UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended | |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.
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| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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Nova LifeStyle, Inc.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2024 (UNAUDITED) AND DECEMBER 31, 2023
| March 31, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advance to suppliers | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other receivables | ||||||||
| Total Current Assets | ||||||||
| Noncurrent Assets | ||||||||
| Plant, property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Lease deposit | ||||||||
| Goodwill | ||||||||
| Total Noncurrent Assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONT’D)
AS OF MARCH 31, 2024 (UNAUDITED) AND DECEMBER 31, 2023
| March 31, 2024 | December 31, 2023 | |||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Operating lease liability, current | ||||||||
| Advance from customers | ||||||||
| Other loan | ||||||||
| Accrued liabilities and other payables | ||||||||
| Income tax payable | ||||||||
| Total Current Liabilities | ||||||||
| Noncurrent Liabilities | ||||||||
| Other Loan | ||||||||
| Operating lease liability, non-current | ||||||||
| Income tax payable | ||||||||
| Total Noncurrent Liabilities | ||||||||
| Total Liabilities | ||||||||
| Contingencies and Commitments | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive (loss) income | ||||||||
| Accumulated deficits | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross (Loss) Profit | ||||||||
| Operating Expenses | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development | ||||||||
| Total Operating Expenses | ||||||||
| Loss From Operations | ( | ) | ( | ) | ||||
| Other Income (Expenses) | ||||||||
| Non-operating income | ||||||||
| Foreign exchange transaction (loss) income | ( | ) | ||||||
| Interest (expense) income, net | ( | ) | ( | ) | ||||
| Financial expense | ( | ) | ( | ) | ||||
| Total Other Income (Expenses), Net | ( | ) | ||||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax Expense | ||||||||
| Net Loss | ( | ) | ( | ) | ||||
| Other Comprehensive Loss | ||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||
| Net Loss and Comprehensive Loss | ( | ) | ( | ) | ||||
| Weighted average shares outstanding - Basic and Diluted | ||||||||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | ) | $ | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (UNAUDITED)
Three Months Ended March 31, 2024
| Common stock | Additional Paid-in | Accumulated Other Comprehensive | Statutory | Retained Earnings (Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Reserve | Deficits) | (Deficit) | ||||||||||||||||||||||
| Balance at Beginning of period | $ | $ | $ | $ | $ | ( | ) | $ | | |||||||||||||||||||
| Stock issued to employees | ||||||||||||||||||||||||||||
| Stock issued to consultants | ||||||||||||||||||||||||||||
| Stock issued to designer | ||||||||||||||||||||||||||||
| Acquisition of AI-Calculation Engine | ||||||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at end of period | $ | $ | | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
Three Months Ended March 31, 2023
| Common stock | Additional Paid-in | Accumulated Other Comprehensive | Statutory | Retained Earnings (Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Reserve | Deficits) | Equity | ||||||||||||||||||||||
| Balance at beginning of period Balance | $ | $ | $ | $ | ( | ) | $ | | ||||||||||||||||||||
| Stock issued to employees | ||||||||||||||||||||||||||||
| Stock issued to consultants | ||||||||||||||||||||||||||||
| Stock issued to designer | ||||||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at end of period Balance | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Write down of inventories | ||||||||
| Stock based compensation expense | ||||||||
| Research and development | ||||||||
| Changes in provision for expected credit loss | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Advance to suppliers | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Advance from customers | ||||||||
| Accrued liabilities and other payables | ||||||||
| Taxes payable | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Net Cash Used in Investing Activities | ||||||||
| Cash Flows From Financing Activities | ||||||||
| Proceed from loan from other | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | ( | ) | $ | ||||
| Net Decrease in Cash and Cash Equivalents | ( | ) | ( | ) | ||||
| Cash and Cash Equivalents, Beginning of Period | ||||||||
| Cash and Cash Equivalents, Ending of Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | $ | ||||||
| Interest expense | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
Note 1 - Organization and Description of Business
Organization and Business
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”), formerly known as Stevens Resources, Inc., was incorporated in the State of Nevada on September 9, 2009.
The Company is a U.S. holding company with no material assets other than the ownership interests of its subsidiaries through which it markets, designs and sells furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), i Design Blockchain Technology, Inc. domiciled in California (“i Design”) and Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020, Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registered and liquidated in January 2021 and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”) which was de-registered and liquidated in February 2023.
Nova Macao was organized under the laws of Macao on May 20, 2006, and was a wholly owned subsidiary of Nova Furniture. Nova Macao was a trading company, importing, marketing and selling products designed and manufactured by third-party manufacturers for the international market. Diamond Bar was incorporated in California on June 15, 2000. Diamond Bar markets and sells products manufactured by third-party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market.
