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DOCUMENTS INCORPORATED BY REFERENCE:
NOVA LIFESTYLE, INC.
Table of Contents
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains 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, regarding our company that include, but are not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.
These forward-looking statements involve various risks and uncertainties. Although we believe our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and other sections in this report. You should read this report and the documents we refer to thoroughly with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this report include additional factors which could adversely impact our business and financial performance.
This report contains statistical data we obtained from various publicly available government publications and industry-specific third-party reports. Statistical data in these publications also include projections based on a number of assumptions. The markets for our products may not grow at the rate projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our securities. In addition, the rapidly changing nature of our customers’ industries results in significant uncertainties in any projections or estimates relating to the growth prospects or future condition of our markets. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of the independent industry publication market data cited in this report was prepared on our or our affiliates’ behalf.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.
As used in this report, “Nova LifeStyle,” “Nova,” the “Company,” “we,” “our” and similar terms refer to Nova LifeStyle, Inc. and its subsidiaries, unless the context indicates otherwise.
Our functional currency is the U.S. Dollar, or USD. See Note 2 of the consolidated financial statements included herein.
PART I
Item 1. Business
Our Company
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”) is a U.S.-headquartered innovative designer and marketer of contemporary styled residential and commercial furniture formerly known as Stevens Resources, Inc. We were incorporated in the State of Nevada on September 9, 2009. The Company’s products are marketed through wholesale and retail channels as well as various online platforms worldwide.
Nova LifeStyle’s family of brands includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.
Our business strength lies in our abilities to quickly adapt to changing market demand and stay ahead of the latest trends in modern furniture designs. Our customers principally consist of designers, distributors and retailers who cater to mid-level and high-end private label home furnishings that have little product overlap within our specific furnishings products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are aligned with our growth strategies, allowing us to continually focus on growing our customer base as well as driving the expansion of our overall distribution and manufacturing relationships worldwide, providing our customers with trendy furnishing solutions.
We generate the majority of our sales as a branding and marketing company with vertically integrated third-party manufacturing capabilities for global furniture distributors and large national retailers. We have established long term relationships with our worldwide customers by providing them with high quality, large scale and cost-effective sourcing solutions. Our worldwide logistics and delivery capabilities provide our customers with the flexibility to select from our extensive furniture collections tailored for their respective needs. Our experience marketing products to international customers have enabled us to fully integrate the supply scale, product delivery logistics, marketing efficiency and design expertise to address customer demand from established markets in the North America, Central America, South America, Asia, and the Middle East.
Reverse split
On December 18, 2019, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of December 20, 2019, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), was effected. All references to shares and per share data have been retroactively restated to reflect such split.
Human Capital Resources
We understand that our success depends on our ability to attract, train and retain our employees. We strive to attract, recruit, and retain employees through competitive compensation and benefit programs, learning and development opportunities that support career growth and advancement opportunities, and employee engagement initiatives that foster a strong Company culture. In addition to cash compensation, we offer customary benefits in accordance with local regulatory requirements as well as stock options to our employees. We also recognize the importance of keeping our employees safe. In response to the COVID-19 pandemic, we implemented changes that we determined were in the best interest of our employees and have followed local government orders to prevent the spread of COVID-19. As of December 31, 2022, we had 28 full time employees worldwide. Our U.S. corporate office and operations employed 24 full-time employees, our location in Malaysia and Hong Kong employed 3 and 1 full-time employees, respectively. We believe that relations with our employees are satisfactory. We have no collective bargaining agreements with our employees.
Recent Developments Related to the COVID-19 Outbreak
Beginning in early 2020, a strain of novel coronavirus (“COVID-19”) has spread globally including the U.S. and Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company’s two showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020. The Los Angeles facility closed on March 16, 2020 and reopened in full operation on June 1, 2020. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business. On August 28, 2020, the Malaysia government extended the shutdown order to all business until March 5, 2021. After the re-opening on March 5, 2021, Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has reopened. In April 2022, Malaysia has reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in China were closed from the end of January 2020 through the beginning of March 2020 and have been open for operation. On August 1, 2022, all travelers are allowed to enter Malaysia regardless for their Covid-19 vaccination status and they are not required for pre-departure or on arrival Covid-19 tests. There are no quarantine orders related to Covid-19 by the Malaysian government upon arrival. In 2022, there have been outbreaks of the Omicron variant of COVID-19 in Hong Kong and many other cities in China, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities have been imposed by local governments. In December 2022, the Chinese government eased its strict zero COVID-19 policy which resulted in a surge of new COVID-19 cases during December 2022 and January 2023. Although our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in India are open for operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset. In June 2022, all the shipping and related costs from Asia have been back to normal. 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.
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Our History
We are a U.S. holding company that operates through several wholly-owned subsidiaries. We design and market residential and commercial furniture products worldwide. Our subsidiaries include Nova Furniture Limited in the British Virgin Islands (“Nova Furniture”), Nova Furniture Limited in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. (“Diamond Bar”), i Design Blockchain Technology, Inc (“i Design”), Nova Living (M) SDN. BHD. (“Nova Malaysia”) and Nova Living (HK) Group Limited (“Nova HK”). Diamond Bar is a California corporation organized on June 15, 2000, which we acquired pursuant to a stock purchase agreement on August 31, 2011. On April 24, 2013, we acquired all of the outstanding stock of Bright Swallow International Group Limited (“Bright Swallow”).
On September 23, 2016, Nova Furniture, a wholly-owned subsidiary of the Company (the “Seller”), entered into a Share Transfer Agreement (the “Agreement”) with Kuka Design Limited, an unrelated company incorporated in British Virgin Islands (“Kuka Design BVI” or “Buyer”). Pursuant to the terms of the Agreement, the Seller sold all of the outstanding equity interests in Nova Furniture (Dongguan) Co., Ltd. (“Nova Dongguan”), a company incorporated in China and a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”). Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan.
On November 10, 2016, Nova Furniture entered into a Trademark Assignment Agreement with Kuka Design BVI (“Assignee”). Pursuant to the terms of the Trademark Assignment Agreement, Nova Furniture assigned the Assignee its full right to, and title in, the NOVA trademark in China for $6,000,000.
On December 7, 2017, Nova LifeStyle, Inc. incorporated i Design under the laws of the State of California, USA. The purpose of i Design is to build our own blockchain technology team. This new company will focus on application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building blockchain-powered platform that enables designers to showcase their products including current and future furniture designs. This company is in a planning stage and has had minimum operations to date.
On December 12, 2019, Nova LifeStyle, Inc. acquired Nova Malaysia which was incorporated in Malaysia on July 26, 2019. Nova Malaysia markets and sells high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.
On January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”) was organized under the laws of Macao on May 20, 2006. Nova Macao was a wholly owned subsidiary of Nova Furniture. 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 was de-registrated and liquidated in January 2021 and its business was taken over by Nova HK.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova HK from unrelated third party at cost of $1,290 which was incorporated in Hong Kong on November 6, 2019. Nova HK took over Nova Macao’s business. This company has had minimum operations in 2021. In February 2022, Nova HK also entered a de-registration and liquidation process and was in the process of transferring all its assets and business to Nova Malaysia. All of Nova HK’s inventory was transferred to Nova Malaysia on February 15, 2022. Operations of Nova HK were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
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Our organizational structure as of December 31, 2022 is set forth in the diagram:
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Our Products
We design and market modern residential and commercial furniture in diverse markets worldwide. Our products feature urban and contemporary styles, combining comfort and functionality in matching furniture collections and upscale luxury pieces appealing to lifestyle-conscious middle and upper middle-income consumers. We also sell physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia. Many of our products are segments of multi-component furniture collections in distinctive design styles, attractively priced in the medium and upper-medium ranges. Our product lines feature upholstered, wood and metal-based furniture pieces. We classify our products by room, designation or series, such as living room, dining room, bedroom and home office series, and by category or product types such as sofas, chairs, dining tables, beds, entertainment consoles, cabinets and cupboards. Our largest selling product categories for the year ended December 31, 2022 were sofas, beds and chairs, which accounted for approximately 41%, 15% and 11% of sales from continuing operations, respectively. For the year ended December 31, 2021, our largest selling product categories were sofas, beds and coffee tables, which accounted for approximately 47%, 15% and 7% of sales from continuing operations, respectively. Our products are manufactured primarily from medium-density fiberboard, or MDF board, and particleboard covered with veneers or lacquers and combined with other materials, including steel, glass, marble, leather, jade and fabrics.
Our product offerings consist of a mix of furnishings designed by us, and sourced from third party manufacturers that are supervised under our rigorous quality control processes. Through market research, customer feedback, and ongoing design development, we identify the latest trends and customer needs in target markets to develop new products, collections and brands. Our product collections are designed to appeal to consumer preferences in specific markets. We develop both individual furniture pieces and complete furniture collections that equip an entire home which feature matching furniture suites, providing convenient home furnishing options for lifestyle-conscious consumers.
We generally introduce new collections and launch new design styles at international furniture exhibitions or trade fairs. However, in 2021, due to Covid-19 pandemic, some international furniture exhibitions or trade fairs were cancelled, and for those were still held, the customers traffic was light. Our products are displayed in our showrooms. We further support our new product launches with product brochures and online marketing campaigns. Our staff collects customer feedback and collaborates with customers worldwide to design store and showroom layouts. In marketing materials, we highlight matching furniture collections by displaying complete and fully accessorized whole-room settings instead of individual furniture pieces. We believe that such in-store presentations provide convenient, one-stop solutions to customers, and thus incentivize clients to purchase an entire room of furniture from us instead of shopping for individual pieces offered by different brands or manufacturers. Our products are mainly designed by our own designers and we also used independent designers in the past for product design. Customer orders are filled by third party manufacturers under our direct quality control. We believe that our products feature superior materials, attractive appearances, superb functionalities and satisfying price points generally desired by today’s middle to upper middle-income consumers worldwide.
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International Markets
We have been selling products to the U.S., Canadian, Honduras, Guatemala, Guam, Puerto Rico, Panama, Costa Rica, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait, Kazakhstan, New Zealand and Middle Eastern markets under the Diamond Sofa brand and selling our Jade Mats to the Malaysia through Nova Malaysia. We believe that discretionary purchases of furniture by middle to upper middle-income consumers will continue to increase in the furniture markets worldwide. We also believe that furniture products that feature contemporary design styles such as ours will continue to attract significant customer demand.
In 2022, our products were sold in 13 countries worldwide, with North America as our principal international market. Sales to North America accounted for 94.2% and 97.9% of our total sales from continuing operations for 2022 and 2021, respectively. Sales to other regions accounted for 5.8% and 2.1% of our total sales from continuing operations for 2022 and 2021, respectively. In 2022, via our subsidiary, Nova Malaysia, we marketed and sold high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia. As we continue to broaden our distribution network, increase direct sales and grow in the emerging markets, we believe that we are well positioned to respond to changing market conditions that will allow us to take advantage of any upturns in the global and local economies of the markets that we serve. That said, the ongoing COVID-19 pandemic could materially and adversely affect the economies of each of the countries in which we market our products, which has adversely affected our ability to generate revenues in 2022. In addition, our ability to market our products in 2022 had been adversely impacted by government imposed quarantines and closures, supply chain and shipping disruptions and our current inability to make sales calls and to attend furniture shows. In June 2022, everything is back to the normal.
Our expansion in Malaysia with health line products has also been disrupted due to COVID-19. Our initial plan was to establish showrooms in which consumers can interact with our products. Through research, we found that consumers were becoming more self-aware about their health and were willing to improve their lifestyles. Our showrooms were stocked and ready for local consumers to visit, however, due to government regulations these operations have been suspended until quarantines and travel restrictions are lifted. In October 2021, the Order was lifted for people who are fully vaccinated and our store has reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. We also started the online sales of our jade mats products in Malaysia since 2021.
Our global logistics and delivery capabilities provide our customers with the flexibility to select from our extensive furniture collections to address their respective needs. We design and supply our products under our own brands. We also design and ship products for other major brands as their OEM designer or supplier. We offer a wide selection of stand-alone furniture pieces across a variety of product categories and approximately over 230 products developed exclusively for the international markets. We also sell products under the Diamond Sofa brand to distributors and retailers in North America, South America, Asia and Middle East and to end-user U.S. consumers our own online orders or through third-party shopping portals. Reflecting market demand, our research and development team works closely with customers to timely modify our existing product designs. We also offer custom-designed styles for specific market segments.
Sales and Marketing
Our sales and marketing strategies target middle and upper middle class, urban consumers, including: (1) direct sales to the U.S. and international customers; (2) internet sales and online marketing campaigns; and (3) participation in exhibitions and trade shows.
We diversify our customer base by increasing direct sales to a broad range of retailers and chain stores across the U.S. and international markets. We plan to continue to expand our direct sales and marketing efforts in North America, and in particular the U.S., which historically is the largest market worldwide for imported furniture. We intend to expand the “Diamond Sofa” brand and introduce new brands for direct sales in the U.S. and international markets while continuing to offer custom-made products under private label.
Diamond Bar also currently sells products under the Diamond Sofa brand in the U.S. through third party shopping portals, shipping orders received online directly to the end customer. We believe that our planned direct-to-consumer online sales and marketing strategies will increase our sales in the U.S. by building our brand awareness and acting as an effective advertising vehicle. We also support new product collections and brand launches with print and online advertising campaigns, participation in furniture exhibitions and by offering product brochures and samples. We provide samples and brochures of new products for international markets to distributors and buyers, as is common in the furniture industry.
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We used to gain new customers by attending many international furniture trade shows throughout the years. During these events, we introduce new product offerings and launch new design collections. We believe this marketing process helps us to develop and detect the latest-trends in the marketplace, allowing us to better understand the challenges and opportunities facing distributors and buyers with whom we have long–standing customer relationships. We usually present new products at the International Famous Furniture Fair (3F) in Dongguan, China and the China International Furniture Exhibition in Shanghai, China, which were suspended in 2020 and 2021 due to COVID-19. We also exhibit new products under the “Diamond Sofa” brand during the Las Vegas Market (U.S.) and the High Point Market (U.S.) trade shows, which were suspended in 2020 due to COVID-19 but were resumed since 2021. Internationally, we participate in trade fairs in collaboration with our customers. We plan to expand our business in the Middle East by attending several furniture exhibitions in those markets, such as trade show in Dubai. To highlight our latest design collections, we maintain year-round showrooms at the Company’s headquarters in California as well as the High Point Market and Las Vegas Market.
In 2021, via our new subsidiary Nova Malaysia, we have marketed and sold high-end physiotherapeutic jade mats to individuals and business companies in Malaysia.
