Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
As used in this Item 2, and unless the context
otherwise indicates, references in this Form 10-Q Report to the terms “VEII” “the Company,” “we,”
“our” and “us” refer to Value Exchange International, Inc. and its consolidated subsidiaries and “you”
and “your” refers to readers of this Form 10-Q Report.
This report on Form 10-Q
contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
These forward-looking statements include, without limitation, statements containing the words “believes,” “anticipates,”
“expects,” “intends,” “projects,” “will,” “should,” “may,” “hopes”
and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but
are not limited to, expectations of future levels of business development spending, general and administrative spending, levels of capital
expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities
available to us and effects as well as our ability to fund, and integrate and grow any acquired or new business operations. Business operations
and financial condition may be materially and adversely affected by any slowdown in regional and national economic growth, weakened liquidity
and financial condition of customers or other factors that Company cannot foresee. Coronavirus COVID 19 pandemic continues to be a threat
to business and financial operations’ condition and performance in China and Hong Kong SAR, especially with the emergence of new
variants of the virus and the need for ongoing vaccinations boosters. Further, the Company being identified by the Securities and Exchange
Commission or “SEC” in April 2022 as a Commission Identified Issuer under the Holding Foreign Companies Accountable Act or
“HFCAA” may have an adverse impact on the public market for Company Common Stock and hinder ability of Company to raise working
capital from investors or lenders. Forward-looking statements are subject to certain known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. The results, events and circumstances reflected in the forward-looking
statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the
forward-looking statements. New risks and uncertainties emerge from time to time, and it is not possible for the Company to predict all
risks and uncertainties that could have an impact on the forward-looking statements contained herein. The forward-looking statements made
in this report on Form 10-Q relate only to events as of the date on which the statements are made and we undertake no obligation to update
them to reflect events or circumstances after the date of this report on Form 10-Q or to reflect new information or the occurrence of
unanticipated events, except as required by law.
These forward-looking statements include, but are not limited to,
statements concerning the following:
•our ability to retain existing
customers, acquire new customers, and expand our customer reach faced with limitations on marketing imposed by COVID 19 pandemic restrictions
on travel and gatherings and limitations of available cash flow and funding;
•our expectations regarding
our future financial performance, including total revenue, gross profit/(loss), net income/(loss), adjusted gross profit/(loss), and adjusted
EBITDA;
•the impact of the COVID-19
pandemic and emerging variants and subvariants of that virus as well as governmental and private sector/customer responses thereto on
our business and financial condition;
•the impact of any economic
disruptions, including inflationary pressures, or on our business and financial condition;
•our ability to maintain our
business model and improve our capital and marketing efficiency;
•our ability to maintain and
enhance our brand and reputation in existing markets and new market niches;
•our ability to effectively
manage any future growth of our business;
•our ability to raise additional
capital as needed and on affordable terms and conditions as well as to prudently use existing funding;
•our ability to improve our
product/service offerings, introduce new products/services and expand into additional markets or niches within existing markers through
effective marketing and sales efforts;
•our ability to compete effectively
with existing competitors and new market entrants in our industry;
•our ability to engage, retain
and afford qualified personnel and contractors;
•our ability to protect our
and any customer data and intellectual property and pay any costs associated therewith; and
•our ability to stay in compliance
with laws and regulations of China and Hong Kong SAR that currently apply or become applicable to our business in the future and at the
same time comply with U.S. laws and regulations and remain a public company with its common stock quoted on the OTC QB Venture Market.
These risks and uncertainties
are reviewed and updated with each SEC report and accompany, but are not limited to those described in “Risk Factors” contained
in the Company’s reports filed with the U.S. Securities and Exchange Commission, including the Annual Report on Form 10-K for the
fiscal year ended December 31, 2021 and any amendments to that Form 10-K.
CORPORATE OVERVIEW
History of Value Exchange International, Inc.
Organization.
We were incorporated in the
State of Nevada on June 26, 2007 under the name “China Soaring Inc.” We changed the Company's name to “Sino Payments,
Inc.” on November 26, 2008 and then further changed to the current name as “Value Exchange International, Inc.” in October
2016. Our Common Stock’s trading symbol changed at the same time from “SNPY” to “VEII.” Our common stock
is quoted on the OTCQB Venture Market.