On December 7, 2017, Nova LifeStyle incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build the Company’s own blockchain technology team. This company will focus on the application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building a blockchain-powered platform that enables designers to showcase their products, including current and future furniture designs. This company is in the planning stage and has had minimal operations through December 31, 2023.
On
December 12, 2019, Nova LifeStyle acquired Nova Malaysia at cost of $
On
January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party,
for cash consideration of $
On October 14, 2020, the Macao Trade and Investment Promotion Institute invalidated licenses for offshore companies under an Order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered into a de-registration process and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.
On
November 5, 2020, Nova LifeStyle acquired Nova HK at cost of $
The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Diamond Bar, i Design, Nova HK and Nova Malaysia.
| 6 |
Going Concern
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis and following GAAP in
the U.S. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these
financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal
course of business. The Company incurred a net loss of $
The Company has faced ongoing losses from operations, and significant cash outflows from cash used in operating activities in past years. The Company lacks assurance regarding its ability to achieve profitability or secure essential financing for its operations. Considering these principal conditions, the Company’s management has determined that it is probable the Company might encounter challenges in meeting its obligations within one year after the issuance of financial statements, primarily due to insufficient cash flow. Therefore, the Company must assess the probability that its plans will effectively alleviate the substantial doubt.
The Company management has the following plans to alleviate the substantial doubt: the Company will participate in four major U.S. furniture fairs every year to seek new customers to increase the Company’s sales. To augment diversified revenue streams, the Company’s subsidiary Nova Malaysia is proactively engaged in the development of an innovative home decoration design IT software systems. Besides, in the second quarter of this year, the Company plans will raise money from the market to increase cash flow and investment capital.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
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The interim unaudited condensed consolidated financial statements as of March 31, 2024 and for the three-month periods ended March 31, 2024 and 2023 have been prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim unaudited condensed consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, previously filed with the SEC on April 15, 2024.
In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s interim unaudited condensed consolidated financial position as of March 31, 2024, its interim unaudited condensed consolidated results of operations and cash flows for the three-month periods ended March 31, 2024 and 2023, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Reverse split
On
May 22, 2023, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of May 22, 2023,
at which time a
Amendments to Articles of Incorporation
On September 5, 2023, the Company filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $ per share, from to . The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
Use of Estimates
In preparing unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for expected credit losses, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
Business Combination
For a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date and measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings is recognized as a gain attributable to the acquirer.
Deferred tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment, annually or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
ASC Topic 350 also permits an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the single step goodwill impairment test is required to be performed. Otherwise, no further testing is required. Performing the qualitative assessment involved identifying the relevant drivers of fair value, evaluating the significance of all identified relevant events and circumstances, and weighing the factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After evaluating and weighing all these relevant events and circumstances, it was concluded that a positive assertion can be made from the qualitative assessment that it is more likely than not that the fair value of Diamond Bar is greater than its carrying amount. As such, it is not necessary to perform the single step goodwill impairment test for the Diamond Bar reporting unit. Accordingly, as of March 31, 2024 and December 31, 2023, the Company concluded there was no impairment of goodwill of Diamond Bar.
| 8 |
Intangible Assets
Intangible assets consist primarily of computer software acquired for internal use. Acquired intangible assets are initially recorded at the acquisition-date fair value. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are carried at cost less accumulated amortization. The estimated useful life of computer software are generally from 5 years.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash, money market funds, investments in interest bearing demand deposit accounts, time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The
Company’s cash is maintained at financial institutions in the United States of America. Deposits in these financial institutions
may, from time to time, exceed the Federal Deposit Insurance Corporation (“FDIC”)’s federally insured limits. The standard
insurance amount is $
Accounts Receivable
The Company’s accounts receivable arises from product sales. The Company does not adjust its receivables for the effects of a significant financing component at contract inception if it expects to collect the receivables in one year or less from the time of sale. The Company does not expect to collect receivables greater than one year from the time of sale.
The Company’s policy is to maintain an allowance for expected credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Accounts receivable consisted of the following as of the date indicated:
| March 31, 2024 | December 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
The expected credit losses (reversal) provision for the three months
ended March 31, 2024 and 2023 was $
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on its historical record and in normal circumstances, the Company receives goods within 4 to 6 months from the date the advance payment is made. During the three months ended March 31, 2024 and December 31, 2023, no provision was made on advances to suppliers.
Inventories
Inventories
are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential
obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions.
