Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains “forward-looking statements”. 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 acquired business lines. 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. These risks and uncertainties include, 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, 2017.
Certain Terms
Except as otherwise indicated by the context, references in this report to:
“Company,” “we,” “us” and “our” are to the combined business of Value Exchange International, Inc., a Nevada corporation, and its consolidated subsidiaries;
“China,” “Chinese” and “PRC,” refer to the People’s Republic of China;
“Renminbi” and “RMB” refer to the legal currency of China;
“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States;
“SEC” or “Commission” refers to the United States Securities and Exchange Commission;
“Securities Act” refers to the Securities Act of 1933, as amended; and
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
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.”
On January 1, 2014, we received 100% of the issued and outstanding shares of in VEI CHN in exchange for i) newly issued 12,000,000 shares of our Common Stock to the majority stockholder of VEI CHN; and ii) 166,667 shares of our Common Stock held by VEI CHN to be transferred to the majority stockholder of VEI CHN (“Share Exchange”). This transaction resulted in the owners of VEI CHN obtaining a majority voting interest in the Company. The merger of VEI CHN into the Company, which has nominal net assets, results in VEI CHN having control of the combined entity.
For financial reporting purposes, the transaction represents a "reverse merger" rather than a business combination and the Company is deemed to be the accounting ‘acquiree’ in the transaction. The transaction was accounted for as a reverse merger and recapitalization. The Company is the legal acquirer but accounting ‘acquiree’ for financial reporting purposes and VEI CHN is the acquired company but accounting acquirer. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the transaction will be those of VEI CHN and will be recorded at the historical cost basis of VEI CHN, and no goodwill will be recognized in this transaction. The consolidated financial statements after completion of the transaction will include the assets and liabilities of VEI CHN and the Company, and the historical operations of the Company and the combined operations of VEI CHN from the initial closing date of the transaction.
22
Current Business Focus
.
We are a provider of customer-centric solutions for the retail industry in China, Hong Kong SAR and Philippines. We intend to seek expansion of that territory to other parts of Southeast Asia. By integrating market-leading Point-of-Sale/Point-of-Interaction (“POS/POI”), Merchandising, Customer Relations Management or “CRM” and related rewards, Locational Based (Global Positioning System (“GPS”) and Indoor Positioning System (“IPS”)) Marketing, Customer Analytics, Business Intelligence solutions, our products and services are intended to provide retailers with 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 information technology (“IT”) source for retailers who wanted 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.
Our retail solutions are installed in an estimated approximately 1/3 of POS/POI-suitable retailers in Hong Kong and Manila, Philippines, processing tens of millions of transactions a year. Company is headquartered in Hong Kong and with offices in Shenzhen, Guangzhou, Shanghai, Beijing, China; Manila, Manila, Philippines; and Kuala Lumpur, Malaysia.
As part a periodic strategic review, which is part of routine management planning, we may review possible opportunities or proposals to expand our business into other parts of Southeast Asia by possible acquisitions of existing business. Acquisitions will require finding suitable acquisitions that will agree to terms and conditions acceptable to us, availability of cash and funding on affordable terms and conditions, and other factors usual and customary to such expansion. Further, we also have to consider the costs and problems in integrating any proposed acquisition into our existing operations.
With the completion of the Share Exchange, the Company, through its operating subsidiaries, has focused on 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 orders 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 provided credit card clearing services to merchants and financial institutions in PRC. Since inception, we strived to implement our business plan, including the key step of creating our Global Processing Platform (“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”). We market our services to local merchants with regional retail locations across Asia Pacific as potential customers of their IP and related credit card and debit card processing systems. We offer interoperability through what is envisioned as a highly efficient infrastructure and perceived exceptional knowledge of the IP processing market through our SinoPay GPP platform. The SinoPay GPP system facilitates the processing of all major credit card types (Visa/MC/AMEX/Diners/Discover/JCB) and is intended to be integrated with China UnionPay to provide processing of UnionPay Debit cards in China. VEII intends to deploy the SinoPay GPP platform throughout Asia with a focus on China, Hong Kong, Thailand, Manila, Philippines, Malaysia, Korea, and Japan.
As of the date of this report, we still have not implemented any IP Business services to any customer. While we have a functioning SinoPay GPP system product for sale, we have yet to sell any SinoPay GPP system to a customer as of the date of this report. We will continue to promote the SinoPay GPP system, but our primary focus is on growing our IT Business because of our strategic decision that IT Business presents greater growth and profit potential than IP Business in the short term. As part of our strategic planning, we will also periodically consider possible alternative means of, and strategies for, developing, promoting or realizing value from the IP Business (other than internal development of the IP Business as a possible, future secondary revenue source of VEII). Further, we believe that the SinoGPP system will require ongoing and potentially expensive marketing and sales effort 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. We may be unable to fund, or be unwilling to pursue, future marketing and sales efforts for the IP Business.
