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 ended December 31, 2021 (the "2021 Form 10-K"). All references to
the second quarter and first six months of 2022 and 2021 mean the three and
six-month periods ended June 30, 2022 and 2021. 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 2021 Form 10-K.
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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 two 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 completed the de-registration
and liquidation process in January 2021.
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 is to
market and sell high-end physiotherapeutic jade mats in Malaysia.
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 completed de-registration and liquidation process in January 2021 and its
business was taken over by Nova HK.
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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 has had minimal operations. In February 2022, Nova HK also entered
a de-registration process and transferred all its assets and business to Nova
Malaysia.
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, Panama,
Kazakhstan, Asian and Middle Eastern markets.
Due to the recent imposition of significant trade tariffs on importation from
China to the United States and the adverse effect such policies have on our
operations, we are actively pursuing alternative product lines with positive
growth potential. One such area pertains to the health-oriented furniture
segment which continues to experience popularity, particularly in Asia. Since
the second quarter of 2019, we have developed a line of high-end
physiotherapeutic jade mats with China-based manufacturing partners for use in
therapy clinics, hospitality, and real estate projects in Asia. We launched our
first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019,
which, after several COVID-19 related temporary closing, was reopened in October
2021. . In April 2022, Malaysia has 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. During
the six months ended June 30, 2022, we wrote down the inventory of $5.12
million. We will regularly monitor the future demands and jade mats market for
impairment consideration. We expect that our flagship showroom/retail store will
serve as one of our primary distribution channels in Malaysia. Marketing of jade
mats will focus on their premium therapeutic qualities and target health
conscious general consumers and professionals. We have limited experience with
operations in Southeast Asia and considerable management attention and resources
may be required to manage these new markets and product lines. We may be subject
to additional risks including credit risk, currency exchange rate fluctuations,
foreign exchange controls, import and export requirements, potentially adverse
tax consequences and higher costs associated with doing business
internationally.
Beginning in 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 then. 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. 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. 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; and we have experienced and may continue to
experience shipping disruptions in the future. Finally, the Company expects that
the impact of the COVID-19 outbreak on the United States and world economies
will continue to have a material adverse impact on the demand for its products.
Because of the significant uncertainties surrounding the COVID-19 pandemic, the
extent of the future business interruption and the related financial impact
cannot be reasonably estimated at this time.
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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.
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) continued significant 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 once the COVID-19 outbreak
dissipates. Some of our manufacturing will continue to be performed in China
because the intellectual know-how necessary to manufacture certain products 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) and particularly in Europe remain
challenging because such markets are experiencing a slow-down and may be
entering a recession due to the COVID-19 pandemic and war in Ukraine.
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.
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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, 2021.
Basis of Presentation
The accompanying unaudited condensed 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 and Nova HK.
Use of Estimates
In preparing condensed consolidated financial statements in conformity with U.S.
GAAP, we make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the condensed consolidated financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
Significant 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 $2,104 and $1,611 as of June 30, 2022 and 2021, respectively. During the six
months ended June 30, 2022 and 2021, bad debts provision (reversal) were $1,060
and ($3,590), respectively; and ($820) and ($130) for the three months ended
June 30, 2022 and 2021, respectively. As of June 30, 2022, we had gross
receivable of $210,359 of which no amount was over 90 days past due. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing trade accounts receivable. We determine the
allowance based on historical bad debt experience, customer concentrations,
customer credit worthiness, current economic trends and changes in customer
payment patterns.
Advances to Suppliers
Advances to suppliers are reported net of allowance when we determine that
amounts outstanding are not likely to be collected in cash or utilized against
purchase of inventories. Based on our historical records and in normal
circumstances, we generally receive goods within 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. 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.
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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.
Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.
The Tax Cuts and Jobs Act of 2017 (the "Act") created new taxes on certain
foreign-sourced earnings such as global intangible low-taxed income ("GILTI")
under IRC Section 951A, which is effective for the Company for tax years
beginning after January 1, 2018. For the quarter ended June 30, 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.
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 six
months and three months ended June 30, 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 condensed consolidated statements of operations.
