VALUE EXCHANGE INTERNATIONAL, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Form 10-K, our actual results could differ materially from the results described in or implied by these forward-looking statements. See "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward-looking statements. Our financial statements are prepared inU.S. dollars and in accordance withU.S. GAAP. Overview of our Business
The IT Business inHong Kong andChina is large and fragmented, comprised of thousands of competitors as well as being a highly competitive industry. A general trend affecting our IT Business is the trend of increasing competition for skilled labor. With a global economy and foreign competitors seeking to penetrateHong Kong andChina as markets as well as to tap into new pools of skilled workers in IT Business, we will undoubtedly face increasing competition for skilled workers in IT Business in theHong Kong andChina markets. We may be unable to afford or effectively compete for necessary skilled workers inHong Kong andChina and, if we are unable to afford or effectively compete for necessary skilled workers, our growth and ability to attain and sustain profit operations in the IT Business may fail. We have not experienced any significant problems in recruiting necessary skilled workers in fiscal years 2020 or 2021. A common problem in the IT Business is retaining skilled workers throughout the duration of a project. Due to the global nature of the IT Business and the growing demand for skilled IT Business workers, a skilled IT business worker can often readily find higher paying positions with competitors, whether local or foreign. While we have not experienced retention problems due primarily to our focus on smaller, shorter term IT business projects, we may experience retention of skilled worker problems if we grow our IT Business and undertake longer term, more complex IT business projects for customers. IT Business is often affected by general economic conditions in our markets and any decline in those conditions could adversely impact our business and financial performance. During periods of economic growth, customers general spend more for IT Business products and services. During periods of economic contraction or uncertainty, such spending generally decreases or is deferred. As such, the prospective business for our IT Business is generally greater during periods of economic growth or stability inHong Kong orChina and decreases during periods of economic decline or uncertainty inHong Kong andChina . In our global economy, and with PRC being still a principal export economy, adverse economic conditions globally or in other regions can adversely impact economic conditions inHong Kong SAR and PRC. PRC has experienced a less dynamic growth in gross national product in the past year and this may reduce the willingness of customers to spend on IT Business The impact of Coronavirus/COVID-19 pandemic in late 2019 and throughout 2020 and 2021 has introduced a risk factor that cannot be fully evaluated as of the date of the filing of this Form 10-K due to a number of uncertainties about reoccurrence of the pandemic in the near future in our key markets and the time frame for developing a vaccine and viral remedial medicines that will allow the economies in our key markets to return to normal state of operation and function. The assumption by Company is that Coronavirus/COVID-19 pandemic will depress performance of Company operations in 2022 and possibly into 2023. The IT Business is global and, with the growth of cloud computing, there is a growing capability and infrastructure for companies in a foreign nation to provide IT Business to customers around the globe as a complement to cloud computing. We have not seen any significant impact of cloud computing on our IT Business in fiscal years 2020 or fiscal year 2021, but we perceive that the expansion of cloud computing could allow foreign customers to provide IT Business products and services to its cloud computing customers in ourHong Kong andChina core market. We may find it more difficult to compete for IT Business inHong Kong andChina if customers of IT Business elect to have cloud computing companies manage, repair and enhance IT Business products, software and systems. The growth of cloud computing coupled with IT Business products and services as an ancillary component of the cloud computing menu of products and services could adversely impact our IT Business inHong Kong andChina markets.
We are examining if our operations could enter into a strategic relationship with a cloud computing company as part of a response to possible future competition from cloud computing companies, but have not taken any steps to pursuing or attaining such a relationship.
