Nova Lifestyle, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022 |
| OR | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-36259
NOVA LIFESTYLE, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 90-0746568 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
| 6565 E. Washington Blvd. Commerce, CA | 90040 | |
| (Address of principal executive offices) | (Zip Code) |
(323) 888-9999
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | NVFY | Nasdaq Stock Market |
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.
☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock outstanding as of November 15, 2022.
Nova LifeStyle, Inc.
Table of Contents
| i |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,170,102 | $ | 6,276,106 | ||||
| Accounts receivable, net | 389,943 | 103,397 | ||||||
| Advance to suppliers | 42,802 | 707,264 | ||||||
| Inventories | 12,760,772 | 17,656,175 | ||||||
| Prepaid expenses | 309,359 | 406,366 | ||||||
| Other receivables | 30,245 | 120,634 | ||||||
| Tax receivable | 949 | 299,011 | ||||||
| Total Current Assets | 16,704,172 | 25,568,953 | ||||||
| Noncurrent Assets | ||||||||
| Plant, property and equipment, net | 383,408 | 510,680 | ||||||
| Operating lease right-of-use assets, net | 2,720,438 | 3,158,734 | ||||||
| Lease deposit | 69,729 | 72,651 | ||||||
| Goodwill | 218,606 | 218,606 | ||||||
| Total Noncurrent Assets | 3,392,181 | 3,960,671 | ||||||
| Total Assets | $ | 20,096,353 | $ | 29,529,624 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONT’D)
AS OF SEPTEMBER 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 928,452 | $ | 358,362 | ||||
| Operating lease liability, current | 740,635 | 731,284 | ||||||
| Advance from customers | 178,507 | 394,376 | ||||||
| Accrued liabilities and other payables | 362,356 | 326,679 | ||||||
| Other loan interest payable | 1,389 | 3,696 | ||||||
| Total Current Liabilities | 2,211,339 | 1,814,397 | ||||||
| Noncurrent Liabilities | ||||||||
| Other Loan | 150,000 | 150,000 | ||||||
| Operating lease liability, non-current | 2,136,793 | 2,577,567 | ||||||
| Income tax payable | 1,157,603 | 1,543,472 | ||||||
| Total Noncurrent Liabilities | 3,444,396 | 4,271,039 | ||||||
| Total Liabilities | 5,655,735 | 6,085,436 | ||||||
| Contingencies and Commitments | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding; as of September 30, 2022 and December 31, 2021, respectively | 6,951 | 6,837 | ||||||
| Additional paid-in capital | 43,147,149 | 42,660,383 | ||||||
| Accumulated other comprehensive (loss) income | (806,054 | ) | 381,850 | |||||
| Accumulated deficits | (27,907,428 | ) | (19,604,882 | ) | ||||
| Total Stockholders’ Equity | 14,440,618 | 23,444,188 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 20,096,353 | $ | 29,529,624 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Net Sales | $ | 10,495,097 | $ | 9,798,154 | $ | 3,016,104 | $ | 2,916,571 | ||||||||
| Cost of Sales | 11,377,203 | 11,025,436 | 1,878,361 | 1,517,032 | ||||||||||||
| Gross (Loss) Profit | (882,106 | ) | (1,227,282 | ) | 1,137,743 | 1,399,539 | ||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | 2,181,750 | 2,970,745 | 643,206 | 1,323,903 | ||||||||||||
| General and administrative expenses | 4,401,272 | 3,993,521 | 1,448,535 | 1,222,478 | ||||||||||||
| - | - | - | - | |||||||||||||
| Total Operating Expenses | 6,583,022 | 6,964,266 | 2,091,741 | 2,546,381 | ||||||||||||
| Loss From Operations | (7,465,128 | ) | (8,191,548 | ) | (953,998 | ) | (1,146,842 | ) | ||||||||
| Other Income (Expenses) | ||||||||||||||||
| Non-operating income | 84 | 84 | ||||||||||||||
| Loss on disposal of fixed assets | (36,549 | ) | ||||||||||||||
| Foreign exchange transaction income (loss) | (644,525 | ) | 32,657 | (708,169 | ) | (1,771 | ) | |||||||||
| Interest (expense) income, net | (8,220 | ) | (5,844 | ) | (2,261 | ) | (31,755 | ) | ||||||||
| Financial expense | (148,208 | ) | (160,368 | ) | (48,648 | ) | (48,732 | ) | ||||||||
| Total Other Income (Expenses), Net | (837,418 | ) | (133,555 | ) | (758,994 | ) | (82,258 | ) | ||||||||
| Loss Before Income Taxes | (8,302,546 | ) | (8,325,103 | ) | (1,712,992 | ) | (1,229,100 | ) | ||||||||
| Income Tax Expense | (180,593 | ) | (167,532 | ) | ||||||||||||
| Net Loss | (8,302,546 | ) | (8,505,696 | ) | (1,712,992 | ) | (1,396,632 | ) | ||||||||
| Other Comprehensive Loss | ||||||||||||||||
| Foreign currency translation | (994,394 | ) | (484,738 | ) | (699,802 | ) | (91,974 | ) | ||||||||
| Net Loss and Comprehensive Loss | (9,296,940 | ) | (8,990,434 | ) | (2,412,794 | ) | (1,488,606 | ) | ||||||||
| Weighted average shares outstanding - Basic and Diluted | 6,885,213 | 5,870,632 | 6,932,931 | 6,399,158 | ||||||||||||
| Net loss per share of common stock | ||||||||||||||||
| Basic and Diluted | $ | (1.21 | ) | $ | (1.45 | ) | $ | (0.25 | ) | $ | (0.22 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficits | Equity | |||||||||||||||||||
| Balance at beginning of period | 6,891,313 | $ | 6,892 | $ | 42,974,288 | $ | 87,258 | $ | (26,194,436 | ) | $ | 16,874,002 | ||||||||||||
| Stock issued to employees | 1,500 | 2 | 3,298 | 3,300 | ||||||||||||||||||||
| Stock issued to consultants | 58,236 | 57 | 169,563 | 169,620 | ||||||||||||||||||||
| Foreign currency translation loss | - | (893,312 | ) | (893,312 | ) | |||||||||||||||||||
| Net loss | - | (1,712,992 | ) | (1,712,992 | ) | |||||||||||||||||||
| Balance at end of period | 6,951,049 | $ | 6,951 | $ | 43,147,149 | $ | (806,054 | ) | $ | (27,907,428 | ) | $ | 14,440,618 | |||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficits | Equity | |||||||||||||||||||
| Balance at beginning of period | 5,609,234 | $ | 5,609 | $ | 39,792,705 | $ | 405,526 | $ | (6,751,453 | ) | $ | 33,452,387 | ||||||||||||
| Stock issued to employees | 1,500 | 2 | 2,968 | 2,970 | ||||||||||||||||||||
| Stock issued to consultants | 5,000 | 5 | 9,895 | 9,900 | ||||||||||||||||||||
| Issuance of common stock | 1,114,508 | 1,114 | 2,759,859 | 2,760,973 | ||||||||||||||||||||
| Foreign currency translation loss | - | (91,974 | ) | (91,974 | ) | |||||||||||||||||||
| Net loss | - | (1,396,632 | ) | (1,396,632 | ) | |||||||||||||||||||
| Balance at end of period | 6,730,242 | $ | 6,730 | $ | 42,565,427 | $ | 313,552 | $ | (8,148,085 | ) | $ | 34,737,624 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Accumulated | Retained | |||||||||||||||||||||||||||
| Additional | Other | Earnings | Total | |||||||||||||||||||||||||
| Common stock | Paid-in | Comprehensive | Statutory | (Accumulated | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Reserve | Deficits) | Equity | ||||||||||||||||||||||
| Balance at beginning of period | 6,836,742 | $ | 6,837 | $ | 42,660,383 | $ | 381,850 | $ | $ | (19,604,882 | ) | $ | 23,444,188 | |||||||||||||||
| Stock issued to employees | 4,500 | 5 | 9,895 | 9,900 | ||||||||||||||||||||||||
| Stock issued to consultants | 109,807 | 109 | 476,871 | 476,980 | ||||||||||||||||||||||||
| Foreign currency translation loss | - | (1,187,904 | ) | (1,187,904 | ) | |||||||||||||||||||||||
| Net loss | - | (8,302,546 | ) | (8,302,546 | ) | |||||||||||||||||||||||
| Balance at end of period | 6,951,049 | $ | 6,951 | $ | 43,147,149 | $ | (806,054 | ) | $ | $ | (27,907,428 | ) | $ | 14,440,618 | ||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Accumulated | Retained | |||||||||||||||||||||||||||
| Additional | Other | Earnings | Total | |||||||||||||||||||||||||
| Common stock | Paid | Comprehensive | Statutory | (Accumulated | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | in Capital | Income | Reserve | Deficits) | Equity | ||||||||||||||||||||||
| Balance at beginning of period | 5,596,234 | $ | 5,596 | $ | 39,766,978 | $ | 798,290 | $ | 6,241 | $ | 351,370 | $ | 40,928,475 | |||||||||||||||
| Stock issued to employees | 4,500 | 5 | 8,905 | 8,910 | ||||||||||||||||||||||||
| Stock issued to consultants | 15,000 | 15 | 29,685 | 29,700 | ||||||||||||||||||||||||
| Issuance of common stock | 1,114,508 | 1,114 | 2,759,859 | 2,760,973 | ||||||||||||||||||||||||
| De-registration and liquidation of Nova Macau | - | (6,241 | ) | 6,241 | ||||||||||||||||||||||||
| Forign currency translation loss | - | (484,738 | ) | (484,738 | ) | |||||||||||||||||||||||
| Net loss | - | (8,505,696 | ) | (8,505,696 | ) | |||||||||||||||||||||||
| Balance at end of period | 6,730,242 | $ | 6,730 | $ | 42,565,427 | $ | 313,552 | $ | $ | (8,148,085 | ) | $ | 34,737,624 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (8,302,546 | ) | $ | (8,505,696 | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 62,110 | 62,055 | ||||||
| Amortization of operating lease right-of-use assets | 632,766 | 380,178 | ||||||
| Loss on disposal of fixed assets | 36,549 | |||||||
| Write down of inventories | 5,169,347 | 5,526,307 | ||||||
| Stock based compensation expense | 486,880 | 38,610 | ||||||
| Changes in bad debt allowance | 2,376 | (3,328 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (295,163 | ) | 332,870 | |||||
| Advance to suppliers | 664,462 | 56,440 | ||||||
| Inventories | (1,706,482 | ) | (491,056 | ) | ||||
| Other current assets | 175,225 | (387,526 | ) | |||||
| Operating lease liabilities | (632,766 | ) | (348,917 | ) | ||||
| Accounts payable | 570,090 | (27,270 | ) | |||||
| Advance from customers | (215,869 | ) | 137,243 | |||||
| Accrued liabilities and other payables | (12,731 | ) | 171,218 | |||||
| Taxes payable | (87,807 | ) | (70,473 | ) | ||||
| Net Cash Used in Operating Activities | (3,453,559 | ) | (3,129,345 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of property and equipment | (5,771 | ) | (155,156 | ) | ||||
| Net Cash Used in Investing Activities | (5,771 | ) | (155,156 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from equity financing, net | 2,760,973 | |||||||
| Net Cash Provided by Financing Activities | 2,760,973 | |||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | 353,326 | $ | (342,380 | ) | |||
| Net decrease in cash and cash equivalents | (3,106,004 | ) | (865,908 | ) | ||||