Suppliers and Manufacturers
We source finished goods from third-party manufacturers to fulfill orders placed by customers through Diamond Bar and Nova Malaysia for the U.S. and international markets. Our two principal suppliers of finished goods in 2022 accounted for approximately 42% of our total purchases from continuing operations for 2022. By maintaining relationships with multiple suppliers, generally we benefit from a more stable supply chain and better pricing. Under ordinary circumstances, if a change of suppliers is necessary, we believe that we can quickly fulfill our requirements from other suppliers without interruptions in order fulfillment. We monitor our suppliers’ ability to meet our product needs and we participate in quality assurance activities to reinforce our high-quality standards. Our third-party manufacturing contracts are generally of annual or shorter durations. We issue production orders to manufacturers based on individual purchase orders. Our manufacturing relationships are non-exclusive, and we are permitted to procure products from other sources at our discretion. None of our manufacturing contracts include production volume or purchase commitments on the part of either party. Our third-party manufacturers are responsible for sourcing raw materials, agreeing to produce parts and finished products to our specifications. We hold our suppliers to high quality standards and delivery deadlines. Our quality control procedures may extend to stringent requirements for raw material suppliers.
The third party contract manufacturers that we utilize 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 due to the COVID-19 outbreak, and recommenced production and shipment in early March 2020. Starting in 2020, certain of the Company’s new products are being sourced from manufacturers in India. 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 China and India are in their normal operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased due to the pandemic, supply chain disruption and port congestion. In June 2022, all the shipping and related costs from Asia have been back to normal. It is possible that our overseas’ based manufacturers may experience future suspensions of operations as a result of any resurgence or new variants of COVID-19. The situation remains highly uncertain. It is therefore difficult for the Company to estimate the negative impact on our ability to deliver products during the remainder of 2023.
Customers
Our target end customer is the middle and upper middle-income consumer of residential and commercial furniture. In the U.S. and international markets, our sales principally are to furniture distributors and retailers who in turn offer our products under their own brands or under our Diamond Sofa brand. No customer accounted for greater than 10% of our total sales from continuing operations for 2022 and 2021. Once the COVID-19 pandemic dissipates, we plan to increase direct sales to retailers and chain stores worldwide as we continue to diversify our customer base from global furniture distributors.
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We are focusing on establishing and growing long-term relationships with our customers. We believe that the majority of our customers view us as a strategic long-term supplier and value the quality of our products, our timely delivery and design capabilities. We generally negotiate renewable supplier agreements with firm pricing on our products, typically for a term of one year, as is customary in the furniture industry, with individual orders made on standard purchase orders. In 2022, we sold products into approximately 13 countries worldwide, with North America as our principal international market, while we expanded our sales in other regions. Sales to North America accounted for 94.2% and 97.9% of our total sales from continuing operations for 2022 and 2021, respectively. The change was attributed principally to our changing sales and marketing strategy to diversify international sales. Sales to other regions accounted for 5.8% and 2.1% of our total sales from continuing operations for 2022 and 2021, respectively. We expect that a majority of our revenues will continue to come from our sales to the U.S. and international markets. We acquired Diamond Bar in August 2011, which has driven expansion of our sales to the U.S., Mexico, and South America through Diamond Bar’s longstanding customer relationships and distribution capabilities. Diamond Bar’s revenues accounted for 99.5% and 100.0% of our total sales from continuing operations for 2022 and 2021, respectively, and Nova Malaysia’s revenues accounted for 0.5% and 0% of our total sales from continuing operations for 2022 and 2021, respectively. In addition, we anticipate increasing internet sales under the Diamond Sofa brand through third-party shopping portals and Nova Malaysia’s website. We believe that as we expand our broad network of distributors and increase direct sales, we will be better positioned to capitalize on emerging market trends.
We typically used to experience stronger fourth calendar quarters as our product sales are subject to the seasonality and fluctuations typical of the furniture industry. This industry-based seasonality was generally caused by shipping lead-times to international markets combined with the real estate market slowdown and decrease in furniture consumption commonly experienced during the summer months in the Northern Hemisphere markets in which the majority of our customers are located and our products sell at retail. However, due to the shipping backlog, our fourth quarter’s sales were worse than the first three quarters in 2022. We believe that consumer demand for furniture generally reflects sensitivity to overall economic conditions, including, but not limited to, unemployment rates, housing market conditions and consumer confidence. In view of the expected adverse impact of the COVID-19 pandemic on the respective economies of those countries in which we sell our products, and the COVID-19 pandemic-related impact on our supply chains and shipping providers, seasonality and period to period fluctuations in product sales are impossible to predict in 2023.
Competition
The furniture industry is large and highly competitive. The industry consists of many manufacturers, distributors and retailers, none of which dominates the fragmented and diverse market. Our products principally compete in the U.S., Canada, Honduras, Guatemala, Guam, Puerto Rico, Panama, Costa Rica, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait, Kazakhstan, New Zealand, and Malaysia and Middle Eastern markets. The primary competitive factors in these markets for our products and target consumers are price, quality, style, marketing, functionality and availability.
In the U.S. and international markets, we compete against other furniture distributors and wholesalers which are mostly located in China and other Southeast Asian countries. We also compete against traditional distributors in North America and Europe. We believe that we have significant competitive advantages over North American and European distributors due to our superb customer service and a history of prompt delivery of high-quality products. Our contemporary product designs have styles and functionality that are better than, or at least comparable to, those offered by our higher-priced competitors. Our design team closely coordinates with our sales and marketing staff to include customer feedback as part of their ongoing R&D improvement process, thus allows the Company to develop and timely modify products to meet the changing stylistic and functional demands from our worldwide customers. We believe that our decades of product experience and proven performance record offer competitive edges over many other suppliers. In addition to our design and logistical capabilities, we believe that our experience from sourcing custom-made products for distributors presents significant benefits to our customers.
Environmental and Regulatory Matters
Our operations are subject to various laws and regulations both domestically and abroad. In the U.S., federal, state and local regulations impose standards on our workplace and our relationship with the environment. For example, the U.S. Environmental Protection Agency, Occupational Safety and Health Administration and other federal agencies have the authority to promulgate regulations that may impact our operations. In particular, we are subject to legislation placing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: the Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and the Comprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of the Consumer Product Safety Commission and the Federal Trade Commission, in addition to regulations concerning employee health and safety matters. We believe the Company has complied with the relevant federal, state, local and international requirements for environmental protection.
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Intellectual Property
We rely on the trademark protection laws in the U.S. to protect our intellectual property and maintain our competitive position in the marketplace. The Company and our subsidiaries currently hold two trademarks registered in the U.S. related to the “Diamond Sofa” brand. In addition, we have registered and maintained numerous internet domain names related to our business, including “novalifestyle.com”, “novaliving.com.my” and “diamondsofa.com.”
Research and Development
We believe that new product designs are important to our continued success. We actively seek to protect our product designs and brand names under the trademark protection laws in the U.S., but the copying of a product’s appearance is a common and ongoing issue in the furniture industry as manufacturers seek to capitalize on popular designs and features by copying those of their competitors and making subtle changes to avoid infringement claims. To remain competitive, we believe that we must constantly innovate to stay ahead of competitors. We have developed a design process that enables us to better manage the short product life cycles for furniture designs by anticipating and responding quickly to changing consumer preferences. Ordinarily, we strive to attend furniture exhibitions worldwide, conduct market research and solicit customer feedback to help us identify new trends and customer needs in our target markets. We then incorporate customer feedback into new product designs. We normally introduce new product collections annually for the U.S. and international markets. We anticipate introducing new products under the “Diamond Sofa” brand on a quarterly basis for the U.S. market. At least annually, we assess the marketing results for new designs in order to decide whether to continue with a particular line.
We use in-house designers and computer-aided modeling systems to generate design and related development work. We have used independent designers in the past for product design, from which we built prototype furniture pieces for refinement and testing. In 2022 and 2021, we invested $10,917 and $110,287, respectively, on research and development expense. We may increase future investments in R&D based on our growth needs.
Furniture Industry Regulations and Standards
We and our products are subject to U.S. and international regulations related to the furniture industry.
Our products are subject to the mandatory and voluntary furniture test standards of the U.S. and international markets in which our products are distributed to end consumers, including those developed by the American National Standards Institute, or ANSI, Business and Institutional Furniture Manufacturer’s Association, or BIFMA, ASTM International, California Air Resources Board, or CARB, Furniture Industry Research Association, or FIRA, and the International Organization for Standardization, or ISO. These environmental, ecological and formaldehyde emission standards and source of origin labeling requirements are national or international, with the U.S. and European Union typically having the strictest standards for their markets. We source products from third party manufacturers and we rely on them to meet all local manufacturing standards.
Employees
As of December 31, 2022, we had 28 full time employees worldwide. Our U.S. corporate office and operations employed 24 full-time employees, our location in Malaysia and Hong Kong employed 3 and 1 a total of 4 full-time employees, respectively. We believe that relations with our employees are satisfactory. We have no collective bargaining agreements with our employees.
Item 1A. Risk Factors
Our business and an investment in our securities are subject to a variety of risks. The following risk factors describe the most significant events, facts or circumstances that could have a material adverse effect upon our business, financial condition, results of operations, ability to implement our business plan and the market price for our securities. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. Many of these events are outside of our control. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.
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Risks Related to Our Business
The COVID-19 pandemic has caused, and could continue to cause business disruptions, resulting in a material, adverse impact to our financial condition and results of operations.
In recent years, there have been outbreaks of epidemics in various countries. Recently, there was an outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization declared COVID-19 a pandemic. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in the U.S., China and Malaysia.
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. However, 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 government imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in China were closed from the end of January 2020 through the beginning of March 2020 and have been open for operation. In 2022, there have been outbreaks of the Omicron variant of COVID-19 in Hong Kong and many other cities in China, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities have been imposed by local governments. In December 2022, the Chinese government eased its strict zero COVID-19 policy which resulted in a surge of new COVID-19 cases during December 2022 and January 2023. Although our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in China and India are open for operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset; and we have experienced and may continue to experience shipping disruptions in the future. In June 2022, all the shipping and related costs from Asia have been back to normal. Any further impact to our results will depend on, to a large extent, future developments and new variants that may emerge regarding COVID-19 and the actions taken by governmental authorities and other entities to contain COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:
| ● | temporary closure of offices, stores, showrooms, warehouse, travel restrictions, cancellation of marketing and promotion activities and in person meetings or suspension of transportation, which may materially adversely affect our financial condition and operating results; | |
| ● | our customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable and require us to record additional allowances for doubtful accounts. We have experienced and may experience the delay or cancellation of orders from customers in the future, which has and may continue to adversely affect our financial condition and operating results; | |
| ● | our customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products, which may materially adversely impact our revenue; | |
| ● | any disruption of our supply chain, logistics providers, customers or our marketing activities could adversely impact our business and results of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to us and customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us; | |
| ● | many of our customers, distributors, suppliers and other partners are small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted. |
The situation remains highly uncertain for any further outbreak or new variants of the COVID-19 and effectiveness of any vaccines. It is therefore difficult for the Company to estimate the impact on our business or operating results that might be adversely affected by any further outbreak or new variants of COVID-19. Potential impact to our results of operations will also depend on future developments and new information that may emerge regarding COVID-19 and the actions taken by governmental authorities and other entities to contain COVID-19 and/or mitigate its impact, almost all of which are beyond our control.
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Changes in economic conditions in the industries and markets served by our customers could adversely affect demand for our products.
The furniture industry is subject to cyclical variations in the global economy and to uncertainty regarding future economic prospects. Our business is affected by the number of orders we are able to secure from our customers, which is determined by the level of our customers’ business activity. Our customers’ level of business activity is in turn determined by the level of consumer spending in the markets our customers serve. Economic downturns could affect discretionary consumer spending habits by decreasing the overall demand for residential and commercial furniture. Any significant or prolonged decline of the economy or inflation in U.S., Malaysia, China or other international markets in which our products are sold will affect disposable income and spending by consumers in these markets, and may lead to a decrease in demand for our products. To the extent that decrease in demand for consumer products translates into a decline in the demand for residential and commercial furniture, our sales and financial performance could be adversely affected. Any economic downturn also could negatively impact our primary customers, furniture wholesalers, distributors and retailers, possibly resulting in a decrease in our sales or earnings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, inflation, the availability of consumer credit and geopolitical factors could have particularly significant effects on our consolidated financial condition, results of operations and cash flows. Any decline in economic activity and conditions in the industries and markets served by our customers and in which we operate may reduce demand for our products and could adversely affect our financial condition and results of operations. The COVID-19 pandemic has materially adversely impacted the global economy which in turn adversely affected the demand for our products.
We historically have derived a substantial part of our sales from a limited number of customers. If we lose any of these customers, or any of these customers reduce the amount of business they do with us, our sales may be adversely affected.
Historically, a substantial part of our sales was attributed to a limited number of customers. But we had no sales to a customer greater than 10% of our total sales from continuing operations for 2022 and 2021. If the demand for our products decreases in one or more of the markets supplied by our largest customers, or if there are any material social or regulatory changes in these markets, our sales could decline and we could lose market share, any of which could materially harm our business. We do not foresee relying on these same customers for sales generation as we expand our business to increase our internet sales and direct sales to the U.S. and other international markets. We cannot assure you, however, that we will be able to successfully implement these plans.
Our decision to move away from low margin products and to eliminate customers who generate low margin sales and that have slow payment histories could result in a decrease in our future sales and earnings.
As we implement our plan to transition to high profit margin products and fast paying clients, we cannot assure that the transition will be successful and that we will eventually develop enough new business to make up the loss of sales from the existing low margin products and slow paying clients. If we are unable to develop enough new clients for our high profit margin products, our sales and net income will be negatively impacted.
If we lose our key personnel, or are unable to attract and retain additional qualified personnel, the quality of our services may decline and our business may be adversely affected.
We rely heavily on the expertise, experience and continued services of our senior management, including our Chief Executive Officer, President, Director and Chairperson, Ms. Lam, and our Chief Financial Officer, Mr. Chuang. Loss of their services could adversely affect our ability to achieve our business objectives. Ms. Lam and Mr. Chuang are key factors in our success at establishing relationships within the furniture industry in the U.S. and international market and capital market because of their extensive industry and financial experience. The continued development of our business depends upon their continued employment. We have entered into employment agreements with Ms. Lam and Mr. Chuang that include provisions for non-competition and confidentiality.
We believe our future success will depend upon our ability to retain key employees and our ability to attract and retain other skilled personnel. We cannot guarantee that any employee will remain employed by us for any period of time or that we will be able to attract, train or retain qualified personnel in the future. Such loss of personnel could have a material adverse effect on our business and company. Furthermore, we will need to employ additional personnel to expand our business. Qualified employees are in great demand and may be unavailable in the time frame required to satisfy our customers’ requirements. There is no assurance we will be able to attract and retain sufficient numbers of highly skilled employees in the future. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates could impair the growth of our business.