Current Business Focus.
We are a provider of customer-centric
solutions for the retail industry in China, Hong Kong SAR and Philippines. Due to impact of Coronavirus/COVID-19 pandemic and lack of
adequate funding, our strategic plan to expand our business into Southeast Asia made no progress.
By integrating market-leading
Point-of-Sale/Point-of-Interaction (“POS/POI”), Merchandising, Customer Relations Management or “CRM” and related
rewards, Locational Based (GPS & Indoor Positioning System (“IPS”)) Marketing, Customer Analytics, Business Intelligence
solutions, our products and services are intended to provide retailers with the capability to offer a consistent shopping experience across
all channels, enabling them to easily and effectively manage the customer lifecycle on a one-to-one basis. We promote ourselves as a single
IT source for retailers who want to extend existing traditional transaction processing to multiple points of interaction, including the
Internet, kiosks and wireless devices. Our products and services are focused on helping retailers realize the full benefits of Customer
Chain Management with its suite of solutions that focus on the customer, on employees, and the infrastructure that supports the selling
channel. Company is headquartered in Hong Kong and with offices in Shenzhen, Guangzhou, Shanghai, Beijing, China; Manila, Philippines;
and Kuala Lumpur, Malaysia.
We believe that the IT Business
often presents opportunities to expand a provider’s market reach or customer base by acquisitions of existing businesses or operating
assets. The Company’s business strategy includes reviewing possible acquisitions of existing businesses or operating assets in existing
or adjacent markets and to do so when and if such an acquisition appears to be compatible and an enhancement of our core business lines
and can be consummated with available cash and other resources. Our ability to pursue and consummate acquisitions may be limited, and
has been limited, by available cash and other resources and the perceived cost and burdens of acquiring and integrating the target business
or new operating assets into our operations. The availability of funding and cash flow are the most significant limitations on our ability
to expand through acquisitions of businesses and assets – both in terms of money on hand and ability to finance acquisitions. We
have not expanded into any new markets by acquisition or otherwise during the fiscal quarter ended September 30, 2022.
The Company, through its operating
subsidiaries, is focusing and will focus on its IT Business, and seek to expand its IT Business services to commercial customers in PRC
and Asia Pacific Region. 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 and China than the “IP Business” (as defined below) and
presents an industry segment that better suits our current technical capabilities, marketing capabilities and financial resources.
Initial Business Focus.
Our initial intended, primary
business was to operate a credit card processing and merchant-acquiring services company that provide credit card clearing services to
merchants and financial institutions in PRC. From inception, we strove unsuccessfully to create and establish a proposed Global Processing
Platform concept to support the credit card processing services (“SinoPay GPP”). Specifically, the Company’s IP business
was to be a provider of Internet Protocol (“IP”) processing services in Asia to bank card-accepting merchants (“IP Business”).
The prior Company efforts to establish an IP Business failed despite a prolonged effort.
With the acquisition of VEI
CHN in 2014 shifted the primary business focus on our IT Business because IT Business provided a revenue generating business line and
because of our strategic decision that IT Business presented a greater growth and profit potential than IP Business. Further, we believe
that the SinoGPP system would require ongoing and potentially expensive marketing and sales effort as well as extensive technical upgrades
and function enhancements due to the highly competitive market for Point Of Sale (“POS”) systems and longer sales cycle for
POS systems than IT Business project and consulting sales.
Smart Baggage Tag.
Through a cooperative effort with another company, Company has the ability to market a smart baggage tag that allows consumers to track
the location of their baggage through a smart phone or device using the smart baggage tag and related application. Efforts to promote
the smart baggage tag were suspended due to impact of COVID-19 pandemic on air travel.
The prospects of the Smart
Tag business as of the date of this Form 10-Q report are uncertain. The Company will have to determine if an expanded or sustained marketing
effort for the Smart Tag is possible based on available resources and business priorities. The IT Business remains the focus of our business
and funding.
Industry Trends and Economic Conditions.
The IT Business in Hong Kong
and China 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 penetrate Hong Kong and China 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 the Hong Kong and China markets. We may be unable to afford or effectively
compete for necessary skilled workers in Hong Kong, Philippines and China 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 to date.
