NOVA LIFESTYLE, INC. Safe Harbor Declaration
The following discussion and analysis are based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "2020 Form 10-K"). All references to the third quarter and first nine months of 2021 and 2020 mean the three and nine-month periods endedSeptember 30, 2021 and 2020. In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the company's business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2020 Form 10-K. OverviewNova 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.
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 aU.S. holding company with no material assets in theU.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 theBritish Virgin Islands ("Nova Furniture "),Nova Furniture Ltd. domiciled inSamoa ("Nova Samoa"),Diamond Bar Outdoors, Inc. domiciled inCalifornia ("Diamond Bar"), Nova Living (M) SDN. BHD. domiciled inMalaysia ("Nova Malaysia") andNova Living (HK) Group Limited domiciled inHong Kong ("Nova HK"). The Company had two former subsidiariesBright Swallow International Group Limited domiciled inHong Kong ("Bright Swallow" or "BSI") which was sold inJanuary 2020 andNova Furniture Macao Commercial Offshore Limited domiciled inMacao ("Nova Macao") which was de-registration and liquidation inJanuary 2021 . 26 OnDecember 7, 2017 , we incorporated iDesign Blockchain Technology, Inc. ("i Design") under the laws of theState 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. OnDecember 12, 2019 , we became the sole shareholder of Nova Living (M) SDN. BHD. ("Nova Malaysia"), a company incorporated onJuly 26, 2019 under the laws ofMalaysia . NovaMalaysia is to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects inMalaysia and other regions inSoutheast Asia .
OnJanuary 7, 2020 , we transferred our entire interest in Bright Swallow toY-Tone (Worldwide) Limited an unrelated third party, for cash consideration of$2,500,000 million , pursuant to a formal agreement entered into onJanuary 7, 2020 . We received the payment onMay 11, 2020 . OnOctober 14, 2020 , Nova Macao's offshore license was invalidated by theMacao Trade and Investment Promotion Institute under the order of Repeal of Legal Regime of the Offshore Services byMacao Special Administrative Region . NovaMacao then entered a de-registration process and its business has been taken over by Nova HK. NovaMacao completed the de-registration and liquidation process inJanuary 2021 .
On
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 attractiveU.S. ,Mexico ,Honduras ,Dominican Republic , Asian and Middle Eastern markets. Due to the recent imposition of significant trade tariffs on importation fromChina tothe 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 inAsia . Since the second quarter of 2019, we have developed a line of high-end physiotherapeutic jade mats withChina -based manufacturing partners for use in therapy clinics, hospitality, and real estate projects inAsia . We launched our first flagship showroom/retail store inKuala Lumpur, Malaysia in late 2019, which, after a COVID-19 related closing, was reopened inMay 2020 . OnAugust 28, 2020 , after few months reopening,Malaysia government extended Movement Control Order to prohibit the businesses to open to public untilMarch 5, 2021 to contain the spread of COVID-19. After the re-opening onMarch 5, 2021 ,Malaysia imposed a new nationwide lockdown onMay 12, 2021 until earlyJune 2021 which was subsequently extended to earlyOctober 2021 . InOctober 2021 , the Order has been lifted for peoplewho are fully vaccinated and our stores are reopened now. We expect that our flagship showroom/retail store will serve as one of our primary distribution channels inMalaysia . Marketing of jade mats will focus on their premium therapeutic qualities and target health conscious general consumers and professionals. We have limited experience with operations inSoutheast 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 2020, a strain of novel coronavirus ("COVID-19") has spread globally including theU.S. andMalaysia . InMarch 2020 , theWorld 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 inMalaysia was closed from March, 2020 to May, 2020. TheLos Angeles facility closed onMarch 16, 2020 and reopened in full operation onJune 1, 2020 . OnMay 12, 2020 , the Company'sKuala Lumpur office and warehouse reopened for business. OnAugust 28, 2020 , theMalaysia government extended the shutdown order to all business untilMarch 5, 2021 After the re-opening onMarch 5, 2021 ,Malaysia government imposed a new nationwide lockdown onMay 12, 2021 until earlyJune 2021 which was subsequently extended to earlyOctober 2021 . InOctober 2021 , the Order has been lifted for peoplewho are fully vaccinated and our stores are reopened now. The third-party contract manufacturers that the Company utilizes inChina were closed from the beginning of theLunar New Year Holiday at the end ofJanuary 2020 through the beginning ofMarch 2020 . Certain of the Company's new products are being sourced from manufacturers inIndia starting in 2020. The factories inIndia suspended their operations as a result of the COVID-19 pandemic during March through earlyMay 2020 . Currently, the factories inIndia are open for operations. Shipping of products fromAsia has experienced significant delays since the onset of the pandemic and the costs of shipping fromAsia have increased since the onset; and we has experienced and may continue to experience shipping disruptions in the future. Finally, the Company expects that the impact of the COVID-19 outbreak onthe 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. 27 We do not have access to a revolving credit facility. OnMay 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. OnMay 5, 2020 ,Diamond Bar Outdoors Inc. ("Diamond Bar") was granted a loan fromCathay Bank in the aggregate amount of$176,294 , pursuant to the Paycheck Protection Program. InJune 19, 2020 , Diamond Bar was granted aU.S. Small Business Administration (SBA) loan in the aggregate amount of$150,000 , pursuant to the Economic Injury Disaster Loan. InJuly 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
