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 |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 011-36259001-36259
NOVA LIFESTYLE, INC.
(Exact name of registrant as specified in its charter)
Nevada | 90-0746568 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
6565 E. Washington Blvd. Commerce, CA | 90040 | |
(Address of principal executive offices) | (Zip Code) |
(323) 888-9999 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | NVFY | Nasdaq Stock Market |
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.
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 ☒
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date: 27,383,6485,567,544 shares of common stock outstanding as of November 9, 2017.May 14, 2021.
Nova LifeStyle, Inc.
Page | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | 1 | |
1 | ||
3 | ||
4 | ||
5 | ||
7 | ||
Item 2. | 26 | |
Item 3. | 36 | |
Item 4. | 36 | |
PART II. OTHER INFORMATION | ||
Item 1. | 37 | |
Item 6. | 38 | |
39 | ||
PART I. FINANCIAL INFORMATION
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
AS OF MARCH 31, 2021 (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 | ||||
March 31, 2021 | December 31, 2020 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 7,641,276 | $ | 8,744,784 | ||||
Accounts receivable, net | 172,346 | 514,939 | ||||||
Advance to suppliers | 351,088 | 381,894 | ||||||
Inventories | 32,940,465 | 32,814,520 | ||||||
Prepaid expenses and other receivables | 219,361 | 349,746 | ||||||
Tax receivable | 479,413 | 489,020 | ||||||
Total Current Assets | 41,803,949 | 43,294,903 | ||||||
Noncurrent Assets | ||||||||
Plant, property and equipment, net | 426,247 | 453,518 | ||||||
Operating lease right-of-use assets, net | 2,120,657 | 2,319,742 | ||||||
Lease deposit | 72,863 | 73,801 | ||||||
Goodwill | 218,606 | 218,606 | ||||||
Deferred tax asset | 117,952 | 117,952 | ||||||
Total Noncurrent Assets | 2,956,325 | 3,183,619 | ||||||
Total Assets | $ | 44,760,274 | $ | 46,478,522 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2021 (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 | ||||
March 31, 2021 | December 31, 2020 | |||||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 490,623 | $ | 743,785 | ||||
Operating lease liability, current | 663,257 | 688,082 | ||||||
Advance from customers | 34,218 | 266,243 | ||||||
Accrued liabilities and other payables | 260,780 | 327,173 | ||||||
Total Current Liabilities | 1,448,878 | 2,025,283 | ||||||
Noncurrent Liabilities | ||||||||
Other Loan | 150,000 | 150,000 | ||||||
Operating lease liability, non-current | 1,583,733 | 1,746,070 | ||||||
Income tax payable | 1,628,702 | 1,628,694 | ||||||
Total Noncurrent Liabilities | 3,362,435 | 3,524,764 | ||||||
Total Liabilities | 4,811,313 | 5,550,047 | ||||||
Contingencies and Commitments | ||||||||
Stockholders' Equity | ||||||||
Common stock, $0.001 par value; 15,000,000 shares authorized, 5,602,734 and 5,596,234 shares issued and outstanding; as of March 31, 2021 and December 31, 2020, respectively | 5,602 | 5,596 | ||||||
Additional paid-in capital | 39,779,842 | 39,766,978 | ||||||
Statutory reserves | - | 6,241 | ||||||
Accumulated other comprehensive income | 569,443 | 798,290 | ||||||
(Accumulated deficits) Retained earnings | (405,926 | ) | 351,370 | |||||
Total Stockholders' Equity | 39,948,961 | 40,928,475 | ||||||
Total Liabilities and Stockholders' Equity | $ | 44,760,274 | $ | 46,478,522 | ||||
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, 2017MARCH 31, 2021 AND 20162020 (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 | |||||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
(Unaudited) | ||||||||
Net Sales | $ | 3,331,567 | $ | 2,203,220 | ||||
Cost of Sales | 1,951,255 | 1,424,191 | ||||||
Gross Profit | 1,380,312 | 779,029 | ||||||
Operating Expenses | ||||||||
Selling expenses | 768,085 | 317,416 | ||||||
General and administrative expenses | 1,378,330 | 1,282,719 | ||||||
Total Operating Expenses | 2,146,415 | 1,600,135 | ||||||
Loss From Operations | (766,103 | ) | (821,106 | ) | ||||
Other Income (Expenses) | ||||||||
Foreign exchange transaction gain (loss) | 68,984 | (156,013 | ) | |||||
Interest (expense) income, net | (2,390 | ) | 20,825 | |||||
Financial expense | (54,352 | ) | (32,740 | ) | ||||
Total Other Income (Expenses), Net | 12,242 | (167,928 | ) | |||||
Loss Before Income Taxes and Discontinued operations | (753,861 | ) | (989,034 | ) | ||||
Income Tax Expense | (9,676 | ) | (23,879 | ) | ||||
Loss From Continuing Operations | (763,537 | ) | (1,012,913 | ) | ||||
Loss From Discontinued Operations | - | (326,531 | ) | |||||
Net Loss | (763,537 | ) | (1,339,444 | ) | ||||
Other Comprehensive (Loss) Income | ||||||||
Foreign currency translation | (228,847 | ) | 158,215 | |||||
Net Loss and Comprehensive Loss | (992,384 | ) | (1,181,229 | ) | ||||
Basic and Diluted weighted average shares outstanding | 5,598,678 | 5,572,196 | ||||||
Loss from continuing operations per share of common stock | ||||||||
Basic and Diluted | $ | (0.14 | ) | $ | (0.18 | ) | ||
Loss from discontinued operations per share of common stock | ||||||||
Basic and Diluted | $ | - | $ | (0.06 | ) | |||
Net loss per share of common stock | ||||||||
Basic and Diluted | $ | (0.14 | ) | $ | (0.24 | ) | ||
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, 2017MARCH 31, 2021 AND 20162020 (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 March 31, 2021
Accumulated | (Accumulated | |||||||||||||||||||||||||||
Additional | Other | deficits) | Total | |||||||||||||||||||||||||
Common stock | Paid in | Comprehensive | Statutory | Retained | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Income | Reserve | Earnings | Equity | ||||||||||||||||||||||
Balance at beginning of period | 5,596,234 | $ | 5,596 | $ | 39,766,978 | $ | 798,290 | $ | 6,241 | $ | 351,370 | $ | 40,928,475 | |||||||||||||||
Stock issued to employees | 1,500 | 1 | 2,969 | - | - | - | 2,970 | |||||||||||||||||||||
Stock issued to consultants | 5,000 | 5 | 9,895 | - | - | - | 9,900 | |||||||||||||||||||||
Closure of Nova Macau | - | - | - | - | (6,241 | ) | 6,241 | - | ||||||||||||||||||||
Foreign currency translation loss | - | - | - | (228,847 | ) | - | - | (228,847 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (763,537 | ) | (763,537 | ) | |||||||||||||||||||
Balance at end of period | 5,602,734 | $ | 5,602 | $ | 39,779,842 | $ | 569,443 | $ | - | $ | (405,926 | ) | $ | 39,948,961 | ||||||||||||||
Three Months Ended March 31, 2020
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common stock | Paid in | Comprehensive | Statutory | Retained | Stockholders' | |||||||||||||||||||||||
Shares | Amount | Capital | Income | Reserve | Earnings | Equity | ||||||||||||||||||||||
Balance at beginning of period | 5,568,734 | $ | 5,568 | $ | 39,605,042 | $ | - | $ | 6,241 | $ | 26,429,695 | $ | 66,046,546 | |||||||||||||||
Stock issued to employees | 3,000 | 3 | 6,387 | - | - | - | 6,390 | |||||||||||||||||||||
Stock issued to consultants | 5,000 | 5 | 12,745 | - | - | - | 12,750 | |||||||||||||||||||||
Stock options vested to board of directors and employees | - | - | 37,844 | - | - | - | 37,844 | |||||||||||||||||||||