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We may not be able to keep pace with competition in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.
The furniture industries in the U.S. and international markets are very competitive and fragmented. Our business is subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Many of our competitors and potential competitors may have substantially greater financial and government support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, style, functionality and availability. We cannot be sure we will have the resources or expertise to compete successfully in the future. Some of our competitors may also be able to provide customers with additional benefits at lower overall costs to increase market share. We cannot be sure we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to continue to differentiate our products through value, styling or functionality from those of our competitors. In addition, some of our customers are also performing more manufacturing services themselves. We may face competition from our customers as they seek to become more vertically integrated. As a result, we are continually subject to the risk of losing market share, which may lower our sales and earnings.
We will face different market dynamics and competition as we develop new products to expand our presence in our target markets. In some markets, our future competitors may have greater brand recognition and broader distribution than we currently enjoy. We may not be as successful as our competitors in generating revenues in those markets due to the lack of recognition of our brands, lack of customer acceptance, lack of product quality history and other factors. As a result, any new expansion efforts could be more costly and less profitable than our efforts in our existing markets. If we are not as successful as our competitors are in our target markets, our sales could decline, our margins could be impacted negatively and we could lose market share, any of which could materially harm our business.
We may lose U.S. market share due to competition and our dependence on production facilities located outside the U.S., which would result in a decrease in our future sales and earnings.
We compete in the U.S. market principally through our sales under the Diamond Sofa brand. The furniture industry in the U.S. is very competitive and fragmented. We compete with many domestic U.S. and international furniture sources, including national department stores, regional or independent specialty stores, dedicated franchises of furniture manufacturers and retailers marketing products through catalogs and over the internet. There are few barriers to entry in the U.S. furniture market, and new competitors may enter this market at any time. Some of our competitors have greater financial resources than we have and often offer extensively advertised and well-recognized branded products. We may not be able to meet price competition or otherwise respond to competitive pressures in the U.S. market. We also may not be able to continue to differentiate our products from those of our competitors in the U.S. through value, styling and functionality because of the large number of competitors and their wide range of product offerings. Furthermore, some large furniture retailers in the U.S. are sourcing products directly from furniture manufacturers located in China and other Southeast Asian countries instead of through distributors like us. Over time, this practice may expand to smaller retailers in the U.S. Accordingly, we are continually subject to the risk of losing U.S. market share, which may decrease our future sales and earnings. Because we source products from third party manufacturers that are located outside the U.S. and we are subject to risks caused by disruption of international transportation such as COVID-19 and other health pandemics as well as the increase of tariffs imposed by the U.S. customs. We might loss business and our reputation might be damaged if there is delay of delivery and shipment from our suppliers.
Failure to anticipate or timely respond to changes in fashion and consumer preferences could adversely impact our business.
Furniture is a styled product and is subject to rapidly changing fashion trends and consumer preferences, as well as to increasingly shorter product life cycles. We believe our past performance has been based on, and our future success will depend, in part, upon our ability to continue to improve our existing products through product innovation and to develop, market and produce new products. We cannot assure you that we will be successful in introducing, marketing and producing any new products or product innovations, or that we will develop and introduce in a timely manner innovations in our existing products that satisfy customer needs or achieve market acceptance. Our success also depends upon our ability to anticipate and respond in a timely manner to fashion trends related to residential and commercial furniture. If we fail to identify and respond to these changes, our sales could decline and we could lose market share, any of which could materially harm our business.
If we are unable to manage our growth, we may not be profitable.
Our continued success depends, in part, upon our ability to manage and expand our operations and facilities in the face of continued growth. This planned growth includes the expansion of our internet sales and diversifying our international sales by expanding our broad network of distributors, increasing direct sales in the U.S. and other international markets and entering emerging growth markets. The growth in our operations has placed, and may continue to place, significant demands on our management, operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could negatively affect our operating results. To manage this growth effectively, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of operations.
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We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.
In connection with the development and expansion of our business, we may incur significant capital and operational expenses. We believe that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing online sales and (ii) diversifying our international sales. We plan to increase and diversify our sales to the U.S. and international markets by establishing new brands for the international markets and to increase our online sales presence.
In the event that available funds are not sufficient to meet our operating needs and our plans for expansion, we intend to pursue alternative financing arrangements, including additional bank loans based on our good credit rating or funds raised through additional offerings of our equity or debt, if and when we determine such offerings are required. Our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties, including:
| ● | Investors’ perceptions of, and demand for, companies in our industry; |
| ● | Investors’ perceptions of, and demand for, companies sourcing from China and other Asian countries; |
| ● | Conditions of the U.S. and other capital markets in which we may seek to raise funds; |
| ● | Our future results of operations, financial condition and cash flows; |
| ● | Governmental regulation of foreign investment in companies in particular countries; |
| ● | Economic, political and other conditions in the U.S., China, and other countries; and |
| ● | Governmental policies relating to foreign currency. |
There is no assurance we will be successful in locating a suitable financing transaction in a timely fashion or at all. In addition, there is no assurance we will obtain the capital we require by any other means. Future financings through equity investments are likely to be dilutive to our existing shareholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly-issued securities may include preferences or superior voting rights, be combined with the issuance of warrants or other derivative securities, or be the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our strategy to maintain our growth and competitiveness.
A substantial portion of our inventory has moved slowly in terms of utilization due to the stay home and store closure orders, delay of shipments and suspension of transportations caused by COVID-19, which has caused and might continue to cause negative impacts on our cash flow, liquidity and financial results.
Due to the COVID-19 pandemic, our showrooms and stores were closed and freight transportation of products from our international suppliers has been delayed or suspended, and a substantial portion of our inventory has moved slowly in terms of utilization. As of December 31, 2022, the Company has written-down total of $45.09 million of slow-moving inventory since 2020, mostly Jade Mats in Malaysia due to the extension of Movement Control Order by Malaysia government which prohibits the businesses from opening to public to control the spread of COVID-19. While our showroom and stores in Malaysia reopened since October 2021, though we cannot offer any assurances they will not be closed again if there is any further outbreak or resurgence of COVID-19 and further closure order from local government. If we have to write down more inventory, our cash flow, liquidity and financial results will be materially adversely affected.
We may experience material disruptions to our ability to acquire sufficient inventory from third-party suppliers that could result in material delays, quality control issues, increased costs and loss of business opportunities, which may negatively impact our sales and financial results.
We rely upon our third-party suppliers to produce our products and maintain sufficient inventory to meet customer demand. A material disruption at our suppliers’ manufacturing facilities could prevent us from meeting customer demand, reduce our sales and negatively impact our financial results. We may also experience quality control issues as we seek out new suppliers or are forced to contract with new suppliers to meet customer demand. Any such material disruption may prevent us from shipping our products on a timely basis, reduce our sales and market share and negatively impact our financial results. Our third-party supplier contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements with other third-party suppliers on commercially reasonable terms. Further, while we maintain an active quality control program, we cannot assure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of substandard products. While we believe that products manufactured by our current third-party suppliers could generally be procured from alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and operations.
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Our dependence on foreign suppliers and our increased global operations subject us to a variety of risks and uncertainties that could impact our operations and financial results.
In 2022, the majority of our products were purchased from foreign suppliers and manufacturers, predominantly in Asia. Our dependence on foreign suppliers means that we may be affected by changes in the value of the U.S. dollar relative to other foreign currencies. For example, any upward valuation in the Chinese yuan or any other foreign currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This, in turn, might cause such foreign vendors to demand higher prices for products in their effort to offset any lost profits associated with any currency devaluation, delay product shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.
We, and our foreign suppliers, are also subject to other risks and uncertainties associated with changing economic and political conditions worldwide. These risks and uncertainties include import duties and quotas, compliance with anti-dumping regulations, port congestion, supply chain disruption, work stoppages, economic uncertainties and adverse economic conditions (including inflation and recession), government regulations, employment and labor matters, wars and fears of war, political unrest, natural disasters, public health issues, regulations to address climate change and other trade restrictions. We cannot predict whether any of the countries from which our raw materials or products are sourced, or in which our products are currently manufactured or may be manufactured in the future, will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign suppliers, including labor disputes resulting in work disruption, the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, could increase the cost, reduce the supply of merchandise available to us, or result in excess inventory if merchandise is received after the planned or appropriate selling season, all of which could adversely affect our business, financial condition and operating results.
A delay in getting non-U.S.-sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales orders and unanticipated inventory accumulation.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide. Supply chain disruption and port congestions caused by COVID-19 have caused delay of shipment and delivery of our products. Any disruptions at ports create significant risks for our business, particularly if work slowdowns, quarantines, lockdowns, strikes or other disruptions occur during our peak importing seasons. Any of these factors could result in reduced sales, canceled sales orders and unanticipated inventory accumulation and have a material adverse effect on our operating results, financial position and cash flows.
Increases in income tax rates, changes in income tax laws or disagreements with tax authorities could adversely affect our business, financial condition or results of operations.
We are subject to income taxes in the United States and in certain foreign jurisdictions in which we operate. Increases in income tax rates or other changes in income tax laws that apply to our business could reduce our after-tax income from such jurisdiction and could adversely affect our business, financial condition or results of operations. In addition, the United States and many of the other countries in which our products are distributed or sold, including countries in which we have significant operations, have recently made or are actively considering changes to existing tax laws.
In October 2018, the Macao Legislative Assembly has approved a bill revoking the current offshore law, to abolish the relevant legislation on the Macao offshore business regime. Starting on January 1, 2021, the exemptions of stamp duty, professional tax (for individuals) and complementary tax (for corporations) will no longer be available to these offshore institutions. 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 was de-registered and liquidated in January 2021 and its business was taken over by Nova HK. In February 2022, Nova HK also entered into a de-registration and liquidation process and was in the process of transferring all its assets and business to Nova Malaysia. All of Nova HK’s inventory was transferred to Nova Malaysia on February 15, 2022.
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Additional changes in the U.S. tax regime or in how U.S. multinational corporations are taxed on foreign earnings, including changes in how existing tax laws are interpreted or enforced, could adversely affect our business, financial condition or results of operations.
We are also subject to regular reviews, examinations and audits by the IRS and other taxing authorities with respect to income and non-income based taxes both within and outside the United States. Economic and political pressures to increase tax revenues in jurisdictions in which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult and the final resolution of tax audits and any related litigation could differ from our historical provisions and accruals, resulting in an adverse impact on our business, financial condition or results of operations. In addition, in connection with the Organization for Economic Co-operation and Development Base Erosion and Profit Shifting project, companies are required to disclose more information to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in various countries.
We are subject to warranty claims for our products, which could result in unexpected expense.
Many of our products carry warranties for defects in quality and workmanship. Historically, the amount for return of products, the discount provided to the customers due to defects and cost for the replacement parts has been immaterial. However, we may experience significant expense as the result of future product quality issues, product recalls or product liability claims which may have a material adverse effect on our business. The actual costs of servicing future warranty claims may exceed our expectations and have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to periodic litigation, product liability risk and other regulatory proceedings, which could result in unexpected expense of time and resources.
From time to time, we may be a defendant in lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse effect on our business, financial condition and results of operations. In addition, any significant litigation, regardless of its merits, could divert management’s attention from our operations and may result in substantial legal costs. The Company has been named in a putative securities class action case and two derivatives cases described in Item 3 below. While the Company believes it has adequate defenses, the defense of those cases could become costly and could significantly divert management attention from its business.
We may not be able to protect our product designs and other proprietary rights adequately, which could adversely affect our competitive position and reduce the value of our products and brands, and litigation to protect our intellectual property rights may be costly.
We attempt to strengthen and differentiate our product portfolio by developing new and innovative brands and product designs and functionality. As a result, our trademarks and other intellectual property rights are important assets to our business. Our success will depend in part on our ability to obtain and protect our products, methods, processes and other technologies, to preserve our trade secrets, and to operate without infringing on the proprietary rights of third parties in China, the U.S. and other international markets. Despite our efforts, any of the following may reduce the value of our owned and used intellectual property:
| ● | Issued and trademarks that we own or have the right to use may not provide us with any competitive advantages; |
| ● | Our efforts to protect our proprietary rights may not be effective in preventing misappropriation of our intellectual property or that of those from whom we license our rights to use; |
| ● | Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we use or develop; or |
| ● | Another party may obtain a blocking patent and we or our licensors would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products. |
Effective protection of intellectual property rights may be unavailable or limited in China or certain other countries. Policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation might be necessary to protect our intellectual property rights, which may be costly and may divert our management’s attention away from our core business. Furthermore, there is no guarantee that litigation would result in an outcome favorable to us. If we are unable to protect our proprietary rights adequately, it would have a negative impact on our operations.
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We, or the owners of the intellectual property rights licensed to us, may be subject to claims that we or such licensors have infringed the proprietary rights of others, which could require us and our licensors to obtain a license or change designs.
Although we do not believe any of our products infringe upon the proprietary rights of others, there is no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or those from whom we have licenses or that any such assertions or prosecutions will not have a material adverse effect on our business. Regardless of whether any such claims are valid or can be asserted successfully, defending against such claims could cause us to incur significant costs and could divert resources away from our other activities. In addition, assertion of infringement claims could result in injunctions that prevent us from distributing our products. If any claims or actions are asserted against us or those from whom we have licenses, we may seek to obtain a license to the intellectual property rights that are in dispute. Such a license may not be available on reasonable terms, or at all, which could force us to change our designs.
We incur significant costs as a result of our operating as a public company and our management is required to devote substantial time to compliance with the regulatory requirements placed on a public company.
As a public company with substantial operations, we incur significant legal, accounting and other expenses. The costs of preparing and filing annual, quarterly and current reports, proxy statements and other information with the SEC and furnishing audited reports to shareholders is time-consuming and costly.
It has also been time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and this remains an ongoing process. Certain members of our management have limited or no experience operating a company whose securities are listed on a national securities exchange or with the rules and reporting practices required by the federal securities laws as applied to a publicly traded company. We have needed to recruit, hire, train and retain additional financial reporting, internal control and other personnel in order to develop and implement appropriate internal controls and reporting procedures.
Our ongoing investment in new products is inherently risky, and could disrupt our current operations.