Discontinued Operations Towards the end of 2019, our Board of Directors determined to discontinue its marketing efforts inCanada and committed to a plan to dispose of Bright Swallow. OnJanuary 7, 2020 , we transferred our entire interest in Bright Swallow toY-Tone (Worldwide) Limited an unrelated third party, for cash consideration of$2,500,000 , pursuant to a formal agreement entered into onJanuary 7, 2020 . We received the payment in full onMay 11, 2020 . Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed 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 LasVegas 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 theU.S. , Chinese, and other international markets; and (iii) trade tariffs imposed bythe United States on certain products manufactured inChina ; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) continued significant delays in the receipt of shipments of our products fromAsia and increased costs of shipping fromAsia . 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 bythe United States on certain products manufactured inChina , we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located inChina to third-party manufacturers located in other parts ofAsia , such asVietnam ,India and/orMalaysia , 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 toMalaysia andIndia starting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues once the COVID-19 outbreak dissipates. Some of our manufacturing will continue to be performed inChina 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 inNorth America (excludingthe United States ) and particularly inEurope remain challenging because such markets are experiencing a slow-down and may be entering a recession due to the COVID-19 pandemic. Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to our accompanying unaudited condensed consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this Management's Discussion and Analysis.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP") forNova LifeStyle and its subsidiaries, Diamond Bar, i Design,Nova Furniture , Nova Samoa, Nova Malaysia, Nova HK and its former subsidiaries, Bright Swallow and Nova Macao. 28 Use of Estimates
In preparing condensed consolidated financial statements in conformity withU.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates. 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$1,873 and$6,371 as ofSeptember 30, 2021 and 2020, respectively. During the nine months endedSeptember 30, 2021 and 2020, bad debts (reversal) expense from continuing operations were ($3,328 ) and$2,429 , respectively; and$262 and$2,458 for the three months endedSeptember 30, 2021 and 2020, respectively. As ofSeptember 30, 2021 , we had gross receivable of$187,270 of which$4,664 was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns. Advances to Suppliers
Advances to suppliers are reported net of allowance when we determine that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on our historical records and in normal circumstances, we generally receive goods within 5 to 9 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers have been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments has been made or recorded by us. Any provisions for allowance for advance to suppliers, if deemed necessary, will be included in general and administrative expenses in the consolidated statements of operations. 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 toU.S. federal and state income taxes. Nova Furniture BVI and Bright Swallow were incorporated in the BVI, Nova Samoa was incorporated inSamoa and Nova Macao was incorporated inMacau . There is no income tax for companies domiciled in the BVI,Samoa andMacau . Accordingly, the Company's condensed consolidated financial statements do not present any income tax provisions related to the BVI,Samoa andMacau tax jurisdictions where Nova Furniture BVI and Bright Swallow, Nova Samoa and NovaMacao are domiciled. NovaMalaysia is incorporated inMalaysia and is subject toMalaysia income taxes. Nova HK is incorporated inHong Kong and is subject
toHong Kong income taxes. 29
The Tax Cuts and Jobs Act of 2017 (the "Act") created new taxes on certain
foreign-sourced earnings such as global intangible low-taxed income ("GILTI")
under IRC Section 951A, which is effective for the Company for tax years
beginning after January 1, 2018 . For the quarter ended September 30, 2021 , the
Company has calculated its best estimate of the impact of the GILTI in its
income tax provision in accordance with its understanding of the Act and
guidance available as of the date of this filing.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which it expects to
receive in exchange for those goods. We recognize revenues following the five
step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as)
we satisfy the performance obligation.