For the three months ended March 31, 2024 and 2023, the Company wrote down $
Plant, Property and Equipment
Property, plant, and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures for maintenance and repairs are expensed as incurred, while additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with no salvage value and estimated lives as follows:
| Computer and office equipment | |
| Decoration and renovation |
| 9 |
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying
amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment
or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against
the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable,
an impairment charge is measured as the amount by which the carrying amount of the asset group asset group exceeds its fair value based
on discounted cash flow analysis or appraisals. There was
Research and Development
Research
and development costs are related primarily to the Company designing and testing its new products during the development stage. In
addition, during 2023, the Company has been developing Virtual and Augmented reality software and AI system for potential consulting
business. The entire system is far from complete as it requires to integrate with other components in order to be functional. It is
still in development stage and not in operation. Research and development costs are recognized in general and administrative
expenses and expensed as incurred. Research and development expenses were $
Income Taxes
In its interim financial statements, the Company follows the guidance in ASC 270 “Interim Reporting” and ASC 740 “Income Taxes” whereby the Company utilizes the expected annual effective rate in determining its income tax provision. The income tax expense for the three months ended March 31, 2024 and 2023 are $, respectively, are primarily related to quarter-to-date income generated from domestic and foreign operation.
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
| 10 |
Nova
Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and
Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where
Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at
the statutory rate of
The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the three months ended March 31, 2024, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal
Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As of March 31, 2024 and December 31, 2023, the accumulated undistributed
loss generated by its foreign subsidiaries were approximately
$
As of March 31, 2024 and 2023, unrecognized tax benefits were approximately $. The total amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective tax rate was $
A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the three months ended March 31, 2024 and 2023, is as follows:
| Gross UTB | ||||||||
| 2024 | 2023 | |||||||
| Balance – January 1 and March 31 | $ | $ | ||||||
As of March 31, 2024 and December 31, 2023, the Company had cumulatively accrued approximately $
| 11 |
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2020-2023 remain open to examination by tax authorities in the U.S.
Revenue Recognition
The Company recognizes revenues when its customers obtain control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC-606: (i) identifies contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenues when (or as) it satisfies the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
The Company’s sales policy allows for product returns within the warranty period if the product is defective and the defects are the Company’s fault. As alternatives to the product return option, the customers have the option of requesting a discount from the Company for products with quality issues or of receiving replacement parts from the Company at no cost. The amount for product returns, the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the three months ended March 31, 2024 and 2023.
In
February 2023, the Company entered into a sales contract to transfer its entire inventory of Jade Mats, with the net realized value of
$
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers and write-downs of inventory.
Shipping and Handling Costs
Shipping
and handling costs related to delivery of finished goods are included in selling expenses. During the three months ended March 31, 2024
and 2023, shipping and handling costs were $
Advertising
Advertising
expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct
advertising, and are included in selling expenses. The Company expenses all advertising costs as incurred. Advertising expense was $
| 12 |
The Company accounts for share-based compensation awards to officers, directors, employees, and for acquiring goods and services from nonemployees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the vesting period. The Company accounts for forfeitures when they occur.
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
| March 31, 2024 | March 31, 2023 | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding – Basic and Diluted * | ||||||||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | ) | $ | ) | ||||
| * |
For the three months ended March 31, 2024, shares of unvested restricted stock, vested stock options to purchase shares of the Company’s common stock, and shares exercisable under warrants were excluded from the EPS calculation, as their effect were anti-dilutive.
| 13 |
For the three months ended March 31, 2023, shares of unvested restricted stock, vested stock options to purchase shares of common stock of the Company, and shares exercisable under warrants were excluded from the EPS calculation, as their effects were anti-dilutive.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
No
customer accounted for
One customer accounted for
The
Company purchased its products from two and three major vendors during the three
months ended March 31, 2024 and 2023, respectively, accounting for a total of
Advances
made to these major vendors were $
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The carrying value of cash, accounts receivable, advances to suppliers, other receivables, accounts payable, advance from customers, other payables and accrued liabilities approximate estimated fair values because of their short maturities.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, and i Design.
The Company’s subsidiary with operations in Malaysia uses its local currency, the Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
| 14 |
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 | ||
| March 31, 2024 | RM
| |
| December 31, 2023 | RM
| |
| Income Statement and cash flow items | ||
| For the three months ended March 31, 2024 | RM
| |
| For the three months ended March 31, 2023 | RM
|
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management determined that the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: the design and sale of furniture.
Management
concluded that the Company had
All of the Company’s long-lived assets are mainly property, plant and equipment located in the United States and Malaysia and are utilized for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by the customers. For example, if the products are delivered to a customer in the United States, the sales are recorded as generated in the United States; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
| 15 |
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company recognized no impairment of ROU assets as of March 31, 2024 and December 31, 2023.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the consolidated balance sheets at March 31, 2024 and December 31, 2023.
Reclassification
Certain prior period accounts have been reclassified in conformity with current period’s presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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 probable, incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost basis. An entity should apply ASU 2016-13 on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the balance sheets as of the date of adoption. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for trouble debt restructurings by creditors and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, ASU 2022-02 requires disclosure of gross write-offs by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, which should be applied prospectively. Both ASU 2016-13 and ASU 2022-02 are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and ASU 2022-02 beginning January 1, 2023. The adoption of ASU 2016-13 and ASU 2022-02 did not have any material impact on our unaudited condensed consolidated financial statement presentation or disclosures.