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Foreign Currency Translation and Transactions
The accompanying unaudited condensed consolidated financial statements are
presented in United States Dollar ("$" or "USD"), which is also the functional
currency of Nova LifeStyle, Nova Furniture, Nova Samoa, 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
June 30, 2022 RM 4.41 to 1
December 31, 2021 RM 4.18 to 1
Income statement and cash flow items
For the six months ended June 30, 2022 RM 4.27 to 1
For the six months ended June 30, 2021 RM 4.10 to 1
Segment Reporting
ASC Topic 280, "Segment Reporting," requires use of the "management approach"
model for segment reporting. The management approach model is based on the way a
company's chief operating decision maker organizes segments within the company
for making operating decisions, assessing performance and allocating resources.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company.
We determined that our operations constitute a single reportable segment in
accordance with ASC 280. We operate exclusively in one business and industry
segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond
Bar is a furniture distributor based in California focusing on customers in the
US, 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. Each of our
subsidiaries is operated under the same senior management of our company, and we
view the operations of Diamond Bar, 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.
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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.
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. We are currently evaluating the impact that the
adoption of ASU 2016-13 and ASU 2022-02 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.
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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 June 30, 2022 and 2021
The following table sets forth the results of our operations for the three
months ended June 30, 2022 and 2021. Certain columns may not add due to
rounding.
Three Months Ended June 30,
2022 2021
$ % of Sales $ % of Sales
Net sales $ 3,813,047 $ 3,550,016
Cost of sales (7,361,224 ) (193 %) (7,557,149 ) (213 %)
Gross loss (3,548,177 ) (93 %) (4,007,133 ) (113 %)
Operating expenses (2,134,539 ) (56 %) (2,271,470 ) (64 %)
Loss from operations (5,682,716 ) (150 %) (6,278,603 ) (177 %)
Other expenses, net (8,791 )
(0 )% (63,539 ) (2 %)
Income tax expenses - 0 % (3,385 ) 0 %
Net loss (5,691,507 ) (149 %) (6,345,527 ) (179 %)
Net Sales
Net sales for the three months ended June 30, 2022 were $3.81 million, an
increase of 7.4% from $3.55 million in the same period of 2021. This increase in
net sales resulted primarily from a 15.3% increase in average selling price,
partially offset by a 6.9% decrease in sales volume. Our three largest selling
product categories in the three months ended June 30, 2022 were sofas, beds, and
chairs, which accounted for approximately 37%, 14% and 11% of sales,
respectively. In the three months ended June 30, 2021, the three largest selling
categories were sofas, beds, and coffee tables, which accounted for
approximately 52%, 16% and 7% of sales, respectively.
The $0.26 million increase in net sales in the three months ended June 30, 2022,
compared to the same period of 2021, was mainly due to increased sales to other
countries. Sales to other countries increased by $232,002 to $266,097 in the
three months ended June 30, 2022 from $34,095 in the same period of 2021,
primarily due to increase in direct container sales in other countries. Sales to
North America increased by 1.2% to $3.48 million in the three months ended June
30, 2022, as compared to $3.44 million in the same period of 2021. It was
primarily due to increased customers switching orders from traditional sales to
direct container sales. Sales to Asia decreased by $9,584 to $62,280 in the
three months ended June 30, 2022, compared to $71,864 in the same period of
2021, primarily due to less sales orders from our customers in Malaysia, as
Malaysia has tightened its monetary policy to maintain the stability of Ringgit,
reducing the purchasing power of the consumers and thus making them less willing
to spend in nonfood categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from
third-party manufacturers. Total cost of sales decreased by 2.6% to $7.36
million in the three months ended June 30, 2022, compared to $7.56 million in
the same period of 2021. Cost of sales as a percentage of sales decreased to
193% in the three months ended June 30, 2022, compared to 213% in the same
period of 2021. 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) our write down
of $5.12 million of our slow-moving inventory, primarily the jade mats in
Malaysia, to the lower of cost and net realizable value in the second quarter of
2022, compared to inventory write-down of $5.53 million in the same period of
2021; (b) we increased our direct container sales which came with higher costs
and low profit margin; (c) increase in shipping costs due to global shipping
container shortage and the Suez Canal ship stuck accident.