Foreign currency translation gain | - | - | - | 158,215 | - | - | 158,215 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (1,339,444 | ) | (1,339,444 | ) | |||||||||||||||||||
Balance at end of period | 5,576,734 | $ | 5,576 | $ | 39,662,018 | $ | 158,215 | $ | 6,241 | $ | 25,090,251 | $ | 64,922,301 | |||||||||||||||
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, 2017MARCH 31, 2021 AND 20162020 (UNAUDITED)
Three Months ended March 31, | ||||||||
2021 | 2020 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (763,537 | ) | $ | (1,339,444 | ) | ||
Net loss from discontinued operations | - | (326,531 | ) | |||||
Net loss from continuing operations | $ | (763,537 | ) | $ | (1,012,913 | ) | ||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 17,751 | 15,442 | ||||||
Amortization of operating lease right-of-use assets | 193,312 | 142,357 | ||||||
Stock compensation expense | 12,870 | 53,789 | ||||||
Changes in bad debt allowance | (3,460 | ) | (23 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 346,053 | 2,307 | ||||||
Advance to suppliers | 30,806 | (74,345 | ) | |||||
Inventories | (125,945 | ) | 368,385 | |||||
Operating lease liabilities | (181,328 | ) | (136,337 | ) | ||||
Other current assets | 130,385 | 1,369 | ||||||
Accounts payable | (253,162 | ) | (122,091 | ) | ||||
Advance from customers | (229,860 | ) | 28,944 | |||||
Accrued liabilities and other payables | (64,427 | ) | 33,024 | |||||
Taxes payable | 9,607 | 27,936 | ||||||
Net Cash Used in Continuing Operations | (880,935 | ) | (672,156 | ) | ||||
Net Cash Provided by Discontinued Operations | - | - | ||||||
Net Cash Used in Operating Activities | (880,935 | ) | (672,156 | ) | ||||
Cash Flows From Investing Activities | ||||||||
Cash received from sales of subsidiary, net of cash disposed of | - | (1,462,200 | ) | |||||
Net Cash Used in Continuing Operations | - | (1,462,200 | ) | |||||
Net Cash Provided by Discontinued Operations | - | - | ||||||
Net Cash Used in Investing Activities | - | (1,462,200 | ) | |||||
Cash Flows From Financing Activities | ||||||||
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 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)
Three Months ended March 31, | ||||||||
2021 | 2020 | |||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | (222,573 | ) | $ | 156,557 | |||
Net decrease in cash and cash equivalents | (1,103,508 | ) | (1,977,799 | ) | ||||
Cash and cash equivalents, beginning of period | 8,744,784 | 8,885,398 | ||||||
Cash and cash equivalents, ending of period | $ | 7,641,276 | $ | 6,907,599 | ||||
Analysis of cash and cash equivalents | ||||||||
Included in cash and cash equivalents per consolidated balance sheets | 7,641,276 | $ | 6,907,599 | |||||
Included in assets of discontinued operations | - | - | ||||||
Cash and cash equivalents, end of period | $ | 7,641,276 | $ | 6,907,599 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Continuing operations: | ||||||||
Cash paid during period for: | ||||||||
Income tax payments | $ | 62 | $ | - | ||||
Interest expense | $ | 1,453 | $ | 1,596 | ||||
Discontinued operations: | ||||||||
Cash paid during period for: | ||||||||
Income tax payments | $ | - | $ | - | ||||
Interest expense | $ | - | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)
Note 1- Organization and Description of Business
Organization and Business
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”), formerly known as Stevens Resources, Inc., was incorporated in the State of Nevada on September 9, 2009.
The Company is a U.S. holding company with no material assets other than the ownership interests of 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”), Nova Living (M) SDN. BHD. (“Nova Malaysia”) and Nova Living (HK) Group Limited (“Nova HK”).
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. 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,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 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 minimum operations as of March 31, 2021.
On December 12, 2019, Nova LifeStyle, Inc. acquired Nova Malaysia at cost of $1 which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition is to market and sell 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 completedtransferred 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 January 7, 2020. The Company received the acquisitionpayment on May 11, 2020. As of December 31, 2020, operations of Bright Swallow an established furniture company with a global client base.
On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova DongguanMacao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered the de-registration procedure and the current business was a wholly foreign-owned enterprise, or WFOE, andtaken over by Nova HK. Nova Macao completed de-registration procedure in January 2021.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova HK at cost of $1,290 which was incorporated under the lawsin Hong Kong on November 6, 2019. Nova HK took over Nova Macao’s business. This company has had minimum operations as of the PRC on June 6, 2003. Nova Dongguan organized Nova Museum on March 17, 2011 as a non-profit organization under the laws of the PRC engaged in the promotion of the culture and history of furniture in China. Nova Dongguan markets and sells products in China to stores in our former franchise network and to wholesalers and agents for domestic retailers and exporters. At the time of sale, Nova Dongguan also provided design expertise and facilities to manufacture branded products and products for international markets under original design manufacturer and original equipment manufacturer agreements, or ODM and OEM agreements. On October 24, 2013, Nova Dongguan incorporated Ding Nuo under the laws of the PRC.
The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Nova Macao, Diamond Bar, i Design, Nova HK and BSI. The “Company” may also from time to timeNova Malaysia.
COVID-19
Beginning in these Notes include2020, a strain of novel coronavirus (“COVID-19”) has spread globally and, at this point, the Company’s former subsidiaries,operations has been adversely impacted by the COVID-19 pandemic. In particular, during the year ended December 31, 2020, Nova Furniture BVI, Nova Dongguan, Nova MuseumMalaysia had not been able to operate in full capacity due to Malaysian government’s shut down orders which resulted in sales lagging and Ding Nuo.slow-moving inventories. The Company’s two showrooms in Kuala Lumpur were closed from March 2020 to May 2020 and closed again since August 2020 and re-opened on March 5, 2021. However, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. The Company expects that the impact of the COVID-19 outbreak on the United States and world economies will continue to have a material adverse impact on the demand for its products.
The extent of the impact of the COVID-19 pandemic will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, economies worldwide have also been negatively impacted by the COVID-19 pandemic. Policymakers around the globe have responded with fiscal policy actions intended to support the economy as a whole, but it is presently unknown whether and to what extent further fiscal actions will continue or be effective. The magnitude and overall effectiveness of these actions remain uncertain.
The severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the efficacy and distribution of COVID-19 vaccines and the extent and severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of the Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition, liquidity or results of operations is uncertain. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
The interim condensed consolidated financial information as of September 30, 2017March 31, 2021 and for the nine and three month periods ended September 30, 2017March 31, 2021 and 20162020 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, 2016,2020, 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,March 31, 2021, its interim condensed consolidated results of operations and cash flows for the nine and three month periods ended September 30, 2017March 31, 2021 and 2016,2020, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Use of Estimates
In preparing 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.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for the Company’s products, and adversely impact its results of operations. During the three months ended March 31, 2021, the Company continued to face increasing uncertainties around its estimates of revenue collectability, accounts receivable credit losses and valuation of inventories. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in its unaudited condensed consolidated financial statements.
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, 2017December 31, 2020 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, 2021 | $ | 5,201 | ||
Reversal | (3,460 | ) | ||
Balance at March 31, 2021 | $ | 1,741 |
| 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 |
During the ninethree months ended September 30, 2016,March 31, 2021 and 2020, bad debt (reversal) expensedebts reversal from continuing operations was $3,460 and discontinued operations were $33,818 and $552,611,$23, respectively. During the three months ended September 30, 2016,March 31, 2021 and 2020, bad debt expenseprovision and written off 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 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 compares the costWrite-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. There were no write-downs of inventories withfrom the net realizable valueCompany’s continuing operation for the three months ended March 31, 2021 and an allowance is made for writing down their inventories to market value, if lower. The Company did not record any2020. There were also no write-downs of inventory at September 30, 2017 and 2016.
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.shares are credited or charged to additional paid-in capital using the average-cost method. Upon retirement of treasury stock, the amounts in excess of par value are charged entirely to retained earnings.
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 $3,264 and $94,839 for the nine months ended September 30, 2017 and 2016, respectively; and $0 and $35,174$12,266 for the three months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. Research and development expense fromDuring the Company’s discontinued operations was $588,790 and $179,643 for 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 differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company recordedfollows 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 (benefit) expense from its discontinued operationsassets and liabilities, classification of approximately ($26,000)current and $36,000, respectively.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture Limited and Bright Swallow areBVI was incorporated in the BVI.BVI, Nova Macao isSamoa was incorporated in Macao.Samoa, and Nova Samoa isHK was incorporated in Oceania.Hong Kong. There is no income tax for companies domiciled in the BVI Oceania or Macao.and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisionprovisions related to the BVI and MacaoSamoa tax jurisdictionjurisdictions where Nova Furniture BVI BSI and Nova MacaoSamoa are domiciled. Nova MacaoMalaysia is anincorporated in Malaysia and is subject to Malaysia income tax-exempt entitytaxes. Nova HK is incorporated in Hong Kong and domiciledis subject to Hong Kong 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 year ended December 31, 2020, the Company has calculated its best estimate of the impact of the GILTI in Macao.
On March 27, 2020, the CARES Act were each enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
As of September 30, 2017,March 31, 2021 and December 31, 2020, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $27.9 million, of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.
A reconciliation of the three month ended March 31, 2021 and 2020 amount of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) is as follows:
Gross UTB | ||||||||
2021 | 2020 | |||||||
Balance – January 1 and March 31 | $ | 935 | 12,547 | |||||
At March 31, 2021 and December 31, 2020, the Company had cumulatively accrued approximately $100 and $131 for estimated interest and penalties related to unrecognized tax benefits, respectively, related to the Company’s continuing operations. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $100 and $125 for the three months ended March 31, 2021, and 2020, respectively. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
At December 31, 2020, 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 did not record interest and penalties related to unrecognized tax benefits as a component of income tax expense for the three months ended March 31, 2021, and 2020 related to the Company’s discontinued operations.
As of March 31, 2021, unrecognized tax benefits were approximately $1.4 million.$900. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $1.4 million$900 as of September 30, 2017.March 31, 2021. As of September 30, 2016,March 31, 2020, unrecognized tax benefits were approximately $4.6 million.$12,500. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $4.6 million$14,000 as of September 30, 2016.
| 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 | ||
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2011-20162018-2020 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, 2017March 31, 2021 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 formconsolidated 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 ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, shipping and handling costs from continuing operations were $1,576$993 and $2,033, respectively; and $623 and $313 for$349, respectively. During the three months ended September 30, 2017 and 2016, respectively. During the nine and three months ended September 30, 2016,March 31, 2020, 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$407,862 and $2,156,451 for the nine months ended September 30, 2017 and 2016, respectively; and $186,381 and $841,345$17,998 for the three months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. AdvertisingDuring the three months ended March 31, 2020, advertising expense from discontinued operations was $60,379 and $59,286 for 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.
Earnings per Share (EPS)
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) earningsloss per share for the nine and three months ended September 30, 2017March 31, 2021 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 | |||||||
March 31, 2021 | March 31, 2020 | |||||||
Net loss from continuing operations | $ | (763,537 | ) | $ | (1,012,913 | ) | ||
Net loss from discontinued operations | - | (326,531 | ) | |||||
Net loss | (763,537 | ) | (1,339,444 | ) | ||||
Weighted average shares outstanding – basic and diluted* | 5,598,678 | 5,572,196 | ||||||
Net loss from continuing operations per share of common stock | ||||||||
Basic and Diluted | $ | (0.14 | ) | $ | (0.18 | ) | ||
Net loss from discontinued operations income per share of common stock | ||||||||
Basic and Diluted | $ | - | $ | (0.06 | ) | |||
Net loss per share of common stock | ||||||||
Basic and Diluted | $ | (0.14 | ) | $ | (0.24 | ) | ||
* | Including 36,307 and 41,307 shares that were granted and vested but not yet issued for the three months ended March 31, 2021 and 2020, respectively. |
For the nine and three months ended September 30, 2017March 31, 2021, 18,000 shares of unvested restricted stock and 2016, 858,334 and 1,925,001stock options to purchase 340,500 shares of the Company’s stock were excluded from the EPS calculation, as their effects were anti-dilutive.
For the three months ended March 31, 2020, 171,667 shares purchasable under warrants, 45,600 shares of unvested restricted stock and stock options to purchase 340,500 shares of the Company’s stock were anti-dilutive and were excluded from EPS respectively, as their effects were anti-dilutive. For the nine and three month periods ended September 30, 2016, the unvested restricted 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%10% or more of the Company’s sales from our continuing operations for the three months ended March 31, 2021. Two customers accounted for 19% and 18% of the Company’s gross accounts receivable as of March 31, 2021, respectively. Two customers accounted for 40% and 27% of the Company’s gross accounts receivable as of December 31, 2020, respectively. One customer accounted for 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 salesfrom our continuing operations for the three months ended September 30, 2017March 31, 2020.
No customer accounted for 10% or more of the Company’s sales from our discontinued operations for the years ended March 31, 2021 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.
The Company purchased its products from fivethree and four major vendors during the nine and three months ended September 30, 2017,March 31, 2021 and 2020, accounting for a total of 82% (26%58% (32%, 19%13%, 15%, 12% and 10% for13% each) and 80% (30%74% (38%, 16%, 12%15%, 11% and 11% for10% each) of the Company’s purchases respectively.
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
● |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The carrying value of cash, accounts receivable, 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, Diamond Bar, Nova HK and i Design, and its former subsidiaries, Nova Macao, Bright Swallow 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 income and comprehensive income. There have been no significant fluctuations in the exchange rate for the conversion of RMB to USD after the balance sheet date.