21 The nature of our IT Business is such that our most significant current asset is accounts receivable. Our most significant current liabilities are payroll related costs, which are generally paid either every two weeks or monthly. If the demand for our IT Business products and services increases, we may generally see an increase in our working capital needs, as we continue to pay our workers on a weekly or monthly basis while the related accounts receivable are outstanding for much longer than normal payment cycle, which may result in a decline in operating cash flows. Conversely, as the demand for our IT Business products and services declines, we may generally see a decrease in our working capital needs, as the existing accounts receivable are collected and not replaced at the same level, resulting in a decline of our accounts receivable balance, with less of an effect on current liabilities due to the shorter cycle time of the payroll related items. This may result in an increase in our operating cash flows; however, any such increase would not be sustainable in the event that a local or global economic downturn continued for an extended period. In order for us to attain sustained success in the near term, we must continue to maintain and grow our customer base, provide high-quality service and satisfaction to our existing clients. In the current economic environment, we must provide our customers with service offerings that are appropriately priced, satisfy their needs, and provide them with measurable business benefits. While we have recently experienced a more demand for our IT Business products and services, we believe that it is too early to determine if developments will translate into sustainable improvements in our pricing or margins in fiscal
year 2021 or over the longer term. The increasing need for cybersecurity products and technologies may be a future weakness of our business plan. We do not have a current cybersecurity product and service line beyond consultants engaged to provide cybersecurity services. Cybersecurity companies may have an advantage over our business model in the future in that cybersecurity companies could leverage their cybersecurity offerings to also sell IT Business services and products that compete with our IT Business products and services. While we may explore enhanced cybersecurity offerings, but we have not identified or commenced launch of any new cybersecurity products as of the date of the filing of this Form 10-K. Principal business
The principal business of VEI CHN for more than 15 years is to provide the IT Business, primarily to leading retailers inHong Kong SAR, Macau SAR and PRC. The primary services and products of the IT Business are:
a) Systems maintenance and related service
VEI CHN Group provides development, customization of software and hardware, enhancements thereto and maintenance services for installed POS system.VEI CHN Group market, sell and maintain its own brand POS software - edgePOS as well as third party brands (e.g. NCR /Retalix , which is one of the leading POS software in the market). These software programs can often integrate with different
IP systems.
Systems maintenance services consist of: i) software maintenance service, including software patches, software code revisions; ii) installing, testing and implementing software; iii) training of customer personnel for the use of software; and iv) technical support and administration for software systems.
Other services include system installation and implementation including i) project planning; ii) System Analysis; iii) design of the entire system; iv) hardware and consumables selection advice and sales; and v) system hardware maintenance. These services typically consist of customer projects for NSO and IMAC for retail, and ad-hoc custom system projects for other business sectors. Our primary focus is the retail sector inHong Kong SAR and PRC.
b) Systems development and integration
VEI CHN Group provides value-added software, which integrate with customer owned or licensed software, and ad-hoc software development projects for other business sectors. Besides use of proprietary, custom software code, our services may from time to time license standard third party software programs. 22 DuringJanuary 2017 , VEI CHN acquired 100% common stock ofTapServices, Inc. ("TSI") for total consideration being$202,636 . TSI is a limited liability corporation organized under the laws ofthe Philippines onMarch 24, 2009 . TSI operations have been managed by Mr.Benny Lee , a director of VEI SHG. TSI commenced revenue generating operations in 2010 and focused on software and computer hardware maintenance on point of sale or "POS" systems for localManila, Philippines businesses. Recent years, TSI business model has been to engage in the business of providing information, data, and communications technology services, to supply and deal in all related products, including computer hardware, software and application products, and to own, design, install, maintain, operate, integrate, sell, lease or otherwise deal in such systems, facilities, gateways, equipment, devices and POS terminals in the retail business. TSI's business line is essentially similar to the business line ofVEI CHN Group in information technology and computer system consulting services and related products' sales. The customer base of TSI includesRobinson Retails Group ("RRG"), Ministop Convenience Stores, and Watson'sPersonal Health and Care (Phil.) Inc. inthe Philippines . In 2021, TSI achieved of$1.6 million in gross revenues. TSI customarily combines maintenance contracts with hardware sales. TSI geographical market is the greaterManila, Philippines region and adjacent areas.