Revenue from product sales is recognized when the customer obtains control of
our product, which typically occurs upon delivery to the customer. We expense
incremental costs of obtaining a contract as and when incurred if the expected
amortization period of the asset that it would have recognized is one year or
less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer. Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the nine months and three months endedSeptember 30, 2021 and 2020. 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 unaudited condensed consolidated financial statements are
presented in
The Company's subsidiary with operations inMalaysia 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 inU.S. dollars. Assets and liabilities are translated intoU.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. 30
Translation of amounts from RM into
Balance sheet items, except for equity accountsSeptember 30, 2021 RM4.19 to1 December 31 , 2020RM4.02 to 1
Income statement and cash flow items
For the nine months ended
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 inCalifornia focusing on customers in the US, Bright Swallow was a furniture distributor focusing on customers primarily inCanada , Nova Macao was a furniture distributor based inMacao focusing on international customers, Nova HK is a furniture distributor based inHong Kong focusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily inMalaysia . 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 NovaMalaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located inthe United States andMalaysia 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 theU.S. , the sales are recorded as generated in theU.S. ; if the customer directs us to ship its products toChina , the sales are recorded as sold inChina . New Accounting Pronouncements
Recently Adopted Accounting Standards
InDecember 2019 , the FASB issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. ASU 2019-12 was effectiveJanuary 1, 2021 . The adoption of ASU 2019-12 did not have any impact on our consolidated financial statement presentation or disclosures. InAugust 2020 , the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. For contracts in an entity's own equity, the type of contracts primarily affected by ASU 2020-06 are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning afterDecember 15, 2023 . Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 , and only if adopted as of the beginning of such fiscal year. We adopted ASU 2020-06 effectiveJanuary 1, 2021 . The adoption of ASU 2020-06 did not have any impact on our consolidated financial statement presentation or disclosures. 31
Recently Issued But Not Yet Adopted Accounting Pronouncements
InJune 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 afterDecember 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. InJanuary 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 afterDecember 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. InMay 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 afterDecember 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. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have any impact 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 Three Months Ended
The following table sets forth the results of our operations for the three months endedSeptember 30, 2021 and 2020. Certain columns may not add due to rounding. Three Months Ended September 30, 2021 2020 $ % of Sales $ % of Sales Net sales$ 2,916,571 $ 3,315,673 Cost of sales (1,517,032 ) (52 )% (9,905,852 ) (299 )% Gross profit (loss) 1,399,539 48 % (6,590,179 ) (199 )% Operating expenses (2,546,381 ) (87 )% (1,652,777 ) (50 )% Loss from operations (1,146,842 ) (39 )% (8,242,956 ) (249 )% Other expenses, net (82,258 ) (3 )% (52,315 ) (2 )% Income tax (expenses) benefit (167,532 ) (6 )% 118,261 4 % Loss from continuing operations (1,396,632 ) (48 )% (8,177,010 ) (247 )% Loss from discontinued operations - - %
- - %
Net loss (1,396,632 ) (48 )% (8,177,010 ) (247 )%
Net Sales
Net sales from continuing operations for the three months ended September 30,
2021 were $2.92 million , a decrease of 12% from $3.32 million in the same period
of 2020. This decrease in net sales resulted primarily from a 25.63% decrease in
sales volume, partially offset by a 18.28% increase in average selling price.