| Cash and cash equivalents, beginning of period | 6,276,106 | 8,744,784 | ||||||
| Cash and cash equivalents, ending of period | $ | 3,170,102 | $ | 7,878,876 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | 247,898 | $ | 251,067 | ||||
| Interest expense | $ | 9,016 | $ | 4,801 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Note 1 - Organization and Description of Business
Organization and Business
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”), formerly known as Stevens Resources, Inc., was incorporated in the State of Nevada on September 9, 2009.
The Company is a U.S. holding company with no material assets other than the ownership interests of its subsidiaries through which it markets, designs and sells furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had two former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020 and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registered and liquidated in January 2021.
Nova Macao was organized under the laws of Macao on May 20, 2006, and was a wholly owned subsidiary of Nova Furniture. Nova Macao was a trading company, importing, marketing and selling products designed and manufactured by third-party manufacturers for the international market. Diamond Bar was incorporated in California on June 15, 2000. Diamond Bar markets and sells products manufactured by third-party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market.
On December 7, 2017, Nova LifeStyle incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build the Company’s own blockchain technology team. This new company will focus on the application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building a blockchain-powered platform that enables designers to showcase their products, including current and future furniture designs. This company is in the planning stage and has had minimal operations through September 30, 2022.
On December 12, 2019, Nova LifeStyle acquired Nova Malaysia at cost of $1.00 which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition was to market and sell high-end physiotherapeutic jade mats in Malaysia.
On January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party, for cash consideration of $2,500,000, pursuant to a formal agreement entered into on January 7, 2020. The Company received the payment on May 11, 2020.
On October 14, 2020, the Macao Trade and Investment Promotion Institute invalidated licenses for offshore companies under an Order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered into a de-registration process and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.
On November 5, 2020, Nova LifeStyle acquired Nova HK at cost of $1,290 which was incorporated in Hong Kong on November 6, 2019. This company had minimal operations. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia.
The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Nova Macao, Diamond Bar, i Design, Nova HK and Nova Malaysia.
| 7 |
COVID-19
Beginning in 2020, a strain of novel coronavirus (“COVID-19”) has spread globally and, at this point, the Company’s operations has been adversely impacted by the COVID-19 pandemic. In particular, Nova Malaysia had not been able to operate in normal condition due to Malaysian government’s shut down orders which resulted in sales lagging and slow-moving inventories. The Company’s two showrooms in Kuala Lumpur were closed from March 2020 to May 2020 and closed again from August 2020 to March 5, 2021. Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021, then the lockdown was extended to early October 2021. In October 2021, Malaysia government lifted lockdown order for people fully vaccinated against COVID-19 and our store has been reopened since then. In April 2022, Malaysia has also reopened the border for foreign visitors. However, COVID-19 in Malaysia increased financial vulnerability for those affected households and business, which contributed to significant decrease of sales and risk of continuous sluggish sales. As a result, we further lowered the estimated sales quantities of the inventories during the interim review. The Company expects that the impact of the COVID-19 outbreak on the United States, Malaysia and world economies will also continue to have a material adverse impact on the demand for its products.
In 2022, there have been outbreaks of the Omicron variant of the COVID-19 in Hong Kong and many other cities in China, along with travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities imposed by local governments. Although our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China.
The extent of the impact of the COVID-19 pandemic that will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as the actions that the Company, other businesses and governments may take to contain the spread of COVID-19 continue to evolve. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset; and we have experienced and may continue to experience shipping disruptions in the future. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.
The severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the new variants of COVID-19, the efficacy and distribution of COVID-19 vaccines and the extent and severity of the impact on the global supply chain and the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be reasonably predicted at this time. As of the date of issuance of the Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition, liquidity or results of operations is uncertain. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
The interim condensed consolidated financial information as of September 30, 2022 and for the nine months and three months ended September 30, 2022 and 2021 have been prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim condensed consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, previously filed with the SEC on April 8, 2022.
| 8 |
In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of September 30, 2022, its interim condensed consolidated results of operations and cash flows for the nine months and three months ended September 30, 2022 and 2021, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, supply chain disruption, depress demand for the Company’s products, and adversely impact its results of operations. During the nine months ended September 30, 2022, the Company continued to face increasing uncertainties around its estimates of revenue collectability, accounts receivable credit losses and valuation of inventories. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may change as new events occur and additional information emerges, and such changes will be recognized or disclosed in its unaudited condensed consolidated financial statements.
Business Combination
For a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date and measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings is recognized as a gain attributable to the acquirer.
Deferred tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment, annually or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
ASC Topic 350 also permits an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test is required to be performed. Otherwise, no further testing is required. Performing the qualitative assessment involved identifying the relevant drivers of fair value, evaluating the significance of all identified relevant events and circumstances, and weighing the factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After evaluating and weighing all these relevant events and circumstances, it was concluded that a positive assertion can be made from the qualitative assessment that it is more likely than not that the fair value of Diamond Bar is greater than its carrying amount. As such, it is not necessary to perform the two-step goodwill impairment test for the Diamond Bar reporting unit. Accordingly, as of September 30, 2022 and December 31, 2021, the Company concluded there was no impairment of goodwill of Diamond Bar.
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Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash, money market funds, investments in interest bearing demand deposit accounts, time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company’s accounts receivable arises from product sales. The Company does not adjust its receivables for the effects of a significant financing component at contract inception if it expects to collect the receivables in one year or less from the time of sale. The Company does not expect to collect receivables greater than one year from the time of sale.
The Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. An analysis of the allowance for doubtful accounts is as follows:
| Balance at January 1, 2022 | $ | 1,044 | ||
| Provision for the period | 2,376 | |||
| Balance at September 30, 2022 | $ | 3,420 |
The bad debts provision (reversal) for the nine months ended September 30, 2022 and 2021 was $2,376 and ($3,328), respectively; and $1,316 and $262 for the three months ended September 30, 2022 and 2021, respectively.
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on its historical record and in normal circumstances, the Company receives goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, freight transportation of products from the Company’s international suppliers has been delayed or suspended during the outbreak.
Inventories
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions.
Plant, Property and Equipment
Plant, property, and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures for maintenance and repairs are expensed as incurred, while additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with no salvage value and estimated lives as follows:
| Computer and office equipment | 5 - 10 years |
| Decoration and renovation | 5 - 10 years |
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Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group asset group exceeds its fair value based on discounted cash flow analysis or appraisals. There was no impairment of long-lived assets for the nine months and three months ended September 30, 2022 and 2021.
