ITEM 1. BUSINESS. Overview
History of Value Exchange International, Inc.
History. 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. We changed to our current corporate name, “Value Exchange International, Inc.”, on December 5, 2017.
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.
For financial reporting purposes, the January 1, 2014 transaction with VEI CHN represented a "reverse merger" rather than a business combination and the Company was deemed to be the accounting acquiree in the transaction. The transaction was accounted for as a reverse merger and recapitalization. The Company was the legal acquirer but accounting acquiree for financial reporting purposes and VEI CHN was the acquired company but accounting acquirer. Consequently, the assets and liabilities and the operations that 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 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.
Current Business Focus. We are a provider of customer-centric technology solutions for the retail industry in Hong Kong SAR and certain regions of China 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 (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 by available cash and other resources and the perceived cost and burdens of acquiring and integrating in our operations the target business or new operating assets.
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. Since inception, we have 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 in our existing markets of China, Hong Kong and Philippines while seeking business from retailers with market presence 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 will be integrated with China UnionPay to provide processing of UnionPay Debit cards in China. When and if market conditions warrant and VEII has sufficient cash resources or cash flow, adn subject to our focus on the IT Business, VEII intends to deploy the SinoPay GPP platform throughout Asia with a focus on China, Hong Kong, Thailand, Philippines, Malaysia, Korea, and Japan.
As of the date of this Annual Report on Form 10-K, 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 Annual Report on Form 10-K. 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. 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.
History of Value Exchange Int’l (China) Limited. VEI CHN was first established on November 16, 2001 in Hong Kong SAR as a limited liability company 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 its name 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. 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 of VEI and its Subsidiaries
VEII is a holding company for its operating subsidiaries. The principal business of VEI CHN for more than 15 years is to provide the IT Business (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 and PRC.
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, our services may from time to time license standard third party software programs.
Business partner and customers
The main business partner of the IT Business group is the Chinese and Hong Kong subsidiary operations (“WN”) of Diebold Nixdorf AG (formerly, “Wincor Nixdorf AG”, a German public company), a U.S.-German public company subject to the reporting requirements of the Exchange Act, (“DN”). Since 1990’s, VEI CHN Group served the AS Watson Group, a retail conglomerate including Watsons, Parknshop and Fortress, directly and through a sub-contracting arrangement with WN in the China-Hong Kong region. This contributes almost half of the gross sales revenue each year to VEI CHN.
In recent years, VEI CHN has striven to broaden its clientele in retail sector and to other business sectors. VEI CHN Group secured a number of service contracts for leading retail groups, Robinson Retails Group in Philippines and Dairy Farm in Hong Kong. PCCW, a leading telecommunication company in Hong Kong, and Inland Revenue Department of the Hong Kong SAR Government have also become major customers of the VEI CHN Group. The focus on expanding clientele in the retail sector is a current priority of Company’s growth strategy.
The annual sales of VEI CHN Group have been increasing over the past few years in its IT Business by expanding its customer base and its scope of services. VEI CHN Group solution now runs in over 10,000 POS in the region and provides a solid foundation to VEII’s IP system. Also, VEI CHN Group is seeking to leverage its existing POS solution customer base to expand into the mobile Customer Relationship Management and Rewards market. MasterCard’ 2016 Survey Reveals showed two in five Hong Kong consumers shop on smartphones in Hong Kong. The importance of the mobile market in commerce is globally recognized. Even through the Mobile Customer Relationship Management and Rewards programs has not produced any significant revenues to the Group, the programs seek to exploit the increasing use of mobile devices to shop and purchase products and services, to sustain consumer loyalty by rewards for repeat purchases by mobile devices and to permit companies to develop consumer profile databases used to fashion targeted marketing to the consumers based on purchasing habits.
With respect to the IP Business, the Company will seek to implement its IP Business and related credit card and debit card processing systems as part of and as an supplement and enhancement for the IT Business to the Retail Sector. There has been no significant integration of the businesses in fiscal year 2016 and 2017 and there is no deadline for such integration, which will occur as and when, if ever, that the Company can afford to and deems it propitious to integrate operations.
We will evaluate the merits of this business and growth strategy from time to time and may elect in the future to continue to pursue an IP Business, IT Business or focus more on one segment than the other, including seek business opportunities in the applications of digital technology which can raise our customers’ competitive edge leading to increase in market share and profitability in their business sectors. Any change in business focus will be based on current economic conditions, competitive environment, our available cash and infrastructure resources, current customer demand trends and financial results of each segment of our post-Share Exchange business plan. As of the date of the filing of this Annual Report on Form 10-K, we are pursuing our emphasis on IT Business in our core Hong Kong SAR and PRC market while also exploring expansion opportunities in adjacent Asia Pacific markets. Our ability to exploit adjacent market opportunities for expansion will be limited and governed by available, affordable funding and cash flow.
We do not conduct revenue generating operations in North or South America and have no current plans to expand to that market.
Recent Developments. On February 16, 2018, VEI SHG, signed a January 24, 2018 stores equipment support agreement (“Agreement”) with the largest health care and beauty retailer (“Retailer”) in China. Under the Agreement, the Retailer has contracted for site and preventive maintenance and support for computer and point of sale systems (“Systems”) as well as new store and store renovation install and migration services for Systems from the VEI SHG. The Agreement is non-exclusive, covers Retailer’s stores in the northern and eastern region of China and runs through December 2019.
Gross revenue and net profit potential, if any, as well as the full extent of services by VEI SHG under the Agreement are uncertain at this time due to lack of sufficient operational experience as a service provider under the Agreement. VEII anticipates reporting initial financial results and projected financial results for the VEI SHG work under the Agreement with the announcement of the quarterly consolidated financial results on Form 10-Q for VEII’s fiscal quarter ending March 31, 2018. Actual extent of services and financial results of the services may vary from any projected or anticipated scope of services and related financial results.
CORPORATE STRUCTURE
Our corporate organizational chart, as of December 31, 2017, is as follows:
We do not have a set time schedule for integration of IT Business and IP Business as our primary focus is on growing the IT Business while not abandoning the IP Business and our ability to integrate is limited by available and dedicated financial resources and manpower. As of the date of this Annual Report on Form 10-K, the IP Business is a secondary or supplementary offering of our IT Business, but has developed into a revenue source.
Acquisition of Philippines IT Business. On 26 January 2017, nine Company stockholders who have in the aggregate had more than fifty percent (50%) of the voting power of the issued and outstanding shares of the Common Stock as of the record date approved the Stock Purchase Agreement, dated 23 January 2017, (“TSI SPA”). The TSI SPA is by and among VEI CHN; the Company; TapServices, Inc., a corporation organized under the laws of the Republic of the Philippines (the “TSI”); and the sole shareholder of TSI (“TSI shareholder”). Under the TSI SPA: (a) the TSI shareholder who owned One Thousand Two Hundred and Fifty (1,250) shares of TSI Common Stock (the “TSI Shares”), constituting One Hundred Percent (100%) of the issued and outstanding shares of capital stock of TSI, sold all of those TSI Shares to VEI; and (b) TSI issued Eighty-Eight Thousand and Forty-four (88,044) shares of TSI Common Stock to VEI under the TSI SPA (“TSI C-Shares”). The aggregate purchase price for all of the TSI Shares (the “Purchase Price”) was Two Thousand Six Hundred and Thirty-Six United States Dollars (US$2,636.00). The aggregate subscription price for all of the TSI C-Shares (the “C-Share Purchase Price”) was Two Hundred Thousand United States Dollars (US$200,000.00), which amount was deposited with TSI by the Company as a good faith earnest money deposit in January 2015. The TSI SPA was unanimously approved by VEI CHN’s Board of Directors and by the Company’s Board of Directors at a combined board of directors meeting held on 23 January 2017 in Hong Kong SAR. VEI and Company signed the TSI SPA on 25 January 2017 in Hong Kong SAR. As of 26 January 2017, the Company had received written consents from nine Stockholders approving the corporate action, which written consents represent 16,095,324 shares of Common or 54.27% of the issued and outstanding shares of Common Stock as of the record date - there being 29,656,130 shares of Common Stock issued and outstanding as of the record date. TSI’s board of directors approved and signed the TSI SPA on 23 January 2017. The Seller signed the TSI SPA on 26 January 2017. With the consummation of the TSI SPA, TSI is being operated as a wholly owned subsidiary of VEI CHN. For U.S. federal securities law purposes, the consummation of the stock purchase under the TSI SPA occurred with the mailing of a definitive information statement by the Company, which occurred on or about March 15, 2017 TSI is being operated as a subsidiary and VEI’s IT Business operation in greater Manila, Philippines region.
The TSI SPA is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 25, 2017, and filed with the Commission on January 27, 2017. The foregoing summary of the TSI SPA is qualified in its entirety by reference to the TSI SPA.
Marketing
Marketing activities are designed to inform potential clients about the benefits of using our services and include and will include the following: face-to-face sales and marketing; development and distribution of marketing literature; direct mail and email; advertising; promotion of our web site; attendance at trade shows or product seminars; and industry analyst relations campaign.
Sales are managed at the subsidiary level by each subsidiary. The Company has a Sales and Marketing team in each regional office of its existing China/Hong Kong and Manilla markets to promote and maintain good business relationships with our customers. We strive to provide high quality and fast response services to our customers in our Help Centre, Maintenance Support Team and Professional IT Engineer to help customers solve their problems and satisfy their IT needs.
VEI CHN Group has been serving in IT Business sectors for over 15 years, focusing on POS maintenance and support to retail sector. The VEI CHN Group will continue its key business and seek to expand its client base to gain more market share in PRC, Hong Kong SAR, and certain other areas of Asia Pacific. VEII may consider acquiring companies in the Asia Pacific region with similar business, subject to financial wherewithal to do so and subject to a suitable and affordable acquisition opportunity. The perceived cost of market penetration will also be a factor in deciding whether to pursue any acquisition opportunities.
We use strategic partnerships as another way of marketing and selling our IT Business. The operating subsidiaries will also cooperate with strategic partners in the local markets to secure and provide maintenance services to major retail customers and as a basis for attempting to expand our business in our markets. In fiscal year 2017, we had over 10 strategic partner arrangements engaged in providing our services to customers in our China/Hong Kong markets.
Competition
We operate in a highly competitive, customer-driven industry and we compete against a variety of local and regional competitors of varying operational sizes, product/service offerings and resources. In some instances, our competitors have fewer regulatory burdens, easier access to financing, greater resources, greater operating capabilities and efficiencies of scale, stronger brand-name recognition, longstanding relationships with regulatory authorities and customers, more customers, and more flexibility to offer discounted services and/or products.
We face significant competition from large multinational service providers, such as DN, NCR, Fujitsu IBM, Toppan Forms and large national companies, such as Octopus card, an electronic payment in online or offline system in Hong Kong SAR. Though VEI CHN Group faces keen competition in the maintenance service market, it believes that it has a well-trained technical team that offers services to the satisfaction of our customers, and, as is the case with many smaller companies in the IT segment, we believe we can offer more customized and cost effective services to certain customers than larger competitors. Without extensive teaming with strategic partners, we lack the capabilities to compete directly with larger competitors in projects or work requiring capabilities of a large company. This can from time to time limit the number and nature projects that we can pursue or handle. VEII may also experience a competitive disadvantage in bids or prospective work where extensive and broad prior projects in certain areas of IT are required to bid and to win bids. An instance of such a competitive disadvantage would be technical work in which we do not have extensive prior experience or we do not have a prior relationship with the customer in question.
We also face competition from companies that are of comparable size and resources. In such competition, price and scope of services or qualification of personnel often determines the winning provider. Competition for qualified personnel is a challenge faced by all companies in the IT Business industry.
Some of our competitors in our industry have substantially greater capital and technical resources than we have and, operate as subsidiaries of financial institutions or bank holding companies, which may allow them on a consolidated basis to own and conduct depository and other banking activities that we do not have the regulatory authority to own or conduct. Since they are affiliated with financial institutions or banks, these competitors do not incur the costs associated with being sponsored by a bank for registration with card networks and they can settle transactions quickly for their own merchants. We do not, however, currently contemplate pursuing an acquisition or strategic relationship with a financial institution in order to increase our competitiveness and such an acquisition or strategic relationship is not prominent in our current business and growth strategy. Our current operational focus is to improve the efficiency and profitability of existing IT Business. As of the date of the filing of this Annual Report on Form 10-K, VEII has not pursued or identified such a financial institution and there can be no assurance that we could consummate a merger or strategic relationship with any financial institution.
Cybersecurity and Security of Computer Networks
We maintain certain computer networks, computer systems and databases in connection with our business operations and services. We use readily available third party security programs to protect these systems and databases and we periodically review security measures. Any security system or program may be vulnerable to hacking or security breaches, especially since hacking and malicious programs are constantly evolving to overcome new security measures. Like any company’s computer and network systems and databases, our systems and databases could be vulnerable to security hacking or malicious programs. We may also be vulnerable to security leaks and violations by employees and contractors, which is a threat faced by all IT Business companies. We have not experienced any significant security breaches or problems as of the date of filing of this Annual Report on Form 10-K. VEII technical staff typically evaluates cybersecurity and security measures from time to time as new threats become known to us.