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 in Hong Kong or China or Manila, Philippines, respectively, and decreases during periods
of economic decline or uncertainty in Hong Kong, China or Manila, Philippines. 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 in Hong Kong, Philippines
or China. China 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 or IP Business.
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 as of the fiscal quarter ending September 30, 2022, but we perceive that the expansion of cloud computing coupled with
IT services and products could allow foreign companies to provide IT Business products and services to its cloud computing customers in
our Hong Kong and China core markets as well as in the Philippines. We may find it more difficult to compete for IT Business in Hong Kong
and China, and perhaps the Philippines, 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 in Hong Kong and China markets as
well as the Philippines.
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 satisfy
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 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 2022 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 to customers and we have not current plans to develop a cybersecurity business
line. 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.
We also face a possible competitive
threat from Cloud computing services, which we do not provide to customers (except through third party providers). Cloud computing services
can and do offer additional services to customers, which services can include the same IT Business services as our company. Cloud computing
companies could leverage their relationship with customers to persuade them to use the Cloud computing service for IT Business needs.
This leverage could pose a competitive threat to our IT Business. We lack the current financial and technical resources to compete in
the Cloud computing business.
Covid 19 Pandemic. Since
the beginning of 2020, the worldwide spread of the novel coronavirus (“Covid 19”) has been rapid and unprecedented. On
March 11, 2020, the World Health Organization declared Covid 19 a global pandemic. Efforts to control the spread of Covid 19 have led
governments and other authorities to impose restrictions which have resulted in business closures and disrupted global supply chains. In
addition to reductions in business levels, the altered marketplace environment has negatively impacted our freight mix and shipment profile.
The extent of the long term adverse effect of the COVID-19 pandemic on our business results is unknown and depends on future developments,
including the severity and duration of the pandemic.
Covid 19 pandemic affected
our primary operations in Hong Kong SAR and Manila, Philippines in first fiscal quarter of 2020 by forcing limited business travel, remote
work arrangements by personnel, customers suspending or reducing operations and use of third party services and suspension or cancellations
of normal business activities by us and customers. While there has been a degree of easing restrictions on businesses, there are still
restrictions on our and customers’ business activities. The full impact of Covid 19 pandemic on our business may not be fully understood
or realized from fiscal period to fiscal period in light of the emergence of new variants of the virus with differing potential impact
on our business and economies of our primary markets. There remains the risk of new variants of Covid 19 emerging that are vaccine resistant
and, as such, capable of significant disruption of the economies in our primary markets.
Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. Company has not sought and does not
intend to seek any assistance under the CARES Act as of the date of this
Form 10-Q report. Our operations and personnel are not based in the U.S.
History of Value Exchange Int’l (China)
Limited
VEI CHN was first established
on November 16, 2001 in Hong Kong SAR with limited liability under the name of “Triversity Hong Kong Limited” and subsequently
changed its name to “Triversity (Asia Pacific) Limited” on April 24, 2002 and then further changed its name to “TAP
Investments Group Limited” on November 16, 2007. TAP Investments Group Limited changed to its current name as “Value Exchange
Int’l (China) Limited” on May 13, 2013.
VEI CHN is an investment holding
company with two subsidiaries established in Hong Kong SAR, namely TAP Services (HK) Limited which was incorporated on August 25, 2003
and acquired by VEI CHN on September 25, 2008, and subsequently changed to its current name as Value Exchange Int’l (Hong Kong)
Limited (“VEI HKG”) on May 13, 2013. VEI CHN set up a wholly-owned Foreign Enterprise (WOFE) in Shanghai, PRC, in September
2, 2008 in the name of Value Exchange Int’l (Shanghai) Limited (“VEI SHG”). In January 2019, VEI SHG set up a 51% subsidiary
in Hunan, PRC, in the name of Value Exchange Int’l (Hunan) Limited (“VEI HN”). In February 2020, VEI SHG set up a 51%
subsidiary in Shanghai, PRC, in the name of Shanghai Zhaonan Hengan Information Technology Co., Limited (“SZH”). In January
2022, VEI HKG set up a 100% subsidiary in Shenzhen, PRC, in the name of Haomeng Technology (Shenzhen) Co., Ltd. (“HTS”).