Research and Development
Research and development costs are related primarily to the Company designing and testing its new products during the development stage. Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and development expenses were $10,328 and $110,251 for the nine months ended September 30, 2022 and 2021, respectively; and $660 and $105,460 for the three months ended September 30, 2022 and 2021, respectively.
Income Taxes
In its interim financial statements, the Company follows the guidance in ASC 270 “Interim Reporting” and ASC 740 “Income Taxes” whereby the Company utilizes the expected annual effective rate in determining its income tax provision. The income tax expense for the nine months and three months ended September 30, 2022 is $. The income tax expense for the nine months and three months ended September 30, 2021 are $180,593 and $167,532, respectively, and are primarily related to quarter-to-date income generated from foreign operation.
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
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Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at the statutory rate of 24%. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes at the statutory rate of 16.5%. In February 2022, Nova HK was deregistered.
The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the quarter ended September 30, 2022, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As of September 30, 2022 and December 31, 2021, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $26.7 million of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.
As of September 30, 2022, unrecognized tax benefits were approximately $. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 as of September 30, 2022. As of September 30, 2021, unrecognized tax benefits were approximately $900. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $900 as of September 30, 2021.
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A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the nine months ended September 30, 2022 and 2021, is as follows:
| Gross UTB | ||||||||
| 2022 | 2021 | |||||||
| Balance – January 1 and September 30 | $ | 935 | ||||||
At September 30, 2022 and December 31, 2021, the Company had cumulatively accrued approximately $0, respectively, for estimated interest and penalties related to unrecognized tax benefits. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $0 and $21 for the nine months ended September 30, 2022 and 2021, respectively; and $0 and $7 for the three months ended September 30, 2022 and 2021, respectively. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2018-2021 remain open to examination by tax authorities in the U.S.
Revenue Recognition
The Company recognizes revenues when its customers obtain control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identifies contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenues when (or as) it satisfies the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
The Company’s sales policy allows for product returns within the warranty period if the product is defective and the defects are the Company’s fault. As alternatives to the product return option, the customers have the option of requesting a discount from the Company for products with quality issues or of receiving replacement parts from the Company at no cost. The amount for product returns, the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the nine months and three months ended September 30, 2022 and 2021.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers and write-downs of inventory.
Shipping and Handling Costs
Shipping and handling costs related to delivery of finished goods are included in selling expenses. During the nine months ended September 30, 2022 and 2021, shipping and handling costs were $1,398 and $4,524, respectively, and $1,222 and $1,585 for the three months ended September 30, 2022 and 2021, respectively.
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Advertising
Advertising expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising, and are included in selling expenses. The Company expenses all advertising costs as incurred. Advertising expense was $857,548 and $1,122,959 for the nine months ended September 30, 2022 and 2021, respectively, and $237,875 and $299,012 for the three months ended September 30, 2022 and 2021, respectively.
The Company accounts for share-based compensation awards to officers, directors, employees, and for acquiring goods and services from nonemployees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the vesting period. The Company accounts for forfeitures when they occur.
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss | $ | (8,302,546 | ) | $ | (8,505,696 | ) | $ | (1,712,992 | ) | $ | (1,396,632 | ) | ||||
| Weighted average shares outstanding – Basic and Diluted * | 6,885,213 | 5,870,632 | 6,932,931 | 6,399,158 | ||||||||||||
| Net loss per share of common stock | ||||||||||||||||
| Basic and Diluted | $ | (1.21 | ) | $ | (1.45 | ) | $ | (0.25 | ) | $ | (0.22 | ) | ||||
| * | Including and shares that were granted and vested but not yet issued for the nine months ended September 30, 2022 and 2021, respectively. |
For the nine months and three months ended September 30, 2022, shares exercisable under warrants, shares of unvested restricted stock and vested stock options to purchase shares of the company’s stock were excluded from the EPS calculation, as their effects were anti-dilutive.
For the nine months and three months ended September 30, 2021, shares purchasable under warrants, shares of unvested restricted stock and vested stock options to purchase shares of the Company’s stock were excluded from EPS calculation, as their effects were anti-dilutive.
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Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
No customer accounted for 10% or more of the Company’s sales for the nine and three months ended September 30, 2022. No customer accounted for 10% of the Company’s sales for the nine months ended September 30, 2021, while one customer accounted for 15% of the Company’s sales for the three months ended September 30, 2021. Two customers accounted for 64% and 13%, respectively, of the Company’s gross accounts receivable as of September 30, 2022. Four customers accounted for 22%, 19%, 14% and 14%, respectively, of the Company’s gross accounts receivable as of December 31, 2021.
The Company purchased its products from two and three major vendors during the nine months ended September 30, 2022 and 2021, respectively, accounting for a total of 45% for 2022 (23%, and 22%) and 56% for 2021 (25%, 18%, and 13%) of the Company’s purchases. The Company purchased its products from three major vendors during the three months ended September 30, 2022 and 2021, accounting for a total of 62% for 2022 (25%, 25% and 12%) and 56% for 2021 (21%, 18% and 17%) of the Company’s purchases.
Advances made to these vendors were $8,899 and $307,718 as of September 30, 2022 and December 31, 2021, respectively. Accounts payable to these vendors were $219,097 and $125,636 as of September 30, 2022 and December 31, 2021, respectively.
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The carrying value of cash, accounts receivable, advances to suppliers, other receivables, accounts payable, advance from customers, other payables and accrued liabilities approximate estimated fair values because of their short maturities.
Foreign Currency Translation and Transactions
The condensed consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The Company’s subsidiary with operations in Malaysia uses its local currency, the Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
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Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.
The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:
| Balance sheet items, except for equity accounts | ||||
| September 30, 2022 | RM 4.64 to 1 | |||
| December 31, 2021 | RM 4.18 to 1 | |||
| Income Statement and cash flow items | ||||
| For the nine months ended September 30, 2022 | RM 4.34 to 1 | |||
| For the nine months ended September 30, 2021 | RM 4.13 to 1 | |||
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management determined that the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: the design and sale of furniture.
Management concluded that the Company had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the United States, Nova HK was a furniture distributor based in Hong Kong focusing on international customers, and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. They are all operated under the same senior management of the Company, and management views the operations of Diamond Bar, Nova HK and Nova Malaysia as one entity for making business decisions.
All of the Company’s long-lived assets are mainly property, plant and equipment located in the United States and Malaysia and are utilized for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by the customers. For example, if the products are delivered to a customer in the United States, the sales are recorded as generated in the United States; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
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Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company recognized no impairment of ROU assets as of September 30, 2022 and December 31, 2021.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the consolidated balance sheets at September 30, 2022 and December 31, 2021.
Reclassification
Certain prior period accounts have been reclassified in conformity with current period’s presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on the Company’s condensed consolidated financial statements.
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Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. In March 2022, the FASB issued ASU 2022-02, Topic 326. The ASU eliminates the accounting guidance for trouble debt restructurings by creditors in Subtopic 310-40, and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, the ASU requires disclosure of gross writeoffs of receivables by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. This ASU is effective for periods beginning after December 15, 2022. The Company is currently evaluating the impact that the adoption of ASU 2016-13 and ASU 2022-02 will have on its condensed consolidated financial statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Adoption of the ASUs is on a modified retrospective basis. As the Company qualifies as a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact that the adoption of ASU 2017-04 will have on its condensed consolidated financial statement presentation or disclosures.
The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 3 - Inventories
The inventories as of September 30, 2022 and December 31, 2021 totaled $12,760,772 and $17,656,175, respectively, and consisted entirely of finished goods.
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For the nine months and three months ended September 30, 2022, the Company wrote-down $5,169,347 and $50,293 of slow-moving inventory, respectively. The inventory write-down is included in “Cost of Sales” in the consolidated statements of operations. For the nine months and three months ended September 30, 2021, the Company wrote-down $5,526,307 and $0 of slow-moving inventory, respectively. In light of the current and developing business conditions as a result of COVID-19 pandemic, additional write downs of inventories may be required in subsequent periods.
Note 4 - Plant, Property and Equipment, Net
As of September 30, 2022 and December 31, 2021, plant, property and equipment consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Computer and office equipment | $ | 429,215 | $ | 474,196 | ||||
| Decoration and renovation | 450,401 | 487,002 | ||||||
| 879,616 | 961,198 | |||||||
| Less: accumulated depreciation | (496,208 | ) | (450,518 | ) | ||||
| $ | 383,408 | $ | 510,680 | |||||
Depreciation expense was $62,110 and $62,055 for the nine months ended September 30, 2022 and 2021, respectively, and $19,949 and $23,529 for the three months ended September 30, 2022 and 2021, respectively.
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Note 5 - Advances to Suppliers
The Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $42,802 and $707,264 as of September 30, 2022 and December 31, 2021, respectively.
Note 6 - Prepaid Expenses and Other Receivables
Prepaid expenses and other receivables consisted of the following as of September 30 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Prepaid expenses | $ | 309,359 | $ | 406,366 | ||||
| Other receivables | 30,245 | 120,634 | ||||||
| $ | 339,604 | $ | 527,000 | |||||
As of September 30, 2022 and December 31, 2021, prepaid expenses and other receivables mainly represented prepaid insurance, prepaid advertising expense, and Celero and Cardknox account balances.