There can be no assurance that our efforts to protect our computer systems, networks and other information systems will prevent any of the problems identified as cyber security attacks or problems. The problem of this type might be caused by events such as computer hacking, computer viruses, worms and other destructive or disruptive software, "cyber-attacks" and other malicious activity, defects in the hardware and software comprising our network and information systems, as well as natural disasters, power outages, terrorist attacks and similar events. Such events could have an adverse impact on us and our customers, including degradation of service, service disruption, excessive call volume to help centers and damage to our or customers’ equipment and data. Operational or business delays for our operations or customer operations may result from the disruption of computer systems, network or information systems and the subsequent remediation activities. These events may create negative publicity resulting in reputation or brand damage with customers and our results of operations could suffer. Since we provide computer, software and system services and products to customers, cyber security attacks on our computer systems, networks and other information systems may affect our customers’ computer systems, networks and other information systems and produce liabilities on our part to such customers.
Key Personnel
The following personnel are considered critical to our operations: Kenneth Tan and Benny Lee, who provide executive management services and strategic direction. We do not have key man insurance to fund replacement of any key personnel. We also frequently use third party consultants acting as independent contractors to assist in the completion of various projects, which consultants are usually hired on a project-by-project basis. Third parties are instrumental to keep the development of projects on time and on budget. Reliance on independent contractors is common in technology services businesses. We do not anticipate and have not experienced any significant problem in securing needed technical expertise, but the inability to secure needed technical expertise is a risk faced by IT service companies like our company.
A common problem in our industry is key or important contractors and employees being lured to more attractive or lucrative work opportunities. VEII cannot typically match the level and scope of financial incentives offered by larger competitors to workers. VEII has to rely on active recruitment coupled with offering projects that match workers’ skills and interests as well as providing an appealing work environment and competitive base compensation in order to maintain or create an adequate work force on a project-by-project basis.
Insurance
Except the Company’s subsidiaries in (i) PRC are required to cover its employees with medical, retirement and unemployment insurance programs, and (ii) Hong Kong are required to cover its employees with labor insurance programs under the prevailing laws and regulations of the PRC and in Hong Kong, we do not maintain other insurance. Because we may not have sufficient insurance, if we are made a party to a liability legal action, we may not have sufficient funds to defend the litigation or may suffer another liability. If that occurs a judgment or liability that is not covered by any insurance or covered by available cash or funding, could cause us to cease or reduce operations. We did not experience any significant claims against our insurance in fiscal year 2017.
Government Regulation
We are not currently subject to direct Chinese, United States federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to electronic commerce and the U.S. securities laws applicable to the Company. However, the Internet is increasingly popular and essential on a global basis. As a result, it is possible that a number of international and local laws and regulations may be adopted with respect to the Internet applications and transactions, including ones used in or serviced by our service. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. Existing and future laws and regulations governing the privacy of end users or their customers’ information is or may become part of the regulatory burden of conducting our business lines. We do not provide our services in the U.S. as of the date of this Annual Report on Form 10-K, but the global nature of the Internet and e-commerce and financial transactions means that any company may become subject from time to time to U.S. or foreign laws on privacy, financial regulation, business regulation or tax law.
We are not certain how our existing business may be affected by the application of existing, evolving laws, or extension of foreign laws to our operations and, governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity and export or import matters. The vast majority of such laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet market place, including areas affecting our business lines. Such uncertainty could reduce demand for services or increase the cost of doing business as a result of litigation or regulatory costs or increased service delivery costs. In addition, because our services could be available over the Internet in multiple states and foreign countries, other jurisdictions may claim that we are required to qualify to do business in each such state or foreign country. Our failure to qualify a business in a jurisdiction where it is required to do so could subject it to taxes and penalties. It could also hamper our ability to enforce contracts in such jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could have a material adverse effect on our business, results of operations and financial condition.
Like many companies, and from time to time, the Company may review the economic and tax advantages of various jurisdictions for businesses like the Company business in order to determine if there are any significant long-term advantages in relocating or expanding the Company operations to another jurisdiction, whether in whole or in part. Any such review is part of the customary strategic planning of the Company.
We are subject to the Foreign Corrupt Practice Act, or “FCPA,” and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. Our activities in Asia create the risk of unauthorized payments or offers of payments by consultants or agents of our company, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. Also, our existing safeguards and any future improvements may prove to be less than effective, and consultants, sales agents of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. The U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Employees
We have more than 260 full time employees as of December 31, 2017, including officers of the Company and including employees and officers of VEI CHN and its subsidiaries.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. Any investor should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer or be undermined. In that case, the trading price of our common stock could decline, and any investor may lose all or part of the investor’s investment. You should read the section entitled “Special Note Regarding Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this Annual Report on Form 10-K.
Risks Related to Our Business
Because we have a limited operating history with VEI CHN and now TSI as a subsidiary, and we have experienced past changes in management, we may not be able to successfully manage our business or achieve profitability.
Our operating income and assets are not significant, especially in light of the numerous competitors in our industry and the fact that many of those competitors have substantially greater technical and financial resources, market share, broader geographical market reach, brand recognition, customer loyalty and strategic alliances than our company. We are vulnerable to larger competitors targeting our services, and the ability of our competitors to undercut our pricing for sustained periods. With limited resources and funding, our company cannot afford to engage in any pricing competition because we require profits in order to sustain our business. The likelihood of our success must be considered in light of the expenses, complications and delays frequently encountered in connection with the establishment and expansion of our services and the extremely competitive environment in which we will operate. Our performance must be considered in light of the risks, expenses and difficulties frequently encountered in establishing profitability in the evolving, highly competitive IT industries. If we cannot successfully manage our business, we may not be able to generate future profits and may not be able to support our operations. We have the added burden of managing the recently acquired IT Business and our traditional IP Business and seeking to integrate them.
Our company has had changes in management in the past three years and such changes are not conducive to continuity of business or business strategies and are disruptive to business operations. If we do not maintain a stable, competent management team in our service, our company may fail or fail to achieve profitability. Our management team has been stable for fiscal year 2017.
Our industry is highly competitive and if we are unable to compete successfully, our business will be harmed or fail.
The industry of our services, both IP Business and IT Business, are global as well as local and with numerous competitors in every market and region. Further, many customers have or may develop or acquire the capability to provide our services and products in house, especially with the development of software and other technologies that eliminate or reduce the need for customers to use outside services like our company. Moreover, we believe foreign competitors and competitors with operations or subcontractors in countries such as South Korea and India may become an increasing source of competition, due largely to their access to low-cost, high-skilled labor and low cost software and technological development resources. If we are unable to compete successfully against current or future competitors in the industry, our expected revenues, margins and market share could be adversely affected, any of which could significantly harm our business or even our survival. We do not possess the resources to withstand any sustained downturn in business or extensive competition aimed at our customer base.
Our success depends on certain key personnel. We rely on highly skilled and qualified personnel, and if we are unable to continue to attract and retain such qualified personnel it will adversely affect our business.
Our performance to date has been and will continue to be largely dependent on the talents, efforts and performance of our senior management and key technical personnel, who generally have, in our opinion, significant experience with our company and substantial relationships and reputations within the industry of our services. Certain of our executive officers and top technical personnel may enter into employment and noncompetition agreements. However, while it is customary in the industry to use employment agreements as a method of retaining the services of key executive personnel, these agreements do not guarantee us the continued services of such employees. We do not currently have an employment agreement with our key personnel, or with most of our key technical and engineering personnel. The loss of our executive officers or our other key personnel, particularly with little or no notice, could cause delays on business developments and projects and could have an adverse impact on our customers and industry relationships, our business, operating results or financial condition. While we may rely on independent contractors or consultants for technical needs, we may also experience an inability to hire such expertise in the future. The job market for experienced IT personnel is competitive in PRC and Hong Kong SAR as well as globally. We also lack the resources or funding to match more established competitors’ compensation packages for the kind of personnel that is critical to our company’s survival and success.
Our success depends to a significant extent on our ability to identify, attract, hire, train and retain qualified creative, technical and managerial personnel or to contract with such personnel as independent contractors. We expect competition for personnel with the specialized technical skills needed to create our products and provide our services will continue to intensify in our business because commerce’s reliance on technology increases in order to meet the competitive need for operational efficiencies and related automation and connectivity. We plan to hire individuals on a project-by-project basis, and individuals who work on one or more projects for us may not be available to work on future projects. If we have difficulty identifying, attracting, hiring, training and retaining such qualified personnel, or incur significant costs in order to do so, our business and financial results could be negatively impacted.
We may not be able to successfully implement our strategies of expanding in our industry, effectively or at all.
A key feature of our growth strategy is to expand our existing services in PRC and Hong Kong SAR. This strategy requires us to leverage the talents of our key personnel, their experience and developing and protecting any market share or any proprietary rights. As a company, however, we have limited financial resources to accomplish these goals. Entry into these businesses or into new markets presents significant challenges and subjects our business lines to significant risks, including those risks set forth in these Risk Factors. The inability to successfully manage these challenges could adversely affect our potential success in these businesses. Such failure would significantly limit our ability to grow our business and could deplete our working capital and limit our ability to operate or pursue new businesses or new markets. We may lack the revenues and funding to pursue our business, which could doom our business to failure or a restructuring to a more limited business.
Our successful pursuit of profitable business faces various risks and challenges, including:
the success of our business will be primarily dependent on customer acceptance of our services and products, which is extremely difficult to predict;
achieving sustainable operating revenues sufficient to support our business;
the business can be capital-intensive and our capacity to generate cash from our operations may be insufficient to meet our anticipated capital requirements, especially the capital needs of penetrating and developing our services;
technological developments could render obsolete our technologies, services and products and undermine our services in the industry;
the need to access expertise and technical resources in each market in which we may operate presents high capital costs that may be beyond our ability to fund;
we may be unable to compete for or afford key personnel in our industry that pays a premium for talent, especially since our common stock has a limited market price and limited liquidity;
strikes by one or more of the labor unions or similar groups that may provide personnel essential to our operations, or a shortage of qualified personnel, could delay or halt our business operations;
technologies and customer tastes and demands can shift or change unexpectedly in the rapidly evolving IT industry and IP industry and we may lack the wherewithal to respond to such changes; and
acquisitions we pursue in our industry and related industries could result in operating difficulties, dilution to our shareholders and other consequences harmful to our business. Integration of new acquisitions can undermine an acquiring company’s business strengths by diluting resources and manpower and imposing operational losses.
As part of our growth strategy, and if we attain funding and stability and profitability in our core business, we may selectively pursue strategic acquisitions in our industry and related industries. We may not be able to consummate such acquisitions, or efficiently integrate new businesses into our existing business, which could adversely impact our growth. If we do consummate acquisitions, integrating an acquired company, business or technology may result in unforeseen operating difficulties and expenditures, including:
increased expenses due to transaction and integration costs;
potential liabilities of the acquired businesses;
potential adverse tax and accounting effects of the acquisitions;
diversion of capital and other resources from our existing business;
diversion of our management’s attention during the acquisition process and any transition periods;
loss of key employees of the acquired businesses following the acquisition or inability of existing management to manage newly acquired businesses; and
inaccurate budgets and projected financial statements due to inaccurate valuation assessments of the acquired businesses.
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Furthermore, achieving these objectives will require investments which may result in short-term costs without generating any current revenues and therefore may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.
Interruption or failure of our ability to timely provide our services and products, which could damage our reputation and have an adverse impact on our operating results.
Our future success is significantly dependent on our ability to provide services and deliverables that consistently meet our customers’ needs. We may rely on contractors and their software applications, hardware and other information technology and communications systems for the development and provision of our services and deliverables to customers.
Our services, deliverables and products may be vulnerable to damage or interruption from earthquakes, hurricanes, terrorist attacks, floods, fires, power loss, telecommunications failures, cyber-attacks or computer viruses or other attempts to harm our systems, and similar events. Like all companies in the industry, we are also vulnerable to hackers and destructive computer programs. The expertise of hackers is constantly evolving and no system is absolutely secure from hackers or malicious software programs.
We cannot predict the effect that rapid technological change may have on our business or industry.
Our industry is rapidly evolving, primarily due to technological developments. The rapid growth of technology prevents us from being able to accurately predict the overall effect that technological growth may have on our potential revenue and profitability. This requires us to either develop these capabilities by acquiring or developing our own intellectual property rights, which can result in substantial research and development costs and substantial capital expenditures or to purchase third-party licenses, which can result in significant expenditures. In the event we seek to obtain third-party licenses, we cannot guarantee that they will be available or, once obtained, will continue to be available on commercially reasonable terms, or at all. If we are unable to develop and effectively market new technologies that adequately or competitively address the needs of changes in our industry, it could have an adverse effect on our business and growth prospects.