Principal business
Company’s primary operating
subsidiary is VEI CHN. The principal business of VEI CHN for more than 15 years is to provide the Information Technology Services and
Solutions (consisting of select services and solutions in computer software programming and integration, and computer systems, Internet
and information technology systems engineering, consulting, administration and maintenance, including e-commerce and payment processing)
to the Retail Sector, primarily to leading retailers in Hong Kong SAR, Macau SAR and PRC and as more fully described below. As is customary
in the industry, such services and solutions are provided by both company employees, contractors and consultants. 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 markets,
sells and maintains its own brand POS software – edgePOS as well as third party brands (e.g. NCR / Retalix), which is one of the
leading POS software programs in the market. These software enhancements and programming can integrate with different IP systems.
Systems maintenance services
consist of: i) software maintenance service, including software patches and software code revisions; ii) installing, testing and implementing
software; iii) training of customer personnel for the use of software; and iv) technical support for software systems.
Other services include system
installation and implementation, including i) project planning; ii) analysis of customer information and business needs from a IT perspective
(“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 New Store Opening (“NSO”) and Install, Move,
Add and Change (“IMAC”) for retail, and ad-hoc custom system projects for other business sectors. Our primary focus is the
retail sector in Hong Kong SAR, PRC and Manila, Philippines.
| b) | Systems development and integration |
VEI CHN Group provides value-added
software, which integrates with customer owned or licensed software, and ad-hoc software development projects for other business sectors.
Besides use of proprietary, custom software code, VEI CHN services may from time to time license standard third party software programs.
Financial Performance Highlights
The following are some financial highlights for
the third quarter of 2022:
| · | Net revenue: Our net revenues were $7,737,842
for the nine months ended September 30, 2022, as compared to $7,478,537 for the same period in 2021, an increase of $259,305 or 3.5%.
|
| · | Gross profit: Gross profit for the nine months
ended September 30, 2022 was $1,281,169 or 16.6% of net revenues, as compared to $1,968,641 or 26.3% of net revenues for the same period
in 2021, a decrease of $687,472 or 34.9%. |
| · | Profit from operations: Our loss from operations
totaled $77,822 for the nine months ended September 30, 2022, as compared to profit from operations $384,038 for the same period in 2021,
a change of $461,860. |
| · | Net income: We had a net income of $138,991 for
the nine months ended September 30, 2022, compared to $576,654 for the same period in 2021, a decrease of $437,663 or 75.9%. |
| · | Basic and diluted net income per share was $0.00
for the nine months ended September 30, 2022. |
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2022 and 2021
The following tables set forth key components of our results of operations
for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in U.S. dollars)
| |
Three Months Ended September 30, 2022 | | |
Three Months Ended September 30, 2021 | |
| |
US$ | | |
As a percentage
of revenues | | |
US$ | | |
As a percentage
of revenues | |
NET REVENUES | |
| | | |
| | | |
| | | |
| | |
Service income | |
| 2,556,808 | | |
| 100 | % | |
| 2,884,770 | | |
| 100 | % |
COST OF SERVICES | |
| | | |
| | | |
| | | |
| | |
Cost of service income | |
| (2,302,012 | ) | |
| (73.5 | %) | |
| (2,224,718 | ) | |
| (77.1 | %) |
GROSS PROFIT | |
| 254,796 | | |
| 26.5 | % | |
| 660,052 | | |
| 22.9 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| (517,726 | ) | |
| (22.9 | %) | |
| (483,767 | ) | |
| (16.8 | %) |
Foreign exchange gain | |
| 21,980 | | |
| 6.9 | % | |
| 7,516 | | |
| 0.3 | % |
(LOSS) PROFIT FROM OPERATIONS | |
| (240,950 | ) | |
| 10.5 | % | |
| 183,801 | | |
| 6.4 | % |
OTHER INCOME | |
| 74,241 | | |
| 2.9 | % | |
| 67,291 | | |
| 2.3 | % |
(LOSS) PROFIT BEFORE
PROVISION FOR INCOME TAXES | |
| (166,709 | ) | |
| 13.4 | % | |
| 251,092 | | |
| 8.7 | % |
INCOME TAXES CREDIT
(EXPENSES) | |
| 27 | | |
| 0.0 | % | |
| (162 | ) | |
| 0.0 | % |
NET (LOSS) INCOME | |
| (166,682 | ) | |
| 13.4 | % | |
| 250,930 | | |
| 8.7 | % |
Net revenues. Net revenues were
$2,556,808 for the three months ended September 30, 2022, as compared to $2,884,770 for the same period in 2021, a decrease of $327,962
or 11.4%. This decrease was primarily attributable to the decrease in our revenue from i) sales of hardware and consumables with revenues
decreasing from $762,562 for the three months ended September 30, 2021 to $223,104 for the three months ended September 30, 2022; and
ii) sales of systems development and integration with revenue decreasing from $56,314 for the three months ended September 30, 2021 to
$28,964 for the three months ended September 30, 2022; offset by iii) sales of systems maintenance with revenues increasing from $2,065,894
for the three months ended September 30, 2021 to $2,304,740 for the three months ended September 30, 2022.