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 | ||||
March 31, 2021 | RM4.15 to 1 | |||
December 31, 2020 | RM4.02 to 1 | |||
Income statement and cash flows items | ||||
For the period ended March 31, 2021 | RM4.07 to 1 | |||
For the period ended March 31, 2020 | RM4.18 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, Nova HK is a furniture distributor based in Hong Kong focusing on international customers, and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. They are all operated under the same senior management of the Company, and management views the operations of Diamond Bar, Bright Swallow, Nova Macao, Nova HK 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 and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations ofrequested by 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.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. The lease has remaining lease term of approximately four years. Lease expense is recognized on a straight-line basis over the lease term. The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company recognized no impairment of ROU assets as of March 31, 2021 and December 31, 2020.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the consolidated balance sheets.
New Accounting Pronouncements
Recent Adopted Accounting Standards
In February 2016,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. 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 applied the new standard beginning January 1, 2021.
In August 2020, the FASB issued ASU No. 2016-02, Leases (Topic 842)2020-06 “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). The new standard establishes” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a right-of-use (“ROU”) model that requiresresult, a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leasesconvertible debt instrument will be classifiedaccounted for as either finance or operating, with classification affectinga single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the patterntype of expense recognitioncontracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in the income statement. The new standardregistered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A 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. The Company is in the process of evaluating the impact of2023. Early adoption of this ASU on the consolidated financial statements.
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. 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.
The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 3- 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 November 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 March 31, 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 consolidated statements of operations:
March 31, 2020 | ||||
Sales | $ | - | ||
Cost of sales | - | |||
Operating expenses | - | |||
Other expense, net | - | |||
Loss on disposal of subsidiary | (326,531 | ) | ||
Loss before income taxes | (326,531 | ) | ||
Income tax benefit | - | |||
Loss from discontinued operations | $ | (326,531 | ) | |
| 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 | ) | ||||||
Note 4 -Inventories
The inventories as of September 30, 2017March 31, 2021 and December 31, 20162020 totaled $6,720,649$32,940,465 and $2,781,123,$32,814,520, respectively, and were all finished goods.
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. There were no write-downs of inventories from the Company’s continuing operation for the three months ended March 31, 2021 and 2020. There were also no write-downs of inventories from the Company’s discontinued operations for the three months ended March 31, 2020
Note 5 - Plant, Property and Equipment, Net
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, 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 | |||||
March 31, 2021 | December 31, 2020 | |||||||
Computer and office equipment | $ | 396,041 | $ | 396,302 | ||||
Decoration and renovation | 438,521 | 448,641 | ||||||
Less: accumulated depreciation | (408,315 | ) | (391,425 | ) | ||||
| $ | 426,247 | $ | 453,518 | |||||
Depreciation expense from continuing operations was $30,307$17,751 and $33,217 for the nine months ended September 30, 2017 and 2016, respectively; and $10,164 and $11,128$15,442 for the three months ended September 30, 2017March 31, 2021 and 2016,2020, 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 $351,088 and $381,894 as of March 31, 2021 and December 31, 2020, respectively. No impairment charges were made on advances to suppliers for the three months ended March 31, 2021 and 2020.
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, 2017March 31, 2021 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 | |||||
March 31, 2021 | December 31, 2020 | |||||||
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$0 for the three months ended September 30, 2017March 31, 2021 and 2016, respectively.2020. 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 | |||
| September 30, 2017 | December 31, 2016 | |||||||
| Prepaid expenses | $ | 288,784 | $ | 573,005 | ||||
| Other receivables | 27,049 | 69,886 | ||||||
| Total | $ | 315,833 | $ | 642,891 | ||||
Note 8-Prepaid Expenses 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 paymentOther Receivables
Prepaid expenses and other receivables consisted of the principalfollowing at March 31, 2021 and interestDecember 31, 2020:
March 31, 2021 | December 31, 2020 | |||||||
Prepaid expenses | $ | 99,425 | $ | 217,591 | ||||
Other receivables | 119,936 | 132,155 | ||||||
| $ | 219,361 | $ | 349,746 | |||||
As 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, 2017March 31, 2021 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 | ||||
March 31, 2021 | December 31, 2020 | |||||||
Other payables | $ | 8,890 | $ | 6,428 | ||||
Salary payable | 13,462 | 6,731 | ||||||
Financed insurance premiums | - | 103,104 | ||||||
Accrued rents | 10,429 | 14,899 | ||||||
Accrued marketing | - | 30,000 | ||||||
Accrued commission | 95,269 | 112,673 | ||||||
Accrued expenses, others | 132,730 | 53,338 | ||||||
| $ | 260,780 | $ | 327,173 | |||||
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, 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 - LinesOther Loans
On May 4, 2020, the Company received loan proceeds in the amount of Credit
The unforgiven portion of the PPP loan, if any, 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 entered into an agreementintends to use the proceeds for purposes consistent with the PPP.
On May 5, 2020, Diamond Bar was granted a bankloan from Cathay Bank in Californiathe aggregate amount of $176,294, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Loan, which was in the form of a Note dated May 5, 2020 matures on May 5, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on May 5, 2020. Funds from the Loan may only be used for a line of credit of uppayroll costs, costs used to $5,000,000 with annualcontinue group health care benefits, mortgage payments, rent, utilities, and interest of 4.25% and maturity on June 1, 2015. On June 8, 2015,other debt obligations. The Company intends to use the bank extended and modifiedentire Loan amount for qualifying expenses. Under the terms of the loan agreementPPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. On June 5, 2020, Congress passed a new law that allowed current PPP borrowers can choose to extend the lineeight-week period to 24 weeks to use the funds, but cannot extended beyond December 31, 2020. The Company had used up all the PPP loan proceeds for qualifying purposes within 24 weeks, and is waiting for the forgiveness application from Cathay Bank. No interest had been accrued for on this loan as of creditMarch 31, 2021.
The Company used up to a maximum of $6,000,000 until July 31, 2015 and $5,000,000 thereafter with an annual interest rate of 4.25% and maturity on September 1, 2015 (the term of whichall the bank allowed to extend until the renewal described in the following sentence while the bank conducted its own audit associated therewith). On September 28, 2015, 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 to a maximum of $8,000,000 with annual interest of 4%. PPP loan proceeds within 24 weeks.
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 maturity on June 1, 2019. The annual interest was 4.25% as of September 30, 2017. The line of credit is secured by all of the assets of Diamond Bar and is guaranteed by Nova LifeStyle. As of September 30, 2017 and December 31, 2016, Diamond Bar had $3,322,040 and $6,129,841 outstanding on the line of credit, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded interest expense of $145,857 and $167,381, respectively; and $40,932 and $61,127 for the three months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, Diamond Bar had $4,677,960 available for borrowing without violating any covenants.
Note 10 11- 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, 2021, 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,March 31, 2021 and 2020, the Company paiddid not incur any rental amounts of $32,916 and $16,458 that are included in selling expenses from continuing operations.
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 | ||||||||
On December 1, 2014,January 4, 2018, the Company entered into a consultingsales representative agreement with a consulting firm, which is owned by the Chief Executive Officer and Chairman of the Board, for management consulting services effective on December 1, 2014.sales representative service for a term of two years. On January 4, 2020, the Company renewed the agreement for an additional two years. The Company agreed to issue 60,000compensate the sales representative via commission at predetermined rates of the relevant sales amount. During the three months ended March 31, 2021 and 2020, the Company recorded $99,918 and $27,499 as commission expense to this sales representative consulting firm, respectively.