Our revenue may be adversely affected if we fail to protect any essential proprietary rights or fail to enhance or develop new technology.
If we are unable to license third party technologies or develop our own proprietary technologies in response to the demands of our services, we may be unable to compete in the industry and we may fail. With our limited financial resources, we may be unable to attain or develop needed technologies required to be profitable or competitive.
We may enter into contracts to protect any licensed or developed technologies, but such agreements may be ineffective to protect technologies that are critical to our business.
In addition, we may be required to litigate in the future to enforce any technologies or any intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have an adverse effect on our business and/or our operating results. We do not have reserves for litigation and may be unable to afford to litigate, which could mean the loss of the value of any intellectual property rights.
Third-party technology licenses may not be available to us in the future.
We may rely on certain technology that we license from third parties, including software. These third-party technology licenses may not in the future be available to us on commercially reasonable terms, or at all. The loss of any of these technology licenses could result in delays in performance of work until we identify, license and integrate equivalent technology, and we may not be able to identify, or license any such equivalent technology in a timely manner or at all. Any resulting delays in a performance could damage our reputation and result in a decrease in our revenues during the period of delay, either of which could materially adversely affect our business, operating results and/or financial condition.
We need additional and ongoing financing to fund our operations, which we may not be able to obtain on acceptable terms or at all. Additional capital raising efforts in future periods will be dilutive to our then current stockholders or result in increased interest expense and debt load in future periods.
We may need to raise additional and ongoing working capital to fund our plans to invest in current business development, sustain current operations or marketing initiatives and possible future acquisition of the operating assets. Our future capital requirements depend on a number of factors, including our ability to manage any growth of our business and our ability to control our expenses. Also, if we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders will probably experience significant dilution due to the “penny stock” status of the VEII Common Stock.
New securities issued by us may contain certain rights, preferences or privileges that are senior to those of our Common Stock or other securities. Such seniority may adversely impact the rights and any possible financial return for our holders of the VEII Common Stock.
We cannot assure investors that we will be able to raise the working capital as needed in the future on terms acceptable to us, if at all. If we do not raise capital as needed, we will be unable to operate our business or fully implement our business development and acquisition expansion strategy.
The inability to successfully manage any growth of our business, whether through acquisitions or expansion of existing businesses, may have an adverse effect on our operating results.
If we experience growth in the number of employees and the scope of our operations, then such growth will result in increased responsibilities for our management. If our management is unable to successfully manage expenses in a manner that allows us to both improve operations and at the same time pursue potential market opportunities, the growth of our business could be adversely impacted, which may, in turn, negatively affect our operating results or financial condition. In addition, we believe that a critical contributor to any success will be a creative culture. As we attempt to grow and alter our business to focus increasingly on the creation, production and marketing of services and products, and as we experience change in response to the requirements of being a public company, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our future success.
We may not be able to adequately finance the significant costs associated with the development of new product lines and new services.
Any technology business is subject to a demand to have the newest product and services to match changes in technology and customer purchasing habits. This technological cycle will require us to purchase new products and develop new services to match changes in the technologies used by our customers.
We could be required to expend substantial funds for and commit significant resources to the following:
training our personnel on new products and services;
purchasing new products for resell;
marketing and promotional costs for new products and services; and
our future operating results will depend to a significant extent on our ability to continue to provide new and competitive products that compare favorably on the basis of cost and performance with the design and manufacturing capabilities of competitive third-party technologies. We will need to sufficiently increase our net sales to offset these increased costs, the failure of which would negatively affect our operating results.
If we incur additional indebtedness, such indebtedness could further exacerbate the risks associated with our substantial indebtedness.
If we incur additional indebtedness, such indebtedness will be added to our current debt levels and the related risks we currently face could be magnified. Any decrease in our revenues or an increase in operating costs (and corresponding reduction in our cash flows) would also adversely affect our ability to pay our indebtedness as it comes due.
Changes in PRC, regional or global economic conditions could adversely affect our profitability.
A decline in Hong Kong or PRC, or regional or global, economic conditions could lead to a decrease in customer discretionary spending, which in turn could adversely affect demand for our services. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in customers’ demand away from our services and products or make competitors’ services and products more attractive and more affordable. Such events could cause a decrease in the demand for our services and products, which would have an adverse effect on our profitability and operating results.
We are dependent on Hong Kong SAR and, to a lesser extent, PRC for our customers and revenues. We lack extensive diversification into new geographical markets, which is a goal of our company, but we also believe there is sufficient business in Hong Kong SAR and PRC to support our short-term business and financial goals and to support our foreseeable operating overhead. The acquisition of TapServices, Inc. is an effort to expand the reach of geographical markets beyond PRC and Hong Kong SAR, but we remain committed to expanding our business in PRC and Hong Kong SAR as our core geographical market.
Since we do not have revenue generating operations in North or South America, we do not anticipate any direct, immediate adverse consequences from any trade disputes between U.S. and China (other than any impact on China and Hong Kong economic conditions).
A substantial amount of our sales revenue is derived from sales to a limited number of customers, and our business will suffer if sales to these customers decline.
We have derived a significant portion of our revenue from a limited number of customers. For the year ended December 31, 2017, our revenue was concentrated in our largest customer that accounted for approximately 41.2% of annual revenues. As of December 31, 2017, $29,754 or 6.6% of our accounts receivable, was due from our largest customer. We do not have long term contractual arrangements or regular negotiation with most of these customers. The loss of one or more of these customers could damage our business, financial condition and results of operations. We are endeavoring but may not succeed expanding our customer base in order to reduce reliance on major customers.
We face an inherent business risk of exposure to product or service liability claims that could have a material adverse effect on our operating results.
Because of the nature of our products and services, we face an inherent business risk of exposure to product or service related liability claims arising from the claimed failure of our products or services, whether proprietary or licensed, to perform as intended and the resulting damages or harm to customer’s business, computers, network, e-pay or information systems, including cybersecurity breach claims and end user privacy claim liabilities. We do not have insurance coverage for product and service liabilities, but we intend to obtain such insurance coverage upon receipt of sufficient funding or revenues from operations to afford such insurance coverage. The absence of product and service liability insurance could impose significant liabilities on our company and result in its failure.
The Company is or could become subject to laws and regulations worldwide, changes to which could increase the Company’s costs and individually or in the aggregate adversely affect the Company’s business.
The Company is or could become subject to general business and securities laws and regulations under the laws of PRC and U.S. These laws and other foreign laws and regulations could affect the Company’s activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety.
We operate in Hong Kong SAR and PRC. The control of the Communist Party over the government of PRC and Hong Kong SAR injects potential risk exposure from sudden, unexpected changes in laws or regulations or trade regulations that could be adverse to the Company. Any changes in PRC laws and regulations, or their interpretation, or the imposition of new taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Risks Related to Our Common Stock
While our common stock is quoted on The OTC Markets Group, Inc. QB Tier, there is not now, and there may not ever be, a sustained active, liquid public market for our common stock and we cannot assure you that the Common Stock will become liquid or that it will be listed on a national securities exchange (other than OTC). There currently is only a minimal public market for our Common Stock. Failure to develop or maintain a liquid public trading market could negatively affect the value of our Common Stock and make it difficult or impossible for stockholders to sell their shares.
Our Common Stock was quoted on the OTC Markets Group, Inc. Pink quotation system (“OTC Pink Sheets”) under the trading symbol “SNPY” since March 18, 2013. Effective December 5, 2016, the Common Stock of VEII started quotation on The OTC Markets Group, Inc. QB Tier (“OTCQB”) under the current trading symbol “VEII.” Due to a lack of a significant public float and primary market makers, VEII Common Stock is less liquid, receives less or no coverage by security analysts and news media, and generates lower prices than might otherwise be obtained if they were listed on a national securities exchange or NASDAQ, had active primary market makers and had analysts’ coverage.
Some, but not all, of the factors which may delay or prevent the listing of our Common Stock on a more widely-traded and liquid market than the OTCQB include the following: our stockholders’ equity may be insufficient; the market value of our outstanding securities may be too low; our net income from operations may be too low; our Common Stock may not be sufficiently widely held; we may not be able to secure market makers for our Common Stock; and we may fail to meet the rules and requirements mandated by, any of the several exchanges and markets to have our Common Stock listed.
Our issued Common Stock is held by a relatively small number of shareholders. We would have to increase the public float considerably as part of any effort to enhance the liquidity of our Common Stock.
The market price for our Common Stock can be volatile given our status as a relatively unknown company with a small and thinly traded public float, limited operating history of our services and lack of sustained profits which could lead to wide fluctuations in our share price.
The market for our Common Stock can be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our Common Stock are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of shares of our Common Stock are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operations and lack of sustained profits to date, and uncertainty of future market acceptance for our existing and potential products and services. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our Common Stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our Common Stock will be at any time, including as to whether our common stock will sustain their current market prices, or as to what effect that the sale of shares or the availability of common stock for sale at any time will have on the prevailing market price.
The application of the “penny stock” rules could adversely affect the market price of our Common Stock and increase your transaction costs to sell those shares.
The SEC has adopted Rule 3a51-1 (17 CFR §240.3a51-1) under the Exchange Act, which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 of Exchange Act requires:
that a broker or dealer approve a person’s account for transactions in penny stocks, and
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
obtain financial information and investment experience objectives of the person, and
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
sets forth the basis on which the broker or dealer made the suitability determination, and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Brokers may also have internal rules against handling “penny stock” in general.
A limited number of our shareholders own a large percentage of our Common Stock, which will allow them to exercise significant influence over matters subject to shareholder approval.
Our executive officers, directors and their affiliated entities will beneficially own or control approximately 42.81% if the outstanding shares of our Common Stock. Accordingly, these executive officers, directors and their affiliated entities, acting as a group, will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets, dissolution, or any other significant corporate transaction. These shareholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other shareholders. This significant concentration of Common Stock ownership may adversely affect the trading price of our Common Stock due to investors’ perception that conflicts of interest may exist or arise.
Regulations
Inapplicability of the 2012 JOBS Act
We have determined that we are not eligible for classification as an “Emerging Growth Company” under the Jumpstart our Business Start-ups Act of 2012 (“JOBS Act”) due to the fact that shares were issued by us under the Form SB-2 Registration Statement (Commission File Number #333-147493; filed on November 17, 2007) by China Soaring, Inc., the former name of the Company. We do not qualify as an “Emerging Growth Company” and do not qualify for any of the reduced or delayed disclosure options available to an Emerging Growth Company and as summarized below.
The JOBS Act provides scaled disclosure provisions for an eligible Emerging Growth Company, including, among other things: (a) permitting an Emerging Growth Company to include only two years of audited financial statements in a registration statement filed under the Securities Act of 1933 for an initial public offering of common equity securities; (b) allowing an Emerging Growth Company to comply with the smaller reporting company version of Item 402 of Regulation S-K (Executive Compensation); and (c) removing the requirement that our independent registered public accounting firm attest to the effectiveness of Emerging Growth Company’s internal control over financial reporting in accordance with Section 404(b) of the Sarbanes-Oxley Act of 2002. The JOBS Act also exempts an Emerging Growth Company from the following additional compensation-related disclosure provisions that were imposed on U.S. public companies pursuant to the Dodd-Frank Act: the advisory “say-on-pay” vote on executive compensation required under Section 14A(a) of the Exchange Act; the Section 14A(b) requirements relating to shareholder advisory votes on golden parachute compensation; the Section 14(i) requirements for disclosure relating to the relationship between executive compensation and financial performance of the issuer; and the requirement of Dodd-Frank Act Section 953(b)(1), which will require disclosure as to the relationship between Chief Executive Officer and median employee pay. Under Section 102(b)(1) of the JOBS Act, "Emerging Growth Companies" can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Currently, there are no unresolved Commission staff comments.
ITEM 2.
ITEM 2. PROPERTIES.
We own no real property. Our company and subsidiary operations leases the following office spaces:
1) 7/F, Darton Tower, 142 Wai Yip Street, Kwun Tong, Kowloon, Hong Kong
2) Room 04, 23/F, Newpoly Tower, No. 2 Zhong Shan Liu Road, Guangzhou, China 510180
3) Room 705, 7/F, Cai Wu Wei Jing Long Building, No. 139 Hong Bao Road, Luo Hu District, Shen Zhen, China 518001
4) Room 201, Block A7, No. 700 Yi Shan Road, Xuhui District, Shanghai, China 200233
5) Room 1107, 2/F, No.15 West Majiapu Road, Fengtai District, Beijing, China 100068
6) Unit 510 East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Centre, Pasig City 1605 Philippines
7) 24B Summit One Office Tower 530 Shaw Boulevard, Mandaluyong City, Philippines
We believe that the above space is sufficient for our current operations. We paid $369,198 in aggregate lease payments in fiscal year 2017 for the above spaces.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Except as disclosed in this Annual Report on Form 10-K, and as of the filing of this Annual Report on Form 10-K, we know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which our director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our Common Stock was quoted on the OTC Bulletin Board since October 29, 2008, and was originally traded under the symbol “CHIJ.OB.”. On December 17, 2008, our Common Stock began trading under our current symbol of “SNPY.OB.”. Since March 18, 2013, VEII Common Stock is quoted on OTC Pink Sheets under the trading symbol “SNPY.” Effective December 5, 2016, the Common Stock of VEII started quotation on OTCQB under the current trading symbol “VEII.”. The CUSIP number for our common stock is 829348200. Because we are quoted on OTCQB, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange. We are not aware of any stock analysts who cover our common stock or publish reports on our company or our common stock.