Note 7 - Accrued Liabilities and Other Payables
Accrued liabilities and other payables consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Other payables | $ | 6,493 | $ | 6,893 | ||||
| Salary payable | 6,442 | 6,231 | ||||||
| Financed insurance premiums | 141,945 | 134,173 | ||||||
| Accrued auditing | 20,000 | |||||||
| Accrued commission | 85,221 | 66,507 | ||||||
| Accrued expenses, others | 102,255 | 112,875 | ||||||
| $ | 362,356 | $ | 326,679 | |||||
As of September 30, 2022 and December 31, 2021, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating expenses incurred in Malaysia. Other payables represented other taxes payable and 401(k) payable.
Note 8 - Other Loans
On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. On June 5, 2020, Congress passed a new law that allowed current PPP borrowers to choose to extend the eight-week period to 24 weeks to use the funds, but which cannot be extended beyond December 31, 2020. The Company had used the loans for eligible purposes and on December 28, 2020, the Company submitted the loan forgiveness application to the bank. On November 15, 2021, the Small Business Administration (SBA) approved the company’s forgiveness application and no interest had been accrued on this loan as of September 30, 2022 and December 31, 2021.
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On May 5, 2020, Diamond Bar was granted a loan from Cathay Bank in the aggregate amount of $176,294 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated May 5, 2020 matures on May 5, 2022 and bore interest at a rate of 1.00% per annum, payable monthly commencing on May 5, 2020. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. On June 5, 2020, Congress passed a new law that allowed current PPP borrowers to choose to extend the eight-week period to 24 weeks to use the funds but which cannot be extended beyond December 31, 2020. The Company had used all the PPP loan proceeds for qualifying purposes within 24 weeks. On June 15, 2021, the Small Business Administration (SBA) approved the Company’s loan forgiveness application and no interest had been accrued on this loan as of September 30, 2022 and December 31, 2021.
On June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. The Loan, which was in the form of a promissory note dated June 19, 2020, matures on June 18, 2050 and bears interest at a rate of 3.75% per annum, payable monthly beginning 12 months from the date of the promissory note. Funds from the Loan may only be used for working capital. The loan was secured by all tangible and intangible property of Diamond Bar. It has accumulated interest of $4,272 and $4,328 for the nine months ended September 30, 2022 and 2021, respectively; and interest of $1,433 and $1,461 for the three months ended September 30, 2022 and 2021, respectively.
Note 9- Related Party Transactions
On September 30, 2011, Diamond Bar leased a showroom in High Point, North Carolina from the Company’s President who is currently also the Chief Executive Officer and Chairperson of the Board. The lease is renewable and has been renewed each year since 2011. On April 1, 2022, the Company renewed the lease for an additional one year term at a cost of $34,562. During the nine months ended September 30, 2022 and 2021, the Company recorded rental amounts of $17,281 and $34,561, respectively, which were included in selling expenses; and rental amounts of $8,641 and $17,280 for the three months ended September 30, 2022 and 2021, respectively.
On January 4, 2018, the Company entered into a sales representative agreement with a consulting firm, which is owned by the President, Chief Executive Officer and Chairperson of the Board, for sales representative service for a term of two years. On January 4, 2020, the Company renewed the agreement for an additional two years which was amended in July 2020. If not terminated during the first year, the agreement will continue until one party or the other terminates the agreement with 30 days written notice. The Company agreed to compensate the consulting firm via commission at predetermined rates of the relevant sales amount. During the nine months ended September 30, 2022 and 2021, the Company recorded $314,163 and $304,958 as commission expense to this consulting firm, respectively; and $88,149 and $93,156 for the three months ended September 30, 2022 and 2021, respectively.
In September 2021, Nova Malaysia entered into a consultancy agreement with an I.T. firm whose sole shareholder was a director of Nova Macao to provide E-Commerce Web Application Setup, E-Commerce Essentials Implementation, E-Commerce UIUX and other related services. During the nine and three months ended September 30, 2022, the Company recorded $317,152 and $29,181 as technology service expenses to this I.T. firm, respectively.
Note 10- Stockholders’ Equity
On May 28, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) at its annual meeting. The 2021 Plan was approved by the Board of Directors of the Company on April 12, 2021 and has a total of shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On June 16, 2021, the Company filed Form S-8 to register the shares of the Company’s common stock under the 2021 Plan.
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Shares and Warrants issued through Private Placement
On July 23, 2021, the Company conducted a registered direct offering of shares of common stock. The shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on October 8, 2020 and subsequently declared effective on October 15, 2020. Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of 1,114,508 shares of common stock in a concurrent private placement. The combined purchase price for one share of common stock and a warrant to purchase one share of common stock was $. The warrants have an exercise price of $3.50 per share, are exercisable beginning six-months from the date of issuance, and will expire five and a half years from the date of issuance. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021.
In conjunction with this offering, the Company issued warrants to purchase 111,451 shares of common stock at an exercise price of $ per share to the placement agent and its designees. The placement agent warrants are exercisable on the six-month anniversary of the issuance date. The placement agent warrants are exercisable for four and a half years from the initial exercise date. The placement agent warrants have piggy-back registration rights and have a termination date of July 23, 2026.
The warrants issued in the private placement described above are exercisable for a fixed number of shares, and are classified as equity instruments under ASC 815-40-25-10. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated life ofyears, volatility of %, risk-free interest rate of % and dividend yield of %. No estimate of forfeitures was made as the Company has a short history of granting options and warrants. The fair value of the warrants issued to investors at grant date was $2,018,597.
Warrants
The following is a summary of the warrant activity for the nine months ended September 30, 2022:
Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2022 | 1,225,959 | $ | ||||||||||
| Exercisable at January 1, 2022 | $ | - | - | |||||||||
| Granted | - | - | ||||||||||
| Exercised / surrendered | - | - | ||||||||||
| Expired | - | - | ||||||||||
| Outstanding at September 30, 2022 | 1,225,959 | $ | ||||||||||
| Exercisable at September 30, 2022 | 1,225,959 | $ | ||||||||||
Shares Issued to Consultants
On November 16, 2020, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2020 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting % on February 15, 2021, % on May 15, 2021, % on August 15, 2021 and % on November 15, 2021. The fair value of the shares was $39,600, which was calculated based on the stock price of $per share on November 16, 2020 and is being amortized over the service term. The shares were issued pursuant to the 2014 Omnibus Long-Term Incentive Plan. During the nine months and three months ended September 30, 2021, the Company charged $ and $, respectively, to operations as consulting expenses.
On November 2, 2021, the Company entered into an information technology consulting agreement with a consultant for analyzing and developing the Company’s information technology infrastructure and system, and related general business advisory services effective on November 2, 2021 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, shares issued before the end of November 2021 and remaining shares will be issued on the one-year anniversary of the agreement. The fair value of the shares was $236,000, which was calculated based on the stock price of $per share on November 2, 2021 and is being amortized over the service term. The shares were issued pursuant to Nova Lifestyle, Inc. 2021 Omnibus Equity Plan (the “2021 Plan”). During the nine months and three months ended September 30, 2022, the Company charged $ and $, respectively, to operations as consulting expenses.
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On November 2, 2021, the Company entered into a marketing consulting agreement with a consultant for developing branding and marketing strategies, analyzing and evaluating consumer data services effective on November 2, 2021 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, shares issued before the end of November 2021 and remaining shares will be issued on the one-year anniversary of the agreement. The fair value of the shares was $236,000, which was calculated based on the stock price of $ per share on November 2, 2021 and is being amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the nine months and three months ended September 30, 2022, the Company charged $ and $, respectively, to operations as consulting expenses.
On November 11, 2021, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2021 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting % on February 15, 2022, % on May 15, 2022, % on August 15, 2022 and % on November 15, 2022. The fair value of the shares was $46,600, which was calculated based on the stock price of $ per share on November 16, 2021 and is being amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the nine months and three months ended September 30, 2022, the Company charged $ and $, respectively, to operations as consulting expenses.
On January 28, 2022, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development effective on February 1, 2022 for twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2022 for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading day of the corresponding month. The shares were issued pursuant to the 2021 Plan. During the nine months and three months ended September 30, 2022, the company issued and shares to the designer and charged $80,000 and $30,000, respectively, to operations as designer fee.
On July 1, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on July 1, 2022 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting % on July 1, 2022, % on October 1, 2022,% on January 1, 2023 and % on April 1, 2023. The fair value of the shares was $36,000, which was calculated based on the stock price of $ per share on July 1, 2022 and is being amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the nine months and three months ended September 30, 2022, the Company charged $ to operations as consulting expenses.
Shares and Options Issued to Independent Directors
On November 4, 2019, the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three independent members of the board of directors. The Company agreed to grant the Company’s three independent directors options to purchase an aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, vesting % on November 30, 2019, % on February 28, 2020, % on May 31, 2020, and % on August 31, 2020. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes option pricing model. The fair value of the options was calculated using the following assumptions: estimated life of , volatility of %, risk free interest rate of %, and dividend yield of %. The fair value of the stock options was $114,740 at the grant date.