Note 12- 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 firm for three yearsnext 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 consulting services.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 will be issued according to the following vesting schedule set forth as follows: The initial 10,000 shares were required to be issued within 30 days upon signing ofrepurchased from time to time at the agreement; for the remaining 50,000 shares, the Company issued to the consultant 10,000 shares of common stock on or before each of June 1, 2015, December 1, 2015, June 1, 2016, December 1, 2016 and June 1, 2017. The Company or the consultant may terminate the agreement at any time by 90 days’ written notice to the other party. The fair value of the 60,000 shares was $224,400, which was calculated based on the stock price of $3.74 per share on December 1, 2014 and will be amortized over the service term. During each of the nine-month and three-month periods ended September 30, 2017 and 2016, the Company amortized $56,100 and $18,700 as consulting expenses, respectively.
Shares Issued to grant the consultant 10,000 unregistered restricted shares of the Company’s common stock per month, for a total commitment of 150,000 shares of common stock. The fair value of the 150,000 shares was $204,000, 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 $54,400 and $108,800 as consulting expenses, respectively; and $0 and $40,800 for the three months ended September 30, 2017 and 2016 as consulting expenses, respectively.
On February 1, 2016, the Company entered into an agreement with a consultant for E-Commerce consulting service with a term of 24 months. The Company agreed 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 November 15, 2016,16, 2020, the Company entered into a consulting agreement with a consultant for business developmentconsulting and financial advisory servicestrategy services effective on November 16, 2020 for a term of 12 months.one-year term. The Company agreed to grant the consultant 100,00020,000 shares of the Company’s common stock. TheTwenty-five percent (25%) of those shares would be issued pursuant tovested on February 15, 2021, 25% will vest on May 15, 2021; 25% will vest on August 15, 2021 and the Plan.remaining 25% will vest on November 15, 2021. The fair value of the 100,00020,000 shares was $294,000,$39,600 which was calculated based on the stock price of $2.94$1.98 per share on November 15, 201616, 2020 and will be amortized over the service term. During the nine and three months ended September 30, 2017, the Company amortized $220,500 and $73,500 as consulting expense, respectively.
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.
Shares and Options Issued to Independent Directors
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,January 31, 2020, the Company entered into agreementsextended 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 November 15, 2016,10, 2020, the Company entered intoextended an employment agreement with the Company’s Corporate Secretary for a designer for furniture design servicesterm of one year effective onfrom November 15, 2016 for 1 year.14, 2020. 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,$11,880, which was calculated based on the stock price of $2.94$1.98 per share on November 15, 2016 and will be amortized over10, 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,November 10, 2020, 25% on May 15, 2017,March 31, 2021, 25% will vest on August 15, 2017June 30, 2021 and the remaining 25% will vest on November 15, 2017.September 30, 2021. During the nine and three months ended September 30, 2017,March 31, 2021, the Company amortized $220,500 and $73,500$2,970 as stock compensation, respectively.compensation.
On August 29, 2017 (the “Grant Date”),12, 2019, 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$3.85 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 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,assumptions: estimated life of ten years, volatility of 84%87%, risk free interest rate of 0.16%1.49%, and dividend yield of 0%. The fair value of 780,0007,000 stock options was $643,182$18,318 at the grant date. During the nine and three months ended SeptemberMarch 30, 2017,2020, the Company recorded $321,591$9,159 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 March 31, 2021, unrecognized share-based compensation expense was $32,057.
Stock option activity under the Company’s stock-based compensation plans is shown below:
Number of | Average | Aggregate Intrinsic | Weighted | |||||||||||||
Outstanding at January 1, 2021 | 340,500 | $ | 5.97 | $ | - | 2.33 | ||||||||||
Exercisable at January 1, 2021 | 340,500 | 5.97 | $ | - | 2.33 | |||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
Outstanding at March 31, 2021 | 340,500 | $ | 5.97 | $ | - | 2.08 | ||||||||||
Exercisable at March 31, 2021 | 340,500 | $ | 5.97 | $ | - | 2.08 | ||||||||||
(1) | The intrinsic value of the stock options at |
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
Nova Dongguan and Ding Nuo, such subsidiaries were required to transfer 10% of net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the subsidiary’s registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholdersMacao dissolved in proportion to their shareholdings or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issuance is not less than 25% of the registered capital.
Common Welfare Fund
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 doesdid not participate in this voluntary fund.
Geographical distribution of sales consisted of the following for the nine and three months ended September 30, 2017March 31, 2021 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 | |||||||||
2021 | 2020 | |||||||
Geographical Areas | ||||||||
North America | $ | 3,006,431 | $ | 2,184,856 | ||||
Asia* | 178,282 | - | ||||||
Other countries | 146,854 | 18,364 | ||||||
| $ | 3,331,567 | $ | 2,203,220 | |||||
Geographical location of identifiable long-lived assets as of March 31, 2021 and December 31, 2020:
2021 | 2020 | |||||||
Geographical Areas | ||||||||
North America | $ | 2,087,621 | $ | 2,236,709 | ||||
Asia* | 459,283 | 536,551 | ||||||
| $ | 2,546,904 | $ | 2,773,260 | |||||
* excluding Hong Kong
Note14- Commitments and Contingencies
On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the U.S. 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 rent is recorded on a straight-line basis over the term of the lease.
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 expense from continuing operationspayment was 20,000 Malaysia Ringgit ($4,918) and has been adjusted to 35,000 Malaysia Ringgit ($8,607) since August 1, 2020.
On October 29, 2019, Nova Malaysia entered into a lease agreement for the nine months endedshowroom 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 ($2,282).
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 30, 20171, 2020 and 2016 was $597,103 and $510,018, respectively; and $224,349 and $180,528expiring on August 31, 2022. The monthly rental payment is $30,000 Malaysia Ringgit ($7,377).
The operating lease expense for the three months ended September 30, 2017March 31, 2021 and 2016. The rental expense is recorded on a straight-line basis over the term of the lease.
| 12 Months Ending September 30, | Amount | |||
| 2018 | $ | 596,600 | ||
| 2019 | 77,991 | |||
| 2020 | - | |||
| 2021 | - | |||
| 2022 | - | |||
| Thereafter | - | |||
| Total | $ | 674,591 | ||
2021 | 2020 | |||||||
Operating lease cost – straight line | $ | 200,794 | $ | 176,252 | ||||
Total lease expense | $ | 200,794 | $ | 176,252 | ||||
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2021:
Operating Leases | ||||
2022 | $ | 757,699 | ||
2023 | 682,621 | |||
2024 | 665,826 | |||
2025 | 338,667 | |||
Thereafter | - | |||
Total undiscounted cash flows | 2,444,813 | |||
Less: imputed interest | (197,823 | ) | ||
Present value of lease liabilities | 2,246,990 | |||
Lease Term and Discount Rate
March31, 2021 | ||||
Weighted-average remaining lease term - years | ||||
Operating leases - USA | 3.59 | |||
Operating leases - Malaysia | 1.11 | |||
Weighted-average discount rate (%) | ||||
Operating leases - USA | 5.00 | % | ||
Operating leases - Malaysia | 2.88 | % | ||
Note15 - Commitments and Contingencies
Legal Proceedings
On August 22, 2017,December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company entered intoand its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the 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 an Amended Complaint, plaintiffs seek to represent a one-year employment agreement, effectiveclass of entities involved in any transaction in Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as of August 22,lead designer and manufacturer for all furnishings in its planned $460 million senior care center in China; and (2) inflated its reported sales in 2016 and 2017 with Jefferytwo major customers. Plaintiffs claim that the falsity of these representations was exposed in a blog posted on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers. Plaintiffs, however, have offered no evidence of falsity other than the Seeking Alpha blog.