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Moreover, total cost of sales excluding our write down of our slow-moving
inventory, increased by 10.4% to $2.24 million in the three months ended June
30, 2022, compared to $2.03 million in the same period of 2021. Cost of sales as
a percentage of sales, excluding our write down of our slow-moving inventory,
increased to 59%, in the three months ended June 30, 2022, compared to 57% in
2021. The increase was primarily resulted from the increase of our direct
container sales, which came with higher costs as well as shipping costs.
Gross Loss
Gross loss was $3.55 million in the three months ended June 30, 2022, compared
to gross loss of $4.01 million in the same period of 2021, representing a
decrease in gross loss of $0.46 million. Our gross loss margin was 93% in the
three months ended June 30, 2022, compared to a gross loss margin of 113% in the
same period of 2021. The decrease in gross loss margin is a result of our write
down of $5.12 million of our slow-moving inventory, primarily the jade mats in
Malaysia, in the three months ended June 30, 2022, compared to $5.53 million of
inventory write-down in the same period of 2021.
Operating Expenses
Operating expenses consisted of selling, general and administrative expenses and
loss on disposal of fixed assets. Operating expenses were $2.13 million in the
three months ended June 30, 2022, compared to $2.27 million in the same period
of 2021. Selling expenses decreased by 12.4%, or $0.11 million, to $0.77 million
in the three months ended June 30, 2022, from $0.88 million in the same period
of 2021, primarily due to decreased marketing and advertising expenses. In
addition, general and administrative expenses decreased by 0.2%, or $28,385, to
$1.36 million in the three months ended June 30, 2022, from $1.39 million in the
same period of 2021, primarily due to the decrease of $0.13 million in legal
fees but partially offset by an increase of $0.12 million in consulting fees.
Other Expenses, Net
Other expenses, net, was $8,791 in the three months ended June 30, 2022,
compared with $63,539 in the same period of 2021, representing a decrease in
other expenses of $54,748. The decrease in other expenses was due primarily to
the increase of foreign exchange gain of $80,437 to $45,881 for the three months
ended June 30, 2022 from foreign exchange loss of $34,556 in the same period of
2021. The increase in gain in three months ended June 30, 2022 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 income was
partially offset by the decrease in interest income of $31,186 to interest
expense, net of $2,885 for the three months ended June 30, 2022 from interest
income, net of $28,301 in the same period of 2021. The interest income in the
period of 2021 was caused by the loan of $1.21 million to an unrelated party
with 6% annual interest rate. The loan has been fully paid off on August 13,
2021.
Income Tax Expenses
Income tax expense was $nil in the three months ended June 30, 2022, compared
with $3,385 in the same period of 2021. The income tax expenses were primarily
related to the foreign-sourced earnings from one of our subsidiaries, Nova HK
for the three months ended June 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $5.69 million in the three months
ended June 30, 2022, compared with net loss of $6.35 million for the same period
of 2021.
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Comparison of Six Months Ended June 30, 2022 and 2021
The following table sets forth the results of our operations for the six months
ended June 30, 2022 and 2021. Certain columns may not add due to rounding.
Six Months Ended June 30,
2022 2021
$ % of Sales $ % of Sales
Net sales $ 7,478,993 $ 6,881,583
Cost of sales (9,498,842 ) (127 %) (9,508,404 ) (138 %)
Gross loss (2,019,849 ) (27 %) (2,626,821 ) (38 %)
Operating expenses (4,527,830 ) (61 %) (4,417,885 ) (64 %)
Loss from operations (6,547,679 ) (88 %) (7,044,706 ) (102 %)
Other expenses, net (1,945 ) (0 %) (51,297 ) (1 %)
Income tax expenses - 0 % (13,061 ) 0 %
Net loss (6,589,554 ) (88 %) (7,109,064 ) (103 %)
Net Sales
Net sales for the six months ended June 30, 2022 were $7.48 million, an increase
of 8.7% from $6.88 million in the same period of 2021. This increase in net
sales resulted primarily from a 15.8% increase in average selling price,
partially offset by a 6.1% decrease in sales volume. Our three largest selling
product categories in the six months ended June 30, 2022 were sofas, beds, and
chairs, which accounted for approximately 41%, 14% and 10% of sales,
respectively. In the six months ended June 30, 2021, the three largest selling
categories were sofas, beds and coffee tables, which accounted for approximately
50%, 15% and 7% of sales, respectively.