Shares Issued to Employees
On November 10, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2020. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $11,880, which was calculated based on the stock price of $ per share on November 10, 2020, the date the award was determined by the Compensation Committee of the Board of Directors, vesting % on November 10, 2020, % on March 31, 2021, % on June 30, 2021 and % on September 30, 2021. During the nine months and three months ended September 30, 2021, the Company amortized $ and $, respectively, to operations as stock compensation expense.
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On November 11, 2021, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2021. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s 2021 Omnibus Equity Plan. The fair value of these shares was $13,200, which was calculated based on the stock price of $ per share on November 11, 2021, the date the award was determined by the Compensation Committee of the Board of Directors, vesting% on November 10, 2021, % on March 31, 2022, % on June 30, 2022 and % on September 30, 2022. During the nine months and three months ended September 30, 2022, the Company amortized $ and $, respectively, to operations as stock compensation expense.
Options Issued to Employees
On August 12, 2019, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (%) of those stock options vested immediately, and the remaining % vested on the six-month anniversary of the grant date.
The fair value of the option granted to the Chief Financial Officer in 2019 was recognized as compensation expense over the vesting period of the stock option award. The fair value of the option was calculated using the following assumptions: estimated life of , volatility of %, risk free interest rate of %, and dividend yield of %. The fair value of the stock options was $18,318 at the grant date.
As of September 30, 2022, unrecognized share-based compensation expense was $.
Number of Shares | Average Exercise Price per Share | Weighted Average Remaining Contractual Term in Years | |||||||||
| Outstanding at January 1, 2022 | 340,500 | $ | 5.97 | ||||||||
| Exercisable at January 1, 2022 | 340,500 | 5.97 | |||||||||
| Granted | - | - | |||||||||
| Exercised | - | - | |||||||||
| Forfeited | 206,500 | 6.87 | - | ||||||||
| Outstanding at September 30, 2022 | 134,000 | 4.58 | |||||||||
| Exercisable at September 30, 2022 | 134,000 | 5.97 | |||||||||
| (1) | The intrinsic value of the stock options at September 30, 2022 is the amount by which the market value of the Company’s common stock of $ as of September 30, 2022 exceeds the average exercise price of the option. As of September 30, 2022, the intrinsic value of the outstanding and exercisable stock options was $. |
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Note 11 - Geographical Analysis
Geographical distribution of sales consisted of the following for the nine months and three months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Geographical Areas | ||||||||||||||||
| North America | $ | 9,863,167 | $ | 9,237,435 | $ | 2,766,486 | $ | 2,850,262 | ||||||||
| Asia (excluding China) | 61,247 | 248,118 | (1,034 | ) | (2,028 | ) | ||||||||||
| Other countries | 570,683 | 312,601 | 250,652 | 68,337 | ||||||||||||
| $ | 10,495,097 | $ | 9,798,154 | $ | 3,016,104 | $ | 2,916,571 | |||||||||
Geographical location of identifiable long-lived assets as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Geographical Areas | ||||||||
| North America | $ | 2,548,487 | $ | 2,986,290 | ||||
| Asia | 555,359 | 683,124 | ||||||
| $ | 3,103,846 | $ | 3,669,414 | |||||
Note 12- Lease
On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the United States with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provided an option to extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another three years with an expiration date of October 31, 2021. On October 15, 2021, the Company extended the lease for another five years with an expiration date of October 31, 2026. The initial monthly rental payment is $42,000 with an annual 3% increase.
The Company has entered into several lease agreements for office and warehouse space in Commerce, California and showroom space in Las Vegas, Nevada and High Point, North Carolina (see Note 9) on monthly or annual terms.
On July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a -year term, expiring on July 14, 2021. The initial monthly rental payment was 20,000 Malaysia Ringgit ($4,608) and was increased to 35,000 Malaysia Ringgit ($8,065) effective August 1, 2020. On July 15, 2021, Nova Malaysia extended the lease for another two years with an expiration date of July 31, 2023.
On October 29, 2019, Nova Malaysia entered into a lease agreement for a showroom with a -year term, commencing on December 1, 2019 and expiring on November 30, 2021. On November 26, 2021, Nova Malaysia extended the lease to November 30, 2022 with an option for renewal for another term of 24 months. The monthly rental payment is 9,280 Malaysia Ringgit ($2,138).
On August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a -year term, commencing on September 1, 2020 and expiring on August 31, 2022. On July 29, 2022, Nova Malaysia extended the lease for another two years with an expiration date of August 31, 2024. The monthly rental payment is 30,000 Malaysia Ringgit ($6,912).
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Operating lease expense for the nine months and three months ended September 30, 2022 and 2021 was as follows:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost – straight line | $ | 640,430 | $ | 603,764 | $ | 213,477 | $ | 203,388 | ||||||||
The following is a schedule, by years, of maturities of operating lease liabilities as of September 30, 2022:
| Operating Leases | ||||
| 2022 (remainder) | $ | 210,874 | ||
| 2023 | 807,868 | |||
| 2024 | 754,510 | |||
| 2025 | 701,142 | |||
| Thereafter | 598,820 | |||
| Total undiscounted cash flows | 3,073,214 | |||
Lease Term and Discount Rate
| September 30, 2022 | ||||
| Weighted-average remaining lease term - years | ||||
| Operating leases - USA | 4.09 | |||
| Operating leases - Malaysia | 1.63 | |||
| Weighted-average discount rate (%) | ||||
| Operating leases - USA | 3.25 | % | ||
| Operating leases - Malaysia | 4.66 | % | ||
Supplemental cash flow information related to leases where the Company was the lessee for the nine months ended September 30, 2022 and 2021 was as follows:
| 2022 | 2021 | |||||||
| Operating cash outflows from operating leases | $ | 632,766 | $ | 210,922 | ||||
Note 13 - Commitments and Contingencies
Legal Proceedings
On December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently appointed as lead plaintiffs and, on June 18, 2019, filed an Amended Complaint.
Plaintiffs seek to represent a class of entities acquiring Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in its planned $460 million senior care center in China; and (2) inflated sales in 2016 and 2017 by recognizing significant sales to two allegedly non-existent customers. Plaintiffs claim that the falsity of these representations was exposed in a blog posted on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers.
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On March 8, 2022, the parties to the Barney Action filed a Stipulation of Settlement (“Settlement”) with the Court. Under the terms of the Settlement, and without admitting to any wrongdoing, fault, or liability, the Company agreed to a payment of $750,000 to completely resolve the Barney Action. The $750,000 would be funded by the remainder of any retention under applicable directors and officer liability insurance with the remainder paid by the directors and officer liability insurer. The settlement provided for the class members’ complete release of all claims against the Company and the named defendants with respect to any of the matters alleged in the litigation. The Settlement was subject to various conditions, including preliminary approval by the Court, notice to all class members, an opt-out period, and a final hearing and approval by the Court.
By Memorandum Opinion and Order dated August 29, 2022, the Court denied the Barney plaintiffs’ unopposed Motion to Certify a Settlement Class and to Approve the Settlement. The Court held that plaintiffs had not met their burden of establishing the prerequisites to class certification of adequacy of class counsel, numerosity, and the superiority of class certification in fairly and efficiently adjudicating the controversy. The Court similarly concluded that plaintiffs had failed to make a threshold showing that the settlement was fair and adequate. Finally, the Court rejected plaintiffs’ proposed plan for providing notice of the settlement to putative class members, finding that it was inadequate under the circumstances.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, the derivative actions will be activated. The parties disagree as to when that will occur. Defendants have asserted that the Action must remained stayed until the final disposition of the Barney Action, meaning, the Court’s final approval of the Settlement. Plaintiff’s position is that the Court should lift the stay because the class action plaintiffs agreed to settle the case. The Court has yet to address this issue.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Note 14 - Subsequent Events
The Company has evaluated subsequent events through November 18, 2022, the date of the issuance of the condensed consolidated financial statements, and no subsequent event is identified.
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CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” the negatives of such terms and other terms of similar meaning typically identify forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10K). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 2021 Form 10-K. Unless the context otherwise requires, references in this report to “we,” “us,” “Nova,” “Nova Lifestyle” or the “Company” refer to Nova Lifestyle, Inc. and its subsidiaries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Declaration
The following discussion and analysis are based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”). All references to the third quarter and first nine months of 2022 and 2021 mean the three and nine-month periods ended September 30, 2022 and 2021. In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the company’s business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2021 Form 10-K.
Overview
Nova LifeStyle, Inc. is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail and wholesale as well as online selection and global purchase fulfillment. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStyle also sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.
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Nova LifeStyle’s brand family currently includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.
Our customers principally consist of distributors and retailers with specific geographic territories that deploy middle to high end private label home furnishings which have very little competitive overlap with our specific furnishing products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are properly aligned with our growth strategy. This allows us to continually focus on building both our overall distribution and manufacturing relationships through a deployment of popular, as well as trend-based, furnishing solutions worldwide.