Throughout fiscal year 2021, we are focusing and will focus its business in IT Business, and seek to expand its services to commercial customers in PRC andAsia Pacific Region when general economic conditions are favorable for expansion, which requires an end or substantial diminution of the Coronavirus/COVID-19 pandemic, and adequate, affordable funding are available. Such expansion may not be feasible until 2022 or 2023. This strategy is based upon our subjective business judgment that the IT Business presents more opportunities for potential customer order in our core markets of Hong Kong SAR andChina than the IP Business as a standalone business based on a new e-pay platform. This judgment was a factor in deciding to pursue the new strategic focus described in "New Development " section of this Form 10-K.
Financial Performance Highlights
The following are some financial highlights for the 2021:
· Net revenue: Our net revenues were
2021, as compared to$20,551,471 for the year endedDecember 31, 2020 , a decrease of$10,573,550 or 51.4%.
· Gross profit: Gross profit for the year ended
or 26.9% of net revenues, as compared to
for the year endedDecember 31, 2020 , an increase of$625,632 or 30.5%.
· Income from operations: Our profit from operations totaled
year ended
31, 2020, an increase of
to the increase in our gross profit.
· Net income: Our net income of
compared to
$571,898 or 542.1%.
· Basic and diluted net income per share was
31, 2021. Results of Operations
Year Ended
The following table summarizes the results of our operations during the years endedDecember 31, 2021 and 2020 and provides information regarding the dollar and percentage increase or (decrease) from the 2020 year to the 2021 year.
23 RESULTS OF OPERATIONS
Comparison of Year Ended
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in
2021 2020 Change
US$ US$ US$ %
NET REVENUES
Service income 9,977,921 20,551,471 (10,573,550 ) (51.4 )
COST OF SERVICES
Cost of service income (7,298,227 ) (18,497,409 ) 11,199,182 (60.5 )
GROSS PROFIT 2,679,694 2,054,062 625,632 30.5
Operating expenses:General and administrative expenses (2,131,194 ) (1,869,455 )
(261,739 ) 14.0 Foreign exchange gain (loss) (13,741 ) (58,281 ) 44,540 (76.4 ) PROFIT FROM OPERATIONS 534,759 126,326 408,433 323.3 OTHER INCOME (EXPENSES) 229,774 (95 ) 229,869 (241967.4 ) INCOME BEFORE PROVISION FOR INCOME TAXES 764,533 126,231 638,302 505.7 INCOME TAXES EXPENSES (87,131 ) (20,727 ) (66,404 ) 320.4 NET INCOME 677,402 105,504 571,898 542.1
Net revenues. Net revenues were$9,977,921 for the year endedDecember 31, 2021 , as compared to$20,551,471 for the fiscal year endedDecember 31, 2020 , a decrease of$10,573,550 or 51.4%. This result was primarily attributable to the increase in our revenue from 1) systems maintenance with revenue increasing from$7,379,350 for the year endedDecember 31, 2020 to$7,439,172 for the year endedDecember 31, 2021 and 2) hardware and consumables with revenue increasing from$1,903,853 for the year endedDecember 31, 2020 to$2,290,531 for the year endedDecember 31, 2021 ; offset by the decrease in our revenue from 3) sales of systems development and integration with revenue decreasing from$11,268,268 for the year endedDecember 31, 2020 to$248,218 for the year endedDecember 31, 2021 .
