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 2021 or 2022. 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 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 COVID-19 pandemic in late 2019 and throughout 2021 and 2022 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 through new variants or mutations of the virus and resulting spikes in infections in the near future in our key markets and the time frame for developing a new or enhanced vaccine and viral remedial medicines that will allow the economies in our key markets to return to normal state of operation and function. The COVID 19 pandemic has eased in 2023 inHong Kong and Chinese government has been more aggressive in combating COVID 19 pandemic in 2022 and into 2023. While COVID 19 pandemic appears to be easing in terms of overall impact on economies inChina andHong Kong in 2023, the possibility of spikes from variants or mutations of the virus and Chinese government orHong Kong government restrictions to combat such spikes continues to raise the specter of COVID 19 pandemic adversely affecting the promotion and growth of our business in 2023 by virtue of adverse impact on the general economy inChina orHong Kong or hampering marketing-sales efforts. 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 2021 or fiscal year 2022, 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. 25
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.
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 2023 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 20 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. 26 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 2022, TSI achieved of$1.68 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 2022, 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 2023 or 2024. This strategy is based upon our subjective business judgment that the IT Business presents more opportunities for potential customer order in our core markets ofHong Kong
SAR andChina .
Financial Performance Highlights
The following are some financial highlights for the 2022:
· Net revenue: Our net revenues were
2022, as compared to$9,977,921 for the year endedDecember 31, 2021 , an increase of$946,409 or 9.5%.
· Gross profit: Gross profit for the year ended
or 15.5% of net revenues, as compared to
for the year endedDecember 31, 2021 , a decrease of$984,225 or 36.7%.
· (Loss) profit from operations: Our loss from operations totaled
the year ended
mainly attributable to the decrease in our gross profit.
· Net income: Our net income totaled
compared to$677,402 for the year endedDecember 31, 2021 , a decrease of$674,036 or 99.5%.
· Basic and diluted net income per share was
31, 2022. Results of Operations
Year Ended
The following table summarizes the results of our operations during the years endedDecember 31, 2022 and 2021 and provides information regarding the dollar and percentage increase or (decrease) from the 2021 year to the 2022 year.
27 RESULTS OF OPERATIONS
Comparison of Year Ended
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in
2022 2021 Change
US$ US$ US$ %
NET REVENUES
Service income 10,924,330 9,977,921 946,409 9.5
COST OF SERVICES
Cost of service income (9,228,861 ) (7,298,227 ) (1,930,634 ) 26.5
GROSS PROFIT 1,695,469 2,679,694 (984,225 ) (36.7 )
Operating expenses:
General and administrative
expenses (2,001,268 ) (2,131,194 ) 129,926 6.1
Foreign exchange gain (loss) 112,044 (13,741 ) 125,785 (915.4 )
(LOSS) PROFIT FROM OPERATIONS (193,755 ) 534,759 (728,514 ) (136.2 )
OTHER INCOME (EXPENSES) 271,149 229,774 41,375 18.0
INCOME BEFORE PROVISION FOR
INCOME TAXES 77,394 764,533 (687,139 ) (89.9 )
INCOME TAXES EXPENSES (74,028 ) (87,131 ) 13,103 (15.0 )
NET INCOME 3,366 677,402 (674,036 ) (99.5 )
Net revenues. Net revenues were$10,924,330 for the year endedDecember 31, 2022 , as compared to$9,977,921 for the fiscal year endedDecember 31, 2021 , an increase of$946,409 or 9.5%. This result was primarily attributable to the increase in our revenue from 1) systems maintenance with revenue increasing from$7,439,172 for the year endedDecember 31, 2021 to$9,243,919 for the year endedDecember 31, 2022 ; offset by the decrease in our revenue from 2) hardware and consumables with revenue decreasing from$2,290,531 for the year endedDecember 31, 2021 to$1,439,553 for the year endedDecember 31, 2022 , and 3) sales of systems development and integration with revenue decreasing from$248,218 for the year endedDecember 31, 2021 to$240,858 for the year endedDecember 31, 2022 .