The following table sets forth, for the periods indicated, the high and low closing prices of our common stock as quoted on the OTC Pink Sheets. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The Company did not declare or pay dividends for the periods shown below.
(1) The above table sets forth the range of high and low closing prices per share of our Common Stock as reported by www.quotemedia.com for the periods indicated.
Holders
As of December 31, 2017, there were approximately 66 stockholders of record of our Common Stock. The number of record holders does not include persons who held our Common Stock in nominee or “street name” accounts through brokers.
Dividend Policy
We have not paid any cash dividends on our Common Stock for the years ended December 31, 2017 and 2016. While we have declared and paid dividends in the past, and we intend to do so in the future, our financial condition may require us to retain future earnings for overhead and business development costs. As such, investors should not invest in our Common Stock on the assumption that it will pay a regular or periodic dividend.
Our Board of Directors has complete discretion on whether to pay dividends, subject to legal requirements and possible shareholder consent. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The Company does not have a current equity compensation plan.
Recent Sales of Unregistered Securities
We have not sold any equity securities during 2017 that went undisclosed in a quarterly report on Form 10-K, Form 10-Q or a current report on Form 8-K that was filed during the period.
The recipients of securities in each transaction represented their intention to acquire the securities for investment only and not with a view to any resale or distribution thereof and appropriate legends were affixed to the share certificates as “Restricted Stock” under Rule 144 of the Securities Act.
Purchases of Equity Securities
No repurchases of our Common Stock were made during the fiscal year 2017.
ITEM 6.
ITEM 6. FINANCIAL DATA.
Not Applicable. The Company, as a “smaller reporting company” (as defined by 17 C.F.R. §229.10(f) (1)), is not required to provide the information required by this Item 6.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by these forward-looking statements. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward-looking statements. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
Overview of our Business
Value Exchange International, Inc.
Our initial business was to operate a credit card processing and merchant-acquiring services company that provides POS - credit card clearing services to merchants and financial institutions in PRC and Hong Kong SAR. Since inception, we have strived to implement our business plan, including the key step of creating our Global Processing Platform (“SinoPay GPP”) and establishing our website, www.sinopayments.com.
Specifically and currently, one of the Company’s business lines, which is secondary or supplementary to our IT Business, is to be a provider of IP processing services in Asia to bank card-accepting merchants. 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 will 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, Philippines, Malaysia, Korea, and Japan.
As of the date of this Annual Report on Form 10-K, we still have not sold or implemented any IP Business to any customer. Our current focus is on growing the IT Business because of our judgment that IT Business presents a more promising segment for growing our revenues and attaining sustained profitability. While we will continue our efforts to sell the IP Business products and services, the IP Business will be more in the order of an optional product and service line, or a lead sales enticement for the IT Business, until we have sufficient funds or revenues to aggressively market and sell IP Business products and services. Since we are focused on the retail sector, the offering of IT Business with an IP Business complementary offering makes sense in terms of fully leveraging all of our capabilities. Our hope is that the dual business lines may prove complementary in that each may lead to business opportunities for the other. As of the date of this Annual Report on Form 10-K, the IT Business and IP Business are presented as separate customer offerings and we have not made any progress in integrating IT Business and IP Business beyond offering them as menu of available services and products. We do not have a set time frame for integration and our efforts may be modified in the future based on then current circumstances. We do not view integration of the IT Business and IP Business as essential to our future operations, but we do view integration as a cost efficiency measure, especially to eliminate any duplicative overhead or lack of focus and consistency in marketing and sales efforts. No significant integration occurred in fiscal year 2017.
Enhancements to the functions of the IP Business products may be required to make them more attractive to the market. When and if we can attain sufficient revenues and/or funding, and subject to then current market demand, we may seek to offer a package of integrated IP Business and IT Business products and services as well as enhanced functionality for our IP Business products.
One factor affecting our IP Business is that POS customers tend to be sensitive to whether a POS provider is a long term provider of systems, services and maintenance. In light of our lack of any presence or financial performance in the IP Business, and the public availability of our financial information, as well as our lack of a prominent brand presence in our markets, we will probably have to significantly improve our financial and business performance to reassure prospective IP Business customers of our staying power as a provider of POS products, systems, and services and to fund the sort of sustained marketing and sales campaigns to increase the end users’ awareness of IP Business brand and capabilities. Such campaigns are beyond our current financial wherewithal and may not be possible in fiscal year 2017.
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 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 2016 or 2017.
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 and decreases during periods of economic decline or uncertainty in Hong Kong and China. 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 SAR and PRC. PRC has experienced a less dynamic growth in gross national product in the past year and this may reduce the willingness of customers to spend on IT Business 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 2016 or fiscal year 2017, but we perceive that the expansion of cloud computing could allow foreign customers to provide IT Business products and services to its cloud computing customers in our Hong Kong and China core market. We may find it more difficult to compete for IT Business in Hong Kong and China 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 a ancillary component of the cloud computing menu of products and services could adversely impact our IT Business in Hong Kong and China markets.
We are examining if our operations could enter into a strategic relationship with a cloud computing company as part of a response to possible future competition from cloud computing companies, but have not taken any steps to pursuing or attaining such a relationship.
The nature of our IT Business is such that our most significant current asset is accounts receivable. Our most significant current liabilities are payroll related costs, which are generally paid either every two weeks or monthly. If the demand for our IT Business products and services increases, we may generally see an increase in our working capital needs, as we continue to pay our workers on a weekly or monthly basis while the related accounts receivable are outstanding for much longer than normal payment cycle, which may result in a decline in operating cash flows. Conversely, as the demand for our IT Business products and services declines, we may generally see a decrease in our working capital needs, as the existing accounts receivable are collected and not replaced at the same level, resulting in a decline of our accounts receivable balance, with less of an effect on current liabilities due to the shorter cycle time of the payroll related items. This may result in an increase in our operating cash flows; however, any such increase would not be sustainable in the event that a local or global economic downturn continued for an extended period.
In order for us to attain sustained success in the near term, we must continue to maintain and grow our customer base, provide high-quality service and satisfaction to our existing clients, and take advantage of cross-selling opportunities within and between the IT Business and IP Business. In the current economic environment, we must provide our customers with service offerings that are appropriately priced, satisfy their needs, and provide them with measurable business benefits. While we have recently experienced a more demand for our IT Business products and services, we believe that it is too early to determine if developments will translate into sustainable improvements in our pricing or margins in fiscal year 2017 or over the longer term.
The increasing need for cybersecurity products and technologies may be a future weakness of our business plan. We do not have a current cybersecurity product and service line beyond consultants engaged to provide cybersecurity services. Cybersecurity companies may have an advantage over our business model in the future in that cybersecurity companies could leverage their cybersecurity offerings to also sell IT Business services and products that compete with our IT Business products and services. While we may explore enhanced cybersecurity offerings, but we have not identified or commenced launch of any new cybersecurity products as of the date of the filing of this Annual Report on Form 10-K.
Principal business
The principal business of VEI CHN for more than 15 years is to provide the IT Business, primarily to leading retailers in Hong Kong SAR, Macau SAR and PRC. The primary services and products of the IT Business are:
a)Systems maintenance and related service
VEI CHN Group provides development, customization of software and hardware, enhancements thereto and maintenance services for installed POS system. VEI CHN Group market, sell and maintain its own brand POS software - edgePOS as well as third party brands (e.g. NCR / Retalix, which is one of the leading POS software in the market). These software programs can often integrate with different IP systems.
Systems maintenance services consist of: i) software maintenance service, including software patches, software code revisions; ii) installing, testing and implementing software; iii) training of customer personnel for the use of software; and iv) technical support and administration for software systems.
Other services include system installation and implementation including i) project planning; ii) System Analysis; iii) design of the entire system; iv) hardware and consumables selection advice and sales; and v) system hardware maintenance. These services typically consist of customer projects for NSO and IMAC for retail, and ad-hoc custom system projects for other business sectors. Our primary focus is the retail sector in Hong Kong SAR and PRC.
b)Systems development and integration
VEI CHN Group provides value-added software, which integrate with customer owned or licensed software, and ad-hoc software development projects for other business sectors. Besides use of proprietary, custom software code, our services may from time to time license standard third party software programs.
During January 2017, VEI CHN acquired 100% common stock of TapServices, Inc. (“TSI”) for total consideration being $202,636. TSI is a limited liability corporation organized under the laws of the Philippines on March 24, 2009. TSI operations have been managed by Mr. Benny Lee, a director of VEI SHG. TSI commenced revenue generating operations in 2010 and focused on software and computer hardware maintenance on point of sale or “POS” systems for local Manila, Philippines businesses. TSI business model in 2016 and 2017 has been to engage in the business of providing information, data, and communications technology services, to supply and deal in all related products, including computer hardware, software and application products, and to own, design, install, maintain, operate, integrate, sell, lease or otherwise deal in such systems, facilities, gateways, equipment, devices and POS terminals in the retail business. TSI’s business line is essentially similar to the business line of VEI CHN Group in information technology and computer system consulting services and related products’ sales. The customer base of TSI includes Robinson Retails Group (“RRG”), Ministop Convenience Stores, and Watson’s Personal Health and Care (Phil.) Inc. in the Philippines. In 2017, TSI secured sales contract had a face value of $3.28 million in gross revenues. TSI customarily combines maintenance contracts with hardware sales. TSI geographical market is the greater Manila, Philippines region and adjacent areas.
Throughout fiscal year 2017, we are focusing and will focus its business in IT Business, and seek to expand its 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. Any expansion is subject to and limited by our then current funding and cash flow, commitment of our manpower, ability to handle additional work and availability of sufficient strategic partner or contractor assistance.
With respect to the IP Business, the Company will continue to seek to implement its IP Business and related credit card and debit card processing systems as part of an enhancement for the IT Business to the Retail Sector.
Financial Performance Highlights
The following are some financial highlights for the 2017:
Net revenue: Our net revenues were $6,455,700 for the year ended December 31, 2017, as compared to $3,999,395 for the year ended December 31, 2016, an increase of $2,456,305 or 61.4%.
Gross profit: Gross profit for the year ended December 31, 2017 was $1,442,285 or 22.3% of net revenues, as compared to $1,128,757 or 28.2% of net revenues, for the year ended December 31, 2016, an increase of $313,528 or 27.8%.
Income from operations: Our income from operations totaled $61,487 for the year ended December 31, 2017, as compared to $63,523 for year ended December 31, 2016, a decrease of $2,036 or 3.2%. The decrease was mainly attributable to the increase in our gross profit and decrease in operating expenses.
Net income: Our net income of $70,934 for the year ended December 31, 2017, compared to $53,889 for the year ended December 31, 2016, an increase of $17,045 or 31.6%.
Basic and diluted net income per share was $0.00 for the year ended December 31, 2017.
Results of Operations
Year Ended December 31, 2017 compared to the year ended December 31, 2016
The following table summarizes the results of our operations during the years ended December 31, 2017 and 2016 and provides information regarding the dollar and percentage increase or (decrease) from the 2016 year to the 2017 year.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 2017 and 2016
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)
Net revenues. Net revenues were $6,455,700 for the year ended December 31, 2017, as compared to $3,999,395 for the fiscal year ended December 31, 2016, an increase of $2,456,305 or 61.4%. This increase was primarily attributable to the increase in our revenue from 1) systems maintenance with revenue increasing from $3,124,148 for the year ended December 31, 2016 to $4,470,838 for the year ended December 31, 2017, 2) systems development and integration with revenue decreasing from $222,037 for the year ended December 31, 2016 to $253,652 for the year ended December 31, 2017; and 3) sales of hardware and consumables with revenue decreasing from $653,210 for the year ended December 31, 2016 to $1,731,210 for the year ended December 31, 2017.
Cost of services. Our cost of services is primarily comprised of our costs of technical staff and general overhead. Our cost of services increased to $5,013,415 or 77.7% of net revenues, for the year ended December 31, 2017, as compared to $2,870,638 or 71.8% of net revenues, for the year ended December 31, 2016, an increase of $2,142,777 or 74.6%. The increase in cost of services was mainly attributable to the increase in our contracting fees to suppliers, and the cost of technical staff, since we are expanding our technical team for the growing demand of our service and therefore rely less on outsider suppliers.
Gross profit. Gross profit for the year ended December 31, 2017 was $1,442,285 or 22.3% of net revenues, as compared to 1,128,757 or 28.2% of net revenues, for the year ended December 31, 2016. The increase of gross profit was largely due to increase in net revenues; and off-set by increase in cost of services in 2017, as compared with 2016.