Cost of services. Our cost of services is primarily comprised of our costs of technical staff and general overhead. Our cost of services were$7,298,227 or 73.1% of net revenues, for the year endedDecember 31, 2021 , as compared to$18,497,409 or 90.0% of net revenues, for the year endedDecember 31, 2020 , a decrease of$11,193,092 or 60.5%. The decrease in cost of services was mainly attributable to the decrease in our contracting fees to suppliers which in line with revenues decreased, and general operating overhead. Gross profit. Gross profit for the year endedDecember 31, 2021 was$2,679,694 or 26.9% of net revenues, as compared to$2,054,062 or 10.0% of net revenues, for the year endedDecember 31, 2020 . The increase of gross profit was largely due to the decrease in cost of services, offset by the decrease in net revenues in 2021, as compared with 2020. General and administrative expenses. General and administrative expenses include the costs associated with staff and support personnel who manage our business activities, office rental expenses, depreciation charge for fixed assets, and professional fees paid to third parties. General and administrative expenses increased to$2,131,194 or 21.4% of net revenues, for the year endedDecember 31, 2021 , as compared to$1,869,455 or 9.1% of net revenues, for the year endedDecember 31, 2020 , an increase of$261,739 or 14.0%. The primary reason for the increase was attributable to an increase in consultancy and professional fees, staff costs and other administrative costs in 2021, as compared with 2020. Profit from operations. As a result of the above analysis, our profit from operations totaled$534,759 for the year endedDecember 31, 2021 , as compared to$126,326 for year endedDecember 31, 2020 , an increase of$408,433 or 323.3%. The change was mainly attributable to the increase in our gross profit. Income taxes. The Company is subject toUnited States federal income tax at a tax rate of 21% in 2021 (2020: 21%) on any revenues subject toU.S. taxation. No provision for income taxes inthe United States has been made as the Company had noU.S. source income taxable inthe United States for the fiscal years endedDecember 31, 2021 and 2020. VEI CHN and VEI HKG were formed inHong Kong and subject toHong Kong income tax at a tax rate of 16.5% for the year endedDecember 31, 2021 . TSI was formed inPhilippines and subject to an income tax rate of 30% for the year endedDecember 31, 2021 . Our VEI SHG, VEI HN and SZH was formed inChina and subject to national and local income taxes withinChina at the applicable tax rate on the taxable income as reported in its PRC statutory financial statements in accordance with relevant income tax laws.China passed a new Enterprise Income Tax Law, or the "New EIT Law," and its implementing regulations, both of which became effective onJanuary 1, 2008 . VEI SHG subject to an income tax rate of 25% for the year endedDecember 31, 2021 . 24 Income taxes expenses amounted to$87,131 or 0.9% of net revenues for the year endedDecember 31, 2021 , as compared to$20,727 or 0.1% of net revenues for the year endedDecember 31, 2020 . The increase was primarily attributable to the current tax expenses increase with the net income, and the utilization of tax loss brought forward and recognition of deferred tax asset attributable for tax loss for the year endedDecember 31, 2021 . Net income. As a result of the foregoing, we had a net income of$677,402 for the year endedDecember 31, 2021 , compared to$105,504 for the year endedDecember 31, 2020 , as a result of the factors described above concerning decrease in cost of services, and increase in other income, offset by decrease in revenue, and increase operating expenses.
Liquidity and Capital Resources
As of
Cash Flows
(All amounts in
Year Ended
December 31,
2021 2020
US$ US$Net cash provided by operating activities 135,356
724,422
Net cash used in investing activities (325,827 ) (145,345 ) Net cash used in financing activities (14,248 ) (311,549 ) Effect of exchange rate changes on cash and cash equivalents (29,220 ) 21,720 Net (decrease) increase in cash and cash equivalents (233,939 ) 289,248 Cash and cash equivalents at the beginning of year 523,337
234,089
Cash and cash equivalents at the end of year 289,398
523,337
Operating Activities
Net cash provided by operating activities was $135,356 for the year ended
December 31, 2021 , which was a decrease of $589,066 or 81.3% from $724,422 for
the year ended December 31, 2020 . The decrease was primarily attributable to the
following:
1) Net income of
2) A change of other receivables, deposit and prepayments, and amounts due from
related parties increased our operating cash balances by
respectively; offset by
3) A change of accounts receivable, accounts payable, other payables and accrued
liabilities, and amounts due to related parties decreased our operating cash
balances by $433,305 , $702,351 , $156,577 , and $490,717 .