Our three largest selling product categories in the three months ended September
30, 2021 were sofas, beds and dining table, which accounted for approximately
40%, 14% and 8% of sales from our continuing operations, respectively. In the
three months ended September 30, 2020 , the three largest selling categories were
sofas, beds and coffee table, which accounted for approximately 50%, 13%and 9%
of sales from our continuing operations, respectively.
32
The $0.40 million decrease in net sales from continuing operations in the three
months ended September 30, 2021 , compared to the same period of 2020, was mainly
due to decreased sales to North America and Asia . Sales to North America ,
decreased by 8.03% to $2.85 million in the three months ended September 30,
2021 , as compared to $3.10 million in 2020, primarily due to receiving less
sales orders from our customers in North America . Sales to Asia decreased to
$nil in the three months ended September 30, 2021 , compared to $213,954 in the
same period of 2020, primarily due to government lockdown order in Malaysia
because of COVID-19 pandemic which resulted in $nil sales. Sales to other
countries increased by $65,660 to $68,337 in the three months ended September
30, 2021 from $2,677 in the same period of 2020, primarily due to receiving more
sales orders from our customers in other countries.
Cost of Sales
Cost of sales from continuing operations consists primarily of costs of finished
goods purchased from third-party manufacturers. Total cost of sales from
continuing operations decreased by 85% to $1.52 million in the three months
ended September 30, 2021 , compared to $9.91 million in the same period of 2020.
Cost of sales as a percentage of sales decreased to 52% in the three months
ended September 30, 2021 , compared to 299% in 2020. The decrease of cost of
sales in dollar term, and cost of sales as a percentage of sales, is a result of
two related factors: (a) no inventory write-down in the third quarter of 2021,
compared to our write-down of $7.77 million of our slow-moving inventory in the
same period of 2020; (b) a change in the mix of our products sold as a result of
our suspension of operations in Malaysia due to COVID-19. Due to Malaysia
government's extended shut down orders caused by prolonged COVID-19 pandemic,
our Malaysian operations have been curtailed.
Moreover, total cost of sales from continuing operations decreased by 29% to
$1.52 million in the three months ended September 30, 2021 , compared to total
cost of sales of $2.14 million which excluded our write down of $7.77 million of
our slow-moving inventories in the same period of 2020. The decrease was
primarily resulted from the decrease of our sales. Cost of sales as a percentage
of sales decreased to 52%, in the three months ended September 30, 2021 ,
compared to 64%, excluding our write down of $7.77 million of our slow-moving
inventory, in 2020. It was primarily the result of the sale of higher quality
products with higher profit margins.
Gross Profit (Loss)
Gross profit from continuing operations was $1.40 million in the three months
ended September 30, 2021 , compared to gross loss of $6.59 million in the same
period of 2020, representing an increase in gross profit of $7.89 million . The
increase was primarily due to no slow-moving inventory was written down in the
three months ended September 31, 2021 , compared with our write down of $7.77
million of our slow-moving inventory in the same period of 2020. Our gross
profit margin was 48% in the three months ended September 30, 2021 , compared to
a gross profit margin of 36%, excluding our write down of $7.77 million of our
slow-moving inventory, in the same period of 2020. The increase in gross profit
margin is a result of the sale of higher quality products with higher profit
margins.
Operating Expenses
Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses were$2.55 million in the three months endedSeptember 30, 2021 , compared to$1.65 million in same period of 2020. Selling expenses increased by 153%, or$0.80 million , to$1.32 million in the three months endedSeptember 30, 2021 , from$0.52 million in the same period of 2020, primarily due to increased marketing and advertising expenses. In addition, general and administrative expenses increased by 8%, or$0.09 million , to$1.22 million in the three months endedSeptember 30, 2021 , from$1.13 million in the same period of 2020, primarily due to an increase in research and development expenses of$0.11 million . Other Expenses, Net Other expenses, net, from continuing operations was$82,258 in the three months endedSeptember 30, 2021 , compared with other expenses, net, of$52,315 in the same period of 2020, representing an increase in other expenses of$29,943 . The increase in other expenses was due primarily to the write-off of interest income for an unrelated party (see Note 9), resulting in interest expense, net amounted to$31,755 for the three months endedSeptember 30, 2021 from interest expense, net of$644 in the same period of 2020.