Cost of services. Our cost of services is primarily comprised of our costs of technical staff and general overhead. Our cost of services were$9,228,861 or 84.5% of net revenues, for the year endedDecember 31, 2022 , as compared to$7,298,227 or 73.1% of net revenues, for the year endedDecember 31, 2021 , an increase of$1,930,634 or 26.5%. The increase in cost of services was mainly attributable to the increase in our contracting fees to suppliers and cost of technical staff for the growing demand of our service. Gross profit. Gross profit for the year endedDecember 31, 2022 was$1,695,469 or 15.5% of net revenues, as compared to$2,679,694 or 26.9% of net revenues, for the year endedDecember 31, 2021 . The decrease of gross profit was largely due to the increase in cost of services, offset by the increase in net revenues in 2022, as compared with 2021. 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 decreased to$2,001,268 or 18.3% of net revenues, for the year endedDecember 31, 2022 , as compared to$2,131,194 or 21.4% of net revenues, for the year endedDecember 31, 2021 , a decrease of$129,926 or 6.1%. The primary reason for the decrease was attributable to a decrease in consultancy and professional fees, and other administrative costs in 2022, as compared with 2021. (Loss) profit from operations. As a result of the above analysis, our loss from operations totaled$193,755 for the year endedDecember 31, 2022 , as compared to profit from operations totaled$534,759 for year endedDecember 31, 2021 , a change of$728,514 . The change was mainly attributable to the decrease in our gross profit.
Income taxes. The Company is subject toUnited States federal income tax at a tax rate of 21% in 2022 (2021: 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, 2022 and 2021. 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, 2022 . TSI was formed inPhilippines and subject to an income tax rate of 30% for the year endedDecember 31, 2022 . 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, 2022 . 28 Income taxes expenses amounted to$74,028 or 0.7% of net revenues for the year endedDecember 31, 2022 , as compared to$87,131 or 0.9% of net revenues for the year endedDecember 31, 2021 . The decrease was primarily attributable to the current tax expenses decrease, and the utilization of tax loss brought forward for the year endedDecember 31, 2022 . Net income. As a result of the foregoing, we had a net income of$3,366 for the year endedDecember 31, 2022 , compared to net income of$677,402 for the year endedDecember 31, 2021 , as a result of the factors described above concerning increase in cost of services, offset by increase in revenue, increase in other income and increase operating expenses.
Liquidity and Capital Resources
As of
Cash Flows
Cash Flow. Regarding the cash transfer throughout our organization, we have implemented internal cash management policies for all of our subsidiaries, which require the relevant financial staff to verify that the relevant documents issued by the requesting staff are approved by a supervisor and are qualified for distribution under internal accounting rules, and then the actual distribution requires the approval of a competent supervisor of the relevant financial staff. Any voucher will be stamped after payment and the payee will sign the request for payment as a receipt. In addition, all payments shall be made by remittance, crossed and stamped non-endorsed transfer cheques, except for certain specified cash payables. When transferring any inter-group funds or to our investors, the cash management procedures is the same as the cash management policies for external payment to payees as set out above. As such, ourHong Kong subsidiaries, Chinese subsidiaries and ourPhilippines subsidiary are funded by their respective internal cash inflows or, when necessary, by capital injection from VEI CHN. Our subsidiaries occasionally purchase goods or services from intra-group subsidiaries in other geographic location, and payment is made directly into the operating subsidiary which is providing goods or services. None of the Company or its consolidated subsidiaries have ever faced difficulties, restrictions or limitations on the ability to transfer cash which have been made between the Company, our subsidiaries in different jurisdiction, or to our U.S. investors due to any reasons, including but not limited to the interventions in or the imposition of restrictions and limitations by theHong Kong or Chinese law or regulation governing the transfer of cash. However, there can be no assurance that there will not be additional or new laws, rules and regulations promulgated by, or other actions taken by, theHong Kong or Chinese government authorities, which may lead to potential intervene in or impose restrictions on the ability of the Company or our subsidiaries to transfer cash. In such events, our business, financial condition and results of operations may be materially and adversely affected. For a description of the risks facing the Company associated with our structure, please refer to "Item 1A. Risk Factors -Operational and Legal Risks Associated with being aU.S. Public Company with Chinese-Based and Hong Kong-Based Operations below at page 18 and further description of Chinese Laws and Regulations in Item 1. Business at page 14.