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Obligations Total Due Due in Less Due in 1-3 Due in 4-5 Due in more than 1 year Years years than 5 years Operating lease obligations, including imputed interest 421,590 266,924 154,666 - - 25 Investing Activities Net cash used in investing activities increased to$325,827 in the year endedDecember 31, 2021 , which was an increase of$180,482 or 124.2% from$145,345 for the year endedDecember 31, 2020 . The increase in net cash used in investing activities was attributable to the purchase of plant and equipment by$326,578 ; offset by cash provided by the interest received by$751 for the year ended
December 31, 2021 . Financing Activities Net cash used in financing activities was$14,248 in the year endedDecember 31, 2021 , which was a decrease of$297,302 or 95.4% from$311,549 for the year endedDecember 31, 2020 . The decrease was attributable to the cash provided by issued share capitals, proceeds from non-controlling interests, and process from bank loan by$650,000 ,$18,600 and$14,322 respectively; offset by cash used in dividend paid, principal payments on leases, and repayment of bank loan by$169,291 ,$489,005 , and$38,874 respectively for the year endedDecember 31, 2021 . Future Financings We believe that our cash on hand and cash flow from operations will meet our expected capital expenditure and working capital requirements for our current IT Business for the next 12 months. However, we may in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity, sales, marketing and branding activities or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects. OnFebruary 16, 2018 , VEI SHG signed aJanuary 24, 2018 stores equipment support agreement ("Agreement") with the largest health care and beauty retailer ("Retailer") inPeople's Republic of China ("China"). Under the Agreement, the Retailer has contracted for site and preventive maintenance and support for computer and point of sale systems ("Systems") as well as new store and store renovation install and migration services for Systems from the VEI SHG. The Agreement is non-exclusive, covers Retailer's stores in the northern and eastern region ofChina and runs throughDecember 2020 . Gross revenue and net profit potential, if any, as well as the full extent of services by VEI SHG under the Agreement are uncertain at this time due to lack of sufficient operational experience as a service provider under the Agreement. The Agreement may require the Company to seek additional equity and/or debt funding to provide the capital needed to staff and purchase product under the Agreement. InMarch 2020 , a renewal agreement signed with the Retailer, and related service extended to31 March 2023 . The amount and availability of such funding is not certain as of the date of this Form 10-K Adequate and affordable funding, required by, if any, the Agreement is essential to the ability of VEI SHG to perform its obligations under the Agreement. While the Company does not currently anticipate any problems in obtaining the necessary funding, if any is required, and has not experienced problems in funding this contract in fiscal year 2021, the Company makes no assurances about its ability to timely, affordably obtain the necessary funding for the Agreement. During fiscal year 2021, VEI SHG had$4,373,007 in gross revenues from the work under the Agreement. The Company's strategic plan includes efforts to expand its markets by acquisitions of existing business operations in new markets or establishment of new offices in the new markets as well as expanding IT Business in existing markets, this effort has been hampered or delayed by lack of adequate funding or working capital from operations, COVID-19 pandemic impact on efforts to pursue such opportunities, the "penny stock" nature of our Common Stock and inability to locate suitable opportunities capable of consummation under then current circumstances and available resources. The ability of the Company to fund such expansion is not certain and the impact of any such funding on the Company's liabilities and cash flow is uncertain until an expansion opportunity is identified, pursued and consummated. Expansion efforts of the Company, which the Company views as critical to achieving sustained profitability, may be undermined by the Company's limited cash flow from operations and from the lack of affordable, adequate funding from outside sources. The ability of the Company to raise funding is also severely hampered by its penny stock status and lack of an active public stock market in its Common Stock. The Coronavirus/COVID-19 pandemic will probably reduce the amount of traditional private working capital funding sources and further hamper funding of any growth initiatives of the Company.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 26 Critical Accounting Policies Our consolidated financial statements and accompanying notes have been prepared in accordance withUnited States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in note 2 of the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Basis of presentation and principle of consolidation
The consolidated financial statements include all of the assets, liabilities,
revenues, expenses and cash flows of entities in which the Company has a
controlling interest ("subsidiaries"). Intercompany accounts and transactions
between consolidated companies have been eliminated in consolidation.