23
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 2017 or 2018 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 (especially in new geographical markets in which we so not have established operations or business relationships with local companies) 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. As a smaller reporting company, we may be more vulnerable to adverse general economic conditions than larger competitors. 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 in fiscal years 2017 or fiscal year 2018 to date, 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, and take advantage of any cross-selling opportunities between the IT Business and IP Business. Sustaining success may also possibly require developing new services or products in the IT Business. Developing new services and products will be highly dependent on our ability to raise affordable, adequate working capital or generate sufficient cash flow from operations. 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 2018 or over the longer term.
24
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.
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, and Cucumbuy.com Limited (“CUCUMBUY”), which was incorporated on May 14, 2013 and disposed on May 21, 2018. VEI CHN also 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”).
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.
25
Financial Performance Highlights
The following are some financial highlights for the third quarter of 2018:
Net revenue: Our net revenues were $5,960,046 for the nine months ended September 30, 2018, as compared to $4,647,965 for the same period in 2017, an increase of $1,312,081 or 28.2%.
Gross profit: Gross profit for the nine months ended September 30, 2018 was $1,351,340 or 22.7% of net revenues, as compared to $1,236,970 or 26.6% of net revenues for the same period in 2017, an increase of $114,370 or 9.2%.
Income from operations: Our income from operations totaled $194,915 for the nine months ended September 30, 2018, as compared to $271,228 for the same period in 2017, a decrease of $76,313 or 28.1%.
Net income: We had a net income of $286,287 for the nine months ended September 30, 2018, compared to $273,954 for the same period in 2017, an increase of $19,075 of 7.0%.
Basic and diluted net income per share was $0.01 for the nine months ended September 30, 2018.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2018 and 2017
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in U.S. dollars)
|
Three Months Ended
September 30, 2018
|
|
Three Months Ended
September 30, 2017
|
|
|
US$
|
|
|
As a
percentage of
revenues
|
|
|
US$
|
|
As a
percentage of
revenues
|
NET REVENUES
|
|
|
|
|
|
|
|
|
|
|
Service income
|
|
1,843,594
|
|
|
100%
|
|
|
1,563,652
|
|
100%
|
COST OF SERVICES
|
|
|
|
|
|
|
|
|
|
|
Cost of service income
|
|
(1,578,839)
|
|
|
(85.6%)
|
|
|
(1,260,618)
|
|
(80.6%)
|
GROSS PROFIT
|
|
264,755
|
|
|
14.4%
|
|
|
303,034
|
|
19.4%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
(310,737)
|
|
|
(16.9%)
|
|
|
(320,688)
|
|
(20.5%)
|
Foreign exchange gain (loss)
|
|
(7,721)
|
|
|
(0.4%)
|
|
|
119
|
|
0.0%
|
LOSS FROM OPERATIONS
|
|
(53,703)
|
|
|
(2.9%)
|
|
|
(17,535)
|
|
(1.1%)
|
OTHER INCOME (EXPENSES)
|
|
38,074
|
|
|
2.1%
|
|
|
4,916
|
|
0.3%
|
LOSS BEFORE PROVISION FOR
INCOME TAXES
|
|
(15,629)
|
|
|
(0.8%)
|
|
|
(12,619)
|
|
(0.8%)
|
INCOME TAXES CREDIT
|
|
5,639
|
|
|
0.3%
|
|
|
6,616
|
|
0.4%
|
NET LOSS
|
|
(9,990)
|
|
|
(0.5%)
|
|
|
(6,003)
|
|
(0.4%)
|
Net revenues
. Net revenues were $1,843,594 for the three months ended September 30, 2018, as compared to $1,563,652 for the same period in 2017, an increase of $279,942 or 17.9%. This increase was primarily attributable to the increase in our revenue from i) systems maintenance with revenues increasing from $1,046,220 for the three months ended September 30, 2017 to $1,158,624 for the three months ended September 30, 2018; and ii) sales of hardware and consumables with revenue increasing from $453,644 for the three months ended September 30, 2017 to $676,917 for the three months ended September 30, 2018; and offset by a decrease in our revenue from our sales of systems development and integration with revenues increasing from $63,788 for the three months ended September 30, 2017 to $8,053 for the three months ended September 30, 2018.
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 $1,578,839 or 85.6% of net revenues, for the three months ended September 30, 2018, as compared to $1,260,618 or 80.6% of net revenues, for the same period in 2017, an increase of $318,221 or 25.2%. The increase in cost of services was mainly attributable to the increase in our cost of technical staff and overhead.
26
Gross profit
. Gross profit for the three months ended September 30, 2018 was $264,755 or 14.4% of net revenues, as compared to $303,034 or 19.4% of net revenues, for the same period in 2017, a decrease of $38,279 or 12.6%. 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 2017.