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 slightly increased to $1,332,218 or 20.6% of net revenues, for the year ended December 31, 2017, as compared to $1,068,279 or 26.7% of net revenues, for the year ended December 31, 2016, an increase of $263,939 or 24.7%. The primary reason for the increase was attributable to an increase rent and rates, consultancy and professional fee and depreciation and amortization expenses since we incurred more in these area in 2016.
Income from operations. As a result of the above analysis, our income from operations totaled $61,487 for the year ended December 31, 2017, as compared to $63,523 for year ended December 31, 2016, a decrease of $2,036 or 3.2%. The change was mainly attributable to the increase in operating expenses; and off-set by an increase in our gross profit.
Income taxes. The Company is subject to United States federal income tax at a tax rate of 34% on any revenues subject to U.S. taxation. No provision for income taxes in the United States has been made as the Company had no U.S. source income taxable in the United States for the fiscal years ended December 31, 2017 and 2016.
VEI CHN, VEI HKG and CUCUMBUY were formed in Hong Kong and subject to Hong Kong income tax at a tax rate of 16.5% for the year ended December 31, 2017. TSI was formed in Philippines and subject to an income tax rate of 30% for the year ended December 31, 2017. Our VEI SHG was formed in China and subject to national and local income taxes within China at the applicable tax rate on the taxable income as reported in its PRC statutory financial statements in accordance with relevant income tax laws. China passed a new Enterprise Income Tax Law, or the “New EIT Law,” and its implementing regulations, both of which became effective on January 1, 2008. VEI SHG subject to an income tax rate of 25% for the year ended December 31, 2017.
Income taxes credit increased to $7,797 or 0.1% of net revenues for the year ended December 31, 2017, as compared to Income taxes expenses $35,204 or 0.9% of net revenues for the year ended December 31, 2016. The change was primarily attributable to the utilization of tax loss brought forward and recognition of deferred tax asset attributable for tax loss for the year ended December 31, 2017.
Net (loss) income. As a result of the foregoing, we had a net income of $70,934 for the year ended December 31, 2017, compared to net income $53,889 for the year ended December 31, 2016, as a result of the factors described above concerning higher revenue, lower operating expenses and hence, higher relevant gross profits.
Liquidity and Capital Resources
As of December 31, 2017, we had cash and cash equivalents of $23,062. The following table provides detailed information about our net cash flow for all financial years presented in this report.
Cash Flows
(All amounts in U.S. dollars)
Operating Activities
Net cash used in operating activities was $364,929 for the year ended December 31, 2017, which was a change of $713,379 from net cash provided by operating activities of $348,450 for the year ended December 31, 2016. The change was primarily attributable to the following:
1) Net income of $70,934 for the year ended December 31, 2017, compared to $53,889 for the year ended December 31, 2016; and
2) A change of Accounts receivable, Other receivables, deposit and prepayments, Deferred income and Amounts due to related parties decreased our operating cash balances by $210,376, $161,285, $698,297 and $228,847 respectively; offset by
3) A change of Amounts due from related parties increased our operating cash balances by $462,510.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2017 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
Total Due
Due in Less than 1 year
Due in 1-3 Years
Due in 4-5 years
Due in more than 5 years
Obligations
Operating Lease Obligations
630,567
311,381
319,186
-
-
Debt Obligations
33,808
31,882
1,926
-
-
Investing Activities
Net cash used in investing activities decreased to $101,174 in the year ended December 31, 2017, which was a decrease of $955 from $102,129 for the year ended December 31, 2016. The decrease in net cash used in investing activities was attributable to the purchase of plant and equipment by $186,962; offset by cash provided by the acquisition of a subsidiary by $85,788 for the year ended December 31, 2017.
Financing Activities
Net cash provided by financing activities was $2,817 in the year ended December 31, 2017, which was a change of $219,459 from net cash used in financing activities of $216,642 for the year ended December 31, 2016. The change was attributable to cash provided by borrowing under bank loan by $45,006; offset by the repayment of loan from a director amounts to $42,189 for the year ended December 31, 2017.
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 changed business conditions, implementation of our strategy to expand our production capacity, sales, marketing and branding activities or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
On February 16, 2018, VEI SHG signed a January 24, 2018 stores equipment support agreement (“Agreement”) with the largest health care and beauty retailer (“Retailer”) in People’s Republic of China (“China”). Under the Agreement, the Retailer has contracted for site and preventive maintenance and support for computer and point of sale systems (“Systems”) as well as new store and store renovation install and migration services for Systems from the VEI SHG. The Agreement is non-exclusive, covers Retailer’s stores in the northern and eastern region of China and runs through December 2019. Gross revenue and net profit potential, if any, as well as the full extent of services by VEI SHG under the Agreement are uncertain at this time due to lack of sufficient operational experience as a service provider under the Agreement. The Agreement may require the Company to seek additional equity and/or debt funding to provide the capital needed to staff and purchase product under the Agreement. The amount and availability of such funding is not certain as of the date of this Form 10-K Annual Report. Adequate and affordable funding, required by, if any, the Agreement is essential to the ability of VEI SHG to perform its obligations under the Agreement. While the Company does not currently anticipate any problems in obtaining the necessary funding, if any is required, the Company makes no assurances about its ability to timely, affordably obtain the necessary funding for the Agreement.
Since part of the Company’s strategic plan is to seek to expand its revenue generating operations by expanding into new markets and/or acquiring new businesses, as well as developing new services and products, all of which shall be as permitted by the limited resources of the Company and available, affordable funding, the Company may require funding in the future for such expansion. The ability of the Company to fund such expansion is not certain and the impact of any such funding on the Company’s liabilities and cash flow is uncertain until an expansion opportunity is identified and pursued. Expansion efforts of the Company, which the Company views as critical to sustained profitability, may be undermined by the Company’s limited cash flow from operations and from the lack of affordable, adequate funding from outside sources.
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 years.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in note 2 of the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Basis of presentation and principle of consolidation
The consolidated financial statements include all of the assets, liabilities, revenues, expenses and cash flows of entities in which the Company has a controlling interest (“subsidiaries”). Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) (i.e. the Company) but as a continuation of the financial statements of the legal subsidiary (accounting acquirer) (i.e VEI CHN), with one adjustment, which is to retroactively adjust the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree).
The consolidated financial statements include the accounts of Value Exchange International, Inc. and the following subsidiaries:
1. Value Exchange Int’l (China) Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on November 16, 2001;
2. Value Exchange Int’l (Shanghai) Limited, a wholly-owned subsidiary of the Company incorporated in Shanghai as a private company on September 2, 2008;
3. Value Exchange Int’l (Hong Kong) Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on August 25, 2003 and acquired by VEI CHN on September 25, 2008;
4. Cucumbuy.com Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on May 14, 2013; and
5. TapServices, Inc., a wholly-owned subsidiary of the Company incorporated under the laws of the Republic of the Philippines as a private company on March 24, 2009 and acquired by VEI CHN on January 23, 2017.
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 following entities were consolidated as of December 31, 2017:
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.
Accounts receivable and other receivables
Receivables include trade accounts due from customers and other receivables such as cash advances to employees, utility deposits paid and advance to suppliers. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. As of December 31, 2017 and 2016, there was no allowance for uncollectible accounts receivable, respectively. Management believes that the remaining accounts receivable are collectable.
Plant and equipment
Plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, if any. Expenditures for maintenance and repairs are charged to earnings as incurred. Major additions are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
Estimated Useful Life
Leasehold improvements
Lesser of lease term or the estimated useful lives of
5 years
Computer equipment
5 years
Computer software
5 years
Office furniture and equipment
5 years
Motor Vehicle
3 years
Building
5 years
Goodwill and intangibles
Intangibles with a definite life, including customer relationships and goodwill were recorded in connection with the acquisition of TSI. Intangible assets are amortized based on their estimated economic lives using the straight-line method with estimated lives as follows:
Estimated Economic Life
Customer relationship
3 years
Goodwill represents the excess of the cost of acquisition over the fair value of net assets acquired. Goodwill is not amortized, but is instead tested for impairment annually.
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 years ended December 31, 2017 and 2016.
Billings in excess of revenues recognized are recorded as deferred revenue.
Income taxes
The Company accounts for income taxes in accordance with the accounting standard issued by the Financial Accounting Standard Board (“FASB”) for income taxes. Under the asset and liability method as required by this accounting standard, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The charge for taxation is based on the results for the reporting period as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
Under the accounting standard regarding accounting for uncertainty in income taxes, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred.
Foreign currency translation
The functional currency and reporting currency of the Company is the U.S. Dollar. (“US$” or “$”). The functional currency of the Hong Kong subsidiaries is the Hong Kong Dollar. The functional currency of the PRC subsidiary is RMB. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the exchange rate as quoted by the Hong Kong Monetary Authority (“HKMA”) at the end of the period. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Year ended
December 31, 2017
December 31, 2016
RMB : USD exchange rate
6.7518
6.6875
Average period ended
HKD : USD exchange rate
7.800
7.800
Average period ended
PESO : USD exchange rate
49.8403
N/A
Average period ended
Year ended
December 31, 2017
December 31, 2016
RMB : USD exchange rate
6.5060
7.0191
HKD : USD exchange rate
7.800
7.800
PESO : USD exchange rate
49.8403
N/A
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption, or expected adoption and effects of our consolidated financial position, results of operations and cash flows.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, as a “smaller reporting company” (as defined by §229.10(f) (1)), is not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements as of December 31, 2017 and 2016 begins on page of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On December 13, 2016, the Board of Directors of the Company approved a resolution to appoint Ecovis David Yeung Hong Kong (“ECOVIS”), with current address Room 1905, 19/Fl., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong, to replace its certifying public auditor, Centurion ZD CPA Limited (“Centurion”), formerly known as AWC (CPA) Ltd., of 7th Floor, Nan Dao Commercial Building, 359-361 Queen’s Road Central, Sheung Wan, Hong Kong SAR. The engagement of ECOVIS was consummated by January 16, 2017. The Board decided to change certifying public auditor because Centurion advised the Board that Centurion did not wish to handle future VEII audit work due to the cost and resource demands.
ECOVIS has provided the Company with the required independent letter under Rule 3526 of Public Company Accounting Oversight Board rules.
ECOVIS’s report on the financial statements for the fiscal year ended December 31, 2017 and 2016, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting.
During the fiscal year ended December 31, 2017, (i) there were no disagreements with ECOVIS on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of ECOVIS, would have caused ECOVIS to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Centurion’s report on the financial statements for the fiscal year ended December 31, 2014 and 2015, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company's ability to continue as a going concern.
During the years ended December 31, 2014 and 2015 and through January 16, 2017, (i) there were no disagreements with Centurion on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Centurion, would have caused Centurion to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (ii) accumulated and communicated to our management, including Company’s Chief Executive Officer and Chief Financial Officer, or officers performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our internal control over financial reporting is deemed effective.
The creation of the Audit Committee and the more active participation of the Audit Committee in review and improvement in the disclosure controls and procedures was one action taken to endeavor to improve our disclosure controls and procedures. Further, the Company may seek the assistance of outside consultants with experience in internal disclosure controls and disclosures in the fiscal year 2017 to enhance disclosure controls and procedures.
Internal Controls over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our assessment we determined that, as of December 31, 2017, our internal control over financial reporting is deemed effective.
Changes in Internal Controls over Financial Reporting
Management have reinforced proper controls over in place to ensure that all disclosures required were originally addressed in the financial statements, and ensure that all permanent file documents are maintained in a working file which becomes an essential component of the financial closing process.
Controls over proper segregation of functions, duties and responsibilities with respect to our cash and control over the related disbursements have been in place, and additional staff and accounting personnel hired to deal with related administrative and financial matters.
Except as noted herein, there have been no further changes in our internal controls over financial reporting during our most recent fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting
Company’s management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be in an Annual Report on Form 10-K during the year covered by this Annual Report on Form 10-K, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The Company has adopted a code of ethics that applies to the Company’s directors, officers and employees, including the Chief Executive Officer and the Chief Financial Officer and any other persons performing similar functions. The text of our code of ethics, “Code of Ethics,” has been posted on our website at https://www.value-exch.com. The Company will provide a copy of the code of ethics without charge upon request to Corporate Secretary, Value Exchange International, Inc., 7/F., Darton Tower, 142 Wai Yip Street, Kwun Tong, Kowloon, Hong Kong SAR.
Directors, Executive Officers, Promoters and Control Persons
The following sets forth the name and position of each of our current executive officers, directors and significant employees and their ages and titles as of December 31, 2017.