We have invested and expect to continue to invest in new products. Our plan 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 is a reflection of our ongoing efforts to innovate and provide useful products in new geographical markets. Such endeavors including the investment of jade mats in Malaysia involve significant risks and uncertainties, including insufficient revenues from such investments to offset any new liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, distraction of management from current operations, and risks and competition not discovered in our due diligence and decision making of such strategy plans could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities. Because the development and investment in new products and markets are inherently risky, no assurance can be given that such plans will be successful and will not adversely affect our reputation, financial condition, and operating results.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately. Any inability to report and file our financial results accurately and timely could harm our business and adversely affect the trading price of our common stock.
We are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2022. See “Item 9A. Controls and Procedures.” However, our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
We are a holding company that depends on cash flow from our wholly owned subsidiaries to meet our obligations, and any inability of our subsidiaries to pay us dividends or make other payments to us when needed could disrupt or have a negative impact on our business.
We are a holding company with no material assets other than the stock of our wholly owned subsidiaries, Diamond Bar, Nova Furniture, Nova Samoa and Nova Malaysia. We rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. If our subsidiaries are unable to pay us dividends and make other payments to us when needed because of regulatory restrictions or otherwise, we may be materially and adversely limited in our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.
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We may not be able to attract the attention of major brokerage firms because we became public by means of a share exchange, which could limit our ability to obtain future capital and financing.
There may be risks associated with our becoming public by means of a share exchange, or reverse merger with a public shell company that had no revenues, operations or material assets prior to the time of the share exchange. Analysts of major brokerage firms may not provide coverage for our company because there is no incentive for brokerage firms to recommend the purchase of our common stock. Furthermore, we can give no assurance that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf, which could limit our ability to obtain future capital and financing.
The audit report included in our Annual Report on Form 10-K for the year ended December 31, 2021 was prepared by auditors who were not inspected fully by the Public Company Accounting Oversight Board (the “PCAOB”), and as such, investors are deprived of the benefits of such inspection.
Our former auditor, Centurion ZD CPA & Co. (“Centurion ZD”), is required to undergo regular inspections by the PCAOB as an auditor of companies that are publicly traded in the United States and a firm registered with the PCAOB. However, because Centurion ZD is based in Hong Kong, a jurisdiction where the PCAOB was unable to conduct inspections before December 2022, Centurion ZD and its audit work were not inspected independently and fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections and may lose confidence in our reported financial information and procedures and the quality of our financial statements.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. In accordance with the HFCA Act, trading in securities of any registrant on a national securities exchange or in the over-the-counter trading market in the United States may be prohibited if the PCAOB determines that it cannot inspect or fully investigate the registrant’s auditor for three consecutive years beginning in 2021, and, as a result, an exchange may determine to delist the securities of such registrant. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCA Act”), which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On December 29, 2022, a legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”), was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to Accelerating Holding Foreign Companies Accountable Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, thus reducing the time period before our securities may be prohibited from trading or delisted if our auditor is unable to meet the PCAOB inspection requirement.
On December 2, 2021, SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (the “Commission-Identified Issuers”). A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
On December 16, 2021, the PCAOB issued its determinations (the “Determination”) that they are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong. The Determination includes lists of public accounting firms headquartered in mainland China and Hong Kong that the PCAOB was unable to inspect or investigate completely. Centurion ZD CPA & Co. is headquartered in Hong Kong and was included in the PCAOB Determinations.
As a result, we will be required to comply with the submission or disclosure requirements in our annual report filing covering the fiscal year ended December 31, 2022 and our securities may be prohibited from trading on Nasdaq or another U.S. stock exchange if our auditor is not inspected by the PCAOB for two consecutive years as specified in the HFCA Act and Consolidated Appropriations Act, and this ultimately could result in our shares of common stock being delisted from Nasdaq. The market price of our shares could be materially adversely affected as a result of anticipated negative impacts of these actions upon, as well as negative investor sentiment towards, companies whose auditors are not inspected fully by the PCAOB, regardless of our actual operating performance.
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On October 7, 2022, the Company dismissed its independent accountant, Centurion ZD. On October 6, 2022, the Audit Committee of the Board of Directors of the Company and the Board of Directors of the Company, resolved to, and did, cause the Company to engage WWC, P.C. (“WWC”) as the Company’s independent auditor for the fiscal year ending December 31, 2022. WWC is located in the United States and has not been identified by the PCAOB as a firm that the PCAOB is unable to fully inspect and investigate.
On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination.
If it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction or any other reasons, the lack of inspection could cause the trading in our securities to be prohibited under HFCA Act and Consolidated Appropriations Act, and as a result Nasdaq may delist our securities. If our shares of common stock are unable to be listed on another securities exchange, such a delisting would substantially impair our shareholders ability to sell or purchase their shares when they wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our shares of common stock. Further, new laws and regulations or changes in laws and regulations in both the United States, China and Hong Kong could affect our ability to list our shares on Nasdaq, which could materially impair the market for and market price for our shares.
If relations between the U.S. and China worsen, our business could be adversely affected as we have to find new suppliers and manufacturers out of China.
Political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by then U.S. President that prohibit certain transactions with certain Chinese companies and their applications. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Controversies may arise in the future between these two countries. These controversies also could make it more difficult for us to provide our products to our customers in the U.S. and China. The international trade policies of China and the U.S. could adversely affect our business, and the imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports from China, including those applied specifically to furniture products, or the imposition of taxes, import duties or other charges on exports to the U.S. could increase our costs and decrease our earnings. Due to an increase in tariffs imposed by the U.S., some customers are seeking alternative resources instead of China, which has negatively affected the purchase orders and our sales as we mainly resource our products from China. In order to avoid these new tariffs, the market has shifted towards an uncertain era. The Company started to source certain of its new products from manufacturers in India in 2020. Sales during this stage may also be impacted by this shift in behavior. The U.S. government currently has increased tariffs from 25%. During this time period our company will continue to seek alternatives and new resources to increase the revenue. If and to the extent we are not able to mitigate the effects of such trade or tariff policies, our operations may be adversely affected.
Our compliance with the Foreign Corrupt Practices Act may put us at a competitive disadvantage, while our failure to comply with the Foreign Corrupt Practices Act may result in substantial penalties.
We are required to comply with the United States Foreign Corrupt Practices Act, or the FCPA, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties. Non-U.S. companies, including some of our competitors, are not subject to the provisions of the FCPA. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in mainland China and other Asian countries that we conduct business. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.
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Risks Related to Our Securities
Our shares may be delisted under the HFCA Act and related regulations if the PCAOB is unable to inspect our auditor, and the delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On June 22, 2021, the U.S. Senate passed the AHFCA Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On December 29, 2022, a legislation entitled the Consolidated Appropriations Act, was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to AHFCA Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, thus reducing the time period before our securities may be prohibited from trading or delisted if our auditor is unable to meet the PCAOB inspection requirement.
Our financial statements contained in the annual report on Form 10-K for the year ended December 31, 2021 have been audited by Centurion ZD, an independent registered public accounting firm that is headquartered in Hong Kong. Centurion ZD, is a firm registered with the PCAOB, and is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. However, because Centurion ZD. is based in Hong Kong, a jurisdiction where the PCAOB was unable to conduct inspections without the approval before December 2022, Centurion ZD and its audit work were not inspected independently and fully by the PCAOB.
On December 16, 2021, the PCAOB issued its determinations (the “Determination”) that they are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong. The Determination includes lists of public accounting firms headquartered in mainland China and Hong Kong that the PCAOB is unable to inspect or investigate completely. Centurion ZD is headquartered in Hong Kong and was included in the PCAOB Determinations.
On October 7, 2022, the Company dismissed its independent accountant, Centurion ZD. On October 6, 2022, the Audit Committee of the Board of Directors of the Company and the Board of Directors of the Company, resolved to, and did, cause the Company to engage WW as the Company’s independent auditor for the fiscal year ending December 31, 2022. WWC is located in the United States and has not been identified by the PCAOB as a firm that the PCAOB is unable to fully inspect and investigate.
On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination.
If PCAOB is unable to inspect or investigate completely our auditor, it could cause the trading in our securities to be prohibited under the Holding Foreign Companies Accountable Act and related regulations, and as a result Nasdaq may delist our securities. If our securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase our securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares. Further, new laws and regulations or changes in laws and regulations could affect our ability to list our securities on Nasdaq, which could materially impair the market for and market price for our securities.
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The market price for our common stock may be volatile, which could make it more difficult or impossible for an investor to sell our common stock for a positive return on their investment.
The trading price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include, but are not limited to, our quarterly operating results or the operating results of other companies in our industry, announcements by us or our competitors of acquisitions, new products, product improvements, commercial relationships, intellectual property, legal, regulatory or other business developments and changes in financial estimates or recommendations by stock market analysts regarding us or our competitors. In addition, the stock market in general, and the market for companies that became public by means of a reverse acquisition with a public shell company in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated or disproportionate to their operating performance. These broad market fluctuations may materially affect our stock price, regardless of our operating results. Furthermore, the market for our common stock historically has been limited and we cannot assure you that a larger market will ever be developed or maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, these factors may make it more difficult or impossible for you to sell our common stock for a positive return on your investment.
Shares of our common stock lack a significant trading market, which could make it more difficult for an investor to sell our common stock.
Our common stock is traded on The NASDAQ Stock Market LLC. However, there is no assurance that an active trading market in our common stock will be sustained. As a result, an investor may find it more difficult to dispose of our common stock.
If we fail to continue to meet the listing standards of NASDAQ, our common stock may be delisted, which could have a material adverse effect on the liquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. The NASDAQ Stock Market LLC has requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us to maintain a minimum bid price of $1.00 per share of our common stock. The Company was notified on January 18, 2019 that pursuant to NASDAQ Listing Rule 5810(c)(3)(A), it was afforded 180 calendar days to regain compliance with the minimum bid price requirement and was also provided an additional 180 days grace period. On December 18, 2019, we filed a Certificate of Change with the Secretary of State of Nevada with an effective date of December 20, 2019 to effect a 1-for-5 reverse stock split of the Company’s common stock to meet the $1.00 per share minimum closing bid price requirement. On January 9, 2020, we received a written notification from the NASDAQ Stock Market Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum closing bid price requirement for continued listing on the NASDAQ Capital Market.
On June 24, 2022, the Company received a letter from Nasdaq notifying the Company that, because the closing bid price for the Company’s common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company no longer meets the minimum bid price requirement for continued listing on Nasdaq under Nasdaq Marketplace Rule 5550(a)(2), which requires a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The Company has a period of 180 calendar days from the date of notification, until December 21, 2022 (the “Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. On December 22, 2022, the Company received a written notification from the Nasdaq indicating that the Company has been granted an additional 180 calendar day period or until June 19, 2023, to regain compliance with the $1.00 minimum closing bid price requirement for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Listing Rule. If compliance cannot be demonstrated by June 19, 2023, Nasdaq will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal the Staff’s determination to a Hearings Panel (the “Panel”) of NASDAQ.
In addition, we may be unable to meet other applicable NASDAQ listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common stock in which case, our common stock could be delisted. If our common stock were to be delisted, the liquidity of our common stock would be materially adversely affected and the market price of our common stock could decrease.
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Future sales of shares of our common stock by our shareholders could cause our stock price to decline.
Future sales of shares of our common stock could adversely affect the prevailing market price of our stock. As of March 15, 2023, Steven Qiang Liu, our largest shareholder and vice president of the Company, owned approximately 27.9% of our outstanding shares of common stock. If Mr. Liu sells a large number of shares, or if we issue a large number of shares, the market price of our stock could decline. Moreover, the perception in the public market that significant shareholders might sell shares of our stock could depress the market for our shares. If such shareholders sell substantial amounts of our common stock in the public market, such sales could create a circumstance commonly referred to as an “overhang,” in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price we deem reasonable or appropriate.
We may issue additional shares of our common stock or debt securities to raise capital or complete acquisitions, which would reduce the equity interest of our shareholders.
Our Articles of Incorporation, as amended, authorize the issuance of up to 15,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2022, there were 7,880,820 authorized and unissued shares of our common stock available for future issuance, based on 7,119,180 shares of our common stock outstanding. Although we have no commitments as of the date of this report to issue our securities, we may issue a substantial number of additional shares of our common stock or debt securities to complete a business combination or to raise capital. On October 8, 2020, we renewed a shelf registration statement on Form S-3 under which we may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The shelf registration statement was declared effective as of October 15, 2020. On July 23, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 1,114,508 shares of the Company’s common stock (the “Common Stock”), at a purchase price of $2.80 per share. Concurrently with the sale of the Common Shares, the Company also sold warrants to purchase 1,114,508 shares of Common Stock. The Common Shares were offered and sold by the Company pursuant to the shelf registration statement on Form S-3 and the Warrants and the shares issuable upon exercise of the Warrants were sold without registration under the Securities Act of 1933 in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act. The gross proceeds of the offering 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.
The issuance of additional shares of our common stock may significantly reduce the equity interest of our existing shareholders and adversely affect prevailing market prices for our common stock.
We do not expect to pay dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant. We are a holding company that depends on cash flow from our wholly owned subsidiaries to meet our obligations, and any inability of our subsidiaries to pay us dividends or make other payments to us when needed could disrupt or have a negative impact on our business. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business. If we do not pay dividends, our common stock may be less valuable because a return on your investment will occur only if our stock price appreciates.
Our principal shareholders have the ability to exert significant control in matters requiring a shareholder vote and could delay, deter or prevent a change of control in our company.
As of March 15, 2023, Steven Qiang Liu, our largest shareholder, owned approximately 27.9% of our outstanding shares of common stock. Mr. Liu may exert significant influence over us, giving him the ability, among other things, to exercise significant control over the election of all or a majority of the Board of Directors and to approve significant corporate transactions that require the shareholders’ approval. Such share ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. Without the consent of Mr. Liu, we could be prevented from entering into potentially beneficial transactions if such transactions conflict with our principal shareholder’s interests. As an officer of the Company, Mr. Liu owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in the best interests of our shareholders. As a shareholder, Mr. Liu is entitled to vote his shares in his own interests, which may not always be in the interests of our shareholders.
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Provisions in the Nevada Revised Statutes and our Amended and Restated Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our Board of Directors and our officers may have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances, pursuant to provisions in the Nevada Revised Statutes and our Amended and Restated Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its shareholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. Accordingly, you may be unable to prevail in a legal action against our directors or officers even if they have breached their duty of care. In addition, our Amended and Restated Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely affect prevailing market prices for our common stock.
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. Since it is in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks. On December 21, 2018, Seeking Alpha published a report that contained various false allegations against the Company, which has driven down the market price of our common stock. The author of that article disclosed that he had accumulated a short position in the Company’s common stock prior to the publication of the article. As of December 31, 2018, the closing price of our common stock as reported on the NASDAQ Stock Market was $2.30, representing a decrease of $1.55 compared to $3.85, the closing price of our common stock as of December 20, 2018.