We are a U.S. holding company with no material assets in the U.S. other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential and commercial furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had two former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020 and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which completed the de-registration and liquidation process in January 2021.
On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build our own blockchain technology team. i Design is in the planning stage and has had minimum operations to date. On December 12, 2019, we became the sole shareholder of Nova Living (M) SDN. BHD. (“Nova Malaysia”), a company incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia is to market and sell high-end physiotherapeutic jade mats in Malaysia.
On January 7, 2020, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of $2,500,000. We received the payment on May 11, 2020.
On October 14, 2020, Nova Macao’s offshore license was invalidated by the Macao Trade and Investment Promotion Institute under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao completed de-registration and liquidation process in January 2021 and its business was taken over by Nova HK.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group Limited (“Nova HK”) which was incorporated in Hong Kong on November 6, 2019. This company has had minimal operations. In February 2022, Nova HK also entered a de-registration process and transferred all its assets and business to Nova Malaysia.
Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, Honduras, Panama, Kazakhstan, Asian and Middle Eastern markets.
Due to the recent imposition of significant trade tariffs on importation from China to the United States and the adverse effect such policies have on our operations, we are actively pursuing alternative product lines with positive growth potential. One such area pertains to the health-oriented furniture segment which continues to experience popularity, particularly in Asia. Since the second quarter of 2019, we have developed a line of high-end physiotherapeutic jade mats with China-based manufacturing partners for use in therapy clinics, hospitality, and real estate projects in Asia. We launched our first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019, which, after several COVID-19 related temporary closing, was reopened in October 2021. In April 2022, Malaysia has reopened the border for foreign visitors. However, COVID-19 in Malaysia increased financial vulnerability for those affected households and business, which contributed to significant decrease of sales and risk of continuous sluggish sales. As a result, we further lowered the estimated sales quantities of the inventories during the interim review. During the nine months ended September 30, 2022, we wrote down the inventory of $5.12 million. We will regularly monitor the future demands and jade mats market for impairment consideration. We expect that our flagship showroom/retail store will serve as one of our primary distribution channels in Malaysia. Marketing of jade mats will focus on their premium therapeutic qualities and target health conscious general consumers and professionals. We have limited experience with operations in Southeast Asia and considerable management attention and resources may be required to manage these new markets and product lines. We may be subject to additional risks including credit risk, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.
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Beginning in early 2020, a strain of novel coronavirus (“COVID-19”) has spread globally including the U.S. and Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company’s two showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020. The Los Angeles facility closed on March 16, 2020 and reopened in full operation on June 1, 2020. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business. On August 28, 2020, the Malaysia government extended the shutdown order to all business until March 5, 2021. After the re-opening on March 5, 2021, Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since then. In April 2022, Malaysia has reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in China were closed from the beginning of the Lunar New Year Holiday at the end of January 2020 through the beginning of March 2020. In 2022, there have been outbreaks of the Omicron variant of COVID-19 in Hong Kong and many other cities in China, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities have been imposed by local governments. Although our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in India are open for operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset; and we have experienced and may continue to experience shipping disruptions in the future. Finally, the Company expects that the impact of the COVID-19 outbreak on the United States and world economies will continue to have a material adverse impact on the demand for its products. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.
We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar Outdoors Inc. (“Diamond Bar”) was granted a loan from Cathay Bank in the aggregate amount of $176,294, pursuant to the Paycheck Protection Program. On June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. In July 2021, we completed a registered direct offering of our shares of common stock and received offering gross proceeds of $3,120,622. We currently believe that our financial resources will be adequate to finance our operations through the outbreak. However, in the event that we do need to raise capital in the future, the outbreak-related instability in the securities markets could adversely affect our ability to raise additional capital.
While there can be no assurance, at the present time we expect the outbreak-related circumstances to result in material impairments of our inventory of Jade Mattress in Malaysia that significantly affect management’s judgements in assessing the fair value of our assets.
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Principal Factors Affecting Our Financial Performance
At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2019 Collection in the Las Vegas Market, with a view to attracting a higher-end ultimate customer. We believe these new strategies, will provide us with significant long term growth opportunities. The transition has and is expected to continue to adversely impact our revenue and our net profit in the short-term as we roll out new products and market those products to our existing client base and to new potential customers better suited for the higher end products, and as we assess our new products’ market acceptance. Significant factors that we believe could affect our operating results are the (i) prices of our products to our international retailer and wholesaler customers and their markups to end consumers; (ii) general economic conditions in the U.S., Chinese, and other international markets; and (iii) trade tariffs imposed by the United States on certain products manufactured in China; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) continued significant delays in the receipt of shipments of our products from Asia and increased costs of shipping from Asia. We believe most of our customers are willing to pay for our high quality and stylish products, timely delivery, and strong production capacity at price levels which we expect will allow us to maintain a relatively high gross profit margin for our products. We do not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by the United States on certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in China to third-party manufacturers located in other parts of Asia, such as Vietnam, India and/or Malaysia, countries unaffected by the tariffs. Implementation of a relocation of manufacturing (which by necessity includes an assessment of the factory’s ability to deliver the quantity of the product, in accordance with the Company’s specifications, and in accordance with the Company’s quality control requirements) is time-consuming, but a portion of our manufacturing has been transitioned to Malaysia and India starting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues once the COVID-19 outbreak dissipates. Some of our manufacturing will continue to be performed in China because the intellectual know-how necessary to manufacture certain products is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also allow us at least to maintain our gross profit margins. The markets in North America (excluding the United States) and particularly in Europe remain challenging because such markets are experiencing a slow-down and may be entering a recession due to the COVID-19 pandemic and war in Ukraine.
Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to our accompanying unaudited condensed consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this Management’s Discussion and Analysis.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for Nova LifeStyle and its subsidiaries, Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia and Nova HK.
Use of Estimates
In preparing condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates.
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Accounts Receivable
Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We do not expect to collect receivables greater than one year from the time of sale. Our policy is to maintain an allowance for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We maintained an allowance for bad debt of $3,420 and $1,873 as of September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022 and 2021, bad debts provision (reversal) were $2,376 and ($3,328), respectively; and $1,316 and $262 for the three months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we had gross receivable of $393,363 of which no amount was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns.
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on our historical records and in normal circumstances, we generally receive goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers have been delayed or suspended during the outbreak.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.
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The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the quarter ended September 30, 2022, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer.
Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the nine months and three months ended September 30, 2022 and 2021.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on our condensed consolidated statements of operations.
Foreign Currency Translation and Transactions
The accompanying unaudited condensed consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The Company’s subsidiary with operations in Malaysia uses its local currency, Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is normally the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.
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The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:
| Balance sheet items, except for equity accounts | ||||
| September 30, 2022 | RM 4.64 to 1 | |||
| December 31, 2021 | RM 4.18 to 1 | |||
| Income statement and cash flow items | ||||
| For the nine months ended September 30, 2022 | RM 4.34 to 1 | |||
| For the nine months ended September 30, 2021 | RM 4.13 to 1 |
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions, assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
We determined that our operations constitute a single reportable segment in accordance with ASC 280. We operate exclusively in one business and industry segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the US, Nova HK was a furniture distributor based in Hong Kong focusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Nova HK and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United States and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
New Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did not have any impact on our condensed consolidated financial statement presentation or disclosures.
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In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on our condensed consolidated financial statements.
Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. In March 2022, the FASB issued ASU 2022-02, Topic 326. The ASU eliminates the accounting guidance for trouble debt restructurings by creditors in Subtopic 310-40, and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, the ASU requires disclosure of gross write offs of receivables by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. This ASU is effective for periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2016-13 and ASU 2022-02 will have on our consolidated financial statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Adoption of the ASUs is on a modified retrospective basis. As the Company qualifies as a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2017-04 will have on our consolidated financial statement presentation or disclosures.
We do not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on our financial statement presentation or disclosures.
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Results of Operations
Comparison of Three Months Ended September 30, 2022 and 2021
The following table sets forth the results of our operations for the three months ended September 30, 2022 and 2021. Certain columns may not add due to rounding.
| Three Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Net sales | $ | 3,016,104 | $ | 2,916,571 | ||||||||||||
| Cost of sales | (1,878,361 | ) | (62 | )% | (1,517,032 | ) | (52 | )% | ||||||||
| Gross Profit | 1,137,743 | 38 | % | 1,399,539 | 48 | % | ||||||||||
| Operating expenses | (2,091,741 | ) | (69 | )% | (2,546,381 | ) | (87 | )% | ||||||||
| Loss from operations | (953,998 | ) | (32 | )% | (1,146,842 | ) | (39 | )% | ||||||||
| Other expenses, net | (758,994 | ) | (25 | )% | (82,258 | ) | (3 | )% | ||||||||
| Income tax expenses | - | 0 | % | (167,532 | ) | (6 | )% | |||||||||
| Net loss | (1,712,992 | ) | (57 | )% | (1,396,632 | ) | (48 | )% | ||||||||
Net Sales
Net sales for the three months ended September 30, 2022 were $3.02 million, an increase of 3.4% from $2.92 million for the same period of 2021. This increase in net sales resulted primarily from a 6.1% increase in average selling price, partially offset by a 2.5% decrease in sales volume. Our three largest selling product categories for the three months ended September 30, 2022 were sofas, beds, and chairs, which accounted for approximately 38%, 15% and 12% of sales, respectively. For the three months ended September 30, 2021, the three largest selling categories were sofas, beds, and dining tables, which accounted for approximately 40%, 14% and 8% of sales, respectively.