Name
Age
Position with the Company
Director Since
Matthew Mecke
Director
11/ 21/08
Kenneth Tan
Chief Executive Officer, President and Director
08/26/13
Bella Tsang
Secretary, Treasurer, Principal financial officer and Director
08/26/13
Johan Pehrson
Director
07/07/14
Edmund Yeung
Director
06/25/15
Channing Au
Chief Financial Officer and Treasurer
Not applicable
The business experience during the past five years of the person presently listed above as an Officer or Director of the Company is as follows:
Matthew Mecke. Prior to his appointment as Chairman and Chief Executive Officer of VEII, Matthew Mecke was a member of the board of directors of Sino Fibre Communications, Inc. (OTCBB: SFBE) based in China and Hong Kong starting in January 2006. Mr. Mecke also served as president, principal executive officer of Sino Fibre Communications from January 2006 to October 2007 and as chairman of board of directors from January 2006 to December 2007. From October 2003 to January 2006, Mr. Mecke was a founder, vice chairman, president, and Chief Executive Officer of Asia Payment Systems (OTCBB: APYM). From October 1998 to July 1999, Mr. Mecke was a co-founder and served as Senior Vice President, Systems and Product Development for First Ecom.com (NASD: FECC), an international e-commerce payment gateway pioneer based in Hong Kong which linked e-commerce merchants with offshore back-end transaction processing systems. From April 1994 to July 1998, Mr. Mecke was an employee of First Data Corp. (formerly NYSE: FDC) in the United States and Hong Kong. Mr. Mecke was responsible for middle management of retail card system operations. In the late 1990’s, Mr. Mecke was a management executive of First Data Asia in Hong Kong, where his responsibilities included strategic planning, new business development, e-commerce applications and pricing. On August 26, 2013, Mr. Mecke resigned his position as Chief Executive Officer and President of the Company, which resignation did not involve any dispute with the Company. He remains a Director of the Company.
Kenneth Tan. Prior to his appointment as Chief Executive Officer and President of VEII, Mr. Tan was the President, Sales for Value Exchange International Limited (“VEI”), a related company of VEI CHN, and was responsible to sales for the Asia Pacific region. Before taking up the appointment in VEI, Mr. Tan was the Vice President, Sales of PCCW Solutions since 2003. He has more than 25 years of experience in the IT industries and had held key sales management positions in IBM, Oracle and EDS. He holds a Bachelor of Science degree in Electrical and Electronics Engineering from the University of Hong Kong.
Bella Tsang. Prior to her appointment as Secretary and Director of VEII, Ms. Tsang had been working as Marketing Manager of VEI HKG since 2003 and was responsible for marketing of its solutions to various retailers in the Greater China and the Asia Pacific markets. Ms. Tsang holds a Diploma of Marketing from the Institute of Marketing. She was responsible for organizing training to all level of professional staff in Ernst & Whinney (now Ernst & Young, an international accountancy, auditing and consulting firm) in 1987.
Johan Pehrson. Johan Pehrson is one of the two founders of ER-Konsult, a business consultancy firm since 1999 in Sweden. Mr. Pehrson graduated at the University of Umea (Sweden) with a degree in Business Marketing. He has performed more than 1,000 workshops to various organizations to facilitate the development of management, markets and sales. On July 7, 2014, Mr. Pehrson was appointed as a member of the VEII Board of Directors.
Edmund Yeung. For the past ten years, Mr. Yeung has been a Managing Director for Whole Glory Investments Ltd., a property investment company. Previously, he also served as the executive director of Combined Chemicals Co., an adhesive product manufacturer, for 15 years. On June 25, 2015, Mr. Yeung was appointed as a member of the VEII Board of Directors.
Channing AU. Channing Au joined Value Exchange Int’l (China) Limited, a subsidiary of the Company, as the Chief Financial Officer in August 2015. On November 5, 2015, Mr. Au was appointed as Chief Financial Officer and Treasurer of VEII. Prior to joining the Company, Mr. Au served as an Audit Manager at Crowe Horwath (HK) CPA Limited since 2010. Prior to that, he worked for CPA firms including KPMG Hong Kong and BDO Limited. Mr. Au has over 10 years extensive experience in provision of audit and consultancy services with clientele varies from unlisted entrepreneurs to companies listed in the United States and Hong Kong. Mr. Au is a member of CPA Australia, and obtained his Master’s Degree in Finance and Bachelor’s Degree in Accountancy from the Hong Kong Polytechnic University.
Audit Committee and Other Board Committees
The VEII Board of Directors had no nominating or compensation committee in fiscal year 2017. The Company relies on the Board of Directors to perform the functions typically performed by a compensation and nominating committee. The VEII Board of Directors established an Audit Committee on October 29, 2015 and appointed the following as the Audit Committee’s initial members: Matthew Mecke, Johan Pehrson and Edmund Yeung.
Audit Committee Duties. The Audit Committee duties are: (1) determine the independent registered public accounting firm to be employed by the Company; (2) discuss the scope of the independent registered public accounting firm’s audit of the Company and any reports or recommendations from that firm; (3) review the Company’s financial statements and the independent registered public accounting firm’s reports and recommendations; (4) reviews conflict of interest issues concerning the Company and its management; (5) makes recommendations to the Company’s Board of Directors about audit, accounting, internal control and related matters.
Compensation and Nominating Duties. The Company’s Board of Directors handles the duties of a compensation and nominating committee. Those duties include: (1) analysis of personnel needs of the Company and its subsidiaries; (2) develops recommendations about compensation, cash and non-cash, for members of Company management; (3) review of job performance of members of Company management; (4) review and vote on employment agreements for senior officers of the Company; and (4) tasks related to the foregoing duties.
The Company’s Board of Directors intends to conduct a bench marking analysis of the following companies in March or April of 2018 as part of determining appropriate compensation for members of Company management: (1) PCM, Inc.; (2) JetPay Corporation; (3) USA Technologies, Inc.; (4) Payment Data Systems, Inc.; and (5) Net Element, Inc.
The Company has not engaged a consultant for benchmarking compensation or advising the Company on compensation issues.
Family Relationships
There are no family relationships between any of our directors and our executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions, and Director Independence - Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Stockholder Communication with the Board of Directors
Stockholders may communicate with the Board of Directors of VEII by sending a letter to our Board of Directors, c/o Corporate Secretary, 7/F., Darton Tower, 142 Wai Yip Street, Kwun Tong, Kowloon, Hong Kong (for submission to the board or committee or to any specific director to whom the correspondence is directed.) Stockholders communicating through this means should include with the correspondence evidence, such as documentation from a brokerage firm, that the sender is a current record or beneficial stockholder of the Company. All communications received as set forth above will be opened by the Corporate Secretary or his designee for the sole purpose of determining whether the contents contain a message to one or more of our directors.
Any contents that are not advertising materials, promotions of a product or service, patently offensive materials or matters deemed, using reasonable judgment, inappropriate for the Board of Directors will be forwarded promptly to the chairman of the Board, the appropriate committee or the specific director, as applicable.
Audit Committee and Audit Committee Financial Expert
The Company formed an Audit Committee on October 29, 2015 (as defined in Item 407 of Regulation S-K). The Company has been unable to locate a prospective independent director who meets the requirements of a financial expert and is willing to serve as a director of the Company. None of the current directors qualify as financial experts.
As formed, the Audit Committee’s duties will be to recommend to the Company’s board of directors the engagement of an independent registered public accounting firm to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The Audit Committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The Audit Committee will at all times be composed exclusively of directors who are, in the opinion of the Company’s Board of Directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
All audit and audit-related services performed by our principal accountant during the fiscal year ended December 31, 2017 were approved by our audit committee.
Code of Ethics
We have adopted a written code of ethics that applies to all of our officers, directors and employees, including our principal executive officer and principal financial officer, or persons performing similar functions, a copy of which is attached as Exhibit 14 to the Quarterly Report on Form 10-Q as filed with the SEC on July 20, 2009.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the year ended December 31, 2017, Forms 5 and any amendments thereto furnished to us with respect to the year ended December 31, 2017, and the representations made by the reporting persons to us, we believe that during the year ended December 31, 2017, our executive officers and directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our executive officers during the twelve month periods ended, December 31, 2017, 2016 and 2015. No other executive officer received compensation greater than $100,000 during any fiscal year.
Summary Compensation Table
Name
and
Principal
Position
Fiscal
Year
Ended
12/31
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Kenneth Tan (1)
-
-
-
-
-
-
-
-
6,410
-
-
-
-
-
-
6,410
62,820
-
-
-
-
-
-
62,820
Alex Chan (2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61,090
-
-
-
-
-
-
61,090
Bella Tsang (3)
48,462
-
-
-
-
-
-
48,462
41,667
-
-
-
-
-
-
41,667
26,923
-
-
-
-
-
-
26,923
Channing Au (4)
42,308
-
-
-
-
-
-
42,308
61,410
-
-
-
-
-
-
61,410
28,873
-
-
-
-
-
-
28,873
Footnotes:
(1) Mr. Kenneth Tan was appointed as Chief Executive Officer and a Director of the Company as of August 26, 2013.
(2) Mr. Alex Chan was appointed as Chief Financial Officer and a Director of the Company as of August 26, 2013; and On June 25, 2015, Alex Chan resigned as Chief Financial Officer, Treasurer of the Company, and a member of the VEII’s Board.
(3) Ms. Bella Tsang was appointed as Secretary and Director of the Company as of August 26, 2013, and was appointed as Treasurer and principal financial officer of the Company as of June 25, 2015; and on October 29, 2015, she resigned as a Treasurer and principal financial officer of the Company.
(4) Channing Au was appointed as Chief Financial Officer and Treasurer of the Company as of November 5, 2015.
There are no other compensatory plans or arrangements in use except as disclosed, including payments to be received from the Company with respect to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.
Outstanding Equity Awards at Fiscal Year-End
No executive officer received any equity awards, or holds exercisable or non-exercisable options, as of the years ended December 31, 2017.
Long-Term Incentive Plans
There are no arrangements or plans currently used and in which we provide pension, retirement or similar benefits for directors or executive officers.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Director Compensation
None of the directors received compensation for director services during the fiscal year ending December 31, 2017.
Pension Benefits
No named executive officers received or held pension benefits and the Company does not maintain a pension benefit plan during the fiscal year ended December 31, 2017.
Nonqualified Deferred Compensation
No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2017.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of the fiscal year ended December 31, 2017 (i) by each of our directors; (ii) by each of our named executive officers; (iii) by all of our executive officers and directors as a group; and (iv) by each person or entity known by us to beneficially own more than five percent (5%) of any class of our outstanding shares. As of December 31, 2017, there were 29,656,130 shares of our common stock outstanding:
(1) The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
(2) Based on 29,656,130 issued and outstanding shares of VEII Common Stock as of December 31, 2017.
(3) Matthew Mecke is a Director of the Company. His beneficial ownership includes 0 common shares as of December 31, 2017.
(4) Kenneth Tan is the Company's Chief Executive Officer, President and a Director. His beneficial ownership includes 3,063,725 common shares as of December 31, 2017.
(5) Bella Tsang is the Company's Secretary, and a Director of the Company. Her beneficial ownership includes 6,905,461 common shares as of December 31, 2017.
(6) Johan Pehrson is a Director of the Company appointed on July 7, 2014. His beneficial ownership includes 277,101 common shares as of December 31, 2017.
(7) Edmund Yeung is a Director of the Company appointed on June 25, 2015. His beneficial ownership includes 2,024,400 common shares as of December 31, 2017.
(8) Channing Au is the Company's Chief Financial Officer and Treasurer appointed on November 5, 2015. His beneficial ownership includes 0 common shares as of December 31, 2017.
Changes in Control
There are no present arrangements or pledges of the Company’s securities which may result in a change in control of the Company. The Company has elected not to be governed by the control share provisions or interested shareholder provisions of the laws of State of Nevada, specifically in Nevada Revised Statutes 78.378 to 78.3793, inclusive, and 78.411 to 78.444, inclusive.
The Company is active in exploring possible mergers and acquisitions opportunities as part of its strategy to grow its business lines. As reported in this Annual Report on Form 10-K, the Company and VEI CHN are acquiring 100% of the capital stock of TapServices, Inc., a Philippines company for cash in January 2017, and this transaction do not affect any change of control in the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
Our executive officers, directors and their affiliated entities will beneficially own or control approximately 42.81% of the outstanding shares of our Common Stock. Accordingly, these executive officers, directors and their affiliated entities, acting as a group, will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets, dissolution, or any other significant corporate transaction. Except as set forth in the footnotes of the attached financial statements, and except for the Share Exchange, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has materially affected or will affect the Company.
Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons
The Company has a code of ethics (“policy”). For purposes of our policy only, a “related-person transaction” will be a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person will not be covered by this policy. A related person will be any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons.
We anticipate that, where a transaction has been identified as a related-person transaction, the policy will require management to present information regarding the proposed related-person transaction to our audit committee (or, where approval by our audit committee would be inappropriate, to another independent body of our board of directors) for consideration and approval or ratification. Management’s presentation will be expected to include a description of, among other things, the material facts, the direct and indirect interests of the related persons, the benefits of the transaction to us and whether any alternative transactions are available.
To identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our board of directors will take into account the relevant available facts and circumstances including, but not limited to:
the risks, costs and benefits to us;
the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated;
the terms of the transaction;
the availability of other sources for comparable services or products; and
the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally.