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 $310,737 or 16.9% of net revenues, for the three months ended September 30, 2018, as compared to $320,688 or 20.5% of net revenues, for the same period in 2017, a decrease of $9,951 or 3.1%. The reasons for the decrease was attributable to the decrease in staff cost and other administrative cost.
Loss from operations
. As a result of the above, our loss from operations totaled $53,703 for the three months ended September 30, 2018, as compared to loss from operations totaled $17,535 for the same period in 2017, an increase of $36,168 or 206.3%.
Income taxes credit
.
Income taxes credit totaled $5,639 during the three months ended September 30, 2018, as compared to $6,616 for the same period in 2017, a decrease of $977 or 14.8%.
Net loss
.
As a result of the foregoing, we had a net loss of $9,990 for the three months ended September 30, 2018, compared to $6,003 for the same period in 2017, an increase of $2,033 or 33.9%, as a result of the factors described above.
Comparison of Nine Months Ended September 30, 2018 and 2017
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.
(All amounts, other than percentages, in U.S. dollars)
|
Nine Months Ended
September 30, 2018
|
|
Nine Months Ended
September 30, 2017
|
|
|
US$
|
|
|
As a
percentage of
revenues
|
|
|
US$
|
|
As a
percentage of
revenues
|
NET REVENUES
|
|
|
|
|
|
|
|
|
|
|
Service income
|
|
5,960,046
|
|
|
100%
|
|
|
4,647,965
|
|
100%
|
COST OF SERVICES
|
|
|
|
|
|
|
|
|
|
|
Cost of service income
|
|
(4,608,706)
|
|
|
(77.3%)
|
|
|
(3,410,995)
|
|
(73.4%)
|
GROSS PROFIT
|
|
1,351,340
|
|
|
22.7%
|
|
|
1,236,970
|
|
26.6%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
(1,144,607)
|
|
|
(19.2%)
|
|
|
(962,585)
|
|
(20.7%)
|
Foreign exchange loss
|
|
(11,818)
|
|
|
(0.2%)
|
|
|
(3,157)
|
|
(0.1%)
|
INCOME FROM OPERATIONS
|
|
194,915
|
|
|
3.3%
|
|
|
271,228
|
|
5.8%
|
OTHER INCOME (EXPENSES)
|
|
78,576
|
|
|
1.3%
|
|
|
(13,441)
|
|
(0.3%)
|
INCOME BEFORE PROVISION
FOR INCOME TAXES
|
|
273,491
|
|
|
4.6%
|
|
|
257,787
|
|
5.5%
|
INCOME TAXES CREDIT
|
|
12,796
|
|
|
0.2%
|
|
|
16,167
|
|
0.4%
|
NET INCOME
|
|
286,287
|
|
|
4.8%
|
|
|
273,954
|
|
5.9%
|
Net revenues
. Net revenues were $5,960,046 for the nine months ended September 30, 2018, as compared to $4,647,965 for the same period in 2017, an increase of $1,312,081 or 28.2%. This increase was primarily attributable to the increase in our revenues from i) systems maintenance with revenues increasing from $3,518,038 for the nine months ended September 30, 2017 to $3,897,606 for the nine months ended September 30, 2018; and ii) sales of hardware and consumables with revenue increasing from $927,263 for the nine months ended September 30, 2017 to $1,887,295 for the nine months ended September 30, 2018; and offset by a decrease in our revenue from our systems development and integration with revenues decreasing from $202,664 for the nine months ended September 30, 2017 to $175,145 for the nine months ended September 30, 2018.
27
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 $4,608,706 or 77.3% of net revenues, for the nine months ended September 30, 2018, as compared to $3,410,995 or 73.4% of net revenues, for the same period in 2017, an increase of $1,197,711 or 35.1%. The increase in cost of services was mainly attributable to the increase in contracting fees to suppliers, and our cost of technical staff, depreciation and amortization and overhead.
Gross profit
. Gross profit for the nine months ended September 30, 2018 was $1,351,340 or 22.7% of net revenues, as compared to $1,236,970 or 26.6% of net revenues, for the same period in 2017, an increase of $114,370 or 9.2%. The increase of gross profit was largely due to the increase in net revenues, offset by the increase in cost of services in this period, as compared with the same period of 2017.
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 $1,144,607 or 19.2% of net revenues, for the nine months ended September 30, 2018, as compared to $962,585 or 20.7% of net revenues, for the same period in 2017, an increase of $182,022 or 18.9%. The primary reason for the increase was attributable to the increase in staff cost, rental expenses, professional fees, depreciation charge and other administrative cost.
Income from operations
. As a result of the above, our income from operations totaled $194,915 for the nine months ended September 30, 2018, as compared to $271,228 for the same period in 2017, a decrease of $76,313 or 28.1%.
Income tax credit.