The $0.10 million increase in net sales for the three months ended September 30, 2022, compared to the same period of 2021, was mainly due to increased sales to other countries. Sales to other countries increased by $182,315 to $250,652 for the three months ended September 30, 2022 from $68,337 for the same period of 2021, primarily due to the increase in direct container sales in other countries. The increase in net sales is partially offset by the decrease in sales to North America of $83,776 to $2.77 million for the three months ended September 30, 2022, compared to $2.85 million for the same period of 2021, such decrease being mainly a result of U.S. tightening monetary policy, reducing the purchasing power of the customers and thus making them less willing to spend in nonfood categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales increased by 23.8% to $1.88 million for the three months ended September 30, 2022, compared to $1.52 million for the same period of 2021. Cost of sales as a percentage of sales increased to 62% for the three months ended September 30, 2022, compared to 52% for the same period of 2021. The increase in cost of sales in dollar term and cost of sales as a percentage of sales is a result of three related factors: (a) our write down of $50,293 of our slow-moving inventory, primarily the products in U.S., to the lower of cost and net realizable value for the three months ended September 30, 2022, compared to no inventory write down for the same period of 2021; (b) the increase in our direct container sales which came with low profit margin; (c) the increase in shipping costs due to global shipping container shortage.
Moreover, total cost of sales excluding our inventory write down of $50,293, increased by 20.5% to $1.83 million for the three months ended September 30, 2022, compared to $1.52 million with no inventory write down for the same period of 2021. Cost of sales as a percentage of sales, excluding our inventory write down of $50,293, increased to 61% for the three months ended September 30, 2022, compared to 52% with no inventory write down for the same period of 2021. This increase primarily resulted from the increase in our direct container sales which came with low profit margin and the increase in shipping costs due to global shipping container shortage.
Gross Profit
Gross profit was $1.14 million for the three months ended September 30, 2022, compared to gross profit of $1.40 million for the same period of 2021, representing a decrease in gross profit of $0.26 million. Our gross profit margin was 38% for the three months ended September 30, 2022, compared to a gross profit margin of 48% for the same period of 2021. The decrease in gross profit margin is a result of two factors: (a) our write down of $50,293 of our slow-moving inventory, primarily the products in U.S., for the three months ended September 30, 2022, compared to no inventory write-down for the same period of 2021; (b) the increase in our direct containers sales which came with low profit margin.
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Operating Expenses
Operating expenses consisted of selling and general and administrative expenses. Operating expenses were $2.09 million for the three months ended September 30, 2022, compared to $2.55 million for the same period of 2021. Selling expenses decreased by 51.4%, or $0.68 million, to $0.64 million for the three months ended September 30, 2022, from $1.32 million for the same period of 2021, primarily due to decreased marketing and advertising expenses. In addition, general and administrative expenses increased by 18.5%, or $0.23 million, to $1.45 million for the three months ended September 30, 2022, from $1.22 million for the same period of 2021, primarily due to an increase in travel expense and consulting fee of $0.26 million and $0.13 million, respectively, while the increase was partially offset by a decrease in legal fees and research and development expenses of $0.16 million and $0.10 million, respectively.
Other Expenses, Net
Other expenses, net, was $0.76 million for the three months ended September 30, 2022, compared to other expenses, net of $82,258 for the same period of 2021, representing an increase in other expenses of $676,736. The increase in other expenses was due primarily to the increase in foreign exchange loss of $706,398 to $708,169 for the three months ended September 30, 2022 from foreign exchange loss of $1,771 for the same period of 2021. The increase in foreign exchange loss was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the Company’s assets in Malaysia. However, the increase in other expenses was partially offset by a decrease in interest expense, net of $29,494 to $2,261 for the three months ended September 30, 2022, compared with $31,755 for the same period of 2021. The decrease in interest expense was mainly because, during the three months ended September 30, 2021, we wrote off interest income for the loan of $1.21 million to an unrelated party with 6% annual interest rate which principal has been fully repaid by such third party on August 13, 2021.
Income Tax Expenses
Income tax expense was $0 for the three months ended September 30, 2022, compared to $167,532 for the same period of 2021. The income tax expenses were primarily related to the foreign-sourced earnings from one of our subsidiaries, Nova HK for the three months ended September 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $1.71 million for the three months ended September 30, 2022, compared to net loss of $1.40 million for the same period of 2021.
Comparison of Nine Months Ended September 30, 2022 and 2021
The following table sets forth the results of our operations for the nine months ended September 30, 2022 and 2021. Certain columns may not add due to rounding.
| Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Net sales | $ | 10,495,097 | $ | 9,798,154 | ||||||||||||
| Cost of sales | (11,377,203 | ) | (108 | )% | (11,025,436 | ) | (113 | )% | ||||||||
| Gross loss | (882,106 | ) | (8 | )% | (1,227,282 | ) | (13 | )% | ||||||||
| Operating expenses | (6,583,022 | ) | (63 | )% | (6,964,266 | ) | (71 | )% | ||||||||
| Loss from operations | (7,465,128 | ) | (71 | )% | (8,191,548 | ) | (84 | )% | ||||||||
| Other expenses, net | (837,418 | ) | (8 | )% | (133,555 | ) | (1 | )% | ||||||||
| Income tax expenses | - | 0 | % | (180,593 | ) | (2 | )% | |||||||||
| Net loss | (8,302,546 | ) | (79 | )% | (8,505,696 | ) | (87 | )% | ||||||||
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Net Sales
Net sales for the nine months ended September 30, 2022 were $10.50 million, an increase of 7.1% from $9.80 million for the same period of 2021. This increase in net sales resulted primarily from a 12.8% increase in average selling price, partially offset by a 5.1% decrease in sales volume. Our three largest selling product categories for the nine months ended September 30, 2022 were sofas, beds, and chairs, which accounted for approximately 40%, 14% and 11% of sales, respectively. For the nine months ended September 30, 2021, the three largest selling categories were sofas, beds and coffee tables, which accounted for approximately 47%, 15% and 7% of sales, respectively.
The $0.70 million increase in net sales for the nine months ended September 30, 2022, compared to the same period of 2021, was mainly due to increased sales to North America and other countries. Sales to North America increased by 6.8% to $9.86 million for the nine months ended September 30, 2022, compared to $9.24 million for the same period of 2021. It was primarily due to the increase in direct container sales as we received more sales orders from our existing customers during nine months ended September 30, 2022. Sales to other countries increased by $0.26 million to $570,683 for the nine months ended September 30, 2022 from $312,601 for the same period of 2021, primarily due to the increase in direct container sales in other countries. However, the increase in net sales was partially offset by the decrease in sales to Asia. Sales to Asia decreased by $186,871 to $61,247 for the nine months ended September 30, 2022, compared to $248,118 for the same period of 2021, primarily due to less sales orders from our customers in Malaysia, as Malaysia has tightened its monetary policy to maintain the stability of Ringgit, which reduced the purchasing power of the consumers and thus making them less willing to spend in nonfood categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales increased by $0.35 million to $11.38 million for the nine months ended September 30, 2022, compared to $11.03 million for the same period of 2021. Cost of sales as a percentage of sales decreased to 108% for the nine months ended September 30, 2022, compared to 113% for the same period of 2021. The increase in cost of sales in dollar term primarily resulted from the increase in our direct container sales which came with low profit margin and the increase in shipping costs due to global shipping container shortage. The decrease in cost of sales as a percentage of sales was due to the decrease in our inventory write down of $0.36 million to $5.17 million for the nine months ended September 30, 2022, compared with $5.53 million for the same period of 2021.
Moreover, total cost of sales excluding our inventory write down of $5.17 million, increased by 12.9% to $6.21 million for the nine months ended September 30, 2022, compared to $5.50 million which excluded our inventory write down of $5.53 million for the same period of 2021. Cost of sales as a percentage of sales, excluding our inventory write down of $5.17 million, increased to 59% for the nine months ended September 30, 2022, compared to 56% which excluded our inventory write down of $5.53 million for the same period of 2021. This increase primarily resulted from the increase in our direct container sales which came with low profit margin and the increase in shipping costs due to global shipping container shortage.
Gross Loss
Gross loss was $0.88 million for the nine months ended September 30, 2022, compared to gross loss of $1.23 million for the same period of 2021, representing a decrease in gross loss of $0.35 million. Our gross loss margin was 8% for the nine months ended September 30, 2022, compared to a gross loss margin of 13% for the same period of 2021. The decrease in gross loss margin is mainly a result of our inventory write down of $5.17 million for the nine months ended September 30, 2022, which was less than our inventory write down of $5.53 million for the same period of 2021. We sold more Jade Mats in Malaysia during the nine months ended September 30, 2022, compared to the same period of 2021.
Operating Expenses
Operating expenses consisted of selling, general and administrative expenses. Operating expenses were $6.58 million for the nine months ended September 30, 2022, compared to $6.96 million for the same period of 2021. Selling expenses decreased by 26.6%, or $0.79 million, to $2.18 million for the nine months ended September 30, 2022, from $2.97 million for the same period of 2021, primarily due to decreased marketing and advertising expenses. The general and administrative expenses increased by 10.2%, or $0.41 million, to $4.40 million for the nine months ended September 30, 2022, from $3.99 million for the same period of 2021, primarily due to an increase in consulting fee and travel expense of $0.37 million and $0.27 million, respectively, while the increase was partially offset by a decrease in legal fees and research and development expenses of $0.23 million and $0.10 million, respectively.
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Other Expenses, Net
Other expenses, net, was $837,418 for the nine months ended September 30, 2022, compared to $133,555 for the same period of 2021, representing an increase in other expenses of $703,863. The increase in other expenses was due primarily to the increase in foreign exchange loss of $677,182 to $644,525 for the nine months ended September 30, 2022 from foreign exchange gain of $32,657 for the same period of 2021. The increase in foreign exchange loss was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the Company’s assets in Malaysia. Besides, the increase in other expenses resulted from a loss on disposal of fixed assets of $36,549 for the nine months ended September 30, 2022, compared to zero loss for the same period of 2021, such loss on disposal of fixed assets being due to the de-registration of our subsidiary Nova HK. However, the increase in other expenses was partially offset by a decrease in financial expense of $12,160 to $148,208 for the nine months ended September 30, 2022, compared with $160,368 for the same period of 2021. The decrease in financial expense was mainly because the Company has stopped accepting PayPal payments from customers since PayPal increased its transaction fees during the nine months ended September 30, 2022.
Income Tax Expenses
Income tax expense was $0 for the nine months ended September 30, 2022, compared to $180,593 for the same period of 2021. The income tax expenses were primarily related to the foreign-sourced earnings from one of our subsidiaries, Nova HK for the nine months ended September 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $8.30 million for the nine months ended September 30, 2022, compared to net loss of $8.51 million for the same period of 2021.
Liquidity and Capital Resources
Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks.
We rely primarily on internally generated cash flow and available working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through offerings of our equity or debt, if and when we determine such offerings are required. As of September 30, 2022, we do not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from sales of products will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months.
We had net working capital of $14,492,833 at September 30, 2022, a decrease of $9,261,723 from net working capital of $23,754,556 at December 31, 2021. The ratio of current assets to current liabilities was 7.55-to-1 at September 30, 2022.
The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (3,453,559 | ) | $ | (3,129,345 | ) | ||
| Investing activities | (5,771 | ) | (155,156 | ) | ||||
| Financing activities | - | 2,760,973 | ||||||
Net cash used in operating activities was $3.45 million for the nine months ended September 30, 2022, an increase in cash outflow of $0.32 million from $3.13 million of cash used in operating activities for the same period of 2021. The increase in cash outflow was attributable primarily to an increase in cash outflow of $1.22 million for inventory to $1.71 million cash outflow for the nine months ended September 30, 2022, compared to $0.49 million cash outflow for the same period of 2021, such increase in cash outflow being mainly due to more product purchases made from our suppliers. Also, there was an increase in cash outflow of $0.63 million for accounts receivable to $0.30 million cash outflow for the nine months ended September 30, 2022, compared to $0.33 million cash inflow for the same period of 2021, such increase in cash outflow being mainly a result of more credit sales in the nine months ended September 30, 2022. The increase in operating cash outflow was partially offset by (i) an increase in cash inflow of $0.61 million for advance to suppliers to $0.66 million cash inflow for the nine months ended September 30, 2022, compared to $56,440 cash inflow for the same period of 2021, such increase in cash inflow being mainly due to less deposits paid to our suppliers with more goods being received from them in the nine months ended September 30, 2022 comparing to the same period in 2021; (ii) an increase in cash inflow of $0.60 million for accounts payable to $0.57 million cash inflow for the nine months ended September 30, 2022, compared to $27,270 cash outflow for the same period of 2021, such increase in cash inflow being mainly due to more purchases made on credit in the nine months ended September 30, 2022.
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Net cash used in investing activities was $5,771 for the nine months ended September 30, 2022, compared to $155,156 for the same period of 2021. We incurred cash outflow of $5,771 from purchase of office equipment during the nine months ended September 30, 2022. For the same period of 2021, we incurred cash outflow of $155,156 from purchase of office equipment and leasehold improvement.
Net cash provided by financing activities was $0 for the nine months ended September 30, 2022, compared to $2.76 million cash inflow for the same period of 2021. During the nine months ended September 30, 2021, we received $2.76 million from equity financing.
As of September 30, 2022, we had gross accounts receivable of $393,363, of which $52,301 was not yet past due and $341,062 was less than 90 days past due. We had an allowance for bad debt of $3,420. As of November 9, 2022, accounts receivable of $98,819 outstanding as of September 30, 2022 had been collected.
All accounts receivable outstanding at December 31, 2021 had been collected during 2022.
As of September 30, 2022 and December 31, 2021, we had advances to suppliers of $42,802 and $707,264, respectively. These supplier prepayments are made for goods before we actually receive them.
For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is 4-6 months after our advance payment. Due to the COVID-19 pandemic, freight transportation of products from our international suppliers has been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments had been made or recorded by us. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts. As of September 30, 2022 and December 31, 2021, no reserve on supplier prepayments had been made or recorded by us.
As of November 9, 2022, 36% of our advances to suppliers outstanding at September 30, 2022 had been delivered to us in the form of purchases of furniture.
Shelf Registration
On October 8, 2020, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The shelf registration statement was declared effective on October 15, 2020. On July 23, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 1,114,508 shares of common stock. The shares were offered and sold by the Company pursuant to the effective shelf registration statement on Form S-3. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021.
Other Long-Term Liabilities
As of September 30, 2022, we recorded long-term taxes payable of $1.16 million, consisting of an income tax payable of $1.16 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.
We elected to pay the one-time transition tax over the eight years commencing April 2018.
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Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity 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 that is material to shareholders.
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2022. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during or subsequent to the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently appointed as lead plaintiffs and, on June 18, 2019, filed an Amended Complaint.
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Plaintiffs seek to represent a class of entities acquiring Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in its planned $460 million senior care center in China; and (2) inflated sales in 2016 and 2017 by recognizing significant sales to two allegedly non-existent customers. Plaintiffs claim that the falsity of these representations was exposed in a blog posted on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers.
On March 8, 2022, the parties to the Barney Action filed a Stipulation of Settlement (“Settlement”) with the Court. Under the terms of the Settlement, and without admitting to any wrongdoing, fault, or liability, the Company agreed to a payment of $750,000 to completely resolve the Barney Action. The $750,000 would be funded by the remainder of any retention under applicable directors and officer liability insurance with the remainder paid by the directors and officer liability insurer. The settlement provides for the class members’ complete release of all claims against the Company and the named defendants with respect to any of the matters alleged in the litigation. The Settlement was subject to various conditions, including preliminary approval by the Court, notice to all class members, an opt-out period, and a final hearing and approval by the Court.
By Memorandum Opinion and Order dated August 29, 2022, the Court denied the Barney plaintiffs’ unopposed Motion to Certify a Settlement Class and to Approve the Settlement. The Court held that plaintiffs had not met their burden of establishing the prerequisites to class certification of adequacy of class counsel, numerosity, and the superiority of class certification in fairly and efficiently adjudicating the controversy. The Court similarly concluded that plaintiffs had failed to make a threshold showing that the settlement was fair and adequate. Finally, the Court rejected plaintiffs’ proposed plan for providing notice of the settlement to putative class members, finding that it was inadequate under the circumstances.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, the derivative actions will be activated. The parties disagree as to when that will occur. Defendants have asserted that the Action must remained stayed until the final disposition of the Barney Action, meaning, the Court’s final approval of the Settlement. Plaintiff’s position is that the Court should lift the stay because the class action plaintiffs agreed to settle the case. The Court has yet to address this issue.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
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Item 6. Exhibits
EXHIBIT INDEX
† Filed herewith
‡ Furnished herewith
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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 thereunto duly authorized.
| NOVA LIFESTYLE, INC. | ||
| (Registrant) | ||
| Date: November 18, 2022 | By: | /s/ Thanh H. Lam |
| Thanh H. Lam | ||
| Chairperson and Chief Executive Officer | ||
|
(Principal Executive Officer) | ||
| Date: November 18, 2022 | /s/ Jeffery Chuang | |
| Jeffery Chuang | ||
| Chief Financial Officer | ||
|
(Principal Financial Officer and Principal Accounting Officer) | ||
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