We also expect that the policy will require any interested director to excuse himself from deliberations and approval of the transaction in which the interested director is involved.
Promoters and Certain Control Persons
Except as previously disclosed in our Exchange Act filings with Commission, we did not have any promoters at any time during the past five fiscal years.
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). Mr. Matthew Mecke, Mr. Johan Pehrson and Mr. Edmund Yeung are deemed independent directors (as defined under in NASDAQ Rule 5605(a)(2)) by the Company.
Additional Information About VEII
SEC Reports and Additional Information about the Company
VEII is subject to the informational and reporting requirements of the Exchange Act and, in accordance with this law, files annual, quarterly and current reports, proxy statements and other information with the SEC. One can read and copy the VEII’s SEC filings, including its financial statements, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site known as “EDGAR” and that contains our SEC reports, proxy and information statements, and other information at www.sec.gov.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Auditors’ Fees
The following is a summary of the fees billed to the Company for professional services rendered for the fiscal years ended December 31, 2017 and 2016:
“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.
“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.
“All Other Fees” consisted of fees billed for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit and non-audit services performed by Ecovis David Yeung Hong Kong for our financial statements as of and for the year ended December 31, 2017.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
ITEM 16. Form 10-K Summary. None.
Exhibit List
The list of exhibits included in the attached Exhibit Index is hereby incorporated herein by reference.
Exhibit Number
Exhibit Title
3.1
Certificate of Amendment to the Articles of Incorporation of Value Exchange International, Inc., dated Sept. 8, 2016. (1)
10.1
Stock Purchase Agreement, dated 23 January 2017, by and among Value Exchange International, Inc., Value Exchange International (China) Ltd., TapServices, Inc., and the sole shareholder of TSI. (2)
31.1*
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
XBRL Taxonomy Extension Definition Linkbase
*Filed herewith
(1) Incorporated by reference to Exhibit One to the Information Statement, dated October 18, 2016, and filed by Value Exchange International, Inc. with the Commission on October 25, 2016.
(2) Incorporated by reference to Exhibit 2.1 to the Form 8-K, dated January 25, 2017, filed by Value Exchange International, Inc. with the Commission on January 27, 2017.
**The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the Company specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
VALUE EXCHANGE INTERNATIONAL, INC.
Dated: April 16, 2018
s/ Kenneth Tan
By: Kenneth Tan
Its: President, CEO
(Principal executive officer)
/s/ Channing Au
By: Channing Au
Its: Chief Financial Officer
(Principal financial and accounting officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kenneth Tan and Channing Au and each of them, as his true and lawful attorney-in-fact and agent with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent the full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Kenneth Tan
President, Chief Executive Officer, and Director (Principal Executive Officer)
April 16, 2018
Kenneth Tan
/s/ Channing Au
Chief Financial Officer and Treasurer (Principal financial and accounting officer)
April 16, 2018
Channing Au
/s/ Bella Tsang
Director and Secretary
April 16, 2018
Bella Tsang
/s/ Matthew Mecke
Director
April 16, 2018
Matthew Mecke
/s/ Johan Pehrson
Director
April 16, 2018
Johan Pehrson
/s/ Edmund Yeung
Director
April 16, 2018
Edmund Yeung
VALUE EXCHANGE INTERNATIONAL, INC.
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Contents
Pages
Report of Independent Registered Public Accounting Firm Ecovis David Yeung Hong Kong
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: The board of directors and stockholders of
VALUE EXCHANGE INTERNATIONAL, INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Value Exchange International, Inc. (“the Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017 and 2016, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ecovis David Yeung Hong Kong
Ecovis David Yeung Hong Kong
Certified Public Accountants
Hong Kong, China
April 15, 2018
VALUE EXCHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
ASSETS
US$
US$
CURRENT ASSETS
Cash
23,062
448,053
Accounts receivable, less allowance for doubtful accounts
968,878
451,122
Amounts due from related parties
310,418
760,302
Other receivables and prepayments
313,607
108,141
Inventories
21,489
-
Deposit for acquisition
-
200,000
Total current assets
1,637,454
1,967,618
NON-CURRENT ASSETS
Plant and equipment, net
369,768
178,624
Deferred tax assets
32,668
-
Goodwill
206,812
-
Intangible assets
133,761
-
Total non-current assets
743,009
178,624
Total assets
2,380,463
2,146,242
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
499,884
255,854
Other payables and accrued liabilities
741,209
448,227
Deferred income
200,267
653,686
Amounts due to related parties
141,120
187,403
Current portion of long term bank loan and short term bank loan
31,882
-
Total current liabilities
1,614,362
1,545,170
NON-CURRENT LIABILITIES
Deferred tax liabilities
42,604
-
Long term bank loan
1,926
-
Total non-current liabilities
44,530
1,545,170
Total liabilities
1,658,892
1,545,170
SHAREHOLDERS’ EQUITY
Preferred stock, 100,000,000 shares authorized, $0.00001 par value; no shares issued and outstanding
-
-
Common stock, 100,000,000 shares authorized, $0.00001 par value; 29,656,130 and 29,656,130 shares issued and outstanding, respectively
Additional paid-in capital
690,589
690,589
Retained earnings / (Accumulated deficit)
39,957
(30,977)
Accumulated other comprehensive loss
(9,272)
(58,837)
Total shareholders’ equity
721,571
601,072
Total liabilities and shareholders’ equity
2,380,463
2,146,242
The accompanying notes are an integral part of these consolidated financial statements.
VALUE EXCHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The accompanying notes are an integral part of these consolidated financial statements.
VALUE EXCHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The accompanying notes are an integral part of these consolidated financial statements.
VALUE EXCHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
US$
US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
70,934
53,889
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
Depreciation
108,208
56,042
Amortization
66,880
-
Loss on disposal of plant and equipment
12,019
-
Loan interest expenses
17,195
-
Deferred income taxes
(54,872)
37,682
Changes in operating assets and liabilities
Accounts receivable
(341,247)
(130,871)
Other receivables, deposit and prepayments
(179,548)
(18,263)
Amounts due from related parties
449,884
(12,626)
Inventories
(2,795)
-
Accounts payable
229,744
227,718
Other payables and accrued liabilities
49,606
(1,328)
Deferred income
(488,499)
209,798
Amounts due to related parties
(302,438)
(73,591)
Net cash provided by (used in) operating activities
(364,929)
348,450
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment
(186,962)
(102,129)
Acquisition of a subsidiary
85,788
-
Net cash used in investing activities
(101,174)
(102,129)
CASH FLOWS FROM FINANCING ACTIVITIES:
Process of bank loan
45,006
-
Repayment of loan from a director
(42,189)
(216,642)
Net cash (used in) provided by financing activities
2,817
(216,642)
EFFECT OF EXCHANGE RATE ON CASH
38,295
(15,967)
INCREASE IN CASH
(424,991)
13,712
CASH, beginning of year
448,053
434,341
CASH, end of year
23,062
448,053
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest
(7,196)
(24,726)
Cash received for interest
Cash paid for income taxes
(490)
(14,756)
The accompanying notes are an integral part of these consolidated financial statements.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In U.S. dollars, except for shares and per share data)
Note 1 - Organization and description of business
Value Exchange International, Inc. (“VEII” or the “Company”), formerly known as Sino Payments Inc., was incorporated in the State of Nevada on June 26, 2007. The Company’s principal business is to provide credit and debit card processing services to multinational retailers in Asia and the systems development and information technology business of Value Exchange Int’l (China) Limited (collectively, the “IT Business”).
On January 1, 2014, VEII received 100% of the issued and outstanding shares of in Value Exchange Int’l (China) Limited (“VEI CHN”) in exchange for i) newly issued 12,000,000 shares of VEII’s 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 VEII. The merger of VEI CHN into VEII, which has nominal net assets, resulted in VEI CHN having control of the combined entities.
For financial reporting purposes, the transaction represents a "reverse merger" rather than a business combination and VEII is deemed to be the accounting acquiree in the transaction. The transaction is being accounted for as a reverse merger and recapitalization. VEII 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 VEII, and the historical operations of VEII and the combined operations of VEI CHN from the initial closing date of the transaction.
VEI CHN, formerly known as TAP Investments Group Limited, was incorporated on November 16, 2001 under the laws of Hong Kong SAR and changed its name to Value Exchange Int’l (China) Limited on May 13, 2013. VEI CHN is an investment holding company. The Company provides IT Business’ services and solutions to the retail sector through three operating subsidiaries located in Hong Kong SAR and the People’s Republic of China (“PRC”).
On September 2, 2008 VEI CHN established its first operating subsidiary, Value Exchange Int’l (Shanghai) Limited (“VEI SHG”) in Shanghai, PRC, under the laws of the PRC. VEI SHG engages in software development, trading and servicing of computer hardware and software activities.
On September 25, 2008, VEI CHN acquired its second operating subsidiary, TAP Services (HK) Limited in Hong Kong which subsequently changed its name to Value Exchange Int’l (Hong Kong) Limited (“VEI HKG”) on May 14, 2013. VEI HKG engages in software development, trading and servicing of computer hardware and software activities.
On May 14, 2013, VEI CHN further established another operating subsidiary, Ke Dao Solutions Limited in Hong Kong, which subsequently changed its name to Cumberbuy.com Limited (“CUMBERBUY”) on May 26, 2017. CUMBERBUY conducts consultancy services on IT Services and Solutions activities.
In January 2017, VEI CHN acquired 100% of the capital stock of TapServices, Inc., a corporation organized under the laws of the Republic of the Philippines (the “TSI”). TSI engages in software development, trading and servicing of computer hardware and software activities in Philippines. TSI is operated as a subsidiary of VEI CHN. Prior to and continuing after the acquisition, TSI relied on VEI CHN for provision of IT services.
As of December 31, 2017, all five subsidiaries are wholly owned by the Company.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies
Basis of presentation and principle of consolidation
The consolidated financial statements include all of the assets, liabilities, revenues, expenses and cash flows of entities in which the Company has a controlling interest (“subsidiaries”). Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) (i.e. VEII) but as a continuation of the financial statements of the legal subsidiary (accounting acquirer) (i.e VEI CHN), with one adjustment, which is to retroactively adjust the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree).
The consolidated financial statements include the accounts of Value Exchange International, Inc., and the following subsidiaries:
1. Value Exchange Int’l (China) Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on November 16, 2001;
2. Value Exchange Int’l (Shanghai) Limited, a wholly-owned subsidiary of the Company incorporated in Shanghai as a private company on September 2, 2008;
3. Value Exchange Int’l (Hong Kong) Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on August 25, 2003 and acquired by VEI CHN on September 25, 2008;
4. Cumberbuy.com Limited, a wholly-owned subsidiary of the Company incorporated in Hong Kong as a private company on May 14, 2013.
5. TapServices, Inc., a wholly-owned subsidiary of the Company incorporated in Philippines as a private company on March 24, 2009 and acquired by VEI CHN on January 23, 2017.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
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 following entities were consolidated as of December 31, 2017:
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.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
Cash and cash equivalents
For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash includes cash on hand and demand deposits in accounts maintained with financial institutions or state owned banks within the PRC and Hong Kong.
Accounts receivable and other receivables
Receivables include trade accounts due from customers and other receivables such as cash advances to employees, utility deposits paid and advance to suppliers. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. As of December 31, 2017 and 2016, there was no allowance for uncollectible accounts receivable, respectively. Management believes that the remaining accounts receivable are collectable.
Plant and equipment
Plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, if any. Expenditures for maintenance and repairs are charged to earnings as incurred. Major additions are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
Estimated Useful Life
Leasehold improvements
Lesser of lease term or the estimated useful lives of
5 years
Computer equipment
5 years
Computer software
5 years
Office furniture and equipment
5 years
Motor Vehicle
3 years
Building
5 years
Impairment of long-lived assets
The Company evaluates long lived assets, including equipment, for impairment at least once per year and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Based on the existence of one or more indicators of impairment, the Company measures any impairment of long-lived assets by comparing the asset's estimated fair value with its carrying value, based on cash flow methodology. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired and an impairment loss equal to an amount by which the carrying value exceeds the fair value of the asset is recognized.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
Fair value of financial instruments
The Company values its financial instruments as required by FASB ASC 320-12-65. The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one -
Quoted market prices in active markets for identical assets or liabilities;
Level two -
Inputs other than level one inputs that are either directly or indirectly observable; and
Level three -
Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The carrying values of the Company’s financial instruments; consisting of cash and cash equivalents, accounts receivable, accounts payable, other receivables and prepayments, other payables and accrued liabilities, balances with a related party, balances with related companies and amounts due to director approximate their fair values due to the short maturities of these instruments.
As of December 31, 2017, the Company’s financial instruments consist principally of cash, and amounts due to related parties. Pursuant to ASC 820, the fair value of our cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
There was no asset or liability measured at fair value on a non-recurring basis as of December 31, 2017.