Consolidated financial statements prepared following a reverse acquisition are
issued under the name of the legal parent (accounting acquiree) (i.e. the
Company) but as a continuation of the financial statements of the legal
subsidiary (accounting acquirer) (i.e. VEI CHN), with one adjustment, which is
to retroactively adjust the accounting acquirer's legal capital to reflect the
legal capital of the accounting acquiree. That adjustment is required to reflect
the capital of the legal parent (the accounting acquiree). Comparative
information presented in those consolidated financial statements also is
retroactively adjusted to reflect the legal capital of the legal parent
(accounting acquiree).
The consolidated financial statements include the accounts of
1. Value Exchange Int'l (
incorporated in Hong Kong as a private company on November 16, 2001 ;
2. Value Exchange Int'l (
Company incorporated in
3. Value Exchange Int'l (
Company incorporated in
acquired by VEI CHN on September 25, 2008 ;
4.
the laws of the
2009 and acquired by VEI CHN on January 23, 2017 ; and
5. Value Exchange Int'l (
ownership incorporated in
6.
the Company with 51% ownership incorporated in
February 10, 2020 . The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"), and include the financial statements of the Company and all its wholly-owned subsidiaries that require consolidation. All material intercompany transactions and balances have been eliminated in the consolidation. The following entities were consolidated as ofDecember 31 ,
2021:
Place of Ownership percentage
incorporation
2021 2020
Value Exchange International, USA Parent Company Parent Company
Inc.
Value Exchange Int'l (China) Hong Kong 100% 100%
LimitedValue Exchange Int'l (Shanghai) PRC 100%
100% Limited Value Exchange Int'l (Hong Hong Kong 100% 100% Kong) Limited TapServices, Inc. Philippines 100% 100% Value Exchange Int'l (Hunan) PRC 51% 51% Limited Shanghai Zhaonan Hengan PRC 51% 51% InformationTechnology Co., Limited 27 Use of estimates Preparing consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions affecting 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. The more significant areas requiring using management's estimates and assumptions relate to the collectability of its receivables, the fair value and accounting treatment of financial instruments, the valuation of long-lived assets and valuation of deferred tax liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates. In addition, different assumptions or circumstances could reasonably be expected to yield different results.
Accounts receivable and other receivables
Receivables include trade accounts due from customers and other receivables such as cash advances to employees, utility deposits paid and advance to suppliers. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. As ofDecember 31, 2021 and 2020, there was no allowance for uncollectible accounts receivable, respectively. Management believes that the remaining accounts receivable are collectable. Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, if any. Expenditures for maintenance and repairs are charged to earnings as incurred. Major additions are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of plant and equipment is provided using the straight-line method for substantially all assets with estimated lives
as
follows:
Estimated Useful Life
Leasehold improvements Lesser of lease term or the estimated useful
lives of
5 years
Computer equipment 5 years
Computer software 5 years
Office furniture and equipment 5 years
Motor Vehicle 3 years
Building 5 years
Goodwill and intangibles
Intangibles with a definite life, including customer relationships and goodwill
were recorded in connection with the acquisition of TSI. Intangible assets are
amortized based on their estimated economic lives using the straight-line method
with estimated lives as follows:
Estimated Economic Life
Customer relationship 3 years
Revenue recognition
Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured.
The Company's revenue is derived from three primary sources: (i) professional services for systems development and integration, including procurement of related hardware and software licenses on behalf of customers, if required; (ii) professional services for system maintenance normally for a period of one year; and (iii) sale of hardware and consumables during the service performed as
stated above.