Nova denies that there were any misstatements made in its public disclosures. It also, inter alia, challenges plaintiffs’ ability to establish loss causation and damages.
By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint 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 has now been extended until an unspecified date in August, 2021. On April 9, 2021, plaintiffs filed a Motion to Certify a Class. A hearing on this Motion has been set for July 12, 2021.
Independent of the litigation, the Audit Committee engaged the Company’s new CFO. The employment agreement provided for an annual salary of $50,000independent auditor to CFO and annual bonuses atperform special procedures to confirm the sole discretion of the Board of Directors. The employment agreement also provides for a grant of options to purchase 35,000 shares of the Company’s common stock, which was describedsales challenged in the Note 11 – Stockholders’ equity.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information . . . .”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. 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 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 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, to the extent they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and is advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Note16- Subsequent Events
The company has evaluated subsequent events through the issuance of the condensed consolidated financial statements and no subsequent event is identified.
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,“may,” “will,“will,” “should,“should,” “could,“could,” “would,“would,” “expect,“expect,” “plan,“plan,” “anticipate,“anticipate,” “believe,“believe,” “estimate,“estimate,” “continue,“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”“Risk Factors” and those listed in our 2016Annual Report on Form 10-K.10-K for the year ended December 31, 2020 (the “2020 Form 10K). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 20162020 Form 10-K. Unless the context otherwise requires, references in this report to “we,“we,” “us,“us,” “Nova,“Nova,” “Nova Lifestyle”“Nova Lifestyle” or the “Company”“Company” refer to Nova Lifestyle, Inc. and its subsidiaries.
Item2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2020(the “2020Form 10-K”). All references to the thirdfirst quarter and first ninethree months of 2017 2021and 2016 2020mean the three and nine-monththree-month periods ended September 30, 2017 March 31, 2021and 2016, respectively.2020. 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,“believes,” “anticipates,“anticipates,” “expects”“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’scompany’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 2016 2020Form 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. 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, 2011.2000. 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.
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.
On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova Macao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered the de-registration procedure and the current business was taken over by Nova HK. Nova Macao was dissolved in January 2021.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group Limited (“Nova HK”) which was incorporated in Hong Kong on November 6, 2019. Nova HK took over Nova Macao’s business. This company has had minimum operations as of March 31, 2021.
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,Mexico, Honduras, Dominican Republic, Asian and Middle Eastern markets.
Due to the recent imposition of significant trade tariffs on importation from China to the United States and the adverse effect such policies have on our operations, we are actively pursuing alternative product lines with positive growth potential. One such area pertains to the health-oriented furniture segment which continues to experience popularity, particularly in Asia. Since the second quarter of 2019, we have developed a line of high-end physiotherapeutic jade mats with China-based manufacturing partners for use in therapy clinics, hospitality, and real estate projects in Asia. We launched our first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019, which, after a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysia government extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021 to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. We expect that our flagship showroom/retail store will serve as one of our primary distribution channels in Malaysia. Marketing of jade mats will focus on their premium therapeutic qualities and target health conscious general consumers and professionals. We have limited experience with operations in Southeast Asia and considerable management attention and resources may be required to manage these new markets and product lines. We may be subject to additional risks including credit risk, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.
Beginning in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, and the epidemic quickly spread to many provinces, autonomous regions, and cities in China as well as many parts of the world, including the U.S. and Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company’s two showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020. The Los Angeles facility has been closed since March 16, 2020 and reopened in full operation on June 1, 2020. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business. On August 28, 2020, Malaysia government extended the shutdown order to all business until March 5, 2021 After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. The third-party contract manufacturers that the Company utilizes in China were closed from the beginning of the Lunar New Year Holiday at the end of January 2020 through the beginning of March 2020. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the Covid-19 pandemic during March through early May 2020. Currently, the factories in India are still open for operations. Economic activities in Malaysia were reopened on March 5, 2021 after the six-month shutdown order imposed by Malaysia government on August 28, 2020. However, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset; and we may experience shipping disruptions in the future. Finally, the Company expects that the impact of the COVID-19 outbreak on the United States and world economies will continue to have a material adverse impact on the demand for its products. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.
The COVID-19 outbreak precludes in person sales meetings or visits being made out of all of the Company’s offices or attendance at furniture trade shows, but the Company continues to receive orders and solicit business via telephone and email. The Company has experienced reduced demand for its products and purchase order cancellations as a result of the COVID-19 pandemic, however, though in 2020 we have been experiencing a 39.59% increase in orders placed with us online compared with 2019.
We do not have access to a revolving credit facility. On October 24, 2013, Nova Dongguan incorporated Ding NuoMay 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the lawsPaycheck Protection Program (“PPP”). The PPP, established as part of the PRCCoronavirus Aid, Relief 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 as the nominee shareholder of Ding Nuo.
Many of our employees are currently working remotely, and our systems appear adequate to address the current demands on our employees. We do not expect that the remote working arrangements will materially and adversely impact our internal control over financial reporting and disclosure controls and procedures. While there can be no assurance, at the present time we expect the outbreak-related circumstances to result in material impairments of our inventory of Jade Mattress in Malaysia that significantly affect management’s judgements in assessing the fair value of our assets.
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.
Principal Factors Affecting Our Financial Performance
At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2019 Collection in the Las Vegas Market, with a view to attracting a higher-end ultimate customer. We believe these new strategies, 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 purchasesCOVID-19 pandemic.
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, Nova HK 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 bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates.
Accounts Receivable
Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a discussionsignificant financing component at contract inception if we expect to collect the receivables in one year or less from the time of relevant pronouncements.
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 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 are subject to U.S. federal and state income taxes. Nova Furniture BVI and Bright Swallow were incorporated in the BVI, Nova Samoa was incorporated in Samoa and Nova Macao 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 Bright Swallow, Nova Samoa and Nova Macao are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.
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. 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 three months ended March 31, 2021.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on our 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, Nova HK and i Design.
The Company's subsidiary with operations in Malaysia uses its local currency, Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is normally the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of 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 | ||||
March 31, 2021 | RM4.15 to 1 | |||
December 31, 2020 | RM4.02 to 1 | |||
Income statement and cash flow items | ||||
For the period ended March 31, 2021 | RM4.07 to 1 | |||
For the period ended March 31, 2020 | RM4.18 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, Nova HK is a furniture distributor based in Hong Kong focusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Bright Swallow, Nova Macao, Nova HK and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United States and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
New Accounting Pronouncements
Recent Adopted Accounting Standards
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. 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 applied the new standard beginning January 1, 2021.
In August 2020, the FASB issued ASU No. 2020-06 “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).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning of such fiscal year. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.
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.