The $0.60 million increase in net sales in the six months ended June 30, 2022,
compared to the same period of 2021, was mainly due to increased sales to North
America. Sales to North America increased by 11.1% to $7.10 million in the six
months ended June 30, 2022, as compared to $6.39 million in the same period of
2021. It was primarily due to increase in direct container sales and orders from
our existing customers. Sales to other countries increased by $75,767 to
$320,031 in the six months ended June 30, 2022 from $244,264 in the same period
of 2021, primarily due to increase in direct container sales in other countries.
However, the increase in net sales was partially offset by the decrease in sales
to Asia. Sales to Asia decreased by $187,866 to $62,280 in the six months ended
June 30, 2022, compared to $250,146 in the same period of 2021, primarily due to
less sales orders from our customers in Malaysia, as Malaysia has tightened its
monetary policy to maintain the stability of Ringgit, reducing the purchasing
power of the consumers and thus making them less willing to spend in nonfood
categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from
third-party manufacturers. Total cost of sales decreased by $9,562 to $9.50
million in the six months ended June 30, 2022, compared to $9.51 million in the
same period of 2021. Cost of sales as a percentage of sales decreased to 127% in
the six months ended June 30, 2022, compared to 138% in the same period of 2021.
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) our write down of $5.12 million
of our slow-moving inventory, primarily the jade mats in Malaysia, to the lower
of cost and net realizable value during the first six months of 2022, compared
to inventory write-down of $5.53 million in the same period of 2021; (b) we
increased our direct container sales which came with higher cost and low profit
margin; (c) increase in shipping costs due to global shipping container shortage
and the Suez Canal ship stuck accident.
Moreover, total cost of sales excluding our write down of our slow-moving
inventory, increased by 10.0% to $4.38 million in the six months ended June 30,
2022, compared to $3.98 million in the same period of 2021. Cost of sales as a
percentage of sales, excluding our write down of our slow-moving inventory,
increased to 59%, in the six months ended June 30, 2022, compared to 58% in
2021. The increase was primarily resulted from the increase of our direct
container sales, which came with higher costs as well as shipping costs.
Gross Loss
Gross loss was $2.02 million in the six months ended June 30, 2022, compared to
gross loss of $2.63 million in the same period of 2021, representing decrease in
gross loss of $0.61 million. Our gross loss margin was 27% in the six months
ended June 30, 2022, compared to a gross loss margin of 38% in the same period
of 2021. The decrease in gross loss margin is a result of our write down of
$5.12 million of our slow-moving inventory, primarily the jade mats in Malaysia,
in the six months ended June 30, 2022, compared to $5.53 million of inventory
write-down in the same period of 2021.
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Operating Expenses
Operating expenses consisted of selling, general and administrative expenses,
and loss on disposal of fixed assets. Operating expenses were $4.53 million in
the six months ended June 30, 2022, compared to $4.42 million in the same period
of 2021. Selling expenses decreased by 6.6%, or $0.11 million, to $1.54 million
in the six months ended June 30, 2022, from $1.65 million in the same period of
2021, primarily due to decreased marketing and advertising expenses. The general
and administrative expenses increased by 6.6%, or $0.18 million, to $2.95million
in the six months ended June 30, 2022, from $2.77 million in the same period of
2021, primarily due to an increase in technology services fee and consulting
fees of $0.15 million and $0.25 million, respectively, while the increase was
partially offset by the decrease of $0.19 million in legal fees. Also, the
increase in operating expenses was contributed by a loss on disposal of fixed
assets of $36,549 due to the de-registration of our subsidiary Nova HK.