Income taxes credit totaled $12,796 during the nine months ended September 30, 2018, as compared to $16,167 for the same period in 2017, a decrease of $3,371 or 20.9%.
Net income
.
As a result of the foregoing, we had a net income of $286,287 for the nine months ended September 30, 2018, compared to $273,954 for the same period in 2017, an increase of $19,075 or 7.0%, as a result of the factors described above.
Liquidity and Capital Resources
As of September 30, 2018, we had cash and cash equivalents of $125,415. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Cash Flows
(All amounts in U.S. dollars)
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
US$
|
|
US$
|
Net cash provided by (used in) operating activities
|
|
191,276
|
|
(384,247)
|
Net cash (used in) provided by investing activities
|
|
(72,784)
|
|
1,261
|
Net cash (used in) provided by financing activities
|
|
(79,755)
|
|
6,944
|
Effect of exchange rate changes on cash and cash equivalents
|
|
63,616
|
|
(3,097)
|
Net increase (decrease) in cash and cash equivalents
|
|
102,353
|
|
(379,139)
|
Cash and cash equivalents at the beginning of period
|
|
23,062
|
|
448,053
|
Cash and cash equivalents at the end of period
|
|
125,415
|
|
68,914
|
Operating Activities
Net cash provided by operating activities was $191,276 for the nine months ended September 30, 2018, which was a change of $575,523 or 149.8% from net cash used in operating activities $384,247 for the same period of 2017. The increase in net cash provided by operating activities was mainly attributable to the following:
1)
A change of accounts receivable, other receivables and prepayments, deferred income, and amounts due to related parties increased our operating cash balances by $475,491, $257,619, $308,244 and $263,207 respectively; and
2)
Net income of $286,287 for the nine months ended September 30, 2018, compared to $273,954 for the same period in 2017; offset by:
28
3)
A change of amounts due from related parties and accounts payable decreased our operating cash balances by $420,254 and $252,276 respectively.
Investing Activities
Net cash used in investing activities was $72,784 for the nine months ended September 30, 2018, which was a change of $74,045 from net cash provided by investing activities of $1,261 in the same period in 2017. The change in net cash (used in) provided by investing activities was attributable to cash used in the purchase of plant and equipment by $82,742; offset by the proceeds of disposal of a fixed asset by $9,958, during the nine months ended September 30, 2018.
Financing Activities
Net cash used in financing activities was $79,755 for the nine months ended September 30, 2018, which was a change of $86,699 from net cash provided by financing activities of $6,944 in the same period in 2017. The change in net cash (used in) provided by financing activities was attributable to the repayment of bank loan and loan from a director by $28,473 and $51,282 respectively, during the nine months ended September 30, 2018.
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.
29
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 wholly-owned 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, 2018:
|
|
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%
|
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:
30
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, 2018 and 2017.
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
|
2018
|
|
|
2017
|
|
2018
|
|
|
2017
|
|
US$
|
|
|
US$
|
|
US$
|
|
|
US$
|
|
(unaudited)
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
(unaudited)
|
NET REVENUES
|
|
|
|
|
|
|
|
|
|
Service income
|
|
|
|
|
|
|
|
|
|
- systems development and integration
|
8,053
|
|
|
63,788
|
|
175,145
|
|
|
202,664
|
- systems maintenance
|
1,158,624
|
|
|
1,046,220
|
|
3,897,606
|
|
|
3,518,038
|
- sales of hardware and consumables
|
676,917
|
|
|
453,644
|
|
1,887,295
|
|
|
927,263
|
|
1,843,594
|
|
|
1,563,652
|
|
5,960,046
|
|
|
4,647,965
|
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.
31
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, 2018
|
|
September 30, 2017
|
RMB : USD exchange rate
|
|
6.7731
|
|
6.6577
|
three months average period ended
|
|
|
|
|
HKD : USD exchange rate
|
|
7.800
|
|
7.800
|
three months average period ended
|
|
|
|
|
PESO : USD exchange rate
|
|
51.4137
|
|
49.8403
|
three months average period ended
|
|
|
|
|
Quarter ended
|
|
September 30, 2018
|
|
September 30, 2017
|
RMB : USD exchange rate
|
|
6.4798
|
|
6.8013
|
nine months average period ended
|
|
|
|
|
HKD : USD exchange rate
|
|
7.800
|
|
7.800
|
nine months average period ended
|
|
|
|
|
PESO : USD exchange rate
|
|
50.6620
|
|
49.8403
|
nine months average period ended
|
|
|
|
|
Quarter ended
|
|
September 30, 2018
|
|
December 31, 2017
|
RMB : USD exchange rate
|
|
6.8514
|
|
6.6352
|
HKD : USD exchange rate
|
|
7.800
|
|
7.800
|
PESO : USD exchange rate
|
|
51.4851
|
|
49.8403
|
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.