We do not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on our financial statement presentation or disclosures.
Results of Operations
Comparison of three monthsThree Months Ended September 30, 2017March 31, 2021 and 2016
The following table sets forth the results of our operations for the three months ended September 30, 2017March 31, 2021 and 2016.2020. 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 March 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
Net sales | $ | 3,331,567 | $ | 2,203,220 | ||||||||||||
Cost of sales | (1,951,255 | ) | (59 | %) | (1,424,191 | ) | (65 | %) | ||||||||
Gross profit | 1,380,312 | 41 | % | 779,029 | 35 | % | ||||||||||
Operating expenses | (2,146,415 | ) | (64 | %) | (1,600,135 | ) | (73 | %) | ||||||||
Loss from operations | (766,103 | ) | (23 | %) | (821,106 | ) | (37 | %) | ||||||||
Other income (expenses), net | 12,242 | 0 | % | (167,928 | ) | (8 | %) | |||||||||
Income tax expenses | (9,676 | ) | - | % | (23,879 | ) | (1 | %) | ||||||||
Loss from continuing operations | (763,537 | ) | (23 | %) | (1,012,913 | ) | (46 | %) | ||||||||
Loss from discontinued operations | - | - | % | (326,531 | ) | (15 | %) | |||||||||
Net loss | (763,537 | ) | (23 | %) | (1,339,444 | ) | (61 | %) | ||||||||
Net Sales
Net sales from continuing operations for the three months ended September 30, 2017,March 31, 2021 were $33.22$3.33 million, an increase of 9%51% from $30.54$2.20 million in the same period of 2016.2020. This increase in net sales resulted primarily from an 82%a 13.25% increase in sales volume, simultaneously with a 33.52% increase in average selling price, which was partially offset by a 40% decrease in sales volume.price. Our three largest selling product categories in the three months ended September 30, 2017March 31, 2021 were television cabinets, sofas, beds and dining tables,coffee table, which accounted for approximately 48%49%, 32%15% and 6%8% of sales from our continuing operations, respectively. OurIn the three months ended March 31, 2020, the three largest selling product categories were sofas, beds and coffee table, which accounted for approximately 56%, 12% and 9% of sales from our continuing operations, respectively.
The $1.13 million increase in net sales from continuing operations in the three months ended September 30, 2016 were sofas, beds 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 costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations increased by 37% to $1.95 million in the three months ended March 31, 2021, compared to $1.42 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 this client. North American sales decreased 47% to $11.90 million in the three months ended September 30, 2017, compared to $22.53 million in the same period of 2016, primarily due to the abandonment of sales of lower price and quality products after the sale of our factory in China in connection with our discontinued operations. We aggressively changed our product mix and our sales and marketing strategies to offer high margin products to customers. Sales to Asia, excluding Hong Kong, were $3.33 million in the three months ended September 30, 2017, an increase of 90% from $1.75 million in the same period of 2016, primarily due to the increases of sales orders from customers in the region. We had no sales to Europe, Hong Kong, and other countries in the three months ended September 30, 2017, compared to $4.90 million in the same period 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 profit increased by 28% to $5.90from continuing operations was $1.38 million in the three months ended September 30, 2017,March 31, 2021, compared to $4.60gross profit of $0.78 million in the same period of 2016.2020. Our gross profit margin increased to 18%was 41% in the three months ended September 30, 2017,March 31, 2021, compared to 15%35% in the same period of 2016.2020. The increase in gross profit margin resulted primarily from decreased cost of sales asis a percentage of net sales, which was mainly due to a decreased cost ofresult that we focus on selling products purchased from third parties.
Operating Expenses
Operating expenses consistfrom continuing operations consisted of selling, and general and administrative expenses and research and development expenses. Operating expenses were $3.13$2.15 million in the three months ended September 30, 2017,March 31, 2021, compared to $3.54$1.6 million in same period of 2020. Selling expenses increased by 142%, or $450,669, to $0.77 million in the three months ended March 31, 2021, from $0.32 million in the same period of 2016. Selling2020, primarily due to increased marketing and advertising expenses decreasedand commission expenses. On the other hand, general and administrative expenses increased by 51%7%, or $1.05 million$95,611, to $1.00$1.38 million in the three months ended September 30, 2017,March 31, 2021, from $2.05$1.28 million in the same period of 2016,2020, primarily due primarily to decreased salesan increase in auditing expenses and marketing expense since we decreased advertising on showsrent expenses of $0.17 million and television in the U.S. General and administrative expense increased by 42%$0.03 million, respectively.
Other Income (Expenses), or $0.63 million, to $2.12 millionNet
Other income, net, from continuing operations was $12,242 in the three months ended September 30, 2017, from $1.49 millionMarch 31, 2021, compared with other expenses, net, of $167,928 in the same period of 2016, primarily due to increases in stock compensation of approximately $477,000 and amortization expense of approximately $231,000 on our intangible assets (see note 6 to our condensed consolidated financial statements), notwithstanding2020, representing a decrease in bad debt expenseother expenses of approximately $274,000.
IncomeTax Expenses
Income tax expenses from continuing operations was $9,676 in the three months ended September 30, 2017,March 31, 2021, 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.
| 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 | ) | (- | %) | |||||||||
Loss from Continuing Operations
As a result of the parent company, partially offset by net incomeforegoing, our loss from continuing operations was $0.77 million in the three months ended March 31, 2021, compared with $1.01 million of Diamond Bar. The income tax benefit in 2017 also resulted fromloss for the reversalsame period of our prior year ASC 740-10 (FIN 48) reserves due the expiration of the statute of limitations.
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 October 25, 2016, Nova Dongguan, Nova Museum, and Ding Nuo, areJanuary 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in ourthe accompanying unaudited condensed consolidated financial statements. Lossstatements for all periods presented. We had loss from discontinued operations net of tax, was approximately $1.48 million for the nine months ended September 30, 2016.
Net Loss
As a result of the foregoing, our net loss was $0.77 million in the three months ended March 31, 2021, compared with $0.29$1.34 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 March 31, 2021, 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$40,355,071 at September 30, 2017, an increaseMarch 31, 2021, a decrease of $7.43 million$914,549 from net working capital of $58,407,707$41,269,620 at December 31, 2016.2020. The ratio of current assets to current liabilities was 73.51-to-128.85-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 ninethree months ended September 30, 2017March 31, 2021 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 | |||||
2021 | 2020 | |||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | (880,935 | ) | $ | (672,156 | ) | ||
Investing activities | - | (1,462,200 | ) | |||||
Financing activities | - | - | ||||||
Net cash used in operating activities was $5.36$0.88 million in the ninethree months ended September 30, 2017,March 31, 2021, an increase of cash outflow of $3.90$0.21 million from $1.47$0.67 million of cash used in operating activities in the same period of 2016.2020. The increase inof cash outflow was attributable primarily to an increasedthe increase in cash outflow for inventory of $8.28$0.49 million from advances to suppliers,$0.13 million outflow in the three months ended March 31, 2021, compared with $3.61to $0.37 million cash inflow in the same period, of 2016such increase in cash outflows being mainly due to strategic prepaymentsmore purchase made for inventory purchases to receive vendor discounts. We increased the prepayment amount by approximately $8.49 million to onean increase of our mattress suppliers who is manufacturersales in U.S., comparing with the same period of 2016, due to we would like to sell more mattressthree months ended March 31, 2021. The increase in U.S. market because of higher profit margin comparing with our other products. We also had increasedoperating cash outflow was partially offset by (i) an increase cash inflow of $0.34 million from inventories of $3.94accounts receivable to $0.35 million cash inflow in the ninethree months ended September 30, 2017,March 31, 2021, compared to $0.24 million of$2,307 cash inflow in the same period of 2016, and2020, such increase being primarily due to collect from our customers in timely fashion in the three month ended March 31, 2021; (ii) an increasedincrease cash outflow for accounts payableinflow of $2.21$0.13 million during the nine months ended September 30, 2017,from other current assets to $0.13 million, compared to $0.13 million$1,369 cash inflow in the same period of 2016. We haddue to we made our payments to our service providers in advance basis.
Net cash inflow from accounts receivable of $4.96 million duringused in investing activities was $0 in the ninethree months ended September 30, 2017, compared to $0.56 million outflowMarch 31, 2021 since we have no investing activities. Net cash used in the same period of 2016. This increaseinvesting activities was mainly due to the improved collection of accounts receivable. Net operating cash outflow from our discontinued operations was $0.17$1.46 million in the ninethree months ended September 30, 2016.
Net cash provided by investing activities was $8.23 million in the nine months ended September 30, 2017, an increase of cash inflow of $2.96 million from $5.27 million inflow in the same period of 2016. In the nine months ended September 30, 2017, we received a cash inflow of $15.84 million from debt repayment from unrelated parties, an inflow of $1.25 million on collection of an assignment fee, which were partially offset by a cash outflow from advances to unrelated parties of $8.84 million, and a cash outflow of $17,443 from purchase of property and equipment. In the nine months ended September 30, 2016, we had cash received of $5.50 million from buyer, and paid $7,272 for purchasing property and equipment. Net investing cash outflow from our discontinued operations was $218,170 in the nine months ended September 30, 2016.
As of September 30, 2017,March 31, 2021, we had gross accounts receivable of $37,056,181,$174,087, of which $31,040,535$142,181 was not yet past due $5,981,718and $32,100 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.$1,741. As of October 30, 2017, $2,198,458May 4, 2021, $134,601 of accounts receivable outstanding at September 30, 2017as of March 31, 2021 had been collected.
All accounts receivable outstanding at December 31, 20162020 had been collected.
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we had advances to suppliers of $21,951,040$351,088 and $13,699,752,$381,894, 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, 2017March 31, 2021, and December 31, 2016,2020, no reserve on supplier prepayments had been made or recorded by us.
As of October 31, 2017, $13,669,300, or almost 100%,May 4, 2021, 52% of our advanceadvances to suppliers outstanding at DecemberMarch 31, 20162021 had been delivered to us in the form of inventory purchase.
Shelf Registration
On July 13, 2017, the transaction, the Buyers also received (i) Series A warrants to purchase up to 660,030 shares of common stock in the aggregate at an exercise price of $8.48 per share (the “Series A Warrants”); (ii) Series B warrants to purchase up to 633,628 shares of common stock in the aggregate at an exercise price of $6.82 per share (the “Series B Warrants”); and (iii) Series C warrants to purchase up to 310,478 shares of common stock in the aggregate at an exercise price of $8.53 per share (the “Series C Warrants” and together with the Series A Warrants and the Series B Warrants, the “Warrants”). The Series A Warrants hadCompany filed a term of four years and were exercisable by the holders at any time after the date of issuance. The Series B Warrants had a term of six months and were exercisable by the holders at any time after the date of issuance. The Series C Warrants had a term of four years and were exercisable by the holders at any time after the date of issuance. After the six month anniversary of the issuance date of the Series C Warrants, to the extent that a holder of Series C Warrant had exercised less than 70% of such holder’s Series B Warrants and the closing sale price of the common stock was equal to or greater than $9.81 for a period of ten consecutive trading days, then we were entitled to purchase the entire then-remaining portion of such holder��s Series C Warrants for $1,000. The shares and warrants were registered on a takedown of our shelf registration statement described below.on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The Series B Warrantsshelf registration statement was declared effective as of October 12, 2017 and has expired on October 14, 2014, and none of12, 2020. On October 8, 2020, the Series B Warrants were exercised priorCompany filed a new shelf registration statement on Form S-3 under which the Company may, from time to such expiration.
Other Long-Term Liabilities
As of March 31, 20152021, we recorded long-term taxes payable of $1.63 million, consisting of an income tax payable of $1.63 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, and $5,000,000 thereafter with an annual interest rate of 4.25% and maturity on September 1, 2015 (the term ofa $0.01 million unrecognized tax benefit, as ASC 740 specifies that tax positions for which the bank allowed to extend until the renewal described in the following sentence while the bank conducted its own audit associated therewith). On September 28, 2015, 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 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 maturity on June 1, 2019. The annual interest was 4.25% as of September 30, 2017. The line of credit is secured by alltiming of the assets of Diamond Bar andultimate resolution is guaranteed by Nova LifeStyle. As of September 30, 2017 and 2016, Diamond Bar had $3,322,040 and $6,129,841 outstanding onuncertain should be recognized as long-term liabilities.
We elected to pay the line of credit, respectively. Duringone-time transition tax over the nine months ended September 30, 2017 and 2016, the Company recorded interest expense of $145,857 and $167,381, respectively; and $40,932 and $61,127 for the three months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, Diamond Bar had $4,677,960 available for borrowing without violating any covenants.
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 unaudited 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 March 31, 2021. 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 three months ended March 31, 2021 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, a federal putative class action complaint was filed by George Barney against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the 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 an Amended Complaint, plaintiffs seek to represent a class of entities involved in various lawsuitsany transaction in Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in its planned $460 million senior care center in China; and (2) inflated its reported sales in 2016 and 2017 with that same customer and another major customer. Plaintiffs claim that the falsity of these representations was exposed in a blog posted on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers. Plaintiffs, however, have offered no evidence of falsity other than the Seeking Alpha blog.
Nova denies that there were any misstatements made in its public disclosures. It also, inter alia, challenges plaintiffs’ ability to establish loss causation and damages.
By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint 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 has now been extended until an unspecified date in August, 2021. On April 9, 2021, plaintiffs filed a Motion to Certify a Class. A hearing on this Motion has been set for July 12, 2021.
Independent of the litigation, the Audit Committee engaged the Company’s independent auditor to perform special procedures to confirm the sales challenged in the Barney action. 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 Seeking Alpha blog and 100% sampling of all transactions between the Company and the subject customers. The auditor finished its special procedures in March 2019 and reported to the Audit Committee that no evidence of fictitious sales or of fictitious customers was discovered regarding the customers mentioned in the Seeking Alpha blog,. 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 putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information . . . .”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. 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 directly 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.
While these derivative actions are purportedly asserted on behalf of the Company, it is possible that the Company may directly incur attorneys’ fees and is advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended.
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.
EXHIBIT INDEX
ExhibitNo. | 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: | By: | /s/ | |
Thanh H. Lam Chairperson and Chief Executive Officer (Principal Executive Officer) | |||
Date: May 17, 2021 | /s/ Jeffery Chuang | ||
Jeffery Chuang Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||