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| Stockholders’ Equity | Note 12 - Stockholders’ Equity
On May 28, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) at its annual meeting. The 2021 Plan was approved by the Board of Directors of the Company on April 12, 2021 and has a total of shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. No awards have been granted under the 2021 Plan as of the date of this Report. On June 16, 2021, the Company filed Form S-8 to register the 3,000,000 shares of the Company’s common stock under the 2021 Plan.
Shares and Warrants issued through Private Placement
On July 23, 2021, the Company conducted a registered direct offering of shares of common stock. The shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on October 8, 2020 and subsequently declared effective on October 15, 2020. Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of 1,114,508 shares of common stock in a concurrent private placement. The combined purchase price for one share of common stock and a warrant to purchase one share of common stock was $. The warrants have an exercise price of $3.50 per share, will be exercisable beginning six-months from the date of issuance, and will expire five and a half years from the date of issuance. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021.
In conjunction with this offering, the Company issued warrants to purchase 111,451 shares of common stock at an exercise price of $ per share to the placement agent and its designees. The warrants are exercisable on the six-month anniversary of the issuance date. The warrants are exercisable for four and a half years from the initial exercise date. The placement agent warrants hold piggy-back registration rights and have a termination date of July 23, 2026.
The warrants issued in the private placement described above are exercisable for a fixed number of shares, and are classified as equity instruments under ASC 815-40-25-10. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated life of years, volatility of , risk-free interest rate of and dividend yield of . No estimate of forfeitures was made as the Company has a short history of granting options and warrants. The fair value of the warrants issued to investors at grant date was $2,018,597.
Warrants
The following is a summary of the warrant activity for the nine months ended September 30, 2021:
Shares Issued to Consultants
On November 16, 2019, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2019 for a one year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting % on February 15, 2020, % on May 15, 2020, % on August 15, 2020 and % on November 15, 2020. The fair value of the shares was $51,000 which was calculated based on the stock price of $ per share on November 18, 2019 and was amortized over the service term. The shares were issued pursuant to Nova LifeStyle, Inc.’s 2014 Omnibus Long-Term Incentive Plan (the “Plan”). During the nine months and three months ended September 30, 2020, the Company charged $ and $, respectively, to operations as consulting expenses.
On November 16, 2020, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2020 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting % on February 15, 2021, % on May 15, 2021, % on August 15, 2021 and % on November 15, 2021. The fair value of the shares was $39,600, which was calculated based on the stock price of $ per share on November 16, 2020 and is being amortized over the service term. The shares were issued pursuant to the Plan. During the nine months and three months ended September 30, 2021, the Company charged $ and $, respectively, to operations as consulting expenses.
Shares and Options Issued to Independent Directors
On November 4, 2019, the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three independent members of the board of directors. The Company agreed to grant the Company’s three independent directors options to purchase an aggregate of 60,000 shares of the Company’s common stock at an exercise price of $2.80 per share, with a term of 5 years, vesting % on November 30, 2019, % on February 28, 2020, % on May 31, 2020, and % on August 31, 2020. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes option pricing model. The fair value of the options was calculated using the following assumptions: estimated life of , volatility of %, risk free interest rate of %, and dividend yield of %. The fair value of the stock options was $114,740 at the grant date. During the nine months and three months ended September 30, 2020, the Company charged $ and $, respectively, to operations as directors’ stock compensation expense.
Shares Issued to Employees
On January 31, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2019. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $12,780, which was calculated based on the stock price of $ per share on January 31, 2020, the date the award was determined by the Compensation Committee of the Board of Directors, vesting % on January 31, 2020, % on March 31, 2020, % on June 30, 2020 and % on September 30, 2020. During the nine months and three months ended September 30, 2020, the Company amortized $ and $, respectively, to operations as stock compensation expense.
On November 10, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2020. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $11,880, which was calculated based on the stock price of $ per share on November 10, 2020, the date the award was determined by the Compensation Committee of the Board of Directors, vesting % on November 10, 2020, % on March 31, 2021, % on June 30, 2021 and % on September 30, 2021. During the nine months and three months ended September 30, 2021, the Company amortized $ and $, respectively, to operations as stock compensation expense.
Options Issued to Employees
On August 12, 2019, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of shares of the Company’s common stock at an exercise price of $per share, with a term of years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (50%) of those stock options vested immediately, and the remaining % vested on the six-month anniversary of the Grant Date.
The fair value of the option granted to the Chief Financial Officer in 2019 was recognized as compensation expense over the vesting period of the stock option award. The fair value of the option was calculated using the following assumptions: estimated life of ten years, volatility of %, risk free interest rate of %, and dividend yield of %. The fair value of the stock options was $18,318 at the grant date. During the nine months and three months ended September 30, 2020, the Company recorded $ and $, respectively, to operations as stock compensation expense.
As of September 30, 2021, unrecognized share-based compensation expense was $.
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 former 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 Macau laws and regulations that require 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 Macao dissolved in January 2021. At December 31, 2020, it had surplus reserves of $6,241, representing 50% of its registered capital, which were transferred to additional paid-in capital during the nine months ended September 30, 2021.
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