Except for the following aggregate intra-group cash flow, there were no other
transfers of assets which have been made between our holding company or our
subsidiaries, for the years ended
(All amounts in
Year Ended
December 31,
2022 2021
US$ US$
Net cash (used in) provided by operating
activities (436,361 ) 135,356
Net cash used in investing activities (222,980 ) (325,827 ) Net cash provided by (used in) financing activities 610,828 (14,248 ) Effect of exchange rate changes on cash and cash equivalents (32,109 ) (29,220 ) Net decrease in cash and cash equivalents (80,622 ) (233,939 ) Cash and cash equivalents at the beginning of year 289,398
523,337
Cash and cash equivalents at the end of year 208,776
289,398 29 To the extent cash in the Company's or its subsidiaries' business is held inChina orHong Kong , or held by a Chinese orHong Kong entity, those funds may not be available to fund operations of the Company or its subsidiaries or for other uses outside ofChina orHong Kong due to interventions in or the imposition of restrictions and limitations on the ability of the Company or its subsidiaries by the Chinese government to transfer cash. There can be no assurance the Chinese government will not intervene in or impose restrictions on the ability of the Company or its subsidiaries to transfer cash outside ofChina orHong Kong . See: Item 1A Risk Factors, Operational and Legal Risks Associated with being aU.S. Public Company with Chinese-Based and Hong Kong-Based Operations at page 18. Operating Activities
Net cash used in provided by operating activities was
1) Net income of
$677,402 for the year endedDecember 31, 2021 ; and
2) A change of Accounts receivable, Other receivables, deposit and prepayments,
Amounts due from related parties, and Other payables and accrued liabilities
decreased our operating cash balances by
$405,805 respectively; offset by
3) A change of Accounts payable increased our operating cash balances by
$526,873 .
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Due in Less Due in 1-3 Due in 4-5 Due in more Obligations Total Due than 1 year Years years than 5 years Operating lease obligations, including imputed interest 551,512 380,757 170,755 - - Investing Activities Net cash used in investing activities decreased to$222,980 in the year endedDecember 31, 2022 , which was a decrease of$102,847 or 31.6% from$325,827 for the year endedDecember 31, 2021 . The decrease in net cash used in investing activities was attributable to the purchase of plant and equipment by$223,619 ; offset by cash provided by the interest received by$639 for the year ended
December 31, 2022 . Financing Activities Net cash provided by financing activities was$610,828 in the year endedDecember 31, 2022 , which was a change of$625,076 from net cash used in financing activities totaled$14,248 for the year endedDecember 31, 2021 . The change was attributable to the process from bank loan by$1,054,294 ; offset by cash used in principal payments on leases, and repayment of bank loan, and interest paid by$351,664 ,$57,346 , and$34,456 respectively for the year endedDecember 31, 2022 .
Cash transfer throughout our organization
We have implemented internal cash management policies for all of our subsidiaries, which require the relevant financial staff to verify that the relevant documents issued by the requesting staff are approved by a supervisor and are qualified for distribution under internal accounting rules, and then the actual distribution requires the approval of a competent supervisor of the relevant financial staff. Any voucher will be stamped after payment and the payee will sign the request for payment as a receipt. In addition, all payments shall be made by remittance, crossed and stamped non-endorsed transfer cheques, except for certain specified cash payables. When transferring any inter-group funds or to our investors, the cash management procedures is the same as the cash management policies for external payment to payees as set out above. As such, ourHong Kong subsidiaries, Chinese subsidiaries and ourPhilippines subsidiary are funded by their respective internal cash inflows or, when necessary, by capitalinjection from VEI CHN. Our subsidiaries occasionally purchase goods or services from intra-group subsidiaries in other geographic location, and payment is made directly into the operating subsidiary which is providing goods or services. 30 None of the Company or its consolidated subsidiaries have ever faced difficulties, restrictions or limitations on the ability to transfer cash which have been made between the Company, our subsidiaries in different jurisdiction, or to our U.S. investors due to any reasons, including but not limited to the interventions in or the imposition of restrictions and limitations by theHong Kong or Chinese law or regulation governing the transfer of cash. However, there can be no assurance that there will not be additional or new laws, rules and regulations promulgated by, or other actions taken by, theHong Kong or Chinese government authorities, which may lead to potential intervene in or impose restrictions on the ability of the Company or our subsidiaries to transfer cash. In such events, our business, financial condition and results of operations may be materially and adversely affected. For a description of the risks facing the Company associated with our structure, please refer to Operational and Legal Risks Associated with being aU.S. Public Company with Chinese-Based and Hong Kong-Based Operations below at page 18 and further description of Chinese Laws and Regulations in Item 1 Business at page 14Except for the following aggregate intra-group cash flow, there were no other transfers of assets which have been made between our holding company or our subsidiaries, for the years endedDecember 31, 2022 and 2021: 2022 2021 From To US$ US$ VEI CHN TSI - 11,223 VEI SHG VEI CHN - 346,719 VEI HKG TSI 32,723 37,965 VEI HKG VEI SHG 749,117 645,038 VEI CHN VEI HKG 609,976 946,090 TSI VEI SHG 47,202 - HTS VEI SHG 3,747 - VEI SHG VEI HN 280,733 225,840 VEI SHG SZH 5,514 102,760
For a detailed description on the transfer of cash through our organization and details on the aggregate intra-group cash flow for the years endedDecember 31, 2022 and 2021, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Operating Results - Cash Flow" on page 25.