Although we have timely responded to the false allegations set forth in the Seeking Alpha article, we cannot assure you that false, misleading and/or defamatory articles will not be published again in the future. The publication of any such commentary regarding us in the future may bring about a temporary, or long term, decline in the market price of our common stock. No assurances can be made that similar declines in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal executive offices and those of Diamond Bar are in leased office space with showroom, distribution and warehouse space in Commerce, California. Diamond Bar also maintains showrooms in leased space at Las Vegas Market in Nevada and High Point Market in North Carolina. Nova Macao leased office space in Macao even it entered the de-registration procedure. We terminated the Nova Macao’s lease in 2021. Nova HK did not have a lease and shared an office with an unrelated third party. Nova Malaysia is in leased office space with showroom, service center and warehouse space in Kuala Lumpur, Malaysia.
We believe that our existing office and distribution facilities are adequate for current and presently foreseeable operations. In general, our properties are well maintained, considered adequate and being utilized for their intended purposes. See Note 15 to our consolidated financial statements contained herein, which discloses lease agreements.
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Item 3. Legal Proceedings
On December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently appointed as lead plaintiffs and, on June 18, 2019, filed an Amended Complaint.
Plaintiffs seek to represent a class of entities acquiring Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in its planned $460 million senior care center in China; and (2) inflated sales in 2016 and 2017 by recognizing significant sales to two allegedly non-existent customers. Plaintiffs claim that the falsity of these representations was exposed in a blog posted on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities identified as significant customers.
On March 8, 2022, the parties to the Barney Action filed a Stipulation of Settlement (“Settlement”) with the Court. Under the terms of the Settlement, and without admitting to any wrongdoing, fault, or liability, the Company agreed to a payment of $750,000 to completely resolve the Barney Action. The $750,000 would be funded by the remainder of any retention under applicable directors and officer liability insurance with the remainder paid by the directors and officer liability insurer. The settlement provides for the class members’ complete release of all claims against the Company and the named defendants with respect to any of the matters alleged in the litigation. The Settlement was subject to various conditions, including preliminary approval by the Court, notice to all class members, an opt-out period, and a final hearing and approval by the Court.
By Memorandum Opinion and Order dated August 29, 2022, the Court denied the Barney plaintiffs’ unopposed Motion to Certify a Settlement Class and to Approve the Settlement. The Court held that plaintiffs had not met their burden of establishing the prerequisites to class certification of adequacy of class counsel, numerosity, and the superiority of class certification in fairly and efficiently adjudicating the controversy. The Court similarly concluded that plaintiffs had failed to make a threshold showing that the settlement was fair and adequate. Finally, the Court rejected plaintiffs’ proposed plan for providing notice of the settlement to putative class members, finding that it was inadequate under the circumstances.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, the derivative actions will be activated. The parties disagree as to when that will occur. Defendants have asserted that the Action must remained stayed until the final disposition of the Barney Action, meaning, the Court’s final approval of the Settlement. Plaintiff’s position is that the Court should lift the stay because the class action plaintiffs agreed to settle the case. The Court has yet to address this issue.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Since January 17, 2014, our common stock has been quoted on The NASDAQ Stock Market under the symbol “NVFY.” On April 14, 2023, the closing price for our common stock as reported on the NASDAQ Stock Market was $0.60 per share.
Holders of Record
On April 12, 2023, there were approximately 47 holders of record based on information provided by our transfer agent. Many of our shares of common stock are held in street or nominee name by brokers and other institutions on behalf of shareholders and we are unable to estimate the total number of shareholders represented by these record holders.
Dividend Policy
Dividends may be declared and paid out of legally available funds at the discretion of our Board of Directors. We do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. We currently intend to utilize all available funds to develop our business.
Item 6. Selected Financial Data
Not required.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Declaration
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading “Risk Factors.”
Overview
Nova LifeStyle, Inc. is a distributor 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. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStyle also sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.
Nova LifeStyle’s brand family currently includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.
Our customers principally consist of distributors and retailers with specific geographic territories that deploy middle to high end private label home furnishings which have very little competitive overlap with our specific furnishing products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are properly aligned with our growth strategy. This allows us to continually focus on building both our overall distribution and manufacturing relationships through a deployment of popular, as well as trend-based, furnishing solutions worldwide.
We are a U.S. holding company with no material assets in the U.S. other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential and commercial furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020, and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registration and liquidation in January 2021. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation was completed in February 2023.
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On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build our own blockchain technology team. i Design is in the planning stage and has had minimum operations to date. On December 12, 2019, we became the sole shareholder of Nova Living (M) SDN. BHD. (“Nova Malaysia”), a company incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia markets and sells 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, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of $2,500,000. We received the payment on May 11, 2020.
On October 14, 2020, Nova Macao’s offshore license was invalidated by the Macao Trade and Investment Promotion Institute under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao was de-registration and liquidation in January 2021 and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group Limited (“Nova HK”) which was incorporated in Hong Kong on November 6, 2019. This company had minimal operations. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation was completed in February 2023.
Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, Honduras, Guatemala, Guam, Puerto Rico, Panama, Costa Rica, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait, Kazakhstan, Malaysia, Asian and Middle Eastern markets.
Due to the 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 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. 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 early 2020, a strain of novel coronavirus (“COVID-19”) has spread globally including the U.S. and Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company’s two showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020. The Los Angeles facility closed on March 16, 2020 and reopened in full operation on June 1, 2020. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business. On August 28, 2020, the Malaysia government extended the shutdown order to all business until March 5, 2021. After the re-opening on March 5, 2021, Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in China were closed from the beginning of the Lunar New Year Holiday at the end of January 2020 through the beginning of March 2020. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in India are open for operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset. In June 2022, all the shipping and related costs from Asia have been back to normal. 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.
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We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar Outdoors Inc. (“Diamond Bar”) was granted a loan from Cathay Bank in the aggregate amount of $176,294, pursuant to the Paycheck Protection Program. In June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. In July 2021, we completed a registered direct offering of our shares of common stock and received offering gross proceeds of $3,120,622. We currently believe that our financial resources will be adequate to finance our operations through the outbreak. However, in the event that we do need to raise capital in the future, the outbreak-related instability in the securities markets could adversely affect our ability to raise additional capital.
While there can be no assurance, at the present time we expect the outbreak-related circumstances to result in material impairments of our inventory of Jade Mattress in Malaysia that significantly affect management’s judgements in assessing the fair value of our assets.
Discontinued Operations
On February 15, 2022, we transferred our entire assets and business of Nova HK to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
Principal Factors Affecting Our Financial Performance
At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2019 Collection in the Las Vegas Market, with a view to attracting a higher-end ultimate customer. We believe these new strategies, will provide us with significant long term growth opportunities. The transition has and is expected to continue to adversely impact our revenue and our net profit in the short-term as we roll out new products and market those products to our existing client base and to new potential customers better suited for the higher end products, and as we assess our new products’ market acceptance. Significant factors that we believe could affect our operating results are the (i) prices of our products to our international retailer and wholesaler customers and their markups to end consumers; (ii) general economic conditions in the U.S., Chinese, and other international markets; and (iii) trade tariffs imposed by the United States on certain products manufactured in China; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) delays in the receipt of shipments of our products from Asia and increased costs of shipping from Asia. We believe most of our customers are willing to pay for our high quality and stylish products, timely delivery, and strong production capacity at price levels which we expect will allow us to maintain a relatively high gross profit margin for our products. We do not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by the United States on certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in China to third-party manufacturers located in other parts of Asia, such as Vietnam, India and/or Malaysia, countries unaffected by the tariffs. Implementation of a relocation of manufacturing (which by necessity includes an assessment of the factory’s ability to deliver the quantity of the product, in accordance with the Company’s specifications, and in accordance with the Company’s quality control requirements) is time-consuming, but a portion of our manufacturing has been transitioned to Malaysia and India starting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues. Some of our manufacturing will continue to be performed in China because the intellectual know-how necessary to manufacture certain products is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also allow us at least to maintain our gross profit margins. The markets in North America (excluding the United States) remains challenging because such markets are experiencing a slow-down and may be entering a recession due to the COVID-19 pandemic.
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Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to our accompanying consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this Management’s Discussion and Analysis.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for Nova LifeStyle and its subsidiaries, Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia, Nova HK and its former subsidiary, Nova Macao.
Use of Estimates
In preparing 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates.
Accounts Receivable
Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We do not expect to collect receivables greater than one year from the time of sale. Our policy is to maintain an allowance for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We maintained an allowance for bad debt of $2,914 and $1,044 as of December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021, bad debts provision (reversal) from continuing operations were $1,870 and ($4,157), respectively. During the years ended December 31, 2022 and 2021, bad debt expenses from discontinued operations were $0. As of December 31, 2022, we had gross receivable of $291,392 of which $208,134 was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns.
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Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on our historical records and in normal circumstances, we generally receive goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers have been delayed or suspended during the outbreak.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI, and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia was incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK was incorporated in Hong Kong and was 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, 2022, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
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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 years ended December 31, 2022 and 2021.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on our consolidated statements of operations.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The Company’s subsidiary with operations in Malaysia uses its local currency, Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is normally the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.
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 | ||||
| December 31, 2022 | RM4.40 to 1 | |||
| December 31, 2021 | RM4.18 to 1 | |||
| Income statement and cash flow items | ||||
| For the year ended December 31, 2022 | RM4.40 to 1 | |||
| For the year ended December 31, 2021 | RM4.14 to 1 |
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Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions, assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
We determined that our operations constitute a single reportable segment in accordance with ASC 280. We operate exclusively in one business and industry segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the US, Nova Macao was 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
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did not have any impact on our condensed consolidated financial statement presentation or disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on our condensed consolidated financial statements.
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Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our consolidated financial statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Adoption of the ASUs is on a modified retrospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2017-04 will have on our consolidated financial statement presentation or disclosures.
We do not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on our financial statement presentation or disclosures.
Results of Operations
Comparison of Years Ended December 31, 2022 and 2021
The following table sets forth the results of our operations for the years ended December 31, 2022 and 2021. Certain columns may not add due to rounding.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | %
of Sales | $ | %
of Sales | |||||||||||||
| Net sales | $ | 12,744,871 | $ | 12,556,219 | ||||||||||||
| Cost of sales | (20,526,484 | ) | 161 | % | (7,034,482 | ) | 56 | % | ||||||||
| Gross (loss) profit | (7,781,613 | ) | (61 | )% | 5,521,737 | 44 | % | |||||||||
| Operating expenses | (8,440,738 | ) | (66 | )% | (9,382,285 | ) | (75 | )% | ||||||||
| Loss from operations | (16,222,351 | ) | (127 | )% | (3,860,548 | ) | (31 | )% | ||||||||
| Other expenses, net | (851,166 | ) | (7 | )% | (200,675 | ) | (2 | )% | ||||||||
| Income tax expenses | (2,400 | ) | - | % | (163,893 | ) | (1 | )% | ||||||||
| Loss from continuing operations | (17,075,917 | ) | (134 | )% | (4,225,116 | ) | (34 | )% | ||||||||
| Loss from discontinued operations | (25,754 | ) | - | % | (15,737,377 | ) | (125 | )% | ||||||||
| Net loss | (17,101,671 | ) | (134 | )% | (19,962,493 | ) | (159 | )% | ||||||||
Net Sales
Net sales from continuing operations for the year ended December 31, 2022 were $12.74 million, an increase of 2% from $12.56 million in 2021. This increase in net sales resulted primarily from a 13.30% increase in average selling price, partially offset by a 10.41% decrease in sales volume. Our three largest selling product categories for the year ended December 31, 2022 were sofas, beds and chairs, which accounted for approximately 41%, 15% and 11% of sales from continuing operations, respectively. For the year ended December 31, 2021, the three largest selling categories were sofas, beds and coffee tables, which accounted for approximately 46%, 15% and 7% of sales from continuing operations, respectively.
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The $188,652 increase in net sales from continuing operations for the year ended December 31, 2022, compared to the year of 2021, was mainly due to increased sales to other countries. Sales to other countries increased by $408,150 to $675,008 for the year ended December 31, 2022 from $266,858 for 2021, primarily due to the increase in direct container sales in other countries. However, the increase in net sales from continuing operations was partially offset by the decrease in sales to North America. Sales to North America decreased by 2.3% to $12.01 million for the year ended December 31, 2022, compared to $12.29 million for 2021, such decrease being mainly a result of inflation, U.S. tightening monetary policy, reducing the purchasing power of the customers and thus making them less willing to spend in nonfood categories.
Cost of Sales
Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations increased by 192% to $20.53 million for the year ended December 31, 2022, compared to $7.03 million for 2021. Cost of sales as a percentage of sales increased to 161% for the year ended December 31, 2022, compared to 56% for 2021. The increase in cost of sales in dollar term and cost of sales as a percentage of sales, was mainly due to our write down of $12.90 million of the slow-moving inventory, primarily the jade mats in Malaysia, to the lower of cost and net realizable value for 2022, compared to no inventory write down for 2021. The substantial difference of the inventory write downs between the years ended December 31, 2022 and 2021, was caused by the ownership transfer of the jade mats in Malaysia from Nova HK to Nova Malaysia on February 15, 2022, as Nova HK entered a de-registration process in February 2022 and its operations were reported as discontinued operations for all periods presented, and thus the write down of $15.96 million of the jade mats in Malaysia was reported from the Company’s discontinued operations for 2021.
Moreover, if total cost of sales from continuing operations excluded our inventory write down of $12.90 million for the year ended December 31, 2022, total cost of sales from continuing operations would increase by 8% to $7.62 million for the year ended December 31, 2022, compared to $7.03 million for 2021, and cost of sales as a percentage of sales would increase to 60% for the year ended December 31, 2022, compared to 56% for 2021. The increase in cost of sales in dollar term and cost of sales as a percentage of sales, was a result of the increase in our direct container sales which came with low profit margin.
Gross (Loss) Profit
Gross loss from continuing operations was $7.78 million for the year ended December 31, 2022, compared to gross profit of $5.52 million for 2021, representing a decrease in gross profit of $13.30 million. Our gross loss margin was 61% for the year ended December 31, 2022, compared to a gross profit margin of 44% for 2021. The decrease in gross profit and gross profit margin, was mainly a result of our inventory write down of $12.90 million for 2022, primarily for the jade mats in Malaysia, compared to no inventory write down for 2021.. The substantial difference of the inventory write downs in 2022 and 2021 mainly resulted from the ownership transfer of the jade mats inventories from Nova HK to Nova Malaysia on February 15, 2022. Since the ownership of the jade mats was with Nova HK for 2021, which operations were reported as discontinued operations for all periods present, the write down of $15.96 million of the jade mats was reported as the Company’s discontinued operations for 2021.