28
Multiple-deliverable arrangements
The Company derives revenue from fixed-price sale contracts with customers that may provide for the Company to procure hardware and software licenses with varied performance specifications specific to each customer and provide the technical services for systems development and integration of the hardware and software licenses. In instances where the contract price is inclusive of the technical services, the sale contracts include multiple deliverables. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met: - The delivered item(s) has value to the customer on a stand-alone basis;
- There is objective and reliable evidence of the fair value of the undelivered
item(s); and
- If the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the Company. The Company's multiple-element contracts generally include customer-acceptance provisions which provide for the Company to carry out installation, test runs and performance tests at the Company's cost until the systems as a whole can meet the performance specifications stated in the contracts. The delivered equipment and software licenses have no standalone value to the customer until they are installed, integrated and tested at the customer's site by the Company in accordance with the performance specifications specific to each customer. In addition, under these multiple-element contracts, the Company has not sold the equipment and software licenses separately from the installation, integration and testing services, and hence there is no objective and reliable evidence of the fair value for each deliverable included in the arrangement. As a result, the equipment and the technical services for installation, integration and testing of the equipment are considered a single unit of accounting pursuant to ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements. In addition, the arrangement generally includes customer acceptance criteria that cannot be tested before installation and integration at the customer's site. Accordingly, revenue recognition is deferred until customer acceptance, indicated by an acceptance certificate signed off by the customer.
Revenues of maintenance services are recognized when the services are performed in accordance with the contract term.
Revenues of sale of software, if not bundled with other arrangements, are recognized when shipped and customer acceptance obtained, if all other revenue recognition criteria are met. Costs associated with revenues are recognized
when incurred. Revenues are recorded net of value-added taxes, sales discounts and returns. There were no sales returns during the years endedDecember 31, 2021 and 2020. 2021 2020 US$ US$ NET REVENUES Service income - systems development and integration 248,218 11,268,268 - systems maintenance 7,439,172 7,379,350
- sales of hardware and consumables 2,290,531 1,903,853
9,977,921 20,551,471
Billings in excess of revenues recognized are recorded as deferred revenue.
Income taxes
The Company accounts for income taxes in accordance with the accounting standard
issued by the Financial Accounting Standard Board ("FASB") for income taxes.
Under the asset and liability method as required by this accounting standard,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The charge for taxation is based on
the results for the reporting period as adjusted for items which are
non-assessable or disallowed. It is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date. The effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized.
Under the accounting standard regarding accounting for uncertainty in income
taxes, a tax position is recognized as a benefit only if it is "more likely than
not" that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the "more likely than not" test, no tax benefit is
recorded. Penalties and interest incurred related to underpayment of income tax
are classified as income tax expense in the year incurred.
29
Foreign currency translation
The functional currency and reporting currency of the Company is the U.S.
Dollar. ("US$" or "$"). The functional currency of the Hong Kong subsidiaries is
the Hong Kong Dollar. The functional currency of the PRC subsidiary is RMB.
Results of operations and cash flow are translated at average exchange rates
during the period, and assets and liabilities are translated at the exchange
rate as quoted by the Hong Kong Monetary Authority ("HKMA") at the end of the
period. Capital accounts are translated at their historical exchange rates when
the capital transaction occurred. Translation adjustments resulting from this
process are included in accumulated other comprehensive income. Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
Year ended December 31, 2021 December 31, 2020
RMB : USD exchange rate 6.4707 6.9348
Average period ended
HKD : USD exchange rate 7.800 7.800
Average period ended
PESO : USD exchange rate 48.8351 49.6473
Average period ended
Year ended December 31, 2021 December 31, 2020
RMB : USD exchange rate 6.3699 6.5442
HKD : USD exchange rate 7.800 7.800
PESO : USD exchange rate 50.4854 47.7064
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption, or expected adoption and effects of our consolidated financial position, results of operations and cash flows.
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