Dividends and Other Distributions
The Company was incorporated inNevada ,United States as a holding company and has no revenue generating operations. All revenue generating operations are conducted through our subsidiaries in theHong Kong, China , andPhilippines . We do not anticipate paying dividends in the foreseeable future on our common stock. The Company declared and paid a one-time cash dividend of$0.005 per shares of Common Stock in 2021, which dividend was in the aggregate$169,291 . The declaration of dividends on any class of shares is within the discretion of our board of directors, subject to theNevada law governing declaration and payment of dividends, out of legally available funds, and will depend on the assessment of, among other factors, earnings, capital requirements and our operating and financial condition. If we determine to pay dividends on any of our capital stock in the future to our stockholders, we will be dependent on receipt of funds from our operating subsidiaries. There have been no other transfers, dividends or distributions to our U.S. investors by us. If we determine to pay dividends on any of our Common Stock in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries inHong Kong . Under the current practice of theInland Revenue Department of Hong Kong , no tax is payable inHong Kong in respect of dividends paid by us. There are no restrictions or limitations under the laws ofHong Kong imposed on the conversion ofHong Kong dollar into foreign currencies and the remittance of currencies out ofHong Kong , nor is there any restriction on any foreign exchange to transfer cash between the Company and its subsidiaries, across borders and to investors outside ofChina , nor is there any restrictions and limitations to distribute earnings from the subsidiaries, to the Company and investors outside ofChina and amounts owed. The Chinese laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable accounting standards and regulations. The same requirement applies toHong Kong subsidiaries. 31
Although we did not rely on our Chinese subsidiaries in dividend and other distributions on equity in the past, we may rely on dividends and other distributions on equity paid by our Chinese subsidiaries for our cash and financing requirements in the future, including the funds necessary to pay dividends and other cash distributions to our shareholders or to service any debt we may incur. There have not been any such dividends or other distributions from our Chinese subsidiaries to our subsidiaries located outside ofChina . In addition, save as disclosed above, none of our subsidiaries have ever issued any dividends or distributions to us or their respective shareholders outside ofChina . According to the Foreign Investment Law ofthe People's Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out ofChina its contributions, profits, capital earnings, income from asset disposal, intellectual property rights royalties acquired, compensation or indemnity legally obtained, and income from liquidation, made or derived within the territory ofChina in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount and frequency. According to the Company Law of PRC and other Chinese laws and regulations, our Chinese subsidiaries may pay dividends only out of their respective accumulated profits as determined in accordance with Chinese accounting standards and regulations. In addition, each of our Chinese subsidiaries is required to set aside at least 10% of its accumulated after-tax profits, if any, each year to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Where the statutory reserve fund is insufficient to cover any loss the Chinese subsidiary incurred in the previous financial year, its current financial year's accumulated after-tax profits shall first be used to cover the loss before any statutory reserve fund is drawn therefrom. Such statutory reserve funds and the accumulated after-tax profits that are used for covering the loss cannot be distributed to us as dividends. At their discretion, our Chinese subsidiaries may allocate a portion of their after-tax profits based on Chinese accounting standards to a discretionary reserve fund. As a result of these restrictions, ourChina subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. Statutory reserve funds are not distributable as cash dividends. Renminbi is not freely convertible into other currencies. As result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their potential future renminbi revenues to pay dividends to us. The Chinese government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance of currency out ofChina . Shortages in availability of foreign currency may then restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to our offshore entities for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign-currency-denominated obligations. The renminbi is currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, without the need of the approval of theState Administration of Foreign Exchange of China ("SAFE"). By contrast, the renminbi under the "capital account," which includes foreign direct investment and foreign currency debt, including loans we may secure for our onshore subsidiaries, may be converted into other currencies upon the approval of the SAFE and the conversion is also subject to other restrictions or limitations, e.g., control of a Chinese entity's foreign debt quota. Currently, our Chinese subsidiaries may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The Chinese government may continue to strengthen its capital controls, and additional restrictions and substantial vetting processes may be instituted by SAFE for cross-border transactions falling under both the current account and the capital account. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in renminbi to fund our business activities outside ofChina or pay dividends in foreign currencies to holders of our securities. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries. In addition, shareholders may potentially be subject to Chinese taxes on dividends paid by us in the event we are deemed a Chinese resident enterprise for Chinese tax purposes. According to the Income Tax Law, income such as dividends, rental, interest and royalty from theChina derived by a non-resident enterprise which has no establishment inChina or has establishment but the income has no relationship with such establishment is subject to a 10% withholding tax, which may be reduced if the foreign jurisdiction of incorporation has a tax treaty withChina that provides for a different withholding arrangement, unless the relevant income is specifically exempted from tax under the applicable income tax laws, regulations, notices and decisions which relate to foreign invested enterprises and their investors. According to the Notice of theState Administration of Taxation on Issues Relating to theAdministration of the Dividend Provision in Tax Treaties, the corporate recipients of dividends distributed by Chinese enterprises must satisfy the direct ownership thresholds at all times during the twelve (12) consecutive months preceding the receipt of the dividends. None of the Company or its consolidated subsidiaries have ever faced difficulties, restrictions or limitations on the ability to distribute earnings which have been made between the Company, our subsidiaries in different jurisdiction, or to our U.S. investors due to any reasons, including but not limited to the interventions in or the imposition of restrictions and limitations by theHong Kong or Chinese law to distribute earnings. However, there can be no assurance that there will not be additional or new laws, rules and regulations promulgated by, or other actions taken by, theHong Kong or Chinese government authorities, which may lead to potential intervention in or imposition of restrictions on the ability of the Company or our subsidiaries to distribute earnings, to transfer cash or on foreign exchange. In such events, our business, financial condition and results of operations may be materially and adversely affected. For a description of the risks facing the Company associated with our structure, please refer to Operational and Legal Risks Associated with being aU.S. Public Company with Chinese-Based and Hong Kong-Based Operations at page 18 and further description of Chinese Laws and Regulations in Item 1. Business at page 14. 32 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 2022, the Company makes no assurances about its ability to timely, affordably obtain the necessary funding for the Agreement. During fiscal year 2022, VEI SHG had$4.35 million 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 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. 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. 33
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 .
7.
100% ownership incorporated in
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 ,
2022:
Place of Ownership percentage
incorporation 2022 2021Value Exchange International, Inc. USA Parent Company Parent Company Value Exchange Int'l (China) Limited Hong Kong 100%
100%
Value Exchange Int'l (Shanghai) Limited PRC 100%
100%
Value Exchange Int'l (
100%
TapServices, Inc. Philippines 100%
100%
Value Exchange Int'l (Hunan) Limited PRC 51%
51%
Shanghai Zhaonan Hengan Information PRC 51%
51%
Technology Co., Limited Haomeng Technology (Shenzhen) Co., PRC 100%
-
Limited
Use of estimates
Preparing consolidated financial statements in conformity with U.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.
34
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, 2022 and 2021, 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 LifeCustomer 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.
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: 35
- 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, 2022 and 2021. 2022 2021 US$ US$ NET REVENUES Service income - systems development and integration 240,858 248,218 - systems maintenance 9,243,919 7,439,172
- sales of hardware and consumables 1,439,553 2,290,531
10,924,330 9,977,921
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.
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.
36
Year ended December 31, 2022 December 31, 2021
RMB : USD exchange rate 6.7046 6.4707
Average period ended
HKD : USD exchange rate 7.800 7.800
Average period ended
PESO : USD exchange rate 53.7447 48.8351
Average period ended
Year ended December 31, 2022 December 31, 2021
RMB : USD exchange rate 6.9143 6.3699
HKD : USD exchange rate 7.800 7.800
PESO : USD exchange rate 54.7368 50.4854
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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