Other Expenses, Net
Other expenses, net, was $41,875 in the six months ended June 30, 2022, compared
with $51,297 in the same period of 2021, representing a decrease in other
expenses of $9,422. The decrease in other expenses was due primarily to the
increase of foreign exchange gain of $29,216 to $63,644 for the six months ended
June 30, 2022 from $34,428 in the same period of 2021. The increase in gain in
the six months ended June 30, 2022 was mainly a result of the depreciation of
Malaysian Ringgit against U.S. dollars on the Company's assets in Malaysia.
Also, there was a decrease in financial expense of $12,076 to $99,560 for the
six months ended June 30, 2022, compared with $111,636 in the same period of
2021. However, the decrease in other expenses was partially offset by the
decrease in interest income of $31,870 to interest expense, net of $5,959 for
the six months ended June 30, 2022, from interest income, net of $25,911 in the
same period of 2021. The interest income in the period of 2021 was caused by the
loan of $1.21 million to an unrelated party with 6% annual interest rate. The
loan has been fully paid off on August 13, 2021.
Income Tax Expenses
Income tax expense was $nil in the six months ended June 30, 2022, compared with
$13,061 in the same period of 2021. The income tax expenses were primarily
related to the foreign-sourced earnings from one of our subsidiaries, Nova HK
for the six months ended June 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $6.59 million in the six months
ended June 30, 2022, compared with net loss of $7.11 million for the same period
of 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 June 30,
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 $16,930,614 on June 30, 2022, a decrease of
$6,823,942 from net working capital of $23,754,556 on December 31, 2021. The
ratio of current assets to current liabilities was 8.82-to-1 on June 30, 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 six months ended June 30, 2022 and 2021:
2022 2021
Cash provided by (used in):
Operating activities $ (1,321,892 ) $ (1,614,794 )
Investing activities (1,487 ) (1,373,176 )
Financing activities - -
Net cash used in operating activities was $1.32 million in the six months ended
June 30, 2022, a decrease of cash outflow of $0.29 million from $1.61 million of
cash used in operating activities in the same period of 2021. The decrease of
cash outflow was attributable primarily to the decrease of net loss after the
consideration of non-cash items from $1.14 million for the six months ended June
30, 2021 to $0.70 million in the same period of 2022 There was also an increase
in cash inflow for taxes payable of $0.30 million to $0.12 million cash inflow
in the six months ended June 30, 2022, compared to $0.18 million cash outflow in
the same period of 2021. The increase of cash inflow was primarily due to refund
received from IRS for the carryback of our 2019 NOL to 2014 and 2015 tax years.
The decrease in operating cash outflow was partially offset by the increase in
cash outflow for accounts receivable of $0.47 million to $0.11 million cash
outflow in the six months ended June 30, 2022, compared to $0.36 million cash
inflow in the same period of 2021, such increase in cash outflows being mainly a
result of more credit sales in the six months ended June 30, 2022.
Net cash used in investing activities was $1,487 in the six months ended June
30, 2022, as compared to $1.37 million in the same period of 2021. We incurred
cash outflow of $1,487 from purchase of office equipment during the six months
ended June 30, 2022. During the same period of 2021, we incurred cash outflow of
$152,950 from purchase of office equipment and leasehold improvement and the
loan to an unrelated third party in the amount of $1,220,226.
Net cash provided by financing activities was $nil in the six months ended June
30, 2022 and 2021.
As of June 30, 2022, we had gross accounts receivable of $210,359, of which
$84,325 was not yet past due and $126,034 was less than 90 days past due. We had
an allowance for bad debt of $2,104. As of August 9, 2022, accounts receivable
of $196,862 outstanding as of June 30, 2022 had been collected.
All accounts receivable outstanding on December 31, 2021 had been collected
during 2022.
As of June 30, 2022 and December 31, 2021, we had advances to suppliers of
$302,721 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 4-6 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 of June 30, 2022 and
December 31, 2021, no reserve on supplier prepayments had been made or recorded
by us.
As of August 9, 2022, 80% of our advances to suppliers outstanding on June 30,
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 June 30, 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 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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