Cost of services. Our cost of services
is primarily comprised of our costs of technical staff, contracting fees to suppliers and general operating overhead. Our cost of services
increased to $2,302,012 or 90.0% of net revenues, for the three months ended September 30, 2022, as compared to $2,224,718 or 77.1% of
net revenues, for the same period in 2021, an increase of $77,294 or 3.5%. The increase in cost of services was mainly attributable to
the increase in our general operating overhead.
Gross profit. Gross profit for the
three months ended September 30, 2022 was $254,796 or 10.0% of net revenues, as compared to $660,052 or 22.9% of net revenues, for the
same period in 2021, a decrease of $405,256 or 61.4%. The decrease of gross profit was largely due to the decrease in net revenues, and
the increase in cost of services in this period, as compared with the same period of 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 increased to $517,726 or 20.2% of net revenues, for the three months ended September 30, 2022, as compared to $483,767 or 16.8%
of net revenues, for the same period in 2021, an increase of $33,959 or 7.0%. The reasons for the decrease was attributable to the decrease
in depreciation and other administrative cost.
(Loss) profit from operations. As
a result of the above, our loss from operations totaled $240,950 for the three months ended September 30, 2022, as compared to profit from
operations totaled $183,801 for the same period in 2021, a change of $424,751.
Income taxes credit (expenses).
Income taxes credit totaled $27 during the three months ended September 30, 2022, as compared to Income taxes expenses totaled $162 for
the same period in 2021, a change of $189.
Net (loss) income. As a result of
the foregoing, we had a net loss of $166,682 for the three months ended September 30, 2022, compared to net profit of $250,930 for the
same period in 2021, a change of $417,612 as a result of the factors described above.
Comparison of Nine Months Ended September 30, 2022 and 2021
The following tables set forth key components of our results of operations
for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in U.S. dollars)
| |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
| |
US$ | | |
As a percentage of revenues | | |
US$ | | |
As a percentage of revenues | |
NET REVENUES | |
| | | |
| | | |
| | | |
| | |
Service income | |
| 7,737,842 | | |
| 100 | % | |
| 7,478,537 | | |
| 100 | % |
COST OF SERVICES | |
| | | |
| | | |
| | | |
| | |
Cost of service income | |
| (6,456,673 | ) | |
| (83.4 | %) | |
| (5,509,896 | ) | |
| (73.7 | %) |
GROSS PROFIT | |
| 1,281,169 | | |
| 16.6 | % | |
| 1,968,641 | | |
| 26.3 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| (1,404,314 | ) | |
| (18.1 | %) | |
| (1,578,541 | ) | |
| (21.1 | %) |
Foreign exchange gain (loss) | |
| 45,323 | | |
| 0.6 | % | |
| (6,062 | ) | |
| (0.1 | %) |
(LOSS) PROFIT FROM OPERATIONS | |
| (77,822 | ) | |
| (1.0 | %) | |
| 384,038 | | |
| (21.2 | %) |
OTHER INCOME | |
| 218,948 | | |
| 2.8 | % | |
| 199,139 | | |
| 2.7 | % |
INCOME BEFORE PROVISION
FOR INCOME TAXES | |
| 141,126 | | |
| 1.8 | % | |
| 583,177 | | |
| 7.8 | % |
INCOME TAXES EXPENSES | |
| (2,135 | ) | |
| (0.0 | %) | |
| (6,523 | ) | |
| (0.1 | %) |
NET INCOME | |
| 138,991 | | |
| 1.8 | % | |
| 576,654 | | |
| 7.7 | % |
Net revenues. Net revenues were
$7,737,842 for the nine months ended September 30, 2022, as compared to $7,478,537 for the same period in 2021, an increase of $259,305
or 3.5%. This increase was primarily attributable to the increase in our revenues from i) sales of systems maintenance with revenues increasing
from $5,573,268 for the nine months ended September 30, 2021 to $6,386,367 for the nine months ended September 30, 2022; and ii) sales
of systems development and integration with revenues increasing from $216,452 for the nine months ended September 30, 2021 to $236,311
for the nine months ended September 30, 2022; offset by iii) sales of hardware and consumables with revenue decreasing from $1,688,817
for the nine months ended September 30, 2021 to $1,115,164 for the nine months ended September 30, 2022.
Cost of services. Our cost of services
is primarily comprised of our costs of technical staff, contracting fees to suppliers and overhead. Our cost of services increased to
$6,456,673 or 83.4% of net revenues, for the nine months ended September 30, 2022, as compared to $5,509,896 or 73.7% of net revenues,
for the same period in 2021, an increase of $946,777 or 17.2%. The increase in cost of services was mainly attributable to the increase
in our cost of technical staff, and contracting fees to suppliers.
Gross profit. Gross profit for the
nine months ended September 30, 2022 was $1,281,169 or 16.6% of net revenues, as compared to $1,968,641 or 26.3% of net revenues, for
the same period in 2021, a decrease of $687,472 or 34.9%. The decrease of gross profit was largely due to the increase in cost of services,
offset by the increase in net revenues in this period, as compared with the same period of 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 $1,404,314 or 18.1% of net revenues, for the nine months ended September 30, 2022, as compared to $1,578,541 or
21.1% of net revenues, for the same period in 2021, a decrease of $174,227 or 11.0%. The primary reason for the decrease was attributable
to the decrease in consultancy and professional fee, and other administrative cost.
(Loss) profit from operations. As a result of the above,
our loss from operations totaled $77,822 for the nine months ended September 30, 2022, as compared to profit from operations totaled $384,038
for the same period in 2021, a change of $461,860.
Income tax expenses. Income taxes
expenses totaled $2,135 during the nine months ended September 30, 2022, as compared to $6,523 for the same period in 2021, a decrease
of $4,388 or 67.3%.
Net income. As a result of the foregoing,
we had a net income of $138,991 for the nine months ended September 30, 2022, compared to $576,654 for the same period in 2021, a decrease
of $437,663 or 75.9%, as a result of the factors described above.
Liquidity and Capital Resources
As of September 30, 2022, we had cash and cash
equivalents of $199,113. The following table provides detailed information about our net cash flow for all financial statement periods
presented in this report.
Cash Flows
(All amounts in U.S. dollars)
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
| |
US$ | | |
US$ | |
Net cash used in operating activities | |
| (190,320 | ) | |
| (207,283 | ) |
Net cash used in investing activities | |
| (144,200 | ) | |
| (30,288 | ) |
Net cash provided by financing activities | |
| 273,964 | | |
| 237,731 | |
Effect of exchange rate changes on cash and cash equivalents | |
| (29,729 | ) | |
| (152,728 | ) |
Net decrease in cash and cash equivalents | |
| (90,285 | ) | |
| (152,568 | ) |
Cash and cash equivalents at the beginning of period | |
| 289,398 | | |
| 523,337 | |
Cash and cash equivalents at the end of period | |
| 199,113 | | |
| 370,769 | |
Operating Activities
Net cash used in operating activities was $190,320
for the nine months ended September 30, 2022, which was a decrease of $16,963 or 8.2% from net cash used in operating activities $207,283
for the same period of 2021. The change in net cash used in operating activities was mainly attributable to the following:
| 1) | A change of Accounts receivable, Accounts payable increased our operating cash balances by $51,964, and
$484,627 respectively; offset by; |
| 2) | Net income of $138,991 for the nine months ended September 30, 2022, compared to $576,654 for the same
period in 2021; and |
| 3) | A change of Other receivables, and prepayments, Amounts due from related parties, and Other payables and
accrued liabilities decreased our operating cash balances by $229,454, $181,800 and $117,134. |
Investing Activities
Net cash used in investing activities was $144,200
for the nine months ended September 30, 2022, which was an increase of $113,912 or 376.1% from $30,288 in the same period in 2021. The
decrease in net cash used in investing activities was attributable to cash used in the purchase of plant and equipment by $144,664 ; offset
by interest received by $464, during the nine months ended September 30, 2022.
Financing Activities
Net cash provided by financing activities was
$273,964 for the nine months ended September 30, 2022, which was an increase of $36,233 from $237,731 in the same period in 2021. The
change in net cash provided by financing activities was attributable to the Process of bank loan by $537,349; offset by the Repayment
of bank loan by $38,741, Principal payments on finance leases by $220,464, and Interest paid by $4,180, during the nine months ended September
30, 2022.
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 the next 12 months. However, we may in
the future require additional cash resources due to changes in 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.
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 with United States generally accepted accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with U.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 periods.
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
The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
and include the financial statements of the Company and all its subsidiaries that require consolidation. All material intercompany transactions
and balances have been eliminated in the consolidation. The Company’s fiscal year end is December 31st. The following entities were
consolidated as of September 30, 2022:
|
|
Place of incorporation |
|
Ownership percentage |
Value Exchange International, Inc. |
|
USA |
|
Parent Company |
Value Exchange Int’l (China) Limited |
|
Hong Kong |
|
100% |
Value Exchange Int’l (Shanghai) Limited |
|
PRC |
|
100% |
Value Exchange Int’l (Hong Kong) Limited |
|
Hong Kong |
|
100% |
TapServices, Inc. |
|
Philippines |
|
100% |
Haomeng Technology (Shenzhen) Co., Ltd. |
|
PRC |
|
100% |
Value Exchange Int’l (Hunan) Limited |
|
PRC |
|
51% |
Shanghai Zhaonan Hengan Information
Technology Co., Ltd. |
|
PRC |
|
51% |
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.
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 |
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:
| – | 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 nine months period ended September 30, 2022 and 2021.
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
US$ | | |
US$ | | |
US$ | | |
US$ | |
| |
(unaudited) | | |
(unaudited) | | |
(unaudited) | | |
(unaudited) | |
| |
| | |
| | |
| | |
| |
NET REVENUES | |
| | | |
| | | |
| | | |
| | |
Service income | |
| | | |
| | | |
| | | |
| | |
- systems development and integration | |
| 28,964 | | |
| 56,314 | | |
| 236,311 | | |
| 216,452 | |
- systems maintenance | |
| 2,304,740 | | |
| 2,065,894 | | |
| 6,386,367 | | |
| 5,573,268 | |
- sales of hardware and consumables | |
| 223,104 | | |
| 762,562 | | |
| 1,115,164 | | |
| 1,688,817 | |
| |
| 2,556,808 | | |
| 2,884,770 | | |
| 7,737,842 | | |
| 7,478,537 | |
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 period 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.
Quarter ended | |
September 30, 2022 | | |
September 30, 2021 | |
RMB : USD exchange rate | |
6.8129 | | |
6.4874 | |
three months average period ended | |
| | |
| |
HKD : USD exchange rate | |
7.800 | | |
7.800 | |
three months average period ended | |
| | |
| |
PESO : USD exchange rate | |
55.9140 | | |
49.5606 | |
three months average period ended | |
| | |
| |
Quarter ended | |
September 30, 2022 | | |
September 30, 2021 | |
RMB : USD exchange rate | |
6.5805 | | |
6.4949 | |
nine months average period ended | |
| | |
| |
HKD : USD exchange rate | |
7.800 | | |
7.800 | |
nine months average period ended | |
| | |
| |
PESO : USD exchange rate | |
52.9091 | | |
48.3135 | |
nine months average period ended | |
| | |
| |
Quarter ended | |
September 30, 2022 | | |
December 31, 2021 | |
RMB : USD exchange rate | |
7.0483 | | |
6.4784 | |
HKD : USD exchange rate | |
7.800 | | |
7.800 | |
PESO : USD exchange rate | |
58.4270 | | |
50.4854 | |
Stock-based Compensation
The Company records stock-based compensation in
accordance with ASC 718, Compensation – Stock Compensation using the fair value method. All transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the
cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.