Income Tax (Expenses) Benefit
Income tax expense from continuing operations was$167,532 in the three months endedSeptember 30, 2021 , compared with income tax benefit of$118,261 in the same period of 2020. The income tax expense was primarily related to payable true up for the one-time transition tax commencing inApril 2018 as the result of the tax examination of Internal Revenue Service. 33
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was
Loss from Discontinued Operations
OnJanuary 7, 2020 , we transferred our entire interest in Bright Swallow toY-Tone (Worldwide) Limited , an unrelated third party, for cash consideration of$2.50 million , pursuant to a formal agreement entered into onJanuary 7, 2020 . We received the payment onMay 11, 2020 . Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had no income from discontinued operations in the three months endedSeptember 30, 2020 .
Net Loss As a result of the foregoing, our net loss was$1.40 million in the three months endedSeptember 30, 2021 , compared with$8.18 million for the same period of 2020.
Comparison of Nine Months Ended
The following table sets forth the results of our operations for the nine months endedSeptember 30, 2021 and 2020. Certain columns may not add due to rounding. Nine Months Ended September 30, 2021 2020 $ % of Sales $ % of Sales Net sales$ 9,798,154 $ 7,813,819 Cost of sales (11,025,436 ) (113 )% (12,753,072 ) (163 )% Gross loss (1,227,282 ) (13 )% (4,939,253 ) (63 )% Operating expenses (6,964,266 ) (71 )% (4,663,111 ) (60 )% Loss from operations (8,191,548 ) (84 )% (9,602,364 ) (123 )% Other expenses, net (133,555 ) (1 )% (195,977 ) (2 )% Income tax (expenses) benefit (180,593 ) (2 )% 93,116 1 % Loss from continuing operations (8,505,696 ) (87 )% (9,705,225 ) (124 )% Loss from discontinued operations - - %
(326,531 ) (4 )% Net loss (8,505,696 ) (87 )% (10,031,756 ) (128 )% Net Sales Net sales from continuing operations for the nine months endedSeptember 30, 2021 were$9.80 million , an increase of 25% from$7.81 million in the same period of 2020. This increase in net sales resulted primarily from a 16.25% increase in average selling price with 7.86% increase in sales volume. Our three largest selling product categories in the nine months endedSeptember 30, 2021 were sofas, beds and coffee table, which accounted for approximately 47%, 15% and 7% of sales from our continuing operations, respectively. In the nine months endedSeptember 30, 2020 , the three largest selling categories were sofas, beds and coffee table, which accounted for approximately 51%, 13% and 8% of sales from our continuing operations, respectively. The$1.98 million increase in net sales from continuing operations in the nine months endedSeptember 30, 2021 , compared to the same period of 2020, was mainly due to increased sales toNorth America and other countries. Sales toNorth America , increased by 25.41% to$9.24 million in the nine months endedSeptember 30, 2021 , as compared to$7.37 million in 2020, primarily due to receiving more sales orders from our customers inNorth America . Sales to other countries increased by 1,111% to$312,601 in the nine months endedSeptember 30, 2021 , compared to$25,824 in the same period of 2020, primarily due to receiving more sales orders from our customers in other countries. Sales toAsia decreased by 41.25% to$248,118 in the nine months endedSeptember 30, 2021 , compared to$422,336 in the same period of 2020, primarily due to government lockdown order inMalaysia because of COVID-19 pandemic which resulted in $nil sales in the third quarter of 2021. Cost of Sales Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations decreased by 14% to$11.03 million in the nine months endedSeptember 30, 2021 , compared to$12.75 million in the same period of 2020. Cost of sales as a percentage of sales decreased to 113% in the nine months endedSeptember 30, 2021 , compared to 163% in 2020. The decrease of cost of sales in dollar term, and cost of sales as a percentage of sales, is a result of two related factors: (a) a decrease in inventory write-down of$2.24 million to$5.53 million in the nine months endedSeptember 30, 2021 , compared to our write-down of$7.77 million of our slow-moving inventory in the same period of 2020; (b) a change in the mix of our products sold as a result of our suspension of operations inMalaysia due to COVID-19. Due toMalaysia government's extended shut down orders caused by prolonged COVID-19 pandemic, our Malaysian operations have been curtailed. 34 Moreover, total cost of sales from continuing operations excluding our write down of$5.53 million of our slow-moving inventory, increased by 10% to$5.50 million in the nine months endedSeptember 30, 2021 , compared to total cost of sales of$4.99 million which excluded our write down of$7.77 million of our slow-moving inventory in the same period of 2020. The increase was primarily resulted from to the increase of our sales and shipping costs. Cost of sales as a percentage of sales, excluding our write down of$5.53 million of our slow-moving inventory, decrease to 56%, in the nine months endedSeptember 30, 2021 , compared to 64%, excluding our write down of$7.77 million of our slow-moving inventory, in the same period of 2020. It was primarily the result of the sale of higher quality products with higher profit margins. Gross Loss
Gross loss from continuing operations was$1.23 million in the nine months endedSeptember 30, 2021 , compared to gross loss of$4.94 million in the same period of 2020, representing a decrease in gross loss of$3.71 million . The decrease was primarily due to less amount of slow-moving inventory was written down. We write down$5.53 million of slow-moving inventory in the nine months endedSeptember 31, 2021 , compared with$7.77 million in the same period of 2020. Our gross profit margin was 44%, excluding our write down of$5.50 million of our slow-moving inventory, in the nine months endedSeptember 30, 2021 , compared to a gross profit margin of 36%, excluding our write down of$7.77 million of our slow-moving inventory, in the same period of 2020. The increase in gross profit margin is a result of the sale of higher quality products with higher profit margins. Operating Expenses
Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses were$6.96 million in the nine months endedSeptember 30, 2021 , compared to$4.66 million in same period of 2020. Selling expenses increased by 170%, or$1.87 million , to$2.97 million in the nine months endedSeptember 30, 2021 , from$1.10 million in the same period of 2020, primarily due to increased marketing and advertising expenses. In addition, general and administrative expenses increased by 12%, or$0.43 million , to$3.99 million in the nine months endedSeptember 30, 2021 , from$3.56 million in the same period of 2020, primarily due to an increase in legal fees and rent expenses of$0.11 million and$0.22 million , respectively. Other Expenses, Net Other expenses, net, from continuing operations was$133,555 in the nine months endedSeptember 30, 2021 , compared with$195,977 in the same period of 2020, representing a decrease in other expenses of$62,422 . The decrease was due primarily to the increase in foreign exchange gain of$174,800 to$32,657 for the nine months endedSeptember 30, 2021 from foreign exchange loss of$142,143 in the same period of 2020. The gain inSeptember 30, 2021 was mainly a result of the depreciation of Malaysian Ringgit againstU.S. dollars on the Company's assets inMalaysia . The decrease in other expenses was partially offset by an increase in interest expenses, net of$27,462 to$5,844 for the nine months endedSeptember 30, 2021 , from interest income, net of$21,618 in the same period of 2020. Moreover, there was a decrease in non-operating income to$0 for the nine months endedSeptember 30, 2021 , compared with$38,025 in the same period of 2020. Besides, there was an increase in financial expenses of$46,891 to$160,368 for the nine months endedSeptember 30, 2021 , compared with$113,477 in the same period of 2020. It was mainly due to increase in credit card transaction charges because of increasing sales from Diamond Bar during the nine months endedSeptember 30, 2021 . Income Tax (Expenses) Benefit Income tax expense from continuing operations was$180,593 in the nine months endedSeptember 30, 2021 , compared with income tax benefit of$93,116 in the same period of 2020. The income tax expense were primarily related to payable true up for the one-time transition tax commencing inApril 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
Loss from Discontinued Operations
OnJanuary 7, 2020 , we transferred our entire interest in Bright Swallow toY-Tone (Worldwide) Limited , an unrelated third party, for cash consideration of$2.50 million , pursuant to a formal agreement entered into onJanuary 7, 2020 . We received the payment onMay 11, 2020 . Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had loss from discontinued operations of$0.33 million in the nine months ended September
30, 2020. 35 Net Loss As a result of the foregoing, our net loss was$8.51 million in the nine months endedSeptember 30, 2021 , compared with$10.03 million for the same period
of 2020.