Moreover, if total cost of sales from continuing operations excluded our inventory write down of $12.90 million for the year ended December 31, 2022, gross profit would be $5.12 million for the year ended December 31, 2022, compared to gross profit of $5.52 million for 2021, and our gross profit margin would be 40% for the year ended December 31, 2022, compared to a gross profit margin of 44% for 2021. The decrease in gross profit and gross profit margin, was primarily due to the increasing direct container sales with low profit margin.
Operating Expenses
Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses from continuing operations were $8.44 million for the year ended December 31, 2022, compared to $9.38 million for 2021. Selling expenses from continuing operations decreased by 23%, or $0.84 million, to $2.89 million for the year ended December 31, 2022, from $3.73 million for 2021, primarily due to decreased marketing and advertising expenses. In addition, general and administrative expenses from continuing operations decreased by 2%, or $0.09 million, to $5.56 million for the year ended December 31, 2022, from $5.65 million for 2021, primarily due to a decrease in legal and professional fees, rent expenses, technology services fees and research and development expenses of $0.26 million, $0.13 million, $0.13 million and $0.10 million, respectively, while the decrease was partially offset by an increase in travel expenses and consulting fees of $0.25 million and $0.22 million, respectively.
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Other Expenses, Net
Other expenses, net, from continuing operations were $851,166 for the year ended December 31, 2022, compared to $200,675 for 2021, representing an increase in other expenses of $650,491. The increase in other expenses was due primarily to an increase in foreign exchange loss of $737,507 to $639,432 for the year ended December 31, 2022 from foreign exchange gain of $98,075 for 2021. The increase in foreign exchange loss was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the Company’s assets in Malaysia. However, the increase in other expenses was partially offset by a decrease in interest expenses of $97,928 to $25,216 for the year ended December 31, 2022, compared to $123,144 for 2021.
Income Tax Expenses
Income tax expenses from continuing operations were $2,400 for the year ended December 31, 2022, compared to $163,893 for 2021. The income tax expenses for 2021 were primarily related to payable true up for the one-time transition tax commencing in April 2018 as the result of the tax examination of Internal Revenue Service.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was $17.08 million for the year ended December 31, 2022, compared to $4.23 million for 2021.
Loss from Discontinued Operations
On February 15, 2022, we transferred our entire assets and business in Nova HK to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented. We had loss from discontinued operations of $0.03 million and $15.74 million for the years ended December 31, 2022 and 2021, respectively.
Net Loss
As a result of the foregoing, our net loss was $17.10 million for the year ended December 31, 2022, compared to $19.96 million for 2021.
Liquidity and Capital Resources
Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks.
We rely primarily on internally generated cash flow and available working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through offerings of our equity or debt, if and when we determine such offerings are required. As of December 31, 2022, we do not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from sales of products will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months.
We had net working capital of $6,557,629 at December 31, 2022, a decrease of $17,196,927 from net working capital of $23,754,556 at December 31, 2021. The ratio of current assets to current liabilities was 4.99-to-1 at December 31, 2022.
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The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | $ | (5,367,650 | ) | $ | (4,782,354 | ) | ||
| Investing activities | (8,772 | ) | (154,820 | ) | ||||
| Financing activities | - | 2,760,974 | ||||||
Net cash used in operating activities was $5.37 million for the year ended December 31, 2022, an increase in cash outflow of $0.59 million from $4.78 million of cash used in operating activities for 2021.
The increase in cash outflow was attributable primarily to (i) an increase in cash outflow of $1.01 million for other current assets to $1.19 million cash outflow for the year ended December 31, 2022, compared to $0.18 million cash outflow for 2021, such increase in cash outflow being mainly due to the increasing prepaid expenses regarding technology services incurred for 2022; (ii) an increase in cash outflow of $0.60 million for accounts receivable to $0.19 million cash outflow for the year ended December 31, 2022, compared to $0.42 million cash inflow for 2021, such increase in cash outflow being mainly a result of more credit sales for 2022; (iii) an increase in cash outflow of $0.36 million for advance from customers to $0.22 million cash outflow for the year ended December 31, 2022, compared to $0.13 million cash inflow for 2021, such increase in cash outflow being mainly due to more goods delivered to our customers with less deposits received from them for 2022. The increase in operating cash outflow was partially offset by (i) an increase in cash inflow of $1.01 million for advance to suppliers to $0.69 million cash inflow for the year ended December 31, 2022, compared to $0.33 million cash outflow for 2021, such increase in cash inflow being mainly due to less deposits paid to our suppliers with more goods received from them for 2022; (ii) an increase in cash inflow of $0.35 million for accounts payable to $0.04 million cash outflow for the year ended December 31, 2022, compared to $0.39 million cash outflow for 2021, such increase in cash inflow being mainly a result of more purchases made on credit for 2022.
Net cash used in investing activities was $8,772 for the year ended December 31, 2022, a decrease in cash outflow of $146,048 from $154,820 of cash used in investing activities for 2021. We incurred cash outflow of $8,772 from purchase of office equipment for the year ended December 31, 2022, while we incurred cash outflow of $154,820 from purchase of office equipment and leasehold improvement for the year ended December 31, 2021.
Net cash provided by financing activities was $0 for the year ended December 31, 2022, compared to $2.76 million of cash provided by financing activities for 2021. During the year ended December 31, 2021, we received $2.76 million from equity financing.
As of December 31, 2022, we had gross accounts receivable of $291,392, of which $63,833 was not yet past due and $19,425 was less than 90 days past due. We had an allowance for bad debt of $2,914. As of March 17, 2023, 28% of accounts receivable outstanding as of December 31, 2022 had been collected.
All accounts receivable outstanding at December 31, 2021 had been collected during 2022.
As of December 31, 2022 and 2021, we had advances to suppliers of $21,173 and $707,264, respectively. These supplier prepayments are made for goods before we actually receive them.
For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is 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. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts.
As of March 17, 2023, 30% of our advances to suppliers outstanding at December 31, 2022 had been delivered to us in the form of purchases of furniture.
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Shelf Registration
On October 8, 2020, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The shelf registration statement was declared effective on October 15, 2020. On July 23, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 1,114,508 shares of common stock. The shares were offered and sold by the Company pursuant to the effective shelf registration statement on Form S-3. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021.
Other Long-Term Liabilities
As of December 31, 2022, we recorded long-term taxes payable of $1.16 million, consisting of an income tax payable of $1.16 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.
We elected to pay the one-time transition tax over the eight years commencing April 2018.
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 consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
Our financial statements, together with the report thereon, appear in a separate section of this Annual Report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2022. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
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Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management, with oversight from our audit committee, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. In designing and evaluating internal controls, management recognizes that any internal controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of control systems must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Tread way Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this annual report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
On May 13, 2022, the SEC added us to its conclusive list of issuers identified under the HFCAA following the filing of our annual report on Form 10-K for the year ended December 31, 2021 with the SEC on April 8, 2022, which annual report was audited by Centurion ZD CPA & Co., a registered public accounting firm in Hong Kong that the PCAOB previously was unable to inspect or investigate completely, because of a position taken by an authority in the foreign jurisdiction. As our business, revenues, management and control capabilities mostly in the U.S., the Company dismissed Centurion ZD CPA & Co. as its independent accountant on October 7, 2022, following a review process carried out by the audit committee of the Company. On October 6, 2022, our audit committee engaged WWC, P.C. (“WWC”) as the Company’s independent auditor for the fiscal year ending December 31, 2022. WWC is located in the United States and has not been identified by the PCAOB as a firm that the PCAOB is unable to fully inspect and investigate. Given that WWC now serves as the principal accountant to audit our consolidated financial statements, we expect to be able to comply with the HFCA Act and Consolidated Appropriations Act and certify that we have retained a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate which would preclude a further finding by the SEC that we are a Commission-Identified Issuer.
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Furthermore, in August 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations from September to November 2022. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. As a result, SEC will not provisionally or conclusively identify an issuer as a Commission-Identified Issuer if it files an annual report with an audit report issued by a registered public accounting firm headquartered in China or Hong Kong on or after December 15, 2022, until such time as the PCAOB issues a new determination.
To the extent known by the Company, the Company is not aware of and has no reason to believe that: any governmental entity in the foreign jurisdiction in which the Company or any of its subsidiaries is incorporated or otherwise organized owns shares of any capital stock of record of the Company; any official of the Chinese government or Hong Kong is a board member or officer of the Company or its subsidiaries; or that the Company’s articles of incorporation, as amended, contain any provisions known by the Company to include any charter or charter provisions of the Chinese Communist Party. The Company has determined that no governmental entity in mainland China or Hong Kong, directly or indirectly, possesses the power to direct or cause the direction of the management and policies of the Company or has a controlling financial interest. The Company has made this determination based on the fact that as of the date of this annual report, no such governmental entity has filed a Schedule 13D or 13G, there are no material contracts with such a foreign governmental party, and there is no such foreign government representative on the Company’s Board.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information relating to nominees for director of Nova LifeStyle, compliance with Section 16(a) of the Securities Exchange Act of 1934, and the Company’s code of ethics is set forth under the captions “Proposal 1–Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance,” and “Code of Ethics,” respectively, in the Proxy Statement for the 2023 Annual Meeting of Stockholders. Such information is incorporated herein by reference. The definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2022.
Item 11. Executive Compensation
Information required by this Item 11 relating to executive compensation and other matters is set forth under the captions “Executive Compensation,” “Non-Employee Director Compensation,” and “Corporate Governance” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information related to ownership of common stock of Nova LifeStyle by certain persons is set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to existing or proposed relationships or transactions between Nova LifeStyle and any affiliate of Nova LifeStyle, as well as matters related to director independence, is set forth under the caption “Certain Relationships and Related Transactions” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information relating to Nova LifeStyle’s principal accountant’s fees and services is set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of or are included in this Annual Report:
| 1. | Financial statements listed in the Index to Financial Statements, filed as part of this Annual Report beginning on page F-1; and |
| 2. | Exhibits |
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| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
# Indicates management contract or compensatory plan, contract or arrangement.
†Filed herewith.
‡Furnished herewith.
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NOVA LIFESTYLE, INC.
Consolidated Financial Statements
Years Ended December 31, 2022 and 2021
Index to Consolidated Financial Statements
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Stockholders and Board of Directors of Nova Lifestyle, Inc. |
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Nova Lifestyle, Inc. and subsidiaries (collectively the “Company”) as of December 31, 2022, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal controls over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Inventory impairment
We assessed the carrying value of inventory as a critical audit matter. As described in Note 4 to the consolidated financial statements, as of December 31, 2022, the Company’s inventories balance was $4,932,642, which was an amount that was quantitatively material to the financial statements as a whole, and the account required challenging, subjective and complex judgment and assumptions in regards the estimation of the net realizable value of those assets to determine that the balance was reasonable, and not materially misstated.
The Company’s inventories are stated at the lower of cost or net realizable value, with cost determined on a weighted-average basis. The write-down of potential obsolete or slow-moving inventories is recorded based on management’s assumptions about future demands derived and market conditions. For the year ended December 31, 2022, the Company wrote down $12,904,676 of slow-moving inventory. Inventories have been written down to the Company’s best estimate of their realizable value, which includes consideration of various factors.
Our principal audit procedures performed to address the net realizable value of the inventories and related the impairment expense included the following:
| ● | Observing the physical condition of the inventories during inventory counts. Performing independent analysis of significant assumptions provided by management, by researching wholesale and retail market prices, gaining an understanding of demand for the product by searching for comparable products in the market place. | |
| ● | Inquired with Company personnel to understand management’s model of estimates on selling price and cost of completion to calculate net realizable value and assess the appropriateness of the methodology applied in developing those estimates. | |
●
|
Performed independent inquiry through phone and video conference with the customer contracting to purchase the goods subsequent to the balance sheet date (“buyer”) to understand the sales channel and business relationship. Obtained independent confirmation from the buyer regarding the total value of the sales contract with the buyer. | |
●
|
Performed quantitative analysis and recalculation on net realizable value, to test if any impairment exists, and developed a range of independent estimates for assumptions for the valuation models and compared those estimates with those employed by management. |
The accounts relevant to this critical audit matter include the inventories and cost of sales, and the related disclosure in the accompanying notes 4 to the financial statements.
/s/
Certified Public Accountants
PCAOB
ID No.
We have served as the Company’s auditor since 2022.
April 17, 2023
| F-2 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Nova Lifestyle, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Nova Lifestyle, Inc. and subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of comprehensive (loss) income, changes in stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory write-down
As described in Note 4 of the consolidated financial statements, inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For the year ended December 31, 2021, the Company recorded inventory impairment charges of $15.96 million. Inventories include items that have been written down to the Company’s best estimate of their realizable value, which includes consideration of various factors.
We identified the inventory write-down as a critical audit matter. The Company’s determination of future markdowns is subjective. Specifically, there was a high degree of subjective auditor judgment in evaluating how the Company’s merchandising strategy and related inventory markdown assumptions affected the realizable value of inventory.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following, among others: (i) observing the physical condition of inventories during inventory counts; (ii) evaluating the appropriateness of management’s process for developing the estimates of net realizable value (iii) testing the reliability of reports used by management by agreeing to underlying records; (iv) testing the reasonableness of the assumptions about quality, damages, future demand, selling prices and market conditions by considering with historical trends and consistency with evidence obtained in other areas of the audit; and corroborating the assumptions with individuals within the product team; and (v) assessing the Company’s adjustments of inventory costs to net realizable value for slow-moving and obsolete inventories by (1) comparing the historical estimate for net realizable value adjustments to actual adjustments of inventory costs, and (2) analyzing sales subsequent to the measurement date.
/s/
We served as the Company’s auditor from 2016 to 2022.
April 8, 2022
PCAOB
ID:
| F-3 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2022 AND 2021
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advance to suppliers | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other receivables | ||||||||
| Tax receivable | ||||||||
| Current assets of discontinued operations | ||||||||
| Total Current Assets | ||||||||
| Noncurrent Assets | ||||||||
| Plant, property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Lease deposit | ||||||||
| Goodwill | ||||||||
| Noncurrent assets of discontinued operations | ||||||||
| Total Noncurrent Assets | ||||||||
| Total Assets | $ | $ | ||||||
| F-4 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT’D)
AS OF DECEMBER 31, 2022 AND 2021
| 2022 | 2021 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Operating lease liability, current | ||||||||
| Advance from customers | ||||||||
| Accrued liabilities and other payables | ||||||||
| Income tax payable | ||||||||
| Other loan interest payable | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Noncurrent Liabilities | ||||||||
| Other Loan | ||||||||
| Operating lease liability, non-current | ||||||||
| Income tax payable | ||||||||
| Total Noncurrent Liabilities | ||||||||
| Total Liabilities | ||||||||
| Contingencies and Commitments | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding; as of December 31, 2022 and 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficits | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| F-5 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| 2022 | 2021 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross (Loss) Profit | ( | ) | ||||||
| Operating Expenses | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Total Operating Expenses | ||||||||
| Loss From Operations | ( | ) | ( | ) | ||||
| Other Income (Expenses) | ||||||||
| Non-operating income | ||||||||
| Foreign exchange transaction (loss) income | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Financial expense | ( | ) | ( | ) | ||||
| Total Other Expenses, Net | ( | ) | ( | ) | ||||
| Loss Before Income Taxes and Discontinued Operations | ( | ) | ( | ) | ||||
| Income Tax Expense | ( | ) | ( | ) | ||||
| Loss From Continuing Operations | ( | ) | ( | ) | ||||
| Loss From Discontinued Operations | ( | ) | ( | ) | ||||
| Net Loss | ( | ) | ( | ) | ||||
| Other Comprehensive Loss | ||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||
| Net Loss and Comprehensive Loss | ( | ) | ( | ) | ||||
| Weighted average shares outstanding - Basic and Diluted | ||||||||
| Loss from continuing operations per share of common stock | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations per share of common stock | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| F-6 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Accumulated | Retained | |||||||||||||||||||||||||||
| Additional | Other | Earnings | Total | |||||||||||||||||||||||||
| Common stock | Paid-in | Comprehensive | Statutory | (Accumulated | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Reserve | Deficits) | Equity | ||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | | |||||||||||||||||||||
| Stock issued to employees | ||||||||||||||||||||||||||||
| Stock issued to consultants | ||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| De-registration and liquidation of Nova Macau | - | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Stock issued to employees | ||||||||||||||||||||||||||||
| Stock issued to consultants | ||||||||||||||||||||||||||||
| Stock issued to designer | ||||||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| F-7 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss from discontinued operations | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Loss on disposal of fixed assets | ||||||||
| Write down of inventories | ||||||||
| Stock based compensation expense | ||||||||
| Changes in bad debt allowance | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Advance to suppliers | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Advance from customers | ( | ) | ||||||
| Accrued liabilities and other payables | ||||||||
| Taxes payable | ( | ) | ||||||
| Net Cash Used in Continuing Operations | ( | ) | ( | ) | ||||
| Net Cash Provided by Discontinued Operations | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Used in Continuing Operations | ( | ) | ( | ) | ||||
| Net Cash Used in Discontinued Operations | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from equity financing, net | ||||||||
| Net Cash Provided by Continuing Operations | ||||||||
| Net Cash Provided by Discontinued Operations | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | $ | ( | ) | ||||
| Net Decrease in Cash and Cash Equivalents | ( | ) | ( | ) | ||||
| Cash and Cash Equivalents, Beginning of Year | ||||||||
| Cash and Cash Equivalents, Ending of Year | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Continuing operations: | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | $ | ||||||
| Interest expense | $ | $ | ||||||
| Discontinued operations: | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | $ | ||||||
| Interest expense | $ | $ | ||||||
| F-8 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note 1 - Organization and Description of Business
Organization and Business
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”), formerly known as Stevens Resources, Inc., was incorporated in the State of Nevada on September 9, 2009.
The Company is a U.S. holding company with no material assets other than the ownership interests of its subsidiaries through which it markets, designs and sells furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020 and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registered and liquidated in January 2021. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. In February 2023, Nova HK was completed the process of de-registration and liquidation.
Nova Macao was organized under the laws of Macao on May 20, 2006, and was a wholly owned subsidiary of Nova Furniture. Nova Macao was a trading company, importing, marketing and selling products designed and manufactured by third-party manufacturers for the international market. Diamond Bar was incorporated in California on June 15, 2000. Diamond Bar markets and sells products manufactured by third-party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market.
On December 7, 2017, Nova LifeStyle incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build the Company’s own blockchain technology team. This new company will focus on the application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building a blockchain-powered platform that enables designers to showcase their products, including current and future furniture designs. This company is in the planning stage and has had minimal operations through December 31, 2022.
On December 12, 2019, Nova LifeStyle acquired Nova Malaysia at cost of $1.00 which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition was to market and sell high-end physiotherapeutic jade mats in Malaysia.
On
January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party,
for cash consideration of $
On October 14, 2020, the Macao Trade and Investment Promotion Institute invalidated licenses for offshore companies under an Order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered into a de-registration process and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.
On
November 5, 2020, Nova LifeStyle acquired Nova HK at cost of $
The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Nova Macao, Diamond Bar, i Design, Nova HK and Nova Malaysia.
| F-9 |
COVID-19
Beginning in 2020, a strain of novel coronavirus (“COVID-19”) has spread globally and, at this point, the Company’s operations has been adversely impacted by the COVID-19 pandemic. In particular, Nova Malaysia had not been able to operate in normal condition due to Malaysian government’s shut down orders which resulted in sales lagging and slow-moving inventories. The Company’s two showrooms in Kuala Lumpur were closed from March 2020 to May 2020 and closed again from August 2020 to March 5, 2021. Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021, then the lockdown was extended to early October 2021. In October 2021, Malaysia government lifted lockdown order for people fully vaccinated against COVID-19 and our store has been reopened since then. In April 2022, Malaysia has also reopened the border for foreign visitors. However, COVID-19 in Malaysia increased financial vulnerability for those affected households and business, which contributed to significant decrease of sales and risk of continuous sluggish sales. As a result, we further lowered the estimated sales quantities of the inventories during the interim review. The Company expects that the impact of the COVID-19 outbreak on the United States, Malaysia and world economies will also continue to have a material adverse impact on the demand for its products.
In 2022, there have been outbreaks of the Omicron variant of the COVID-19 in Hong Kong and many other cities in China, along with travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities imposed by local governments. In December 2022, the Chinese government eased its strict zero COVID-19 policy which resulted in a surge of new COVID-19 cases during December 2022 and January 2023. Although our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China.
The extent of the impact of the COVID-19 pandemic that will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as the actions that the Company, other businesses and governments may take to contain the spread of COVID-19 continue to evolve. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset although the shipping cost has been back to normal since June 2022; and we have experienced and may continue to experience shipping disruptions in the future. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.
The severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the new variants of COVID-19, the efficacy and distribution of COVID-19 vaccines and the extent and severity of the impact on the global supply chain and the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be reasonably predicted at this time. As of the date of issuance of the Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition, liquidity or results of operations is uncertain. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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.
Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
| F-10 |
Business Combination
For a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date and measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings is recognized as a gain attributable to the acquirer.
Deferred tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment, annually or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
ASC
Topic 350 also permits an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood
of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test
is required to be performed. Otherwise, no further testing is required. Performing the qualitative assessment involved identifying the
relevant drivers of fair value, evaluating the significance of all identified relevant events and circumstances, and weighing the factors
to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After evaluating
and weighing all these relevant events and circumstances, it was concluded that a positive assertion can be made from the qualitative
assessment that it is more likely than not that the fair value of Diamond Bar is greater than its carrying amount. As such, it is not
necessary to perform the two-step goodwill impairment test for the Diamond Bar reporting unit. Accordingly, as of December 31, 2022 and
December 31, 2021, the Company concluded there was
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash, money market funds, investments in interest bearing demand deposit accounts, time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company’s accounts receivable arises from product sales. The Company does not adjust its receivables for the effects of a significant financing component at contract inception if it expects to collect the receivables in one year or less from the time of sale. The Company does not expect to collect receivables greater than one year from the time of sale.
The Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. An analysis of the allowance for doubtful accounts is as follows:
| Balance at January 1, 2022 | $ | |||
| Provision for the year | ||||
| Balance at December 31, 2022 | $ |
The
bad debts provision (reversal) for the years ended December 31, 2022 and 2021 was $
| F-11 |
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on its historical record and in normal circumstances, the Company receives goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, freight transportation of products from the Company’s international suppliers has been delayed or suspended during the outbreak.
Inventories
Inventories
are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete
or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For
the year ended December 31, 2022, the Company wrote-down $
Plant, Property and Equipment
Plant, property, and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures for maintenance and repairs are expensed as incurred, while additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for substantially all assets with no salvage value and estimated lives as follows:
| Computer and office equipment | |
| Decoration and renovation |
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying
amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment
or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against
the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable,
an impairment charge is measured as the amount by which the carrying amount of the asset group asset group exceeds its fair value based
on discounted cash flow analysis or appraisals. There was
Research and Development
Research
and development costs are related primarily to the Company designing and testing its new products during the development stage.
Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and
development expenses were $
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.
| F-12 |
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova
Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and
Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s
condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where
Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at
the statutory rate of
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, 2022, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal
Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As
of December 31, 2022, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $
| F-13 |
As
of December 31, 2022 and 2021, unrecognized tax benefits were approximately $. The total amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective tax rate was $
A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the years ended December 31, 2022 and 2021, is as follows:
| Gross UTB | ||||||||
| 2022 | 2021 | |||||||
| Balance – January 1 | $ | $ | ||||||
| Foreign exchange adjustment | ( | ) | ||||||
| Balance – December 31 | $ | |||||||
At
December 31, 2022 and December 31, 2021, the Company had cumulatively accrued approximately $
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2019-2022 remain open to examination by tax authorities in the U.S.
Revenue Recognition
The Company recognizes revenues when its customers obtain control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identifies contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenues when (or as) it satisfies the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
The Company’s sales policy allows for product returns within the warranty period if the product is defective and the defects are the Company’s fault. As alternatives to the product return option, the customers have the option of requesting a discount from the Company for products with quality issues or of receiving replacement parts from the Company at no cost. The amount for product returns, the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the years ended December 31, 2022 and 2021
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers and write-downs of inventory.
| F-14 |
Shipping and Handling Costs
Shipping
and handling costs related to delivery of finished goods are included in selling expenses. During the years ended December 31, 2022
and 2021, shipping and handling costs were $
Advertising
Advertising
expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising,
and are included in selling expenses. The Company expenses all advertising costs as incurred. Advertising expense was $
The Company accounts for share-based compensation awards to officers, directors, employees, and for acquiring goods and services from nonemployees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the vesting period. The Company accounts for forfeitures when they occur.
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
| 2022 | 2021 | |||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net loss from discontinued operations | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding – Basic and Diluted * | ||||||||
| Net loss from continuing operations per share of common stock | ||||||||
| Basic and Diluted | ( | ) | ( | ) | ||||
| Net loss from discontinued operations income per share of common stock | ||||||||
| Basic and Diluted | ( | ) | ( | ) | ||||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| * |
| F-15 |
For the year ended December 31, 2022, shares of unvested restricted stock, vested stock options to purchase shares of the Company’s stock, and shares exercisable under warrants were excluded from the EPS calculation, as their effect were anti-dilutive.
For the year ended December 31, 2021, shares of unvested restricted stock, vested stock options to purchase shares of the Company’s stock, and shares exercisable under warrants were excluded from EPS calculation, as their effects 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
No
customer accounted for
The
Company purchased its products from two and three major vendors during the years ended December 31, 2022 and 2021, respectively, accounting
for a total of
Advances
made to these vendors were $
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The carrying value of cash, accounts receivable, advances to suppliers, other receivables, accounts payable, advance from customers, other payables and accrued liabilities approximate estimated fair values because of their short maturities.
| F-16 |
Foreign Currency Translation and Transactions
The condensed consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The Company’s subsidiary with operations in Malaysia uses its local currency, the Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.
The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:
| Balance sheet items, except for equity accounts | ||||
| December 31, 2022 | RM |
|||
| December 31, 2021 | RM |
|||
| Income Statement and cash flow items | ||||
| For the year ended December 31, 2022 | RM |
|||
| For the year ended December 31, 2021 | RM |
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management determined that the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: the design and sale of furniture.
Management concluded that the Company had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the United States, Nova HK was a furniture distributor based in Hong Kong focusing on international customers, and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. They are all operated under the same senior management of the Company, and management views the operations of Diamond Bar, Nova HK and Nova Malaysia as one entity for making business decisions.
| F-17 |
All of the Company’s long-lived assets are mainly property, plant and equipment located in the United States and Malaysia and are utilized for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by the customers. For example, if the products are delivered to a customer in the United States, the sales are recorded as generated in the United States; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company recognized no impairment of ROU assets as of December 31, 2022 and December 31, 2021.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the consolidated balance sheets at December 31, 2022 and December 31, 2021.
Reclassification
Certain prior period accounts have been reclassified in conformity with current period’s presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.
| F-18 |
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on the Company’s condensed consolidated financial statements.
Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. In March 2022, the FASB issued ASU 2022-02, Topic 326. The ASU eliminates the accounting guidance for trouble debt restructurings by creditors in Subtopic 310-40, and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, the ASU requires disclosure of gross writeoffs of receivables by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. This ASU is effective for periods beginning after December 15, 2022. The Company is currently evaluating the impact that the adoption of ASU 2016-13 and ASU 2022-02 will have on its condensed consolidated financial statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Adoption of the ASUs is on a modified retrospective basis. As the Company qualifies as a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact that the adoption of ASU 2017-04 will have on its condensed consolidated financial statement presentation or disclosures.
The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 3 - Discontinued Operations
On February 15, 2022, the Company transferred its entire interest in Nova HK to Nova Malaysia, a subsidiary of the Company.
As of December 31, 2021 and subsequently, operations of Nova HK have been reported as discontinued operations in the Company’s consolidated financial statements. Accordingly, assets, liabilities, revenues, expenses and cash flows related to Nova HK have been reclassified in the consolidated financial statements as discontinued operations for all periods presented.
| F-19 |
The following table summarizes the net assets of Nova HK at the date of disposal (February 15, 2022):
| Inventory | $ | |||
| Equipment, net | ||||
| Net assets of Nova HK upon disposal | ||||
| Interest transferred to Nova Malaysia | ( | ) | ||
| Loss from discontinued operations of subsidiary | $ | ( | ) |
The following table presents the components of discontinued operations in relation to Nova HK reported in the consolidated statements of operations:
| 2022 | 2021 | |||||||
| Sales | $ | $ | ||||||
| Cost of sales | ( | ) | ||||||
| Operating expenses | ( | ) | ( | ) | ||||
| Other (expense) income, net | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit | ||||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
For
the year ended December 31, 2021, the Company wrote-down $
Note 4 - Inventories
The
inventories as of December 31, 2022 and December 31, 2021 totaled $
Inventories are stated at the lower of cost and
net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is
recorded based on management’s assumptions about future demands and market conditions. For
the year ended December 31, 2022 , the Company wrote-down $
Note 5 - Plant, Property and Equipment, Net
As of December 31, 2022 and December 31, 2021, plant, property and equipment consisted of the following:
December 31, 2022 | December 31, 2021 | |||||||
| Computer and office equipment | $ | $ | ||||||
| Decoration and renovation | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| F-20 |
Depreciation
expense was $
During
2022, the company disposed of $
Note 6 – Intangible Assets
As of December 31, 2022 and December 31, 2021, intangible assets consisted of the following:
December 31, 2022 | December 31, 2021 | |||||||
| Accounting software | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Amortization
expense was $
Note 7 - Advances to Suppliers
The
Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $
Note 8 - Prepaid Expenses and Other Receivables
Prepaid expenses and other receivables consisted of the following as of December 31, 2022 and December 31, 2021:
| December
31, 2022 | December 31, 2021 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Other receivables | ||||||||
| $ | $ | |||||||
As
of December 31, 2022 and December 31, 2021, prepaid expenses and other receivables mainly represented prepaid insurance, prepaid advertising
expense, and Celero and Cardknox account balances. In
October 2022, Nova Malaysia entered into a business agreement with an I.T. firm to develop a virtual reality and augmented reality development
project and related works. Nova Malaysia agreed to pay
| F-21 |
Note 9 - Accrued Liabilities and Other Payables
Accrued liabilities and other payables consisted of the following as of December 31, 2022 and December 31, 2021:
| December
31, 2022 | December 31, 2021 | |||||||
| Other payables | $ | $ | ||||||
| Salary payable | ||||||||
| Financed insurance premiums | ||||||||
| Auditing fee | ||||||||
| Warranty liability | ||||||||
| Accrued commission | ||||||||
| Accrued expenses, others | ||||||||
| $ | $ | |||||||
As of December 31, 2022 and December 31, 2021, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating expenses incurred in Malaysia. Other payables represented other taxes payable and 401(k) payable.
Note 10 - Other Loans
On
May 4, 2020, the Company received loan proceeds in the amount of approximately $
On
May 5, 2020, Diamond Bar was granted a loan from Cathay Bank in the aggregate amount of $
On
June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $
| F-22 |
Note 11 - Income Taxes
Taxes recoverable (payable) consisted of the following at December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Income tax recoverable - current | $ | $ | ||||||
| Income tax payable – noncurrent | $ | ( | ) | $ | ( | ) | ||
As
of December 31, 2022 and 2021, noncurrent tax payable were $
The (benefit) provision for income taxes on loss from continuing operations consisted of the following:
| 2022 | 2021 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Hong Kong | ||||||||
| Deferred: | ||||||||
| Federal | ||||||||
| State | ||||||||
| Total provision (benefit) for income taxes | $ | $ | ||||||
The following is a reconciliation of the difference between the actual (benefit) provision for income taxes and the (benefit) provision computed by applying the federal statutory rate on income before income taxes from continuing operations:
| 2022 | 2021 | |||||||
| Tax at federal statutory rate | $ | ( | ) | $ | ( | ) | ||
| Foreign rate differential | ( | ) | ||||||
| ASC 740-10 uncertain tax position | ( | ) | ||||||
| Tax exemption | ||||||||
| Global Intangible Low-Taxed Income | ||||||||
| Stock based compensation | ( | ) | ||||||
| Covid Relief Benefit | ( | ) | ||||||
| Others | ( | ) | ( | ) | ||||
| Valuation allowance | ||||||||
| Total provision (benefit) for income taxes | $ | $ | ||||||
| 2022 | 2021 | |||||||
| Aggregate dollar effect of tax holiday | $ | $ |
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are comprised of the following:
| 2022 | 2021 | |||||||
| Non-Current Deferred Tax Assets: | ||||||||
| Accrued liabilities | $ | $ | ||||||
| Fed & CA amortization | ||||||||
| Stock compensation | ||||||||
| ASC 842 – lease liability | ||||||||
| Inventory | ||||||||
| U.S. NOL | ||||||||
| Capital loss | ||||||||
| Charitable Contribution | ||||||||
| R&D Capitalization | ||||||||
| Interest | ||||||||
| Non-Current Deferred Tax Liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Fed & CA depreciation | ( | ) | ( | ) | ||||
| ASC 842- ROU Asset | ( | ) | ( | ) | ||||
| Net Non-Current Deferred Tax Assets before Valuation Allowance | ||||||||
| Less: Valuation Allowance | ( | ) | ( | ) | ||||
| Non-Current Deferred Tax Assets, Net: | ||||||||
| Total Deferred Assets, Net: | $ | $ | ||||||
Nova LifeStyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI is incorporated in the BVI. There is no income tax for a company domiciled in the BVI. Accordingly, the Company’s consolidated financial statements do not present any income tax provision related to the BVI tax jurisdiction where Nova Furniture BVI is domiciled.
For
U.S. Federal income tax purpose, the Company has net operating loss, or NOL carryforwards of approximately $
For
U.S. California income tax purpose, the Company has net operating loss, or NOL carryforwards of approximately $
Malaysia
has net operating loss, or NOL carryforwards of approximately $
Nova Macao was an income tax-exempt entity incorporated and domiciled in Macao.
Corporate
income tax in Malaysia is calculated at the statutory rate of
Nova
HK has net operating loss, or NOL carryforward of approximately $
Note 12 - Related Party Transactions
On
September 30, 2011,
| F-23 |
On
January 4, 2018, the Company entered into a sales representative agreement with a consulting firm, which is owned by the President, Chief
Executive Officer and Chairperson of the Board, for sales representative service for a term of
In
September 2021, Nova Malaysia entered into a consultancy agreement with an I.T. firm whose sole shareholder was a director of Nova Macao
to provide E-Commerce Web Application Setup, E-Commerce Essentials Implementation, E-Commerce UIUX and other related services. During
the years ended December 31, 2022 and 2021, the Company recorded $
Note 13 - Stockholders’ Equity
On May 28, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) at its annual meeting. The 2021 Plan was approved by the Board of Directors of the Company on April 12, 2021 and has a total of shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On June 16, 2021, the Company filed Form S-8 to register the shares of the Company’s common stock under the 2021 Plan.
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
In
conjunction with this offering, the Company issued warrants to purchase
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 and placement agent at grant date was $
Warrants
The following is a summary of the warrant activity for the year ended December 31, 2022:
Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2022 | $ | |||||||||||
| Exercisable at January 1, 2022 | $ | - | - | |||||||||
| Granted | - | - | ||||||||||
| Exercised / surrendered | - | - | ||||||||||
| Expired | - | - | ||||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||
| Exercisable at December 31, 2022 | $ | |||||||||||
| F-24 |
Shares Issued to Consultants
On
November 16, 2020, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2020 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock,
vesting % on February 15, 2021, % on May 15, 2021, % on August 15, 2021 and % on November 15, 2021. The fair value of the
shares was $
On
November 2, 2021, the Company entered into an information technology consulting agreement with a consultant for analyzing and developing
the Company’s information technology infrastructure and system, and related general business advisory services effective on November
2, 2021 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, shares
issued before the end of November 2021 and remaining shares will be issued on the one-year anniversary of the agreement. The fair
value of the shares was $
On
November 2, 2021, the Company entered into a marketing consulting agreement with a consultant for developing branding and marketing strategies,
analyzing and evaluating consumer data services effective on November 2, 2021 for a -year term. The Company agreed to grant the consultant
shares of the Company’s common stock, shares issued before the end of November 2021 and remaining shares
will be issued on the one-year anniversary of the agreement. The fair value of the shares was $
On
November 11, 2021, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2021 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock,
vesting % on February 15, 2022, % on May 15, 2022, % on August 15, 2022 and % on November 15, 2022. The fair value of the
shares was $
On
January 28, 2022, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development
effective on February 1, 2022 for
On
July 1, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on July
1, 2022 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting %
on July 1, 2022, % on October 1, 2022, % on January 1, 2023 and % on April 1, 2023. The fair value of the shares was $
| F-25 |
On
November 16, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2022 for a -year term. The Company agreed to grant the consultant shares of the Company’s common stock,
vesting % on February 15, 2023, % on May 15, 2023, % on August 15, 2023 and % on November 15, 2023. The fair value of the
shares was $
Shares and Options Issued to Independent Directors
On
November 4, 2019, the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three independent
members of the board of directors. The Company agreed to grant the Company’s three independent directors options to purchase an
aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, vesting
% on November 30, 2019, % on February 28, 2020, % on May 31, 2020, and % on August 31, 2020. The fair value of the stock options
granted was estimated on the date of the grant using the Black-Scholes option pricing model. The fair value of the options was calculated
using the following assumptions: estimated life of , volatility of %, risk free interest rate of %, and dividend yield
of %. The fair value of the stock options was $
Shares Issued to Employees
On
November 10, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective
from November 14, 2020. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s
2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $
On
November 11, 2021, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year
effective from November 14, 2021. The Company agreed to grant an award of
restricted Stock Units to the officer pursuant to the Company’s 2021
Omnibus Equity Plan. The fair value of these shares was $
On
November 11, 2022, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective
from November 14, 2021. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s
2021 Omnibus Equity Plan. The fair value of these shares was $
Options Issued to Employees
On August 12, 2019, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent () of those stock options vested immediately, and the remaining % vested on the six-month anniversary of the grant date.
| F-26 |
The
fair value of the option granted to the Chief Financial Officer in 2019 was recognized as compensation expense over the vesting period
of the stock option award. The fair value of the option was calculated using the following assumptions: estimated life of ,
volatility of %, risk free interest rate of %, and dividend yield of %. The fair value of the stock options was $
As of December 31, 2022, unrecognized share-based compensation expense was $.
Number of Shares | Average Exercise Price per Share | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2022 | $ | |||||||||||
| Exercisable at January 1, 2022 | ||||||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeited | - | |||||||||||
| Outstanding at December 31, 2022 | ||||||||||||
| Exercisable at December 31, 2022 | ||||||||||||
| (1) | The intrinsic value of the stock options at December 31, 2022 is the amount by which the market value of the Company’s common stock of $ as of December 31, 2022 exceeds the average exercise price of the option. As of December 31, 2022, the intrinsic value of the outstanding and exercisable stock options was $. |
Note 14 - Geographical Analysis
Geographical distribution of sales consisted of the following for the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Geographical Areas | ||||||||
| North America | $ | $ | ||||||
| Asia (excluding China) | ||||||||
| Other countries | ||||||||
| $ | $ | |||||||
Geographical location of identifiable long-lived assets as of December 31, 2022 and December 31, 2021:
| 2022 | 2021 | |||||||
| Geographical Areas | ||||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| $ | $ | |||||||
Note 15 - Lease
On
June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the United States
with a year term, commencing on November 1, 2013 and expiring on
The Company has entered into several lease agreements for office and warehouse space in Commerce, California and showroom space in Las Vegas, Nevada and High Point, North Carolina (see Note 12) on monthly or annual terms.
| F-27 |
On
July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a -year term, expiring on
On
October 29, 2019, Nova Malaysia entered into a lease agreement for a showroom with a -year
term, commencing on December 1, 2019 and expiring on
On
August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a -year term, commencing on
September 1, 2020 and expiring on
Operating lease expense for the years ended December 31, 2022 and 2021 was as follows:
| 2022 | 2021 | |||||||
| Operating lease cost – straight line | $ | $ | ||||||
The following is a schedule, by years, of maturities of operating lease liabilities as of December 31, 2022:
| Operating Leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( |
) | ||
| Present value of lease liabilities | ||||
Lease Term and Discount Rate
| December
31, 2022 | ||||
| Weighted-average remaining lease term - years | ||||
| Operating leases - USA | ||||
| Operating leases - Malaysia | ||||
| Weighted-average discount rate (%) | ||||
| Operating leases - USA | % | |||
| Operating leases - Malaysia | % | |||
Supplemental cash flow information related to leases where the Company was the lessee for the years ended December 31, 2022 and 2021 was as follows:
| 2022 | 2021 | |||||||
| Operating cash outflows from operating leases | $ | $ | ||||||
| F-28 |
Note 16 - Commitments and Contingencies
Legal Proceedings
On
March 8, 2022, the parties to the Barney Action filed a Stipulation of Settlement (“Settlement”) with the Court. Under the
terms of the Settlement, and without admitting to any wrongdoing, fault, or liability, the Company agreed to a payment of $
By Memorandum Opinion and Order dated August 29, 2022, the Court denied the Barney plaintiffs’ unopposed Motion to Certify a Settlement Class and to Approve the Settlement. The Court held that plaintiffs had not met their burden of establishing the prerequisites to class certification of adequacy of class counsel, numerosity, and the superiority of class certification in fairly and efficiently adjudicating the controversy. The Court similarly concluded that plaintiffs had failed to make a threshold showing that the settlement was fair and adequate. Finally, the Court rejected plaintiffs’ proposed plan for providing notice of the settlement to putative class members, finding that it was inadequate under the circumstances.
On March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by
leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
| F-29 |
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, the derivative actions will be activated. The parties disagree as to when that will occur. Defendants have asserted that the Action must remained stayed until the final disposition of the Barney Action, meaning, the Court’s final approval of the Settlement. Plaintiff’s position is that the Court should lift the stay because the class action plaintiffs agreed to settle the case. The Court has yet to address this issue.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Note 17 - Subsequent Events
The Company has evaluated subsequent events through April 17, 2023, the date of the issuance of the consolidated financial statements, and the following subsequent event has been identified.
In
February 2023, the company has engaged a sales contract to transfer its entire
inventory of Jade Mats, with the net realized value of $
| F-30 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 17, 2023 | By: | /s/ Thanh H. Lam |
Thanh H. Lam Chairperson and Chief Executive Officer (Principal Executive Officer) | ||
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thanh H. Lam and Jeffery Chuang, jointly and severally, his or her attorneys-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Thanh H. Lam | Chief Executive Officer, President, Director and Chairperson | April 17, 2023 | ||
| Thanh H. Lam | (Principal Executive Officer) | |||
| /s/ Jeffery Chuang | Chief Financial Officer | April 17, 2023 | ||
| Jeffery Chuang | (Principal Financial and Accounting Officer) | |||
| /s/ Min Su | Director | April 17, 2023 | ||
| Min Su | ||||
| /s/ Ming-Cherng Sky Tsai | Director | April 17, 2023 | ||
| Ming-Cherng Sky Tsai | ||||
| /s/ Umesh Patel | Director | April 17, 2023 | ||
| Umesh Patel | ||||
| /s/ Huy P. La | Director | April 17, 2023 | ||
| Huy P. La |
| 39 |
