cash and cash equivalents	$482,559	$1,888,407
Inventories	3,951	10,643
Accounts receivable	825,790	2,899,498
Tax recoverable	-	23,372
Other receivables and deposits	332,497	1,037,508
Goodwill	372,019	617,454
Property, plant and equipment, net	2,845,078	108,371
Intangible assets, net	443,700	495,020
Total assets (not include amount due from intra-group companies)	5,305,594	7,080,273
Liabilities
Deferred income	794,435	779,960
Accounts payable	760,409	2,810,592
Accrued expenses and other payables	1,163,356	452,527
Taxes payable	23,005	68,484
Total current liabilities	2,741,205	4,111,563

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

	2015	2014
Revenue	$7,343,342	$5,892,122
Other income and gains	969,671	28,144
Service costs (Not including service costs payable to intra-group companies)	(6,889,162)	(2,950,016)
Personnel cost	(519,808)	(751,568)
Depreciation expense	(65,088)	(208,186)
Amortization expense	(209,926)	(20,402)
Administrative and other expenses	(684,006)	(446,061)
Income before provision for income taxes (Not including service costs payable to intra-group companies)	(54,977)	1,544,033
Income tax income/(provision for income taxes)	(40,002)	(18,996)
Net income	(94,979)	1,525,037

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 May 31, 2015 and 2014. 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.