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. InMay 2020 , we received loans under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act. InJune 2020 , we obtained a loan pursuant to the Economic Injury Disaster Loan Program. 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 ofSeptember 30, 2021 , 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$35,016,001 atSeptember 30, 2021 , a decrease of$6,253,619 from net working capital of$41,269,620 atDecember 31, 2020 . The ratio of current assets to current liabilities was 15.91-to-1 at September
30, 2021. The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months endedSeptember 30, 2021 and 2020: 2021 2020 Cash provided by (used in): Operating activities$ (3,129,345 ) $ (1,091,885 ) Investing activities (155,156 ) (360,084 ) Financing activities 2,760,973 466,096 Discontinued operations - 1,037,800
Net cash used in operating activities was
The increase of cash outflow was attributable primarily to an increased cash outflow of$27.45 million in advance to suppliers to$0.06 million cash inflow in the nine months endedSeptember 30, 2021 , compared to$27.51 million cash inflow in the same period of 2020, such increase in cash outflow being mainly a result of purchase but not receiving products from our suppliers in the nine months endedSeptember 30, 2020 , compared to the result of purchase and receiving more jade mats products in the same period of 2021. Also, the increase in cash outflow for inventory write down of$2.24 million to$5.53 million cash inflow in the nine months endedSeptember 30, 2021 , compared to$7.77 million cash inflow in the same period of 2020, such increase in cash outflow being mainly due to less amount of non-cash inventory write down was booked. The increase in operating cash outflow was partially offset by the increase in cash inflow for inventory of$26.01 million to$0.49 million cash outflow in the nine months endedSeptember 30, 2021 , compared to$26.50 million cash outflow in the same period of 2020, such increase in cash inflow being mainly due to less purchase made for lagging sales inMalaysia . Net cash used in investing activities was$0.15 million in the nine months endedSeptember 30, 2021 , as compared to$0.36 million in the same period of 2020. We incurred cash outflow of$155,156 from purchase of office equipment and leasehold improvement during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2020 , we incurred cash outflow of$0.36 million from purchase of office equipment and leasehold improvement. Net cash provided by financing activities was$2.76 million in the nine months endedSeptember 30, 2021 , an increase of$2.29 million from cash inflow of$0.47 million in the same period of 2020. In the nine months endedSeptember 30, 2021 , we received$2.76 million from equity financing. In the same period of 2020, we received$0.47 million from other loans. In the nine months endedSeptember 30, 2020 , net cash provided by discontinued operations was$1.04 million related to cash of Bright Swallow disposed of$1.46 million inJanuary 2020 while we received$2.50 million cash consideration
for this sale transaction.
As ofSeptember 30, 2021 , we had gross accounts receivable of$187,270 , of which$94,885 was not yet past due and$87,721 was less than 90 days past due. We had an allowance for bad debt of$1,873 . As ofOctober 31, 2021 ,$151,225 of accounts receivable outstanding as ofSeptember 30, 2021 had been collected.
All accounts receivable outstanding at
36 As ofSeptember 30, 2021 andDecember 31, 2020 , we had advances to suppliers of$324,454 and$381,894 , 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. As such, no reserve on supplier prepayments had been made or recorded by us. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts. As ofSeptember 30, 2021 , andDecember 31, 2020 , no reserve on supplier prepayments had been made or recorded by us.
As of
Shelf Registration OnOctober 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 onOctober 15, 2020 . OnJuly 23, 2021 , the Company conducted a registered direct offering 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 onJuly 27, 2021 . Other Long-Term Liabilities As ofSeptember 30, 2021 , we recorded long-term taxes payable of$0.65 million , consisting of an income tax payable of$0.65 million , primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, and a$0.01 million unrecognized tax benefit, 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
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to shareholders. We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity or that are not reflected in our unaudited condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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