Comprehensive income
U.S. GAAP generally requires that recognized revenue, expenses, gains and losses be included in net income or loss. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income or loss. The components of other comprehensive income or loss consist of foreign currency translation adjustments.
Earnings per share
The Company reports earnings per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
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.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
Revenues are recorded net of value-added taxes, sales discounts and returns. There were no sales returns during the years ended December 31, 2017 and 2016.
US$
US$
NET REVENUES
Service income
systems development and integration
253,652
222,037
systems maintenance
4,470,838
3,124,148
sales of hardware and consumables
1,731,210
653,210
6,455,700
3,999,395
Billings in excess of revenues recognized are recorded as deferred revenue.
Income taxes
The Company accounts for income taxes in accordance with the accounting standard issued by the Financial Accounting Standard Board (“FASB”) for income taxes. Under the asset and liability method as required by this accounting standard, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The charge for taxation is based on the results for the reporting period as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
Under the accounting standard regarding accounting for uncertainty in income taxes, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred.
Refer to Note 9 to the consolidated financial statements for further information regarding the components of the Company’s income tax.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the statements of income on a straight-line basis over the lease periods.
Advertising costs
The Company expenses the cost of advertising as incurred in the period in which the advertisements and marketing activities are first run or over the life of the endorsement contract. Advertising and marketing expense for the years ended December 31, 2017 and 2016 were approximately $3,014 and $185, respectively.
Shipping and handling
Shipping and handling cost incurred to ship computer products to customers are included in selling expenses. Shipping and handling expenses for the years ended December 31, 2017 and 2016 were insignificant.
Research and development costs
Research and development costs are expensed as incurred and are included in general and administrative expenses. Research and development costs for the years ended December 31, 2017 and 2016 were insignificant.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
Foreign currency translation
The functional currency and reporting currency of the Company is the U.S. Dollar. (“US$” or “$”). The functional currency of the Hong Kong subsidiaries is the Hong Kong Dollar. The functional currency of the PRC subsidiary is RMB. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the exchange rate as quoted by the Hong Kong Monetary Authority (“HKMA”) at the end of the period. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments resulting from this process are included in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Year ended
December 31, 2017
December 31, 2016
RMB : USD exchange rate
6.7518
6.6875
Average period ended
HKD : USD exchange rate
7.800
7.800
Average period ended
PESO : USD exchange rate
49.8403
N/A
Average period ended
Year ended
December 31, 2017
December 31, 2016
RMB : USD exchange rate
6.5060
7.0191
HKD : USD exchange rate
7.800
7.800
PESO : USD exchange rate
49.8403
N/A
Commitments and contingencies
The Company follows FASB ASC Subtopic 450-20, “Loss Contingencies” in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
Segment Reporting
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue from software development and maintenance services (but not by sub-services/product type or geographic area) and operating results of the Company and, as such, the Company has determined that the Company has one operating segment as defined by ASC Topic 280 “Segment Reporting”.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU"), 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. In August 2015, FASB issued its final standard formally amending the effective date of the new revenue recognition guidance. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Group is currently evaluating the impact of adoption on its consolidated financial statements.
In January 2016, FASB issued ASU 2016-01 (Subtopic 825-10), Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities not under the fair value option is largely unchanged. The standard is effective for public companies for annual periods (and interim periods within those annual periods) beginning after December 15, 2017. We do not expect a material impact to the consolidated financial statements due to the adoption of this guidance.
In February 2016, FASB issued ASU 2016-02 (Topic 842), Leases, which requires that a lessee should recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expenses for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the method of adoption and the impact ASU 2016-02 will have on our consolidated financial statements, but expect that most existing operating lease commitments will be recognized as operating lease obligations and right-of-use assets as a result of adoption.
In June 2016, FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective on January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a group is required to recognize an allowance based on its estimate of expected credit loss. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this accounting standard update on our consolidated statements of cash flows.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18"). This ASU affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update will become effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018, and early adoption is permitted in any interim or annual period. We are currently evaluating the impact of this guidance on our consolidated financial statements.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 2 - Accounting policies (continued)
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The standard is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to the consolidated financial statements due to the adoption of this guidance.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features. II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU affects all entities that issue financial instruments (for example, warrants or convertible instruments) that include down round features. Part I of this ASU relates to the recognition, measurement, and earnings per share of certain freestanding equity-classified financial instruments that include down round features affect entities that present earnings per share in accordance with the guidance in Topic 260, Earnings Per Share, while in Part II does not have an accounting effect. We are in the process of evaluating the impact of this accounting standard update on our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
Note 3 - Accounts receivable
Accounts receivable as of December 31, 2017 and 2016 consisted of the following:
During the years ended December 31, 2017 and 2016, the Company did not have delinquent accounts receivable to write-off.
All of the Company’s customers are located in the PRC and Hong Kong. The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
Note 4 - Other receivables and prepayments
Other receivables and prepayments as of December 31, 2017 and 2016 consisted of the following:
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 5 - Inventories
Inventories as of December 31, 2017 and 2016 consisted of the following:
Note 6 - Plant and equipment, net
Plant and equipment consisted of the following as of December 31, 2017 and 2016:
Depreciation expense for the years ended December 31, 2017 and 2016 amounted to $108,208 and $56,042, respectively. For the years ended December 31, 2017 and 2016, no interest expense was capitalized into plant and equipment.
As of December 31, 2017 and 2016, the Company's motor vehicle was under finance lease arrangement with a net carrying amount $45,513 and nil respectively.
Note 7 - Acquisition of a subsidiary
On January 25, 2017, VEII entered into a Stock Purchase Agreement, dated January 23, 2017, (“Agreement”) with VEI CHN (the “Purchaser”), a wholly owned subsidiary of the Company, TSI and the sole shareholder of TSI’s issued and outstanding shares of capital stock, who is a resident and citizen of the Philippines (“Seller”). The Agreement was approved by the Board of Directors of the Company and Purchaser at separate board of directors meetings held on January 23, 2017 in Hong Kong SAR. TSI signed the Agreement on January 23, 2017.
As of 26 January 2017, VEII received written consents from 9 beneficial owners of an aggregate of 16,095,324 shares of Company Common Stock, $0.00001 par value, (“Common Stock”), which shares represent 54.27% of the aggregate voting power of the Common Stock as of a record date of January 23, 2017 and which written consents approved the Agreement. With the receipt of these written consents, the Agreement has been signed by all of the parties to the Agreement and approved by all corporate parties’ board of directors and shareholders.
Under the Agreement, the Purchaser acquired 1,250 shares of TSI Common Stock held by the Seller, constituting all of the issued and outstanding shares of TSI Common Stock, for a purchase price of Two Thousand Six Hundred and Thirty-Six United States Dollars (US$2,636.00), and is receiving Eighty Eight Thousand and Forty Four (88,044) shares of TSI Common Stock from TSI for a purchase price of Two Hundred Thousand Dollars and No Cents ($200,000.00).
The purchase price for the 1,250 shares of TSI Common Stock was funded from cash on hand and the purchase price for the Eighty Eight Thousand and Forty Four (88,044) shares of TSI Common Stock was funded by a January 2015 good faith earnest money deposit from the Company.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 7 - Acquisition of a subsidiary (continued)
Upon consummation of the Agreement, TSI is operated as a wholly owned subsidiary of the Purchaser, which Purchaser is a wholly owned subsidiary of the Company.
The Agreement contained usual and customary indemnification provisions.
Note 8 - Goodwill
Goodwill consisted of the following as of December 31, 2017 and 2016:
Note 9 - Intangible Assets
Intangible Assets consisted of the following as of December 31, 2017 and 2016:
Amortization expense for the year ended December 31, 2017 and 2016 amounted to $66,880 and nil, respectively. The amortization expense was included in general and administrative expenses.
Note 10 - Bank loan
Bank loan and accruals consisted of the following as of December 31, 2017 and 2016:
As of December 31, 2017 and 2016, the above bank loan secured by property and equipment with net carrying amount of $45,513 and nil respectively.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 11 - Other payables and accrued liabilities
Other payables and accruals consisted of the following as of December 31, 2017 and 2016:
Accrual mainly represents salary payables and fringe and social security accruals. According to the prevailing laws and regulations of the PRC, all eligible employees of the Company’s subsidiary are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. The Company’s subsidiary is required to accrue for these benefits based on certain percentages of the qualified employees’ salaries. The Company’s subsidiary is required to make contributions to the plans out of the amounts accrued.
The Company’s subsidiaries incorporated in Hong Kong manage a defined contribution Mandatory Provident Fund (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all of its employees in Hong Kong. The Company is required to contribute 5% of the monthly salaries for all Hong Kong based employees to the MPF Scheme up to a maximum statutory limit.
Note 12 - Deferred income
Deferred income consisted of the following as of December 31, 2017 and 2016:
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 13 - Income taxes
Income is subject to tax in the various countries in which the company operates.
The Company is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as the Company had no income taxable in the United States.
The Company’s Hong Kong subsidiaries are subject to Hong Kong Profits Tax at 16.5% of the estimated assessable profit. The Income Tax Laws in Hong Kong exempts income tax for dividends distributed to its shareholders. Accordingly, no deferred tax liability was recognized for the undistributed earnings of the Company and its Hong Kong subsidiaries.
The Company’s Philippine subsidiary is subject to Philippine Statutory Corporate Income Tax at 30%.
The Company’s PRC subsidiary in the PRC is subject to PRC Enterprise Income Tax at 25%.
The Income Tax Laws in PRC also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside PRC for distribution of earnings generated after January 1, 2008. Under the Income Tax Laws, the distribution of earnings generated prior to January 1, 2008 is exempt from the withholding tax. As the Company’s subsidiary located in the PRC that are available for distribution to the Company of approximately $0 at December 31, 2016 are considered to be indefinitely reinvested, and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. As of December 31, 2017, the Company’s subsidiary located in the PRC that are available for distribution to the Company of approximately $0.
The Company’s income tax expense consisted of:
A reconciliation of the income tax expense / (credit) applicable to income before tax using the applicable statutory rates for the jurisdictions in which the Company and its subsidiaries operated to the tax expense / (credit) at the effective tax rates are as follows:
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 13 - Income taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred income tax assets and liabilities are as follows:
Note 14 - Statutory reserves
Statutory reserves
The laws and regulations of the PRC require that before an enterprise distributes profits to its owners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations in proportions determined at the discretion of the Board of Directors after the statutory reserves.
As stipulated by the Company Law of the PRC, as applicable to Chinese companies with foreign ownership, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1. Making up cumulative prior years’ losses, if any;
2. Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the company’s registered capital; and;
3. Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting.
The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any. It may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 15 - Related party and shareholder transactions
Other than disclosed elsewhere in these financial statements, the Company also had the following related party balances and transactions:
Related party balances
Related party transactions:
(i)Mr. Kenneth Tan, a director of the Company, is a shareholder and a director of Value Exchange International Limited, a company incorporated in Hong Kong. The balance is unsecured, interest free and repayable on demand.
(ii)TSI was managed by Mr. Benny Lee, a director of the Company’s subsidiary VEI SHG. The balance is unsecured, interest free and repayable on demand.
TSI is a wholly owned subsidiary of the Company since January 2017 (Note 7).
(iii)Mr. Kenneth Tan is a director of the Company. The balance is unsecured, interest free and repayable on demand.
(iv)Mr. Edmund Yeung is a director of the Company. The balance included a loan from a director is unsecured, interest bearing at 12% per annum, and repayable on February 7, 2016 amount to US$126,120 as of December 31, 2017. As of the day of this report, no repayment has been made since December 31, 2017.
The remaining balance is unsecured, interest free and repayable on demand.
(v)Mr. Matthew Mecke is a director of the Company. The balance is unsecured, interest free and repayable on demand.
(vi)Mr. Johan Pehrson is a director of the Company. The balance is unsecured, interest free and repayable on demand.
VALUE EXCHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Note 16 - Commitments
The Company’s contractual obligations primarily consist of operating lease obligations. The following table sets forth a breakdown of the contractual obligations as of December 31, 2017 and 2016:
Note 17 - Concentration of risks
The Company’s operations are carried out in the PRC and in Hong Kong through the Company’s operating subsidiaries located in PRC and Hong Kong SAR. Its operations in the PRC and Hong Kong SAR are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in government policies regarding laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company provides unsecured credit terms for sales to certain customers. As a result, there are credit risks with the accounts receivable balances. The Company constantly re-evaluates the credit worthiness of customers buying on credit and maintains an allowance for doubtful accounts.
The following individual customer accounted for 10% or more of the Company’s revenues for the years ended December 31, 2017 and 2016:
Aisino Wincor Nixdorf Retail & Banking Systems (Shanghai) Co., Ltd. Company
26.7%
41.2%
Wuhan Watson's Personal Care Stores Co., Limited
15.6%
22.6%
Fujitsu Hong Kong Limited
15%
15%
Wincor Nixdorf (Hong Kong) Limited
11.4%
6%
Individual customer accounts receivable that represented 10% or more of total accounts receivable as of December 31, 2017 and 2016 were as follows: