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, |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 011-36259
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) |
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.
YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES ☒ 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 ☒
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 the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date: 27,383,6485,556,554 shares of common stock outstanding as of November 9, 2017.19, 2020.
Nova LifeStyle, Inc.
Page | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | 1 | |
1 | ||
3 | ||
4 | ||
6 | ||
8 | ||
Item 2. | 27 | |
Item 3. | 39 | |
Item 4. | 39 | |
PART II. OTHER INFORMATION | ||
Item 1. | 40 | |
Item | 42 | |
43 | ||
PART I. FINANCIAL INFORMATION
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
AS OF SEPTEMBER 30, 20172020 (UNAUDITED) AND DECEMBER 31, 2016
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 802,037 | $ | 2,587,743 | ||||
| Accounts receivable, net | 36,938,819 | 42,102,761 | ||||||
| Advance to suppliers | 21,951,040 | 13,669,752 | ||||||
| Inventories | 6,720,649 | 2,781,123 | ||||||
| Assignment fee receivable (Note 3) | -- | 1,250,000 | ||||||
| Receivable from an unrelated party (Note 7) | -- | 7,000,000 | ||||||
| Prepaid expenses and other receivables | 315,833 | 642,891 | ||||||
| Taxes receivable | 14,094 | 14,893 | ||||||
| Total Current Assets | 66,742,472 | 70,049,163 | ||||||
| Noncurrent Assets | ||||||||
| Plant, property and equipment, net | 158,412 | 171,276 | ||||||
| Lease deposit | 43,260 | 43,260 | ||||||
| Goodwill | 218,606 | 218,606 | ||||||
| Intangible assets, net | 4,573,612 | 5,686,623 | ||||||
| Deferred tax asset | 1,498,631 | 874,759 | ||||||
| Total Noncurrent Assets | 6,492,521 | 6,994,524 | ||||||
| Total Assets | $ | 73,234,993 | $ | 77,043,687 | ||||
September 30, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 9,350,615 | $ | 7,423,198 | ||||
Accounts receivable, net | 630,759 | 390,241 | ||||||
Advance to suppliers | 237,361 | 27,745,184 | ||||||
Inventories | 48,458,672 | 29,724,665 | ||||||
Prepaid expenses and other receivables | 389,539 | 173,607 | ||||||
Current assets of discontinued operations | - | 3,041,976 | ||||||
Total Current Assets | 59,066,946 | 68,498,871 | ||||||
Noncurrent Assets | ||||||||
Plant, property and equipment, net | 459,362 | 136,512 | ||||||
Operating lease right-of-use assets, net | 2,521,209 | 2,658,344 | ||||||
Lease deposit | 72,769 | 43,260 | ||||||
Goodwill | 218,606 | 218,606 | ||||||
Deferred tax assets | 117,952 | - | ||||||
Total Noncurrent Assets | 3,389,898 | 3,056,722 | ||||||
Total Assets | $ | 62,456,844 | $ | 71,555,593 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 20172020 (UNAUDITED) AND DECEMBER 31, 2016
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 162,147 | $ | 2,368,775 | ||||
| Line of credit | - | 7,977,841 | ||||||
| Advance from customers | 19,298 | 513,880 | ||||||
| Accrued liabilities and other payables | 726,501 | 780,960 | ||||||
| Total Current Liabilities | 907,946 | 11,641,456 | ||||||
| Noncurrent Liabilities | ||||||||
| Line of credit | 3,322,040 | - | ||||||
| Income tax payable | 2,009,825 | 2,136,788 | ||||||
| Total Noncurrent Liabilities | 5,331,865 | 2,136,788 | ||||||
| Total Liabilities | 6,239,811 | 13,778,244 | ||||||
| Contingencies and Commitments | ||||||||
| Stockholders’ Equity | ||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized, 27,909,843 and 27,309,695 shares issued and outstanding; | 27,910 | 27,309 | ||||||
| Additional paid-in capital | 38,309,891 | 36,885,462 | ||||||
| Statutory reserves | 6,241 | 6,241 | ||||||
| Retained earnings | 28,651,140 | 26,346,431 | ||||||
| Total Stockholders’ Equity | 66,995,182 | 63,265,443 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 73,234,993 | $ | 77,043,687 | ||||
September 30, 2020 | December 31, 2019 | |||||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 597,593 | $ | 417,918 | ||||
Operating lease liability, current | 665,440 | 481,068 | ||||||
| Advance from customers | 53,902 | 26,450 | ||||||
Accrued liabilities and other payables | 360,307 | 301,764 | ||||||
Other loans | 316,096 | - | ||||||
Income tax payable | 186,960 | 22,055 | ||||||
Current liabilities of discontinued operations | - | 215,445 | ||||||
Total Current Liabilities | 2,180,298 | 1,464,700 | ||||||
Noncurrent Liabilities | ||||||||
Other loans | 150,000 | - | ||||||
Operating lease liability, non-current | 1,905,562 | 2,211,061 | ||||||
Income tax payable | 1,642,176 | 1,833,286 | ||||||
Total Noncurrent Liabilities | 3,697,738 | 4,044,347 | ||||||
Total Liabilities | 5,878,036 | 5,509,047 | ||||||
Contingencies and Commitments | ||||||||
Stockholders' Equity | ||||||||
Common stock, $0.001 par value; 15,000,000 shares authorized, 5,762,604 and 5,741,604 shares issued and outstanding; as of September 30, 2020 and December 31, 2019, respectively | 5,762 | 5,741 | ||||||
Additional paid-in capital | 40,367,285 | 40,221,062 | ||||||
Statutory reserves | 6,241 | 6,241 | ||||||
Accumulated other comprehensive income | 417,774 | - | ||||||
Treasury stock, at cost, 172,870 shares as of September 30, 2020 and December 31, 2019 | (616,193 | ) | (616,193 | ) | ||||
Retained earnings | 16,397,939 | 26,429,695 | ||||||
Total Stockholders' Equity | 56,578,808 | 66,046,546 | ||||||
Total Liabilities and Stockholders' Equity | $ | 62,456,844 | $ | 71,555,593 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 20172020 AND 20162019 (UNAUDITED)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Net Sales | $ | 70,813,414 | $ | 72,748,972 | $ | 33,222,625 | $ | 30,538,918 | ||||||||
| Cost of Sales | 58,741,122 | 62,091,435 | 27,323,972 | 25,935,832 | ||||||||||||
| Gross Profit | 12,072,292 | 10,657,537 | 5,898,653 | 4,603,086 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | 2,690,342 | 4,358,206 | 1,003,906 | 2,050,201 | ||||||||||||
| General and administrative expenses | 7,608,323 | 4,756,118 | 2,124,614 | 1,491,684 | ||||||||||||
| Total Operating Expenses | 10,298,665 | 9,114,324 | 3,128,520 | 3,541,885 | ||||||||||||
| Income From Operations | 1,773,627 | 1,543,213 | 2,770,133 | 1,061,201 | ||||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Non-operating income (expense, net) | 797 | 40,994 | -- | 16,623 | ||||||||||||
| Foreign exchange transaction loss | (324 | ) | (5,578 | ) | (94 | ) | (3,281 | ) | ||||||||
| Interest expense, net | (133,093 | ) | (241,202 | ) | (40,932 | ) | (96,535 | ) | ||||||||
| Financial expense | (86,335 | ) | (88,098 | ) | (34,508 | ) | (33,733 | ) | ||||||||
| Total Other Expenses, Net | (218,955 | ) | (293,884 | ) | (75,534 | ) | (116,926 | ) | ||||||||
| Income Before Income Taxes and Discontinued Operations | 1,554,672 | 1,249,329 | 2,694,599 | 944,275 | ||||||||||||
| Income Tax (Benefit) Expense | (750,037 | ) | 60,063 | (262,034 | ) | (100,656 | ) | |||||||||
| Income From Continuing Operations | 2,304,709 | 1,189,266 | 2,956,633 | 1,044,931 | ||||||||||||
| Loss From Discontinued Operations, net of tax | -- | (1,476,572 | ) | -- | (743,594 | ) | ||||||||||
| Net Income (Loss) | 2,304,709 | (287,306 | ) | 2,956,633 | 301,337 | |||||||||||
| Other Comprehensive Loss | ||||||||||||||||
| Foreign currency translation | -- | (420,752 | ) | -- | (98,638 | ) | ||||||||||
| Comprehensive Income (Loss) | $ | 2,304,709 | $ | (708,058 | ) | $ | 2,956,633 | $ | 202,699 | |||||||
| Basic weighted average shares outstanding | 27,570,425 | 24,937,069 | 27,846,921 | 25,558,604 | ||||||||||||
| Diluted weighted average shares outstanding | 27,704,406 | 24,937,069 | 27,980,629 | 25,558,604 | ||||||||||||
| Income from continuing operations per share of common stock | ||||||||||||||||
| Basic | $ | 0.08 | $ | 0.05 | $ | 0.11 | $ | 0.04 | ||||||||
| Diluted | $ | 0.08 | $ | 0.05 | $ | 0.11 | $ | 0.04 | ||||||||
| Loss from discontinued operations per share of common stock | ||||||||||||||||
| Basic | $ | -- | $ | (0.06 | ) | $ | -- | $ | (0.03 | ) | ||||||
| Diluted | $ | -- | $ | (0.06 | ) | $ | -- | $ | (0.03 | ) | ||||||
| Net income (loss) per share of common stock | ||||||||||||||||
| Basic | $ | 0.08 | $ | (0.01 | ) | $ | 0.11 | $ | 0.01 | |||||||
| Diluted | $ | 0.08 | $ | (0.01 | ) | $ | 0.11 | $ | 0.01 | |||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net Sales | $ | 7,813,819 | $ | 19,459,617 | $ | 3,315,673 | $ | 7,690,282 | ||||||||
Cost of Sales | 12,753,072 | 15,286,952 | 9,905,852 | 6,125,892 | ||||||||||||
Gross (Loss) Profit | (4,939,253 | ) | 4,172,665 | (6,590,179 | ) | 1,564,390 | ||||||||||
Operating Expenses | ||||||||||||||||
Selling expenses | 1,100,679 | 1,192,581 | 523,364 | 380,829 | ||||||||||||
General and administrative expenses | 3,562,432 | 4,357,702 | 1,129,413 | 1,455,790 | ||||||||||||
Total Operating Expenses | 4,663,111 | 5,550,283 | 1,652,777 | 1,836,619 | ||||||||||||
Loss From Operations | (9,602,364 | ) | (1,377,618 | ) | (8,242,956 | ) | (272,229 | ) | ||||||||
Other Income (Expenses) | ||||||||||||||||
Non-operating income, net | 38,025 | 37,915 | - | - | ||||||||||||
Foreign exchange transaction loss | (142,143 | ) | (247 | ) | (607 | ) | (168 | ) | ||||||||
Interest income (expense), net | 21,618 | 24,820 | (644 | ) | 399 | |||||||||||
Financial expense | (113,477 | ) | (115,925 | ) | (51,064 | ) | (38,167 | ) | ||||||||
Total Other Expenses, Net | (195,977 | ) | (53,437 | ) | (52,315 | ) | (37,936 | ) | ||||||||
Loss Before Income Taxes and Discontinued operations | (9,798,341 | ) | (1,431,055 | ) | (8,295,271 | ) | (310,165 | ) | ||||||||
Income Tax Benefit (Expense) | 93,116 | (229,170 | ) | 118,261 | 11,915 | |||||||||||
Loss From Continuing Operations | (9,705,225 | ) | (1,660,225 | ) | (8,177,010 | ) | (298,250 | ) | ||||||||
(Loss) Income From Discontinued Operations | (326,531 | ) | 1,078,361 | - | (97,898 | ) | ||||||||||
Net Loss | (10,031,756 | ) | (581,864 | ) | (8,177,010 | ) | (396,148 | ) | ||||||||
Other Comprehensive Income | ||||||||||||||||
Foreign currency translation | 417,774 | - | 223,881 | - | ||||||||||||
Net Loss and Comprehensive Loss | (9,613,982 | ) | (581,864 | ) | (7,953,129 | ) | (396,148 | ) | ||||||||
Basic and Diluted weighted average shares outstanding | 5,579,088 | 5,716,781 | 5,585,734 | 5,677,220 | ||||||||||||
(Loss) Income from continuing operations per share of common stock | ||||||||||||||||
Basic and diluted | $ | (1.74 | ) | $ | (0.29 | ) | $ | (1.46 | ) | $ | (0.05 | ) | ||||
(Loss) Income from discontinued operations per share of common stock | ||||||||||||||||
Basic and diluted | $ | (0.06 | ) | $ | 0.19 | $ | - | $ | (0.02 | ) | ||||||
Net (loss) income per share of common stock | ||||||||||||||||
Basic and diluted | $ | (1.80 | ) | $ | (0.10 | ) | $ | (1.46 | ) | $ | (0.07 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| Cash Flows From Operating Activities | ||||||||
| Net income from continuing operations | $ | 2,304,709 | $ | 1,189,266 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,143,319 | 462,194 | ||||||
| Deferred tax benefit | (623,872 | ) | -- | |||||
| Stock compensation expense | 1,773,537 | 1,216,765 | ||||||
| Changes in bad debt allowance | 203,905 | 33,818 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 4,960,037 | (558,573 | ) | |||||
| Advance to suppliers | (8,281,288 | ) | (3,613,765 | ) | ||||
| Inventories | (3,939,526 | ) | 241,611 | |||||
| Other current assets | (21,452 | ) | (711,727 | ) | ||||
| Accounts payable | (2,206,628 | ) | 129,278 | |||||
| Advance from customers | (494,582 | ) | 584,968 | |||||
| Accrued liabilities and other payables | (54,458 | ) | (325,799 | ) | ||||
| Taxes payable | (126,163 | ) | 52,864 | |||||
| Net Cash Used in Continuing Operations | (5,362,462 | ) | (1,299,100 | ) | ||||
| Net Cash Used in Discontinued Operations | -- | (166,148 | ) | |||||
| Net Cash Used in Operating Activities | (5,362,462 | ) | (1,465,248 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Assignment fee received | 1,250,000 | -- | ||||||
| Purchase of property and equipment | (17,443 | ) | (7,272 | ) | ||||
| Cash received from Buyer | -- | 5,500,000 | ||||||
| Advances to unrelated parties | (8,835,000 | ) | ||||||
| Repayment from unrelated parties | 15,835,000 | -- | ||||||
| Net Cash Provided by Continuing Operations | 8,232,557 | 5,492,728 | ||||||
| Net Cash Used in Discontinued Operations | -- | (218,170 | ) | |||||
| Net Cash Provided by Investing Activities | 8,232,557 | 5,274,558 | ||||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from line of credit and bank loan | 36,881,842 | 29,828,074 | ||||||
| Repayment to line of credit and bank loan | (41,537,643 | ) | (29,301,699 | ) | ||||
| Proceeds from warrants exercised | -- | 203,250 | ||||||
| Net Cash (Used in) Provided by Continuing Operations | (4,655,801 | ) | 729,625 | |||||
| Net Cash Provided by Discontinued Operations | - | 319,762 | ||||||
| Net Cash (Used in) Provided by Financing Activities | (4,655,801 | ) | 1,049,387 | |||||
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 20172020 AND 20162019 (UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | -- | (3,128 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (1,785,706 | ) | 4,855,569 | |||||
| Cash and cash equivalents, beginning of period | 2,587,743 | 988,029 | ||||||
| Cash and cash equivalents, end of period | $ | 802,037 | $ | 5,843,598 | ||||
| Analysis of cash and cash equivalents | ||||||||
| Included in cash and cash equivalents per consolidated balance sheets | $ | 802,037 | $ | 5,718,601 | ||||
| Included in assets of discontinued operations | - | 124,997 | ||||||
| Cash and cash equivalents, end of period | $ | 802,037 | $ | 5,843,598 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Continuing operations: | ||||||||
| Cash paid during the period for: | ||||||||
| Income tax payments | $ | -- | $ | 7,200 | ||||
| Interest expense | $ | 159,686 | $ | 371,036 | ||||
| Discontinued operations: | ||||||||
| Cash paid during the period for: | ||||||||
| Income tax payments | $ | -- | $ | -- | ||||
| Interest expense | $ | -- | $ | -- | ||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common stock | Paid | Treasury | Comprehensive | Statutory | Retained | Stockholders' | ||||||||||||||||||||||||||
Shares | Amount | in Capital | Stock | Income | Reserve | Earnings | Equity | |||||||||||||||||||||||||
Balance at beginning of period | 5,756,104 | $ | 5,756 | $ | 40,322,661 | $ | (616,193 | ) | $ | 193,893 | $ | 6,241 | $ | 24,574,949 | $ | 64,487,307 | ||||||||||||||||
Stock issued to employees | 1,500 | 1 | 3,194 | - | - | - | - | 3,195 | ||||||||||||||||||||||||
Stock issued to consultants | 5,000 | 5 | 12,745 | - | - | - | - | 12,750 | ||||||||||||||||||||||||
Stock options vested to board of directors and employees | - | - | 28,685 | - | - | - | - | 28,685 | ||||||||||||||||||||||||
Foreign currency translation gain | - | - | - | - | 223,881 | - | - | 223,881 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (8,177,010 | ) | (8,177,010 | ) | ||||||||||||||||||||||
Balance at end of period | 5,762,604 | $ | 5,762 | $ | 40,367,285 | $ | (616,193 | ) | $ | 417,774 | $ | 6,241 | $ | 16,397,939 | $ | 56,578,808 | ||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common stock | Paid | Treasury | Comprehensive | Statutory | Retained | Stockholders' | ||||||||||||||||||||||||||
Shares | Amount | in Capital | Stock | Income | Reserve | Earnings | Equity | |||||||||||||||||||||||||
Balance at beginning of period | 5,755,167 | $ | 5,755 | $ | 40,162,403 | $ | (110,034 | ) | $ | - | $ | 6,241 | $ | 34,844,703 | $ | 74,909,068 | ||||||||||||||||
Stock issued to employees | 1,500 | 2 | 5,773 | - | - | - | - | 5,775 | ||||||||||||||||||||||||
Stock issued to consultants | 16,935 | 17 | 67,483 | - | - | - | - | 67,500 | ||||||||||||||||||||||||
Stock options vested to board of directors and employees | - | - | 69,185 | - | - | - | - | 69,185 | ||||||||||||||||||||||||
Common stock repurchased | - | - | - | (405,421 | ) | - | - | - | (405,421 | ) | ||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (396,148 | ) | (396,148 | ) | ||||||||||||||||||||||
Balance at end of period | 5,773,602 | $ | 5,774 | $ | 40,304,844 | $ | (515,455 | ) | $ | - | $ | 6,241 | $ | 34,448,555 | $ | 74,249,959 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common stock | Paid | Treasury | Comprehensive | Statutory | Retained | Stockholders' | ||||||||||||||||||||||||||
Shares | Amount | in Capital | Stock | Income | Reserve | Earnings | Equity | |||||||||||||||||||||||||
Balance at beginning of period | 5,741,604 | $ | 5,741 | $ | 40,221,062 | $ | (616,193 | ) | $ | - | $ | 6,241 | $ | 26,429,695 | $ | 66,046,546 | ||||||||||||||||
Stock issued to employees | 6,000 | 6 | 12,775 | - | - | - | - | 12,781 | ||||||||||||||||||||||||
Stock issued to consultants | 15,000 | 15 | 38,235 | - | - | - | - | 38,250 | ||||||||||||||||||||||||
Stock options vested to board of directors and employees | - | - | 95,213 | - | - | - | - | 95,213 | ||||||||||||||||||||||||
Foreign currency translation gain | - | - | - | - | 417,774 | - | - | 417,774 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (10,031,756 | ) | (10,031,756 | ) | ||||||||||||||||||||||
Balance at end of period | 5,762,604 | $ | 5,762 | $ | 40,367,285 | $ | (616,193 | ) | $ | 417,774 | $ | 6,241 | $ | 16,397,939 | $ | 56,578,808 | ||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common stock | Paid | Treasury | Comprehensive | Statutory | Retained | Stockholders' | ||||||||||||||||||||||||||
Shares | Amount | in Capital | Stock | Income | Reserve | Earnings | Equity | |||||||||||||||||||||||||
Balance at beginning of period | 5,713,330 | $ | 5,713 | $ | 39,864,003 | $ | - | $ | - | $ | 6,241 | $ | 35,030,419 | $ | 74,906,376 | |||||||||||||||||
Stock issued to employees | 4,500 | 5 | 17,321 | - | - | - | - | 17,326 | ||||||||||||||||||||||||
Stock issued to consultants | 55,772 | 56 | 212,444 | - | - | - | - | 212,500 | ||||||||||||||||||||||||
Stock options vested to board of directors and employees | - | - | 211,076 | - | - | - | - | 211,076 | ||||||||||||||||||||||||
Common stock repurchased | - | - | - | (515,455 | ) | - | - | - | (515,455 | ) | ||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (581,864 | ) | (581,864 | ) | ||||||||||||||||||||||
Balance at end of period | 5,773,602 | $ | 5,774 | $ | 40,304,844 | $ | (515,455 | ) | $ | - | $ | 6,241 | $ | 34,448,555 | $ | 74,249,959 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (10,031,756 | ) | $ | (581,864 | ) | ||
Net (loss) income from discontinued operations | (326,531 | ) | 1,078,361 | |||||
Net loss from continuing operations | $ | (9,705,225 | ) | $ | (1,660,225 | ) | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 42,805 | 27,548 | ||||||
| Inventories write-down | 7,767,910 | - | ||||||
Amortization of operating lease right-of-use assets | 437,461 | 27,529 | ||||||
Deferred tax benefit | (117,952 | ) | 436,449 | |||||
Stock compensation expense | 143,049 | 451,724 | ||||||
Changes in bad debt allowance | 2,429 | (214,610 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (242,947 | ) | 58,906,375 | |||||
Advance to suppliers | 27,507,384 | (26,290,956 | ) | |||||
Inventories | (26,501,478 | ) | (18,974,127 | ) | ||||
Operating lease liabilities | (422,511 | ) | - | |||||
Other current assets | (243,402 | ) | (291,141 | ) | ||||
Accounts payable | 179,675 | (3,687,892 | ) | |||||
Advance from customers | 27,452 | (16,783 | ) | |||||
Accrued liabilities and other payables | 59,570 | (449,219 | ) | |||||
Taxes payable | (26,105 | ) | (1,005,567 | ) | ||||
Net Cash (Used in) Provided by Continuing Operations | (1,091,885 | ) | 7,259,105 | |||||
Net Cash Provided by Discontinued Operations | - | 455,167 | ||||||
Net Cash (Used in) Provided by Operating Activities | (1,091,885 | ) | 7,714,272 | |||||
Cash Flows From Investing Activities | ||||||||
Cash received from sales of subsidiary, net of cash disposed of | 1,037,800 | |||||||
Purchase of property and equipment | (360,084 | ) | (25,902 | ) | ||||
Net Cash Provided by (Used in) Continuing Operations | 677,716 | (25,902 | ) | |||||
Net Cash Provided by Discontinued Operations | - | - | ||||||
Net Cash Provided by (Used in) Investing Activities | 677,716 | (25,902 | ) | |||||
Cash Flows From Financing Activities | ||||||||
Proceeds from line of credit and bank loan | - | 17,512,205 | ||||||
Repayment to line of credit and bank loan | - | (23,760,366 | ) | |||||
Proceeds from other loans | 466,096 | - | ||||||
Repurchase of treasury stock | - | (515,455 | ) | |||||
Net Cash Provided by (Used in) Continuing Operations | 466,096 | (6,763,616 | ) | |||||
Net Cash Provided by Discontinued Operations | - | - | ||||||
Net Cash Provided by (Used in) Financing Activities | $ | 466,096 | $ | (6,763,616 | ) | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
2020 | 2019 | |||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | 413,290 | $ | - | ||||
Net increase in cash and cash equivalents | 465,217 | 924,754 | ||||||
Cash and cash equivalents, beginning of period | 8,885,398 | 890,408 | ||||||
Cash and cash equivalents, end of period | $ | 9,350,615 | $ | 1,815,162 | ||||
Analysis of cash and cash equivalents | ||||||||
Included in cash and cash equivalents per consolidated balance sheets | $ | 9,350,615 | $ | 713,138 | ||||
Included in assets of discontinued operations | - | 1,102,024 | ||||||
Cash and cash equivalents, end of period | $ | 9,350,615 | $ | 1,815,162 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Continuing operations: | ||||||||
Cash paid during period for: | ||||||||
Income tax payments | $ | 55,000 | $ | 800,000 | ||||
Interest expense | $ | 6,188 | $ | 38,606 | ||||
Non-cash financing activities: | ||||||||
Operating lease assets obtained in exchange for operating lease obligation | $ | - | $ | - | ||||
Discontinued operations: | ||||||||
Cash paid during period for: | ||||||||
Income tax payments | $ | - | $ | - | ||||
Interest expense | $ | - | $ | - | ||||
The accompanying notes are n integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 20172020 AND 20162019 (UNAUDITED)
Note 1 - Organization and Description of 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 ourits subsidiaries through which we market, designit markets, designs and sellsells furniture worldwide: Nova Furniture Limited in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. in Samoa (“Nova Samoa”), Bright Swallow International Group Limited (“Bright Swallow” or “BSI”), Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”), and Diamond Bar Outdoors, Inc. (“Diamond Bar”) and Nova Living (M) SDN. BHD. (“Nova Malaysia”).
Nova Macao was organized under the laws of Macao on May 20, 2006, and is a wholly owned subsidiary of Nova Furniture. Diamond Bar doing business as Diamond Sofa, was incorporated in California on June 15, 2000. Nova Macao is a trading company, importing, marketing and selling products designed and manufactured by Nova Furniture (Dongguan) Co., Ltd. (“Nova Dongguan”) and third partythird-party manufacturers for the U.S. and international markets. On October 14, 2020, the Company closed down Nova Macao due to the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region which stipulated that the current offshore licenses which are not expired or revoked before 1 January 2021 shall expire from that date. Diamond Bar markets and sells products manufactured by third partythird-party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market. On April 24, 2013, the Company completed the acquisition of Bright Swallow, an established furniture company with a global client base.
On December 7, 2017, Nova LifeStyle, Inc. 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 former subsidiaries,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 to date.
On December 12, 2019, Nova Dongguan,LifeStyle, Inc. acquired Nova Dongguan Chinese Style Furniture MuseumLiving (M) SDN. BHD (“Nova Museum”Malaysia’), which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition is to market and Dongguan Ding Nuo Household Products Co., Ltd. (“Ding Nuo”), was consummatedsell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.
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 $2.50 million, pursuant to a formal agreement entered into on October 25, 2016, and as a result, they are now accounted forJanuary 7, 2020. The Company received the payment on May 11, 2020. As of September 30, 2020, operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. Accordingly, assets, and liabilities, revenues, and expenses and cash flows related to the business of these subsidiariesBright Swallow have been appropriately reclassified in the accompanyingcondensed consolidated financial statements as discontinued operations for all periods presented. Additional information with respect to the sale of these subsidiariesBright Swallow is presented at Note 3.
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, BSI and BSI. The “Company” may also from time to time in these Notes include the Company’s former subsidiaries, Nova Furniture BVI, Nova Dongguan, Nova Museum and Ding Nuo.
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, 20172020 and for the nine and three month periods ended September 30, 20172020 and 20162019 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 not been included.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, 2016,2019, previously filed with the SEC on April 14, 2017.
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, 2017,2020, its interim condensed consolidated results of operations and cash flows for the nine and three month periods ended September 30, 20172020 and 2016,2019, 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.
Beginning in 2020, a strain of novel coronavirus (“COVID-19”) has spread globally and, at this point, the extent to which COVID-19’s adversely impact on the operations of the Company is material. The extent of the adverse impact of COVID-19 on the Company's future business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of testing and treatments, and government stimulus measures. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. During the nine months ended September 30, 2020, Nova Living had not been able to operate in full capacity due to Malaysia government’s shut down orders which resulted sales lagging and slow-moving inventories.
Reverse split
On December 18, 2019, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of December 20, 2019, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), was effected. All references to shares and per share data have been retroactively restated to reflect such split.
Use of Estimates
In preparing condensed 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 condensed 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.goodwill, and loss contingencies. Actual results could differ from those estimates.
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 assetassets 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, 20172020 and 2016,2019, the Company concluded there was no impairment of goodwill of Diamond Bar.
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.
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, 2017 | $ | 3,019,931 | ||
| Provision for the period | 203,905 | |||
| Write off | (3,106,474 | ) | ||
| Balance at September 30, 2017 | $ | 117,362 |
Balance at January 1, 2020 | $ | 3,942 | ||
Provision for the period | 2,458 | |||
Reversal – recoveries by cash | (29 | ) | ||
Balance at September 30, 2020 | $ | 6,371 |
During the nine months ended September 30, 2016,2020 and 2019, bad debtdebts expense (reversal) expense from continuing operations were $2,429 and discontinued operations were $33,818($214,610); and $552,611, respectively. During$2,458 and $5,136 for the three months ended September 30, 2016,2020 and 2019, respectively. During the nine and three months ended September 30, 2020 and 2019, bad debt expenseprovision and write-offs from continuing operations and discontinued operations were $55,294 and $539,327, respectively.
Advances to Suppliers
Advances to suppliers are reported net of allowance when the Company determines that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on its historical record and actual practice,in normal circumstances, the Company always receivedreceives goods within 5 to 9 months from the date the advance payment is made. 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 the Company. Any provisions for allowance for advanceadvances to suppliers, if deemed necessary, will beare included in general and administrative expenses in the condensed consolidated statements of income.
Inventories
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Management comparesWrite-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For the costnine and three months ended September 30, 2020, the Company wrote-down $7.77 million of slow-moving inventory. The inventory write-down is included in “Cost of Sales” from continuing operations in the consolidated statements of comprehensive income. There were no write-downs of inventories withfor the net realizable valuenine and an allowance is made for writing down their inventories to market value, if lower. The Company did not record any write-downs of inventory atthree months ended September 30, 2017 and 2016.2019.
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;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 10%no salvage value and estimated lives as follows:
Computer and office equipment | 5 - 10 years |
Decoration and renovation | 5 - 10 years |
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 review,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 believes that,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 September 30, 2017the asset group asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and December 31, 2016, there was no significant impairmentlosses on the subsequent reissuance of its long-lived assets.
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 expenseexpenses from continuing operations was $364,105were $19,851 and $94,839$85,124 for the nine months ended September 30, 20172020 and 2016,2019, respectively; and $0$458 and $35,174$29,852 for the three months ended September 30, 20172020 and 2016,2019, respectively. Research and development expense from the Company’s discontinued operations was $588,790 and $179,643 forDuring the nine and three months ended September 30, 2016, 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 actual effective tax rate of continuing operations of 48.24% for the nine months ended September 30, 2017 differs from the U.S. federal statutory tax rate, primarily as a result of tax liability reserves from uncertain tax positions.
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 approximately ($26,000)differences between the tax bases of assets and $36,000, respectively. 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.
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 Outdoors, Inc. (“Diamond Bar”) are subject to U.S. federal and state income taxes. Nova Furniture LimitedBVI and Bright Swallow areInternational Group Limited (“BSI”) were incorporated in the BVI.BVI, Nova Macao isSamoa was incorporated in Macao.Samoa, and Nova Samoa isMacau was incorporated in Oceania.Macau. There is no income tax for companies domiciled in the BVI, Oceania or Macao.Samoa and Macau. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisionprovisions related to the BVI, Samoa and MacaoMacau tax jurisdictionjurisdictions where Nova Furniture BVI and BSI, Nova Samoa and Nova MacaoMacau are domiciled. Nova MacaoLiving (M) SDN. BHD, (“Nova Malaysia”) is anincorporated in Malaysia and is subject to Malaysia income tax-exempt entity incorporatedtaxes.
The Tax Cuts and domiciled in Macao.
A reconciliation of the January 1, 2017,2020 through September 30, 2017,2020 amount of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) is as follows:
| Gross UTB | ||||
Beginning Balance – January 1, 2017 | $ | 1,642,381 | ||
| Decrease in unrecorded tax benefits related to the Company’s continuing operations | (160,230 | ) | ||
| Exchange rate adjustment | (85,881 | ) | ||
Ending Balance – September 30, 2017 | $ | 1,396,270 | ||
Gross UTB | ||||
2020 | ||||
Balance – January 1, 2020 | $ | 12,547 | ||
Decrease in unrecorded tax benefits taken, related to the Company’s continuing operations | - | |||
Foreign exchange adjustment | - | |||
Balance – September 30, 2020 | $ | 12,547 | ||
At September 30, 2017,2020 and December 31, 2019, the Company had cumulatively accrued approximately $567,000$1,600 and $1,278 for estimated interest and penalties related to unrecognized tax benefits, of which $567,000 wererespectively, related to the Company’s continuing operations. At December 31, 2016, the Company had cumulatively accrued approximately $494,000 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 expense (benefit), which totaled approximately $73,000$375 and $331,000($84,000) for the nine months ended September 30, 20172020, and 2016, respectively, of which $73,0002019, respectively; and $82,000 were related to the Company’s continuing operations;$240 and totaled approximately $7,000 and $98,000($556,000) for the three months ended September 30, 20172020 and 2016,2019, respectively, of which $7,000 and $15,000 were related to the Company’s continuing operations. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
At September 30, 2019, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits related to the Company’s discontinued operations. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax expense, which totaled $nil and ($533,000) for the nine months ended September 30, 2020, and 2019, respectively, and $nil for the three months ended September 30, 2020 and 2019, respectively, related to the Company’s discontinued operations.
As of September 30, 2020, unrecognized tax benefits were approximately $12,500. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $12,500 as of September 30, 2020. As of September 30, 2019, unrecognized tax benefits were approximately $109,000. The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was $109,000 as of September 30, 2019.
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2011-20162016-2019 remain open to examination by tax authorities in the U.S.
Revenue Recognition
The Company’s revenue recognition policiesCompany 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 in compliance with ASC Topic 605, “Revenue Recognition.” Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and no other significant obligations of the Company exist and collectability is reasonably assured. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, or the possible return of the goods. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.
Revenues from product sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials purchased in China and included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the consolidated financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collectedreserves established for applicable discounts and paidallowances 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 Company acts as an agent foramount is payable to the government.
The Company’s sales policy allows for the return of product returns within the warranty period if the product is defective and the defects are the Company’s fault. As alternatives forto the product return option, the customers have optionsthe option of askingrequesting a discount from the Company for the products with quality issues or of receiving replacement parts from the Company at no cost. The amount for return of products,product returns, the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the nine and three months ended September 30, 20172020 and 2016.
The Company generally expenses sales commissions when incurred because the Company’s former subsidiaries in China began entering into area product franchise agreements with franchisees who operated specialty furniture stores carrying only Nova-branded products. The product franchise agreement provided for the franchisee to retail Nova-brand furniture products for aamortization period ofwould have been one year from the date of the agreement. The franchisee was required to pay a deposit of RMB 30,000 at the signing of the agreement, which is used as payment for future purchases and is deferredor less. These costs are recorded within selling expenses on the Company’s balance sheet as a customer deposit. The franchisee was required to guarantee a minimum purchase amount from the Company during the contract period. The Company had the right to terminate the agreement should the franchisee fail to meet the minimum purchase amount. The Company previously provided the franchisee with store images and designs, signage, floor plan product information and training. In addition, the Company would rebate a per square meter subsidy to the franchisee for the store build-out within 12 months from the agreement date. Under the program, the Company established standard renovation amounts (the “Renovation Subsidy”) for various cities in China. The franchisee was able to obtain, in the formcondensed consolidated statements of credits against purchase orders, percentages of the Renovation Subsidy applicable in the city in which the franchisee is located, as follows: 0% to 30% of the Renovation Subsidy applied to the first purchase order and 5% of each purchase order thereafter until the aggregate of all credits equals 100% of the Renovation Subsidy, or 12 months from the date of the franchise agreement, whichever occurs first. In accordance with ASC 605-50, as the Company does not receive an identifiable benefit from these rebates, the rebates are recorded as a reduction of revenue on sales to the franchisees. All of the franchise agreements relating to the Company’s operations were divested in connection with its discontinued operations (see Note 3 – Discontinued Operations)comprehensive income (loss).
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from otherthird-party manufacturers material costs, labor costs and related overhead that are directly attributable to the productionwrite-downs of the products. Write-downs of inventory to the lower of cost or net realizable value is also recorded in the cost of sales.
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, 20172020 and 2016,2019, shipping and handling costs from continuing operations were $1,576$172,912 and $2,033,$1,411, respectively; and $623$171,926 and $313$548 for the three months ended September 30, 20172020 and 2016,2019, respectively. During the nine and three months ended September 30, 2016,2020 and 2019, shipping and handling costs from discontinued operations were $373,123 and $137,308, respectively.
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 from continuing operations was $847,177$24,740 and $2,156,451$163,065 for the nine months ended September 30, 20172020 and 2016,2019, respectively; and $186,381$5,140 and $841,345$24,371 for the three months ended September 30, 20172020 and 2016,2019, respectively. Advertising expense from discontinued operations was $60,379 and $59,286 forDuring the nine and three months ended September 30, 2016, respectively.
Share-based compensation
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 with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite servicevesting period.
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).
The following table presents a reconciliation of basic and diluted (loss) earningsincome per share for the nine and three months ended September 30, 20172020 and 2016:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Income from continuing operations | $ | 2,304,709 | $ | 1,189,266 | $ | 2,956,633 | $ | 1,044,931 | ||||||||
| Loss from discontinued operations | - | (1,476,572 | ) | - | (743,594 | ) | ||||||||||
| Net income (loss) | 2,304,709 | (287,306 | ) | 2,956,633 | 301,337 | |||||||||||
| Weighted average shares outstanding – basic | 27,570,425 | 24,937,069 | 27,846,921 | 25,558,604 | ||||||||||||
| Dilutive unvested restricted stock | 126,828 | - | 112,480 | - | ||||||||||||
| Dilutive vested stock options | 7,153 | 21,228 | ||||||||||||||
| Weighted average shares outstanding – diluted | 27,704,406 | 2,493,7069 | 27,980,629 | 25,558,604 | ||||||||||||
| (Loss) income from continuing operations per share | ||||||||||||||||
| – basic | $ | 0.08 | $ | 0.05 | $ | 0.11 | $ | 0.04 | ||||||||
| – diluted | $ | 0.08 | $ | 0.05 | $ | 0.11 | $ | 0.04 | ||||||||
| Loss from discontinued operations per share | ||||||||||||||||
| – basic | $ | 0.08 | $ | (0.06 | ) | $ | - | $ | (0.03 | ) | ||||||
| – diluted | $ | 0.08 | $ | (0.06 | ) | $ | - | $ | (0.03 | ) | ||||||
| Net income (loss) per share | ||||||||||||||||
| – basic | $ | 0.08 | $ | (0.01 | ) | $ | 0.11 | $ | 0.01 | |||||||
| – diluted | $ | 0.08 | $ | (0.01 | ) | $ | 0.11 | $ | 0.01 | |||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net loss from continuing operations | $ | (9,705,225 | ) | $ | (1,660,225 | ) | $ | (8,177,010 | ) | $ | (298,250 | ) | ||||
Net (loss) income from discontinued operations | (326,531 | ) | 1,078,361 | - | (97,898 | ) | ||||||||||
Net loss | (10,031,756 | ) | (581,864 | ) | (8,177,010 | ) | (396,148 | ) | ||||||||
Weighted average shares outstanding – basic and diluted* | 5,579,088 | 5,716,781 | 5,585,734 | 5,677,220 | ||||||||||||
Net loss from continuing operations per share of common stock | ||||||||||||||||
Basic and Diluted | $ | (1.74 | ) | $ | (0.29 | ) | $ | (1.46 | ) | $ | (0.05 | ) | ||||
Net (loss) income from discontinued operations income per share of common stock | ||||||||||||||||
Basic and Diluted | $ | (0.06 | ) | $ | 0.19 | $ | - | $ | (0.02 | ) | ||||||
Net loss per share of common stock | ||||||||||||||||
Basic and Diluted | $ | (1.80 | ) | $ | (0.10 | ) | $ | (1.46 | ) | $ | (0.07 | ) | ||||
* | Including 44,307 and 204,305 shares that were granted and vested but not yet issued for the nine months ended September 30, 2020 and 2019, respectively. |
For the nine and three months ended September 30, 2017 and 2016, 858,334 and 1,925,0012020, 171,667 shares purchasable under warrants, 5,000 shares of unvested restricted stock and stock options to purchase 340,500 shares of the Company’s stock were excluded from the EPS respectively,calculation, as their effects were anti-dilutive.
For the nine and three month periodsmonths ended September 30, 2016, the2019, 171,667 shares purchasable under warrants, 5,000 shares of unvested restricted stock and stock options to purchase 277,000 shares of the Company’s stock were anti-dilutive.
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 35% and 10% of the Company’s sales for the nine months ended September 30, 2017 and 2016, respectively. A customer accounted for 54% and 10% of the Company’s sales for the three months ended September 30, 2017 and 2016, respectively. Accounts receivable from this customer were $21,812,355 and $5,216,213 as of September 30, 2017 and December 31, 2016, respectively.
Three customers accounted for 92% (56%, 19%, 15%, 12%22% and 10%14%) of the Company’s sales from our discontinued operations for each)the nine months ended September 30, 2019. Two customers accounted for 86% (68% and 80% (30%, 16%, 12%, 11% and 11% for18% each) of the Company’s purchases, respectively.
The Company purchased its products from four and fivethree major vendors during the nine months ended September 30, 2020 and 2019, accounting for a total of 76% (25%, 19%, 16% and 16% each) and 79% (39%, 21%, and 19% each) of the Company’s purchases from continuing operations, respectively. The Company purchased its products from four and three major vendors during the three months ended September 30, 2016,2020 and 2019, accounting for a total of 59% (20%73% (21%, 15%21%, 12%18%, and 12% for13% each) and 89% (22%86% (30%, 17%, 17%, 17%20%, and 16% for18% each) of the Company’s purchases from continuing operations, respectively.
The Company purchased its products from one supplier for its purchases from discontinued operations. Advances made and accountsto this vendor were $583,979 as of September 30, 2019. Accounts payable to these vendors were $1,561,381 and $481,455this vendor was $1,857 as of December 31, 2016, 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 condensed 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, advanceadvances to suppliers, other receivables, accounts payable, line of credit, advance from customers, other payables and accrued liabilities approximate estimated fair values because of their short maturities. The estimated fair value of the long-term lines of credit approximated the carrying amount as of September 30, 2017, as the interest rates are considered as approximate to the current rate for comparable loans at the respective balance sheet dates.
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, Nova Macao, Bright Swallow, Diamond Bar and Diamond Bar.
The Company's subsidiary with operations in Malaysia uses its local currency, Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency of Nova Dongguan, Nova Museum and Ding Nuo is RMB. The functional currenciesthe currency of the Company’s foreign operationsprimary 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.
Foreign currency transactions denominated in currencies other than the functional currency are translated into USD for balance sheet accountsthe functional currency using the current exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in effect as offoreign currencies at the balance sheet date except forare re-measured at the equity account using the historicalapplicable rates of exchange rate, and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded in the consolidated statements of income and comprehensive income, captioned “Accumulated other comprehensive income.”effect at that date. Gains and losses resulting from transactions denominated in foreign currenciescurrency re-measurement are included in “Other income (expenses)” in the consolidated statements of incomecomprehensive loss.
The financial statements are presented in U.S. dollars. Assets and comprehensive income. There have been no significant fluctuations inliabilities are translated into U.S. dollars at the current exchange rate for the conversion of RMB to USD afterin effect at the balance sheet date.
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, 2020 | RM4.16 to 1 | |||
December 31, 2019 | RM4.09 to 1 | |||
Income statement and cash flows items | ||||
For the nine months ended September 30, 2020 | RM4.23 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 US, Bright Swallow is a furniture distributor based in Hong Kong focusing on customers in Canada, and Nova Macao is a furniture distributor based in Macao focusing on international customers.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, Bright Swallow, Nova Macao and Nova MacaoMalaysia as a whole for making business decisions
After the disposal of Nova Dongguan and its subsidiaries all of the Company’s long-lived assets for production were located at its facilities in Dongguan, Guangdong Province, China, and operated within the same environmental, safety and quality regulations governing furniture manufacturers. After the disposal of Nova Dongguan and its subsidiaries,October 2016, all of the Company’s long-lived assets are mainly property, plant and equipment located in the United States for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical locations of the Company’s customers. For example, if the products are delivered to a customer in the US, the sales are recorded as generated in the U.S.
New Accounting Pronouncements
Recent Adopted Accounting Standards
In February 2016,August 2018, the FASB issued ASU No. 2016-02, Leases2018-13, Fair Value Measurement (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee820): Disclosure Framework-Changes to record a ROU assetthe Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognitionLevel 3 instruments in the income statement.fair value hierarchy. The new standardguidance is effective for fiscal years beginning after December 15, 2018, including2019, and interim periods within those fiscal years. Ayears, with early adoption permitted for any eliminated or modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.disclosures. The Company is in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.
Recently issued accounting pronouncements not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidanceAdoption of the ASUs is on a modified retrospective basis. As a smaller reporting company, the standard will be effective for fiscal years,the Company for interim and interimannual reporting periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2022. The Company is currently evaluating the impact that the standard will have on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or disposals of assets or businesses.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
Note 3 - Discontinued Operations
On September 23, 2016, Nova Furniture, a wholly-owned subsidiary ofJanuary 7, 2020, the Company (the “Seller”), entered into a Share Transfer Agreement (the “Agreement”) with Kuka Designtransferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated company incorporated in British Virgin Islands (“Kuka Design BVI” or “Buyer”). Pursuantthird party, for cash consideration of $2.50 million, pursuant to the terms of the Agreement, the Seller sold all of the outstanding equity interests in Nova Dongguan, a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”), which such value was primarily derived from Nova Dongguan and Nova Donguan’s wholly owned subsidiary, Nova Museum, and 90.97% owned subsidiary, Ding Nuo. Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan. The purchase price of $8,500,000 was fully paid on October 6, 2016.
As of the Trademark Assignment Agreement, Nova Furniture agreed to assign to Kuka Design BVI its full right to, and title in, the NOVA trademark in China for $6,000,000 (the “Assignment Fee”). Kuka Design BVI was to pay the Assignment Fee in two installments: $1,000,000 on or before NovemberSeptember 30, 2016, and $5,000,000 on or before December 31, 2016. As the result of the assignment of NOVA trademark in China, Nova Furniture and its affiliated companies, including Nova Macao, have ceased to use the NOVA trademark and brand in their business in China. A portion of the Assignment Fee in the amount of $4,750,000 was received in 2016, and the remaining balance of $1,250,000 was fully paid in January 2017.
The following table summarizes the net assets of Bright Swallow at the date of disposal (January 7, 2020):
Cash and cash equivalents | $ | 1,462,200 | ||
Accounts receivable, net | 969,841 | |||
Advance to suppliers | 609,935 | |||
Accounts payable | (948 | ) | ||
Advance from customers | (126,916 | ) | ||
Accrued liabilities and other payables | (2,553 | ) | ||
Income tax payable | (85,028 | ) | ||
Net assets of Bright Swallow upon disposal | 2,826,531 | |||
Cash received as of September 30, 2020 | (2,500,000 | ) | ||
Loss on disposal of subsidiary | $ | (326,531 | ) |
The following table presents the components of discontinued operations in relation to Bright Swallow reported in the condensed consolidated statements of operations:
| Nine Months ended September 30, | Three Months Ended September 30 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Sales from external customers | $ | - | $ | 15,351,105 | $ | - | $ | 6,111,494 | ||||||||
| Cost of goods sold | - | (13,338,316 | ) | - | (5,284,100 | ) | ||||||||||
| Operating expenses | - | (3,231,788 | ) | - | (907,016 | ) | ||||||||||
| Loss before income taxes | - | (1,450,487 | ) | - | (780,545 | ) | ||||||||||
| Income tax (expense) benefit | - | 26,085 | - | (36,951 | ) | |||||||||||
| Loss from discontinued operations | $ | - | $ | (1,476,572 | ) | $ | - | $ | (743,594 | ) | ||||||
For the nine months ended | For the three months ended | |||||||||||||||
September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
Sales | $ | - | $ | 5,118,229 | $ | - | $ | 1,632,554 | ||||||||
Cost of sales | - | (4,742,345 | ) | �� | - | (1,627,566 | ) | |||||||||
Operating expenses | - | (308,165 | ) | - | (102,264 | ) | ||||||||||
Other expense, net | - | (890 | ) | - | (622 | ) | ||||||||||
Loss on disposal of subsidiary | (326,531 | ) | - | - | - | |||||||||||
(Loss) Income before income taxes | (326,531 | ) | 66,829 | - | (97,898 | ) | ||||||||||
Income tax benefit | - | 1,011,532 | - | - | ||||||||||||
(Loss) income from discontinued operations | $ | (326,531 | ) | $ | 1,078,361 | $ | - | $ | (97,898 | ) | ||||||
Note 4 - Inventories
The inventories as of September 30, 20172020 and December 31, 20162019 totaled $6,720,649$48,458,672 and $2,781,123,$29,724,665, respectively, and were all finished goods.
During the three months ended September 30, 2020 and 2019, write-downs of obsolete inventories to lower of cost or net realizable value of $7,767,910 and $0, respectively, were charged to cost of sales.
During the nine months ended September 30, 2020 and 2019, write-downs of obsolete inventories to lower of cost or net realizable value of $7,767,910 and $0, respectively, were charged to cost of sales.
Note 5 - Plant, Property and Equipment, Net
As of September 30, 20172020, and December 31, 2016,2019, plant, property and equipment consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Computer and office equipment | $ | 283,336 | $ | 274,735 | ||||
| Decoration and renovation | 118,858 | 110,015 | ||||||
| Less: accumulated depreciation | (243,782 | ) | (213,474 | ) | ||||
| $ | 158,412 | $ | 171,276 | |||||
September 30, 2020 | December 31, 2019 | |||||||
Computer and office equipment | $ | 393,400 | $ | 346,141 | ||||
Decoration and renovation | 437,498 | 118,858 | ||||||
Less: accumulated depreciation | (371,536 | ) | (328,487 | ) | ||||
| $ | 459,362 | $ | 136,512 | |||||
Depreciation expense from continuing operations was $30,307$42,805 and $33,217$27,548 for the nine months ended September 30, 20172020 and 2016,2019, respectively; and $10,164$14,791 and $11,128$9,038 for the three months ended September 30, 20172020 and 2016,2019, respectively. Depreciation expense from discontinued operations was $1,011,125 and $331,323$0 for the nine and three months ended September 30, 2016, respectively.
Note 6 - Advances to Suppliers
The Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $237,361 and $27,745,184 as of September 30, 2020 and December 31, 2019, respectively. No impairment charges were made on advances to suppliers for the nine and three months ended September 30, 2020 and 2019.
Note 7 - Intangible Assets,
The Company acquired a customer relationship with a fair value of $50,000 on August 31, 2011, as part of its acquisition of Diamond Bar. Concurrently with its acquisition of Diamond Bar, the Company entered into a trademark purchase and assignment agreement for all rights, title and interest in two trademarks (Diamond Sofa and Diamond Furniture) for $200,000 paid in full at the closing. Amortization of said customer relationship and the trademarks is provided using the straight-line method and estimated lives were 5 years for each.
The Company acquired a customer relationship with a fair value of $6,100,559 on April 24, 2013, as part of its acquisition of Bright Swallow. Amortization of said customer relationship is provided using the straight-line method and its estimated life was 15 years.
Intangible assets consisted of the following as of September 30, 20172020 and December 31, 2016:
| September 30, 2017 | December 31, 2016 | |||||||
| �� | ||||||||
| eCommerce platform | $ | 1,208,200 | $ | 1,208,200 | ||||
| Customer relationship | 6,150,559 | 6,150,559 | ||||||
| Trademarks | 200,000 | 200,000 | ||||||
| Less: accumulated amortization | (2,985,147 | ) | (1,872,136 | ) | ||||
| $ | 4,573,612 | $ | 5,686,623 | |||||
September 30, 2020 | December 31, 2019 | |||||||
Customer relationship | $ | 50,000 | $ | 50,000 | ||||
Trademarks | 200,000 | 200,000 | ||||||
Less: accumulated amortization | (250,000 | ) | (250,000 | ) | ||||
| $ | - | $ | - | |||||
Amortization of intangible assets from continuing operations was $1,113,011 and $428,977 for the nine months ended September 30, 2017 and 2016, respectively; and $371,004 and $140,215 for the three months ended September 30, 2017 and 2016, respectively. Amortization of intangible assets from discontinued operations was $28,164 and $9,305$0 for the nine and three months ended September 30, 2016, respectively.
| 12 months ending September 30, | ||||
| 2018 | $ | 676,032 | ||
| 2019 | 406,704 | |||
| 2020 | 406,704 | |||
| 2021 | 406,704 | |||
| 2022 | 406,704 | |||
Note 78 - Receivables from an Unrelated Party, Prepaid Expenses and Other Receivables
Prepaid expenses and the status of the establishment and promotion of the Platform, the Company does not wish to continue to finance the promotion of the Platform. On March 20, 2017, the Company and the unrelated party terminated the MOU and released both parties from all the obligations and liabilities under the MOU. The Company agreed to bear the costs of $800,000 incurred by the unrelated party on the Platform, which were charged as expenses in the first quarter of fiscal year 2017. The Company collected a total of approximately $13 million, which was prepaid previously, as of September 30, 2017, and no further balance was owed by the unrelated party.
| September 30, 2017 | December 31, 2016 | |||||||
| Prepaid expenses | $ | 288,784 | $ | 573,005 | ||||
| Other receivables | 27,049 | 69,886 | ||||||
| Total | $ | 315,833 | $ | 642,891 | ||||
September 30, 2020 | December 31, 2019 | |||||||
Prepaid expenses | $ | 309,654 | $ | 148,750 | ||||
Other receivables | 79,885 | 24,857 | ||||||
| $ | 389,539 | $ | 173,607 | |||||
As of $2,000,000 to an unrelated party. The advance is unsecured and bears interest of 5% per annum. The unrelated party agreed to pay the whole amount of $2,000,000 back to the Company by May 31, 2017. During the nine months ended September 30, 2017, the Company collected full payment of the principal2020, and interest of $26,575 from the unrelated party.
Note 89 - Accrued Liabilities and Other Payables
Accrued liabilities and other payables consisted of the following as of September 30, 20172020 and December 31, 2016:
| September 30, 2017 | December 31, 2016 | |||||||
| Other payables | $ | 18,462 | $ | 47,790 | ||||
| Salary payable | 42,909 | 30,207 | ||||||
| Financed insurance premiums | 128,891 | 66,314 | ||||||
| Accrued rents | 84,659 | 102,269 | ||||||
| Accrued commission | 360,630 | 494,108 | ||||||
| Accrued expenses, others | 90,950 | 40,272 | ||||||
| Total | $ | 726,501 | $ | 780,960 | ||||
September 30, 2020 | December 31, 2019 | |||||||
Other payables | $ | 7,929 | $ | 33,115 | ||||
Salary payable | 16,578 | 16,419 | ||||||
Financed insurance premiums | 207,756 | 102,354 | ||||||
Accrued rents | 17,864 | 17,733 | ||||||
Accrued commission | 98,800 | 53,850 | ||||||
Accrued expenses, others | 11,380 | 78,293 | ||||||
| $ | 360,307 | $ | 301,764 | |||||
As of September 30, 20172020, and December 31, 2016,2019, other accrued expenses mainly included legal and professional fees, transportationutilities and unpaid operating expenses and utilities.incurred in Malaysia. Other payables represented other tax payable and meal expenses.
Note 910 - Lines of Credit
On September 28, 2015,19, 2017, Diamond Bar extended the line of credit up to a maximum of $6,000,000 with annual interest of 3.75% (4% from December 17, 2015) and maturity on June 1, 2017. On January 20, 2016, Diamond Bar increased the line of credit up$8,000,000 to a maximum of $8,000,000 with annual interest of 4%. On June 22, 2017, Diamond Bar extended the line of credit to maturity on September 1, 2017. On September 19, 2017, Diamond Bar extended the line of credit to maturitymature on June 1, 2019. The annual interest rate was 4.25%5.50% as of September 30, 2017.December 31, 2019. The line of credit is was secured by all of the assets of Diamond Bar and is guaranteed by Nova LifeStyle.LifeStyle. We paid off our lines of credit upon expiration on June 30, 2019. As of September 30, 20172020, and December 31, 2016,2019, Diamond Bar had $3,322,040 and $6,129,841$0 outstanding on the line of credit, respectively.credit. During the nine months ended September 30, 20172020 and 2016,2019, the Company recorded interest expense of $145,857$0 and $167,381,$35,444, respectively; and $40,932 and $61,127$0 for the three months ended September 30, 20172020 and 2016, respectively. 2019.
As of September 30, 2017,2020, and December 31, 2019, we do not have any credit facilities.
Note 11 - 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 can choose to extend the eight-week period to 24 weeks to use the funds, but cannot extended beyond December 31, 2020.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months. Diamond Bar had $4,677,960 availableintends to use the proceeds for borrowing without violating any covenants.
On May 5, 2020, Diamond Bar was granted a loan from Cathay Bank in compliance with the stated covenants.
The Company most likely will use up all the PPP loan proceeds within 24 weeks.
On February 16, 2016, Nova Macao extendedJune 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the maturityaggregate 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 line of credit to January 31, 2017, with an annual interest rate of 4% and principal of up to $6,500,000. The loan requires monthly payment of interest and that the interest rate willpromissory note. Funds from the Loan may only be adjusted annually.used for working capital. The loan was secured by assignmentall tangible and intangible property of Sinosure (China Export and Credit Insurance Company) credit insurance and was guaranteed by Nova LifeStyle andthe Diamond Bar. The Company did not extend the line of credit and paid it off in February 2017. As of September 30, 2017 and December 31, 2016, Nova Macao had $0 and $1,848,000 outstanding on the line of credit, respectively. During the nine months ended September 30, 2017 and 2016, Nova Macao paid interest of $13,828 and $57,304, respectively; and $0 and $18,890 for the three months ended September 30, 2017 and 2016, respectively.
Note 1012 - 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 ourthe Chief Executive Officer and Chairman of the Board. The lease is to be renewed and has been renewed each year since 2011. On March 16, 2017,April 1, 2020, the Company renewed the lease for an additional one year term. The lease was $32,916 for the amount of $34,561, with a term of one year and only for use during two furniture exhibitions to be held between April 1, 2017 and March 31, 2018.year. During the nine and three months ended September 30, 2017,2020 and 2019, the Company paid rental amounts of $32,916 and $16,458$17,281 that are included in selling expenses from continuing operations.
On January 4, 2018, the Company paid rental amountsentered into a sales representative agreement with a consulting firm, which is owned by the Chief Executive Officer and Chairman of $32,916 that are included in selling expenses from continuing operations.
Note 1113 - Stockholders’ Equity
Share repurchase program
On December 12, 2017, the Company issued a press release announcing that the Board of Directors of the Company had approved a 10b-18 share repurchase program to repurchase up to $5 million of its outstanding common stock. Under the repurchase program, shares of the Company’s common stock may be repurchased from time to time over the next 12 months. The program expired on December 8, 2018 and no shares have been repurchased under the program.
On June 4, 2019, the Board of Directors of the Company adopted a 10b-18 share repurchase program to repurchase up to $2 million of its common stock. The share repurchase authorization permits shares to be repurchased from time to time at the discretion of the Company’s management, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The program is effective as of June 5, 2019 and will expire on June 4, 2020. During the nine and three months ended September 30, 2020, the Company did not repurchase its common stock. During the nine and three months ended September 30, 2019, the Company repurchased 135,545 and 106,407 shares of its common stock, respectively. On December 11, 2019, the Company closed out this repurchase program. As of December 31, 2019, the Company repurchased a total of 172,740 shares of its common stock.
Warrants
The following is a summary of the warrant activity for the nine months ended September 30, 2017:
Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2017 | 858,334 | $ | 2.71 | 3.92 | ||||||||
| Exercisable at January 1, 2017 | 858,334 | 2.71 | 3.92 | |||||||||
| Granted | - | - | - | |||||||||
| Exercised / surrendered | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Outstanding at September 30, 2017 | 858,334 | $ | 2.71 | 3.17 | ||||||||
| Exercisable at September 30, 2017 | 858,334 | $ | 2.71 | 3.17 | ||||||||
Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
Outstanding at January 1, 2020 | 171,667 | $ | 13.55 | 0.92 | ||||||||
Exercisable at January 1, 2020 | 171,667 | $ | 13.55 | 0.92 | ||||||||
Granted | - | - | - | |||||||||
Exercised / surrendered | - | - | - | |||||||||
Expired | - | - | - | |||||||||
Outstanding at September 30, 2020 | 171,667 | $ | 13.55 | 0.17 | ||||||||
Exercisable at September 30, 2020 | 171,667 | $ | 13.55 | 0.17 | ||||||||
Shares Issued to grant the consultant 10,000 shares of the Company’s common stock per month, for a total commitment of 240,000 shares. Twelve and half percent (12.5%) of those shares vested or will vest on April 30, 2016, 12.5% on July 30, 2016, 12.5% on October 31, 2016, 12.5% on January 31, 2017, 12.5% on April 30, 2017, 12.5% on July 30, 2017, 12.5% on October 31, 2017, and the remaining 12.5% on January 31, 2018. The fair value of the 240,000 shares was $326,400, which was calculated based on the stock price of $1.36 per share on February 1, 2016, the date the agreement was executed, and will be amortized over the service term. During the nine months ended September 30, 2017 and 2016, the Company amortized $122,400 and $108,800 as consulting expenses, respectively; and $40,800 for the three months ended September 30, 2017 and 2016.
On June 30, 2017, the Company entered into a consulting agreement with a consultant for business advisory service for a term of 12 months. The Company agreed to compensate the consultant a one-time amount of $10,000 worth of shares of the Company’s common stock based on the price per share on June 30, 2017. The Company also granted the consultant $10,000 worth of shares of the Company’s common stock per month starting from July 1, 2017 for a period of 12 months. The shares were issued pursuant to Nova LifeStyle, Inc.’s 2014 Omnibus Long-Term Incentive Plan (the “Plan”) approved by the Board of Directors (“Board”) of the Company on May 13, 2014 and ratified at the annual shareholder meeting on June 30, 2014. The Plan was registered under Form S-8 on July 30, 2014. On June 12, 2018, the Company renewed the agreement with the consultant for an additional year and agreed to compensate the consultant $10,000 worth of shares of the Company’s common stock per month starting from July 1, 2018 for a period of 12 months. The shares were issued pursuant to the Plan. On January 31, 2019, the Company terminated the agreement. During the nine and three months ended September 30, 2019, the Company recorded $10,000 and $0 as consulting expense, respectively.
On November 16, 2018, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2018 for one year. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock. Twenty-five percent (25%) of those shares vested on February 15, 2019 and 25% on May 15, 2019; 25% vested on August 15, 2019 and the remaining 25% vested on November 15, 2019. The fair value of 20,000 shares was $90,000 which was calculated based on the stock price of $4.50 per share on November 16, 2018 and was amortized over the service term. The shares were issued pursuant to the Plan. During the nine and three months ended September 30, 2019, the Company amortized $67,500 and $22,500 as consulting expenses, respectively.
On December 1, 2018, the Company entered into a consulting agreement with a consultant for business advisory services effective as of January 1, 2019 and ending on December 31, 2019. The Company granted the consultant $15,000 worth of shares of the Company’s common stock per month starting from January 1, 2019 for 12 months. The shares were granted pursuant to the Plan. On January 1, 2019, the consultant terminated the agreement for personal reasons.
On November 16, 2019, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2019 for a one year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock. Twenty-five percent (25%) of those shares vested on February 15, 2020, 25% vested on May 15, 2020; 25% vested on August 15, 2020 and the remaining 25% will vest on November 15, 2020. The fair value of 20,000 shares was $51,000 which was calculated based on the stock price of $2.55 per share on November 18, 2019 and will be amortized over the service term. The shares would be issued pursuant to the Plan. During the nine and three months ended September 30, 2017,2020, the Company amortized $32,500$38,250 and $12,750 as consulting expense.
Shares and Warrants Issued through Private Placement
Private Placement on May 28, 2015
On May 28, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers (the “Purchasers”) pursuant to which the Company offered to the Purchasers, in a registered direct offering, an aggregate of 2,970,509594,102 shares of common stock, par value $0.001 per share. Of these, 2,000,001400,000 shares were sold to the Purchasers at a negotiated purchase price of $2.00$10.00 per share, for aggregate gross proceeds to the Company of $4,000,002, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. In accordance with the terms of the Securities Purchase Agreement, entered on April 14, 2014, the Company exchanged outstanding 2014 Series A Warrants were exchangedwith their holders for 660,030132,006 shares of common stock, and exchanged the outstanding 2014 Series C Warrants were exchangedwith their holders for 310,47862,096 shares of common stock.
In a concurrent private placement, the Company also sold to the Purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering, pursuant to that certain Common Stock Purchase Warrant, by and between the Company and each Purchaser (the “2015 Warrants”). The 2015 Warrants became exercisable beginning on the six month anniversary of the date of issuance (the “Initial Exercise Date”) at an exercise price of $2.71$13.55 per share and will expire on the five year anniversary of the Initial Exercise Date. The purchase price of one share of the Company’s common stock under the 2015 Warrants is equal to the exercise price.
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 2015 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 of 5 years, volatility of 107%, risk-free interest rate of 1.55% and dividend yield of 0%. 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 $3,147,530.
On August 9, 2016, the Board approved a restricted stock award agreement under the 2014 Omnibus Long-Term Incentive Plan with four independent directors. The Company agreed to grant $40,000 worth of stocks to each of its four independent directors. The restricted period lapses as to 25% of the restricted stock granted vested on September 30, 2016 based on the closing price of common stock on Nasdaq as of August 9, 2016, 25% of the restricted stock granted vested on December 31, 2016 based on the closing price of common stock on Nasdaq as of September 30, 2016, 25% of the restricted stock granted vested on March 31, 2017 based on the closing price of common stock on Nasdaq as of December 31, 2016, and 25% of the restricted stock granted vested on June 30, 2017 based on the closing price of common stock on Nasdaq as of March 31, 2017. During the nine and three months ended September 30, 2017, the Company amortized $96,438 and $17,096 as directors’ stock compensation expenses, respectively. During the nine and three months ended September 30, 2016, the Company amortized $23,233 as directors’ stock compensation expenses.
Shares Issued to Employees and Service Providers
On May 18, 2016,February 27, 2018, the Company entered into agreementsrenewed an employment agreement with three designers for product design servicesthe Company’s Corporate Secretary for a term of 24 months. The Company agreed to grant each designer 240,000 shares of the Company’s common stock. Twenty five percent (25%) of those shares vested or will vest on May 31, 2016, 25% on December 18, 2016, 25% on June 18, 2017 and the remaining 25% on December 18, 2017. The fair value of these shares was $388,800, which was calculated based on the stock price of $0.54 per share on May 18, 2016, the date the agreement was executed, and will be amortized over the service term. During the nine months ended September 30, 2017 and 2016, the Company amortized $145,401 and $72,434 as stock compensation expenses, respectively; and $48,999 for the three months ended September 30, 2017 and 2016.
On December 13, 2018, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year. The Company agreed to grant an award of 6,000 restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $23,100, which was calculated based on the stock price of $3.85 per share on December 13, 2018, the date the awards were determined by the Compensation Committee of the Board. Twenty-five percent (25%) of those shares vested on December 30, 2016,13, 2018, 25% on March 31, 2017,2019, 25% on June 30, 20172019 and the remaining 25% vestvested on September 30, 2017.2019. During the nine and three months ended September 30, 2017,2019, the Company amortized $68,886$17,325 and $23,214$5,775 as stock compensation, respectively.
On November 15, 2016,December 14, 2019, the Company entered intoextended an employment agreement with the Company’s Corporate Secretary for a designer for furniture design services effective on November 15, 2016 for 1term of one year. The Company agreed to grant an award of 6,000 restricted Stock Units to the designer 100,000 shares ofofficer pursuant to the Company’s common stock.2014 Omnibus Long-Term Incentive Plan. The fair value of the 100,000these shares was $294,000,$12,780, which was calculated based on the stock price of $2.94$2.13 per share on November 15, 2016 and will be amortized overJanuary 31, 2020, the service term.date the awards were determined by the Compensation Committee of the Board. Twenty-five percent (25%) of those shares vested on February 15, 2017,January 31, 2020, 25% on May 15, 2017,March 31, 2020, 25% will vest on August 15, 2017June 30, 2020 and the remaining 25% will vestvested on November 15, 2017.September 30, 2020. During the nine and three months ended September 30, 2017,2020, the Company amortized $220,500$9,585 and $73,500$3,195 as stock compensation, respectively.
Options Issued to Employees
On August 29, 201724, 2018 (the “Grant Date”), the Board approved an option grantsgrant to the Company’s employeesCFO to purchase an aggregate of 780,0007,000 shares of the Company’s common stock (including options to purchase 100,000 shares and 35,000 shares to the Company’s President and CFO, respectively) at an exercise price of $1.26$9.25 per shares,share, with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (50%) of those stock options vested immediately, and the remaining 50% will vestvested on the six-month anniversary of the Grant Date.
The fair value of the option granted to employeesthe CFO in 2018 is recognized as compensation expense over the vesting period of the stock option award. The fair value of the options was calculated using the following assumptions,assumptions: estimated life of ten years, volatility of 84%, risk free interest rate of 0.16%2.72%, and dividend yield of 0%. The fair value of 780,0007,000 stock options was $643,182$43,680 at the grant date. During nine and three months ended September 30, 2019, the Company recorded $21,840 and $0 as stock compensation, respectively.
On August 12, 2019, the Board approved an option grant to the Company’s CFO to purchase an aggregate of 7,000 shares of the Company’s common stock at an exercise price of $3.85 per share, with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (50%) of those stock options vested immediately, and the remaining 50% vested on the six-month anniversary of the Grant Date.
The fair value of the option granted to the CFO in 2019 is recognized as compensation expense over the vesting period of the stock option award. The fair value of the options was calculated using the following assumptions: estimated life of ten years, volatility of 87%, risk free interest rate of 1.49%, and dividend yield of 0%. The fair value of 7,000 stock options was $18,318 at the grant date. During the nine months ended September 30, 2020 and 2019, the Company recorded $9,159 as stock compensation; $0 and $9,159 for the three months ended September 30, 2017, the Company recorded $321,5912020 and 2019 as stock compensation.
Number of Shares | Average Exercise Price per Share | Aggregate Intrinsic Value(1) | Weighted Average Remaining Contractual Term in Years | |||||||||||||
| Granted | 1,080,000 | $ | 1.37 | 5.00 | ||||||||||||
| Exercised | - | - | - | |||||||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding at September 30, 2017 | 1,080,000 | $ | 1.37 | 315,000 | 4.93 | |||||||||||
| Exercisable at September 30, 2017 | 465,000 | $ | 1.32 | 156,750 | 4.92 | |||||||||||
As of September 30, 2020, unrecognized share-based compensation expense was $7,837.
Stock option activity under the Company’s stock-based compensation plans is shown below:
Number of | Average | Aggregate Intrinsic | Weighted | |||||||||||||
Outstanding at January 1, 2020 | 340,500 | $ | 5.97 | $ | - | 3.33 | ||||||||||
Exercisable at January 1, 2020 | 292,000 | 6.48 | $ | - | 3.08 | |||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
Outstanding at September 30, 2020 | 340,500 | $ | 5.97 | $ | - | 2.58 | ||||||||||
Exercisable at September 30, 2020 | 340,500 | $ | 5.97 | $ | - | 2.58 | ||||||||||
(1) | The intrinsic value of the stock options at September 30, |
Statutory Reserves
As a U.S. holding company, the Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiary, Nova Macao, only out of the subsidiary’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Nova Macao. Pursuant to the corporate laws of the PRC and Macao, including the PRC Regulations on Enterprises with Foreign Investment, Nova Macao is required to maintain a statutory reserve by appropriating from after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings. As a result of the PRCMacau laws and regulations described below that require such annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as a general statutory reserve fund until such reserve balance reaches 50% of the subsidiary’s registered capital. Nova Macao is restricted in its ability to transfer a portion of its net assets to the Company as a dividend.
Surplus Reserve Fund
At September 30, 20172020 and December 31, 2016,2019, Nova Macao had surplus reserves of $6,241, representing 50% of its registered capital.
The common welfare fund is a voluntary fund to which Nova Macao can elect to transfer 5% to 10% of its net income. This fund can only be utilized on capital items for the collective benefit of the subsidiary’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. Nova Macao does not participate in this voluntary fund.
Note 1314 - Geographical Sales
Geographical distribution of sales consisted of the following for the nine and three months ended September 30, 20172020 and 2016:
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| Geographical Areas | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| North America | $ | 37,158,028 | $ | 52,539,699 | $ | 11,900,592 | $ | 22,529,655 | ||||||||
| Europe | 3,456,045 | 10,739,127 | - | 2,932,288 | ||||||||||||
| Australia | 24,690,606 | 3,445,635 | 17,992,912 | 1,356,201 | ||||||||||||
| Asia* | 5,020,746 | 3,596,850 | 3,329,121 | 1,748,750 | ||||||||||||
| Hong Kong | 461,943 | 2,194,115 | - | 1,897,420 | ||||||||||||
| Other countries | 26,046 | 233,546 | - | 74,604 | ||||||||||||
| $ | 70,813,414 | $ | 72,748,972 | $ | 33,222,625 | $ | 30,538,918 | |||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Geographical Areas | ||||||||||||||||
North America | $ | 7,365,659 | $ | 7,663,102 | $ | 3,099,042 | $ | 2,728,228 | ||||||||
China | - | 11,792,589 | - | 4,958,128 | ||||||||||||
Asia* | 422,336 | - | 213,954 | - | ||||||||||||
Hong Kong | - | - | - | - | ||||||||||||
Other countries | 25,824 | 3,926 | 2,677 | 3,926 | ||||||||||||
| $ | 7,813,819 | $ | 19,459,617 | $ | 3,315,673 | $ | 7,690,282 | |||||||||
* excluding China and Hong Kong
Note 15 - Lease
On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provides an option to extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another 36 months with an expiration date of October 31, 2021. The 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 on monthly or annual terms.
On July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a two year term, expiring on July 14, 2021. The monthly rental payment is 20,000 Malaysia Ringgit ($4,724).
On October 29, 2019, Nova Malaysia entered into a lease agreement for office space with a two year term, commencing on December 1, 2019 and expiring on November 30, 2021. The monthly rental payment is 9,280 Malaysia Ringgit ($2,192).
On August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a two year term, commencing on September 1, 2020 and expiring on August 31, 2022. The monthly rental payment is $30,000 Malaysia Ringgit ($7,086).
The operating lease expense for the nine and three months ended September 30, 2020 and 2019 were as follows:
Nine months ended September 30, | Three months ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating lease cost | $ | 384,108 | $ | 465,735 | $ | 107,745 | $ | 155,245 | ||||||||
The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2020:
Operating Leases | ||||
12 months ending September 30, | ||||
2021 | $ | 774,993 | ||
2022 | 720,725 | |||
2023 | 656,010 | |||
2024 | 675,690 | |||
Thereafter | - | |||
Total undiscounted cash flows | 2,827,418 | |||
Less: imputed interest | (256,416 | ) | ||
Present value of lease liabilities | 2,571,002 | |||
Lease Term and Discount Rate
September 30, 2020 | ||||
Weighted-average remaining lease term - years | ||||
Operating leases - USA | 4.09 | |||
Operating leases - Malaysia | 1.56 | |||
Weighted-average discount rate (%) | ||||
Operating leases - USA | 5.00 | % | ||
Operating leases - Malaysia | 3.07 | % | ||
Note 1416 - Commitments and Contingencies
Legal Proceedings
On June 17, 2013,December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company entered into a lease agreementand 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 office, warehouse, storage,the Central District of California, claiming the Company violated federal securities laws and distribution spacepursuing remedies under Sections 10(b) and 20(a) of the Security Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently substituted as plaintiffs and, on June 18, 2019, they filed an Amended Complaint.
In the Amended Complaint, plaintiffs seek to recover compensatory damages caused by the Company’s alleged violations of federal securities laws from December 3, 2015 through December 20, 2018. Plaintiffs claim that the Company: (1) overstated its purported strategic alliance with a five year term, commencingcustomer in China to operate as lead designer and manufacturer for all furnishings in such customer’s planned $460 million senior care center in China; (2) the Company inflated its reported sales in 2016 and 2017 with the Company’s two major customers; and (3) as a result, the Company’s public statements were materially false and misleading at all relevant times. In support of these claims, plaintiffs rely primarily upon a blog appearing in Seeking Alpha on November 1, 2013 and expiring on October 31, 2018. The lease agreement also providesDecember 21, 2018 in which it was claimed that an optioninvestigation failed to extendconfirm the term for an additional six years. The monthly rental payment is $42,000 with an annual 3% increase. The rent is recorded on a straight-line basis over the termexistence of several entities identified as significant customers, Plaintiffs purported to verify some of the lease.
By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint that Nova, Ms. Lam and Mr. Chuang filed (the “Nova Defendants”). The Nova Defendants accordingly answered the Amended Complaint. The Court entered a scheduling order setting a final pretrial conference for July 20, 2020 that it without request from the parties continued to October 19, 2020.
Plaintiffs waited until recently to pursue discovery and have yet to file a Motion for Class Certification. On August 7, 2020, the Nova Defendants filed a Motion for Interim Discovery Conference to address the pace and scope of discovery. By Order entered October 1, 2020 the Court denied the Motion for a Status Conference and continued the Final Pretrial Conference until April 19, 2021.
Independently of the litigation, the Audit Committee engaged the Company’s auditor to perform special procedures to confirm the reported sales. Those procedures included but were not limited to the examination and testing of relevant documentation relating to the sales made by the Company to the customers identified in the purported research report for the periods 2015-2018, and 100% sampling of all transactions between the Company and the subject customers. The Audit Committee finished its special procedures in March 2019 and the Company’s independent auditor has reported to the Audit Committee that, regarding the four subject customers mentioned in the purported research report, the special procedures resulted in no evidence of fictitious sales or of fictitious customers. Please see the details in the Form 8-K filed by the Company with SEC on March 29, 2019.
On January 7, 2014,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 entered intoagainst 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 sublease agreement withresult 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 by leasing her property to Diamond Bar, for warehouse space with a five-year term commencingCompany 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 November 1, 2013 and expiring on October 31, 2018. The Company subleased a portionbehalf of its warehouse space to one of its customers with a one-year term commencing on December 1, 2013 and expiring on November 30, 2014, which has been renewed every year with the current term expiring on October 31, 2017. On October 24, 2017, the Company renewed the sublease agreement with this customer for another one-year term commencing on November 1, 2017 and expiring on October 31, 2018. The sublease income of $5,400 per month was recorded against the rental expense. Duringsame current and former directors and officers named in the nine months endedJie 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 30, 2017 and 2016, the Company recorded $48,600asserted 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. He purports to state direct claims under Sections 10(b) and $60,231 sublease income, respectively; and $16,200 and $20,077 for the three months ended September 30, 2017 and 2016, respectively.
On March 3, 2020, defendants filed in 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 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 total minimum future lease paymentsCourt subsequently entered a similar Order in the Samuels Action. It also took a motion the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
While these derivative actions are as follows:
| 12 Months Ending September 30, | Amount | |||
| 2018 | $ | 596,600 | ||
| 2019 | 77,991 | |||
| 2020 | - | |||
| 2021 | - | |||
| 2022 | - | |||
| Thereafter | - | |||
| Total | $ | 674,591 | ||
Other than the three months ended September 30, 2017 and 2016,above, the Company recorded $0 and $90,000, as stock-based compensationis not currently a party to any legal proceeding, investigation or claim which, in the officers, respectively.
Note 1517 - Subsequent Events
After the issuanceclose of the consolidatedquarter to which these financial statements relate, the Company experienced (and continues to experience) significant adverse impacts of novel coronavirus (COVID-19) and the following subsequent event hasrelated public health orders. The Company’s two showrooms in Kuala Lumpur have been identified.
On October 24, 2017,14, 2020, the Company renewedclosed down Nova Macao due to the sublease agreement with its oneorder of its customers for a one-year term commencing on NovemberRepeal of Legal Regime of the Offshore Services by Macao Special Administrative Region which stipulated that the current offshore licenses which are not expired or revoked before 1 2017 and expiring on October 31, 2018.
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 2016Annual Report on Form 10-K.10-K for the year ended December 31, 2019 (the “2019 Form 10-K). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 20162019 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.
Safe Harbor Declaration
The following discussion and analysis isare 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 2016annual report on Form 10-K.10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”). All references to the third third quarter and first nine months of 20172020 and 20162019 mean the three and nine-monthnine-month periods ended September 30, 2017 2020 and 2016, respectively.2019. 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 20162019 Form 10-K.
Overview
Nova LifeStyle, Inc. is a broad based distributor and retailer of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and global purchase fulfillment globally.fulfillment. We monitor popular trendingtrends and workproducts 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 partythird-party manufacturing partner) a managed variety of high quality bedding foundation components.
Nova LifeStyle’s brand family currently includes Diamond Sofa (www.diamondsofa.com), Colorful World, Giorgio Mobili, and Bright Swallow.
Our customers principally consist of distributors and retailers havingwith specific geographic coveragesterritories that deploy middle to high end private label home furnishings havingwhich have very little competitive overlap withinwith our specific furnishingsfurnishing 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, thus allowingstrategy. This allows us to continually focus on building both same store sales growth as well as drive the expansion of 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 furniture worldwide: Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”), Bright Swallow International Group Limited (“Bright Swallow”), and Diamond Bar.Bar Outdoors, Inc. (“Diamond Bar”) Nova Macao was organized under the laws of Macao on May 20, 2006.2006 and was closed down on October 14, 2020. Nova Macao iswas a wholly owned subsidiary of Nova Lifestyle. Diamond Bar is a California corporation organized on June 15, 2000, which we acquired pursuant to a stock purchase agreement on August 31, 2011. On April 24, 2013, we acquired all of the outstanding stock of Bright Swallow;Swallow which we sold in January 2020. On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. (“i Design”) under the purchase price was $6.5 million in cash and was fully paid at the closinglaws of the acquisition.
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., Canadian, European, Australian, Asian and Middle Eastern markets.
In December 2019, a strain of novel coronavirus, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States and Malaysia. The Company experienced (and continues to experience) significant adverse impacts of novel coronavirus (COVID-19) and the related public health orders. The Company’s two showrooms and warehouse in Kuala Lumpur have been closed since March 18, 2020. The Los Angeles facility has been closed since March 16, 2020. A skeleton staff worked in that facility each day (i) to receive shipping containers of products delivered from the Company’s contract manufacturers and (ii) to ship products to customers. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business and the Company planned to reopen two showrooms on August 31, 2020. However, on August 28, 2020, Malaysia government extended the shutdown order to all business until December 31, 2020. The Company is continuing to experience reduced demand for its products and an increased level of purchase order cancellations as a result of the PRC and contributed capital of RMB 1 million ($162,994). Nova Dongguan made an additional capital contribution of RMB 0.1 million ($16,305) on November 27, 2013 through one of Nova Dongguan’s officers, Mr. Gu Xing Chang, who acted asCOVID-19 pandemic. The third-party contract manufacturers that the nominee shareholder of Ding Nuo.
Discontinued Operations
Towards the end of 2019, our Board of Directors determined to discontinue its marketing efforts in Canada and committed to a plan to dispose of Bright Swallow. On January 7, 2020, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated company incorporated in British Virgin Islands (“Kuka Design BVI” or “Buyer”). Pursuantthird party, for cash consideration of $2.50 million, pursuant to the terms of the Agreement, the Seller sold all of the outstanding equity interests in Nova Dongguan, a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”), which such value was primarily derived from Nova Dongguan and Nova Donguan’s wholly owned subsidiary, Nova Museum, and 90.97% owned subsidiary, Ding Nuo. Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan. The purchase price of $8,500,000 was fully paid on October 6, 2016.
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, and the recent launch of our Summer 2019 Collection, 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) consumer acceptance of our new brands and product collections; and (iii) general economic conditions in the U.S., Chinese, Canadian, European and other international markets.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. We believe most of our customers are willing to pay higher prices 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 marginsmargin for our products. We have diversifieddo not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by acquiring the Diamond Sofa brandUnited States on certain products manufactured in China, we are attempting to shift 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 U.S. markettariffs. 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 developing higher-marginin 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 for the U.S. and international markets, and acquiring Bright Swallow for the Canadian market.is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also should allow us at least to maintain our high gross profit margins. SomeThe markets in North America (excluding the United States) and particularly in Europe remain challenging because such markets are experiencing a slower than anticipated recovery sinceslow-down and may be entering a recession due to the international financial crisis that began in 2008. However, we believe that discretionary purchases of furniture by middle to upper middle-income consumers, our target global consumer market, will increase along with expected growth in the worldwide furniture trade and the recovery of housing markets. Furthermore, we believe that our expansion of direct sales in the U.S. will have a positive impact on our net sales and net income, while helping to diversify our customer base and end consumer markets.
Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to our accompanying unaudited condensed consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1)statements, we believe the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of ourfollowing accounting policies require a higher degree of judgment than othersare the most critical to aid you in their application. 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 previously disclosedand estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements “Summaryhave 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, Nova Macao, i Design, Nova Furniture, Nova Samoa, Nova Malaysia and its former subsidiary, Bright Swallow.
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 Accounting Policies – New Accounting Pronouncements,”estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for a discussionbad debt, valuation of relevant pronouncements.
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 $6,371 and $3,942 as of September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020 and 2019, bad debts expenses (reversal) from continuing operations were $2,429 and ($214,610), respectively; and $2,458 and $5,136 for the three months ended September 30, 2020 and 2019, respectively. During the nine and three months ended September 30, 2020 and 2019, bad debt expenses from discontinued operations were $0. As of September 30, 2020, we had gross receivable of $637,130 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 are reported net of allowance when we determine that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on our historical records and in normal circumstances, we generally receive goods within 5 to 9 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. As such, no reserve on supplier prepayments has been made or recorded by us. Any provisions for allowance for advance to suppliers, if deemed necessary, will be included in general and administrative expenses in the condensed consolidated statements of comprehensive income (loss).
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 Outdoors, Inc. (“Diamond Bar”) are subject to U.S. federal and state income taxes. Nova Furniture BVI and Bright Swallow International Group Limited (“BSI”) were incorporated in the BVI, Nova Samoa was incorporated in Samoa and Nova Macau was incorporated in Macau. There is no income tax for companies domiciled in the BVI, Samoa and Macau. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI, Samoa and Macau tax jurisdictions where Nova Furniture BVI and BSI, Nova Samoa and Nova Macau are domiciled. Nova Living (M) SDN. BHD. (“Nova Malaysia”) is incorporated in Malaysia and is subject to Malaysia income taxes.
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, 2020, 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 and three months ended September 30, 2020 and 2019.
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 comprehensive income (loss).
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, Nova Macao, Bright Swallow, Diamond Bar 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 comprehensive loss.
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, 2020 | RM4.16 to 1 | |||
December 31, 2019 | RM4.09 to 1 | |||
Income statement and cash flow items | ||||
For the nine months ended September 30, 2020 | RM4.23 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, Bright Swallow is a furniture distributor focusing on customers primarily in Canada, Nova Macao is a furniture distributor based in Macao 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, Bright Swallow, Nova Macao 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 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
Recent Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company applied the new standard beginning January 1, 2020.
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. Adoption of the ASUs is on a modified retrospective basis. 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 standard will have on our condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of adopting this standard on our condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, we must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are evaluating the impact this update will have on our financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. We continue to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
Results of Operations
Comparison of three monthsThree Months Ended September 30, 2017 2020 and 2016
The following table sets forth the results of our operations for the three months ended September 30, 20172020 and 2016.2019. Certain columns may not add due to rounding.
| Three Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Net sales | 33,222,625 | 30,538,918 | ||||||||||||||
| Cost of sales | (27,323,972 | ) | (82 | %) | (25,935,832 | ) | (85 | %) | ||||||||
| Gross profit | 5,898,653 | 18 | % | 4,603,086 | 15 | % | ||||||||||
| Operating expenses | (3,128,520 | ) | (9 | %) | (3,541,885 | ) | (12 | %) | ||||||||
| Income from operations | 2,770,133 | 8 | % | 1,061,201 | 3 | % | ||||||||||
| Other expenses, net | (75,534 | ) | (- | %) | (116,926 | ) | (- | %) | ||||||||
| Income tax benefit | (262,034 | ) | (1 | %) | (100,656 | ) | (- | %) | ||||||||
| Income from continuing operations | 2,956,633 | 9 | % | 1,044,931 | 3 | % | ||||||||||
| Loss from discontinued operations | - | - | (743,594 | ) | (2 | %) | ||||||||||
| Net income | 2,956,633 | 9 | % | 301,337 | 1 | % | ||||||||||
Three Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
$ | % of Sales | $ | % of Sales | |||||||||||||
Net sales | $ | 3,315,673 | $ | 7,690,282 | ||||||||||||
Cost of sales | (9,905,852 | ) | (299 | %) | (6,125,892 | ) | (80 | %) | ||||||||
Gross (loss) profit | (6,590,179 | ) | (199 | %) | 1,564,390 | 20 | % | |||||||||
Operating expenses | (1,652,777 | ) | (50 | %) | (1,836,619 | ) | (24 | %) | ||||||||
Loss from operations | (8,242,956 | ) | (249 | %) | (272,229 | ) | (4 | %) | ||||||||
Other income (expenses), net | (52,315 | ) | (2 | %) | (37,936 | ) | (0 | %) | ||||||||
Income tax benefit | 118,261 | 4 | % | 11,915 | 0 | % | ||||||||||
Loss from continuing operations | (8,177,010 | ) | (247 | %) | (298,250 | ) | (4 | %) | ||||||||
Loss from discontinued operations | - | - | % | (97,898 | ) | (1 | %) | |||||||||
Net loss | (8,177,010 | ) | (247 | %) | (396,148 | ) | (5 | %) | ||||||||
Net Sales
Net sales from continuing operations for the three months ended September 30, 2017,2020 were $33.22$3.32 million, an increasea decrease of 9%57% from $30.54$7.69 million in the same period of 2016.2019. This increasedecrease in net sales resulted primarily from an 82% increasea 4.17% decrease in sales volume, simultaneously with a 54.43% decrease in average selling price, which was partially offset by a 40% decrease in sales volume.price. Our largest selling product categories in the three months ended September 30, 20172020 were television cabinets, sofas, beds and diningcoffee table, which accounted for approximately 50%, 13% and 9% of sales from our continuing operations, respectively. In the three months ended September 30, 2019, the largest three selling categories were sofas, beds and coffee tables, which accounted for approximately 48%69%, 32%10% and 6%3% of sales from our continuing operations, respectively.
Our largest selling product categoriesrevenue has been adversely impacted by three factors: (a) the Covid-19 pandemic and its impact on worldwide demand, (b) our decision to move away from low margin products and to eliminate customers generating low margin sales and customers that have slow payment histories, and (c) the increased trade tariffs imposed by the United States on products manufactured in China. The trade tariffs imposed by the United States would have effectively reduced or eliminated our gross margin on our low cost, low margin products, which in part drove our decision to move away from those products. The resulting shift from those low cost, low margin products caused certain of our distributors that historically had represented a significant portion of our revenue to move their business to other providers. The $4.37 million decrease in net sales from continuing operations in the three months ended September 30, 2016 were sofas, beds2020, compared to the same period of 2019, was mainly due to decreased sales to China and dining tables, which accounted for approximately 57%, 15% and 6% of sales, respectively.
Cost of Sales
Cost of sales from continuing operations consists primarily of lower price and quality products after the salecosts of our factory in China in connection with our discontinued operations. We aggressively changed our product mix and ourfinished goods purchased from third-party manufacturers. Total cost of sales and marketing strategiesfrom continuing operations increased by 62% to offer high margin products to customers. Sales to Asia, excluding Hong Kong, were $3.33$9.91 million in the three months ended September 30, 2017, an increase of 90% from $1.752020, compared to $6.13 million in the same period of 2016, primarily due to the increases2019. Cost of sales orders from customers in the region. We had noas a percentage of sales increased to Europe, Hong Kong, and other countries299% in the three months ended September 30, 2017,2020, compared to $4.90 million80% in the same period2019. The increase of 2016, primarily due to the fact that we stopped selling low margin products to customers. We aggressively changed our sales strategy to aim for sales of high margin products. We will continue to pursue marketing efforts in these regions and we anticipate that sales to these regions will increase in near future.
Gross (Loss) Profit
Gross profit from continuing operations decreased by 521% to $27.32loss of $6.59 million in the three months ended September 30, 2017,2020, compared to $25.94gross profit of $1.56 million in the same period of 2016, due primarily to the increase in net sales. Cost of sales as a percentage of sales2019. Our gross profit margin decreased to 82%negative 199% in the three months ended September 30, 2017,2020, compared to 85%a positive gross profit margin of 20% in the same period of 2016.2019. The decrease in costgross profit margin is a result of sales as a percentageour write down of sales resulted$7.77 million of our slow-moving inventory, primarily Jade mats in Malaysia, in the third quarter of 2020.
Operating Expenses
Operating expenses from the decreased costcontinuing operations consisted of products purchased from third parties.
Other Expenses, Net
Other expenses, net, from continuing operations was $52,315 in the three months ended September 30, 2017, from $1.49 million2020, compared with other expenses, net, of $37,936 in the same period of 2016,2019, representing an increase in other expenses of $14,379. The increase in other expenses were due primarily due to increasesincrease in stock compensationfinancial expenses of approximately $477,000 and amortization expense$12,897 to $51,064 for the three months ended September 30, 2020, from $38,167 in the same period of approximately $231,000 on our intangible assets (see note 6 to our condensed consolidated financial statements), notwithstanding a decrease in bad debt expense of approximately $274,000.
Other Expenses, NetIncome Tax Benefit
Income tax benefit from continuing operations was $75,534$118,261 in the three months ended September 30, 2017,2020, compared with $116,926 in the same period of 2016, representing a decrease in other expense of $0.04 million. The decrease in other expense was due primarily to the decreased interest expense on our lines of credit to $40,932 in the three months ended September 30, 2017 from $96,535 in the same period of 2016, which was partially offset by a decrease in non-operating income of $16,623 to $0 in the three month ended September 30, 2017 from $16,623 in the same period of 2016.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was $8.18 million in the three months ended September 30, 2020, compared with $0.30 million of loss for the same period of 2019.
Loss from Discontinued Operations
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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had no income from discontinued operations in the three months ended September 30, 2020, and loss from discontinued operations of $97,898 in the same period of 2019.
Net IncomeLoss
As a result of the foregoing, our net incomeloss was $2.96$8.18 million in the three months ended September 30, 2017,2020, compared with $0.30$0.40 million inof net loss for the same period of 2016. Our net profit margin from continuing operations was 8.90% in the three months ended 2019.
Comparison of Nine Months Ended September 30, 2017, as compared with 3.42% of net profit margin from continuing operations 2020 and 1% of net profit margin in the same period of 2016.
The following table sets forth the results of our operations for the nine months ended September 30, 20172020 and 2016.2019. Certain columns may not add due to rounding.
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Net sales | 70,813,414 | 72,748,972 | ||||||||||||||
| Cost of sales | (58,741,122 | ) | (83 | %) | (62,091,435 | ) | (85 | %) | ||||||||
| Gross profit | 12,072,292 | 17 | % | 10,657,537 | 15 | % | ||||||||||
| Operating expenses | (10,298,665 | ) | (15 | %) | (9,114,324 | ) | (13 | %) | ||||||||
| Income from operations | 1,773,627 | 3 | % | 1,543,213 | 2 | % | ||||||||||
| Other expenses, net | (218,955 | ) | (- | %) | (293,884 | ) | (- | %) | ||||||||
| Income tax (benefit) expense | (750,037 | ) | (1 | %) | 60,063 | - | % | |||||||||
| Income from continuing operations | 2,304,709 | 3 | % | 1,189,266 | 2 | % | ||||||||||
| Loss from discontinued operations | - | - | (1,476,572 | ) | (2 | %) | ||||||||||
| Net income (loss) | 2,304,709 | 3 | % | (287,306 | ) | (- | %) | |||||||||
Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
$ | % of Sales | $ | % of Sales | |||||||||||||
Net sales | $ | 7,813,819 | $ | 19,459,617 | ||||||||||||
Cost of sales | (12,753,072 | ) | (163 | %) | (15,286,952 | ) | (79 | %) | ||||||||
Gross (loss) profit | (4,939,253 | ) | (63 | %) | 4,172,665 | 21 | % | |||||||||
Operating expenses | (4,663,111 | ) | (60 | %) | (5,550,283 | ) | (29 | %) | ||||||||
Loss from operations | (9,602,364 | ) | (123 | %) | (1,377,618 | ) | (7 | %) | ||||||||
Other expenses, net | (195,977 | ) | (2 | %) | (53,437 | ) | (0 | %) | ||||||||
Income tax benefit (expense) | 93,116 | 1 | % | (229,170 | ) | (1 | %) | |||||||||
Loss from continuing operations | (9,705,225 | ) | (124 | %) | (1,660,225 | ) | (9 | %) | ||||||||
(Loss) Income from discontinued operations | (326,531 | ) | (4 | %) | 1,078,361 | 6 | % | |||||||||
Net loss | (10,031,756 | ) | (128 | %) | (581,864 | ) | (3 | %) | ||||||||
Net Sales
Net sales from continuing operations for the nine months ended September 30, 2017,2020 were $70.81$7.81 million, a decrease of 3%60% from $72.75$19.46 million in the same period of 2016.2019. This decrease in net sales resulted primarily from a 40%40.44% decrease in sales volume, which was partially offset bysimultaneously with a 64% increase32.58% decrease in average selling price. Our largest selling product categories in the nine months ended September 30, 20172020 were sofas, televisionbeds and coffee tables, which accounted for approximately 51%, 13% and 8% of sales from our continuing operations, respectively. In the nine months ended September 30, 2019, the largest three selling categories were sofas, cabinets and beds, which accounted for approximately 56%51%, 22%15% and 9% of sales respectively, forfrom our continuing operations, respectively.
Our revenue has been adversely impacted by three factors: (a) the nine months ended September 30, 2017. InCovid-19 pandemic and its impact on worldwide demand, (b) our decision to move away from low margin products and to eliminate customers generating low margin sales and customers that have slow payment histories, and (c) the nine months ended September 30, 2016,increased trade tariffs imposed by the largest three selling categories were sofas, beds and dining tables,United States on products manufactured in China. The trade tariffs imposed by the United States would have effectively reduced or eliminated our gross margin on our low cost, low margin products, which accounted for 59%, 9% and 8%in part drove our decision to move away from those products. The resulting shift from those low cost, low margin products caused certain of sales, respectively, for the nine months ended September 30, 2016.
Cost of Sales
Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations decreased by 79%17% to $0.46$12.75 million in the nine months ended September 30, 2017,2020, compared to $2.19$15.29 million in the same period of 2016. Sales in these regions decreased as we gradually stopped selling low margin products to customers. We changed our sale strategy to selling high margin products. We will continue to maintain our marketing efforts in those regions. Sales to Australia increased to $24.69 million in the nine months ended September 30, 2017, compared to $3.45 million in the same period of 2016, primarily as a result of increased sales orders from one of our customers who was involved in projects in many hotels and apartments during the third quarter of 2017. We do not anticipate that such significant sales orders will continue in the near future from that customer. Sales to Asia, excluding Hong Kong, increased by 40% to $5.02 million in the nine months ended September 30, 2016, compared to $3.60 million in the same period of 2016, primarily due to the increases of sales orders of our products.
Gross (Loss) Profit
Gross profit increasedfrom continuing operations decreased by 13%218% to $12.07loss of $4.94 million in the nine months ended September 30, 2017,2020, compared to $10.66gross profit of $4.17 million in the same period of 2016.2019. Our gross profit margin increaseddecreased to 17%a negative 63% in the nine months ended September 30, 2017,2020, compared to 15%a positive gross profit margin of 21% in the same period of 2016.2019. The increasedecrease in gross profit margin resultedis a result that we wrote off $7.77 million of our slow-moving inventory, primarily from decreased costJade mats in Malaysia, in the third quarter of sales as a percentage of net sales, which was due primarily to a decreased cost of products purchased from third parties.
Operating Expenses
Operating expenses consistfrom continuing operations consisted of selling, general and administrative expenses and research and development expenses. Operating expenses were $10.30$4.66 million in the nine months ended September 30, 2017,2020, compared to $9.11$5.55 million in the same period of 2016.2019. Selling expenses decreased by 38%8%, or $1.67$0.09 million, to $2.69$1.10 million in the nine months ended September 30, 2017,2020, from $1.19 million in the same period of 2019, primarily due to decreased advertising, promotion and show expenses. General and administrative expenses decreased by 18%, or $0.80 million, to $3.56 million in the nine months ended September 30, 2020, from $4.36 million in the same period of 2016,2019, primarily due primarily to decreased salesa decrease of $0.39 million in entertainment and marketing expense since we decreased advertising on showstravel expenses, a decrease of $0.29 million in professional fees and televisiona decrease of $0.15 million in the U.S. General and administrative expense increasedconsulting expenses, partially offset by 60% or $2.85 million to $7.61an increase in bad debt reversal of $0.22 million.
Other Expenses, Net
Other expenses, net, from continuing operations was $0.20 million in the nine months ended September 30, 2017, from $4.76 million2020, compared with other expenses, net, of $53,437 in the same period of 2016, primarily due to changes in increased bad debt expense of approximately $169,000, share-based compensation of approximately $557,000, amortization expense of approximately $684,000 on our intangible assets (see note 6 to our condensed consolidated financial statements), and termination cost on Academic E-commerce platform of approximately $800,000 (see note 7 to our condensed consolidated financial statements).
Net Income (Loss)Tax Expense
Income tax benefit from continuing operations was $93,116 in the nine months ended September 30, 2020, compared with $0.23 million of income tax expenses in the same period of 2019. The income tax benefit for the nine months ended September 30, 2020 was $2.30primarily related to net loss for the three months ended September 30, 2020. The income tax expense for the nine months ended September 30, 2019 was mainly due to full valuation allowance against deferred tax assets in 2019.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was $9.71 million in the nine months ended September 30, 2017, as2020, compared with $0.29$1.66 million of loss for the same period of 2019.
(Loss) Income from Discontinued Operations
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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had loss from discontinued operations of $0.33 million in the nine months ended September 30, 2020, and income from discontinued operations of $1.08 million in the same period of 2019.
Net Loss
As a result of the foregoing, our net loss was $10.03 million in the nine months ended September 30, 2020, compared with $0.58 million of net loss for the same period of 2016. This increase in net income was mainly due to the loss from discontinued operations of $1.48 million in the nine months ended September 30, 2016, and the income tax benefit of $0.75 million in the nine month ended September 30, 2017, compared with $60,063 of income tax expense in the same period of 2016. Our net profit margin from continuing operations was 3% in the nine months ended September 30, 2017, as compared with 2% of net profit margin from continuing operations and 0.4% of net loss margin for the same period of 2016.
Liquidity and Capital Resources
Our principal demands for liquidity are related to our efforts to increase sales toand 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, and collections of accounts receivable, and credit facilities from banks.
We rely primarily on internally generated cash flow and proceeds under our existing credit facilitiesavailable working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through future offerings of our equity or debt, if and when we determine such offerings are required. During 2016,As of September 30, 2020, we raised approximately $3.09 milliondo not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from exercisesales of warrants.
We had net working capital of $65,834,526$56,886,648 at September 30, 2017, an increase2020, a decrease of $7.43 million$10,147,523 from net working capital of $58,407,707$67,034,171 at December 31, 2016.2019. The ratio of current assets to current liabilities was 73.51-to-127.09-to-1 at September 30, 2017.
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, 20172020 and 2016:
| 2017 | 2016 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | $ | (5,362,462 | ) | $ | (1,465,248 | ) | ||
| Investing activities | 8,232,557 | 5,274,558 | ||||||
| Financing activities | (4,655,801 | ) | 1,409,387 | |||||
2020 | 2019 | |||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | (1,091,885 | ) | $ | 7,714,272 | |||
Investing activities | 677,717 | (25,902 | ) | |||||
Financing activities | 466,096 | (6,763,616 | ) | |||||
Net cash used in operating activities was $5.36$1.09 million in the nine months ended September 30, 2017, an increase2020, a decrease of cash outflowinflow of $3.90$8.80 million from $1.47$7.71 million of cash used inprovided by operating activities in the same period of 2016.2019. The increase indecrease of cash outflowinflow was attributable primarily to an increaseda decreased cash inflow of $59.15 million from accounts receivable to $0.24 million cash outflow of $8.28in the nine months ended September 30, 2020, compared to $58.91 million from advances to suppliers, compared with $3.61 millioncash inflow in the same period of 20162019, such decrease being primarily due to strategic prepaymentsour reduced sales in the nine months ended September 30, 2020 and significant accounts receivable collected from our customers in the nine months ended September 30, 2019. In past years, we had allowed our key customers to take longer than the granted credit periods to settle their purchases, in order to boost sales. Starting from the second half of 2018, we had been monitoring them closely for inventory purchasespayment but our accounts receivable still reached a record high of $66.59 million as of December 31, 2018, and this negatively impacted our cash flow from operating activities. In 2019, the industry environment worsened as a result of the imposition by the U.S. of tariffs on products manufactured in China. We determined not to receive vendor discounts. We increasedaccept new sales orders from those key customers until they settled all overdue balances. As a result of customer payments and the prepayment amountsignificant reduction in sales, we were able to reduce our accounts receivable balance by approximately $8.49$66.42 million in the first quarter of 2019. We will continue our efforts to tighten customers’ credit terms and expect that most of our customers will pay according to the contract terms going forward.
The decrease in operating cash inflow was partially offset by the increase in cash inflow for advance to suppliers of $53.80 million to one of our mattress suppliers who is manufacturer$27.51 million cash inflow in U.S., comparing withthe nine months ended September 30, 2020, compared to $26.29 million cash outflow in the same period of 2016,2019, such increase in cash inflows being mainly due to we would likeplacing less amount of deposits to sell more mattressour suppliers in U.S. market becauseChina due to receipt of higher profit margin comparing with our other products. We also had increasedfewer sales orders from customers; and the increase in cash inflow for accounts payable of $3.87 million to $0.18 million cash inflow in the nine months ended September 30, 2020, compared to $3.69 million cash outflow in the same period of 2019, such decrease in cash outflows being mainly due to fewer purchases made in the nine months ended September 30, 2020.
Due to the recent imposition of significant trade tariffs on importation from China to the United States, we are actively developing alternative markets and product lines. We have been developing relationships with potential customers in Asia who intend to purchase high-end health furniture products for use in therapy clinics, hospitality and real estate projects. We have also been networking with sales agents to develop these markets. In the second quarter of 2019, we sourced physiotherapeutic jade mats from manufacturers in China. As of September 30, 2020, purchase of these inventories of $3.94totaled $55.33 million.
Net cash provided by investing activities was $0.68 million in the nine months ended September 30, 2017, compared2020 related to $0.24cash of Bright Swallow disposed of $1.46 million ofin January 2020 while we received $2.50 million cash inflow in the same period of 2016, and an increasedconsideration for this sale transaction. We also incurred cash outflow for accounts payable of $2.21 million during$360,084 from purchases of property and equipment in the nine months ended September 30, 2017,2020, compared to $0.13 million inflow$25,902 in the same period of 2016. We had2019.
Net cash inflow from accounts receivable of $4.96 million during the nine months ended September 30, 2017, compared to $0.56 million outflow in the same period of 2016. This increaseprovided by financing activities was mainly due to the improved collection of accounts receivable. Net operating cash outflow from our discontinued operations was $0.17$0.47 million in the nine months ended September 30, 2016.
As of September 30, 2017,2020, we had gross accounts receivable of $37,056,181,$637,130, of which $31,040,535$523,915 was not yet past due $5,981,718and $113,215 was less than 90 days past due, $8,660 was over 90 days but within 180 days past due and $25,268 over 180 days past due. We had an allowance for bad debt of $117,362 for accounts receivable.$6,371. As of October 30, 2017, $2,198,458November 5, 2020, $302,225 of accounts receivable outstanding atas of September 30, 20172020 had been collected.
All accounts receivable outstanding at December 31, 20162019 had been collected.
As of September 30, 20172020, and December 31, 2016,2019, we had advances to suppliers of $21,951,040$237,361 and $13,699,752,$27,745,184, respectively. The nature of theseThese supplier prepayments is the payment that isare made for goods before we actually receive them. The balances of advances to suppliers have kept increasing in order to secure our purchasing power over new materials and priority position of our production lines with our suppliers, especially when we are introducing eight new product lines in 2017. Also, the decision for such advances is to establish long term relationship with our suppliers.
For a brand 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 five 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 any suppliers failand if a supplier fails to fulfill theour orders within the time frame as stipulated in the purchase contracts. As of September 30, 20172020, and December 31, 2016,2019, no reserve on supplier prepayments had been made or recorded by us.
As of October 31, 2017, $13,669,300, or almost 100%,November 6, 2020, 64% of our advanceadvances to suppliers outstanding at December 31, 2016September 30, 2020 had been delivered to us in the form of inventory purchase.
Lines of Credit
On September 28, 2015,19, 2017, Diamond Bar extended the line of credit up to a maximum of $6,000,000 with annual interest of 3.75% (4% from December 17, 2015) and maturity on June 1, 2017. On January 20, 2016, Diamond Bar increased the line of credit up$8,000,000 to a maximum of $8,000,000 with annual interest of 4%. On June 22, 2017, Diamond Bar extended the line of credit to maturity on September 1, 2017. On September 19, 2017, Diamond Bar extended the line of credit to maturitymature on June 1, 2019. The annual interest rate was 4.25%5.50% as of September 30, 2017.December 31, 2019. The line of credit iswas secured by all of the assets of Diamond Bar and is guaranteed by Nova LifeStyle. We paid off our lines of credit upon expiration on June 30, 2019. As of September 30, 20172020, and 2016,December 31, 2019, Diamond Bar had $3,322,040 and $6,129,841$0 outstanding on the line of credit, respectively.credit. During the nine months ended September 30, 20172020 and 2016,2019, the Company recorded interest expense of $145,857$0 and $167,381,$35,444, respectively; and $40,932 and $61,127$0 for the three months ended September 30, 20172020 and 2016, respectively. 2019.
As of September 30, 2020, and December 31, 2019, we do not have any credit facilities.
Shelf Registration
On July 13, 2017, Diamond Bar had $4,677,960 available for borrowing without violating any covenants.
Other Long-Term Liabilities
As of September 30, 2020, we recorded long-term taxes payable of $1.64 million, consisting of an income tax payable of $1.64 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 Diamond Bar was in compliance withon our post-1986 foreign unremitted earnings, and a $0.01 million unrecognized tax benefit, as ASC 740 specifies that tax positions for which the stated covenants.
We elected to $6,500,000, with a commercial bank in Hong Kong to extendpay the maturity date to January 29, 2016. On February 16, 2016, Nova Macao extendedone-time transition tax over the maturity date of its line of credit to January 31, 2017, with an annual interest rate of 4% and principal of up to $6,500,000. The loan requires monthly payment of interest and that the interest rate will be adjusted annually. The loan was secured by assignment of Sinosure (China Export and Credit Insurance Company) credit insurance and was guaranteed by Nova LifeStyle and Diamond Bar. The Company did not extend the line of credit and paid it off in February 2017. As of September 30, 2017 and 2016, Nova Macao had $0 and $1,848,000 outstanding on the line of credit, respectively. During the nine months ended September 30, 2017 and 2016, the Company paid interest of $13,828 and $57,304, respectively; and $0 and $18,890 for the three months ended September 30, 2017 and 2016, respectively.
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.
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the participationsupervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer our principal executive officer and principal financial officer, respectively, evaluated(“CFO”), the effectiveness of our disclosure controls and procedures as(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, 2020. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report. report, our disclosure controls and procedures were effective.
Disclosure controls and procedures include, without limitation,are controls and procedures that are designed to provide reasonable assuranceensure that information we are required to disclosebe disclosed in our reports that we filefiled or submitsubmitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information(b) is accumulated and communicated to our management, including our Chief Executive OfficerCEO and Chief Financial Officer,CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive OfficerOur management recognizes that any controls and Chief Financial Officer concluded that, asprocedures, no matter how well designed and operated, can provide only reasonable assurance of September 30, 2017, ourachieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were effectiveare designed to provide reasonable assurance of achieving their objectives as of such date.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting was(as defined in Rule 13a-15(f) of the Exchange Act) that we lacked sufficient accounting personnel with the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements. This material weakness has been remediated since Jeffery Chuang has joined Nova asoccurred during nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our CFO since August 22, 2017. Mr. Chuang received his Bachelor of Science in Finance from California State University, Northridge in 1997 and his Master of Science in Taxation from Golden Gate University in 2006. Mr. Chuang is a Certified Public Accountant and is a member of California Society of Certified Public Accountants.
PART II. OTHER INFORMATION
On December 28, 2018, George Barney filed a putative class action complaint 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. Barney claimed the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Security Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently substituted as plaintiffs and, on June 18, 2019, they filed an Amended Complaint.
In the Amended Complaint, plaintiffs seek to recover compensatory damages caused by the Company’s alleged violations of federal securities laws during the period from December 3, 2015 through December 20, 2018. They claim that the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in such customer’s planned $460 million senior care center in China; (2) the Company inflated its reported sales in 2016 and 2017 with the Company’s two major customers; and (3) as a result, the Company’s public statements were materially false and misleading at all relevant times. In support of these claims, plaintiffs rely primarily upon the aforementioned Seeking Alpha blog in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers.
By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint that Nova, Ms. Lam and Mr. Chuang filed (the “Nova Defendants”) The Nova Defendants accordingly answered the Amended Complaint. The Court entered a scheduling order setting a final pretrial conference for July 20, 2020 that it without request from the parties continued to October 19, 2020.
Plaintiffs waited until recently to pursue discovery and have yet to file a Motion for Class Certification. On August 7, 2020, the Nova Defendants filed a Motion for Interim Discovery Conference to address the pace and scope of discovery. By Order entered October 1, 2020 the Court denied the Motion for a Status Conference and continued the Final Pretrial Conference until April 19, 2021.
Independent of the litigation, the Audit Committee engaged the Company’s auditor to perform special procedures to confirm the reported sales. Those procedures included, but were not limited to, the examination and testing of relevant documentation relating to the sales made by the Company to the customers identified in the purported research report for the periods 2015-2018, and 100% sampling of all transactions between the Company and the subject customers. The Audit Committee finished its special procedures in March 2019 and the Company’s independent auditor has reported to the Audit Committee that, regarding the four subject customers mentioned in the purported research report, the special procedures resulted in no evidence of fictitious sales or of fictitious customers. Please see the details in the Form 8-K filed by the Company with SEC on March 29, 2019.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a 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), directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su), and vice president (Steven Qing 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 in the 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 by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Ms. 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 nonpublic information . . . .”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) also 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. He purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, defendants filed in each of the derivative actions motions to stay those proceedings until the Barney action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board 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 the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
While these derivative actions are purportedly asserted on behalf of the Company, if they are reactivated, it is possible that the Company may occasionally become involved in various lawsuitsdirectly incur attorneys’ fees and is advancing the costs of defense for its current directors and officers pursuant to contractual and legal proceedings arisingindemnity 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 ordinary courseopinion of business. Litigationthe management, is subjectlikely to inherent uncertainties and an adverse result in these or other matters that may arise from time to time could have an adverse effect on our business, financial condition or operating results. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on ourthe business, financial condition or operating results.results of operations.
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX
Exhibit No. | Document Description | |
31.1 † | ||
31.2 † | ||
32.1 ‡ | ||
32.2 ‡ |
101.INS† | XBRL Instance Document | |
101.SCH† | XBRL Schema Document | |
101.CAL† | XBRL Calculation Linkbase Document | |
101.DEF† | XBRL Definition Linkbase Document | |
101.LAB† | XBRL Label Linkbase Document | |
101.PRE† | XBRL Presentation Linkbase Document |
† Filed herewith
‡ Furnished herewith
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 | By: | /s/ Thanh H. Lam | |
Thanh H. Lam Chairperson and Chief Executive Officer (Principal Executive Officer) | |||
Date: November | /s/ Jeffery Chuang | ||
Jeffery Chuang Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||