In January 2017, the FASB issued ASU 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). This Update is effective for smaller reporting companies for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022, which is required to be applied prospectively from the date of adoption. The Company adopted ASU 2017-04 for its interim and annual goodwill impairment tests beginning January 1, 2023. The adoption of ASU 2017-04 did not have any impact on our unaudited condensed consolidated financial statements.
| 16 |
Recently Issued But Not Yet Adopted Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Lease (Topic 842): Common Control Arrangements, which clarifies the accounting for leasehold improvements associated with leases between entities under common control (hereinafter referred to as common control lease). ASU 2023-01 requires entities to amortize leasehold improvements associated with common control lease over the useful life to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease, and to account for any remaining leasehold improvements as a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the underlying asset. This ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. An entity may apply ASU 2023-01 either prospectively or retrospectively. The Company is currently evaluating the impact that the adoption of ASU 2023-01 will have on our unaudited condensed consolidated financial statement presentations and disclosures.
ln December 2023, the FASB issued Accounting Standards Update No.2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation,(2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3)income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual period beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements and related disclosures.
The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 3 - Inventories
The
inventories as of March 31, 2024 and December 31, 2023 totaled $
Inventories
are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential
obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions.
For the three months ended March 31, 2024 and 2023, the Company wrote-down $
Note 4 - Plant, Property and Equipment, Net
As of March 31, 2024 and December 31, 2023, plant, property and equipment consisted of the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Computer and office equipment | $ | $ | ||||||
| Decoration and renovation | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense was $
For
three months ended March 31, 2024 and 2023, the Company disposed of $
Note 5 – Intangible Assets
As of March 31, 2024 and December 31, 2023, intangible assets consisted of the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Accounting software | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Amortization
expense was $
| 17 |
Note 6 – Advances to Suppliers
The
Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $
Note 7 – Prepaid Expenses and Other Receivables
Prepaid expenses and other receivables consisted of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Other receivables | ||||||||
| $ | $ | |||||||
As of March 31, 2024 and December 31, 2023, prepaid expenses and other receivables mainly represented prepaid insurance, refund receivable from suppliers, prepaid advertising expense, and Celero and Cardknox account balances.
Note 8 – Accrued Liabilities and Other Payables
Accrued liabilities and other payables consisted of the following as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Other payables | $ | $ | ||||||
| Salary payable | ||||||||
| Financed insurance premiums | ||||||||
| Auditing fee | ||||||||
| Warranty liability | ||||||||
| Accrued commission | ||||||||
| Accrued expenses, others | ||||||||
| $ | $ | |||||||
As of March 31, 2024 and December 31, 2023, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating expenses incurred in Malaysia. Other payables represented balance on credit card, other taxes payable, 401(k) payable and payable for marketing, shipping, and showroom.
Note 9 – Other Loans
On June 19, 2020, Diamond Bar was
granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $
In
February 2024, the Company entered into a loan agreement in the aggregate amount of $
| 18 |
Note 10 – Related Party Transactions
On
September 30, 2011,
On
January 4, 2018, the Company entered into a sales representative agreement with a consulting firm, which is owned by the President, Chief
Executive Officer and Chairperson of the Board, for sales representative service for a term of
Note 11 – Stockholders’ Equity
On May 28, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) at its annual meeting. The 2021 Plan was approved by the Board of Directors of the Company on April 12, 2021 and has a total of shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On June 16, 2021, the Company filed Form S-8 to register the shares of the Company’s common stock under the 2021 Plan.
On August 31, 2023, the Company’s stockholders approved the Company’s 2023 Equity Incentive Plan (the “2023 Plan”) at its special shareholders’ meeting. The 2023 Plan was approved by the Board of Directors of the Company on June 28, 2023 and has a total of shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On December 15, 2023, the Company filed Form S-8 to register the shares of the Company’s common stock under the 2023 Plan.
Shares and Warrants issued through Private Placement
On
July 23, 2021, the Company conducted a registered direct offering of shares of common stock. The shares were offered
and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and
Exchange Commission (the “SEC”) on October 8, 2020 and subsequently declared effective on October 15, 2020.
Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of
In
conjunction with this offering, the Company issued warrants to purchase
The
warrants issued in the private placement described above are exercisable for a fixed number of shares, and are classified as equity instruments
under ASC 815-40-25-10. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC
Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated
life of years, volatility of %, risk-free interest rate of % and dividend yield of %. No estimate of forfeitures was made
as the Company has a short history of granting options and warrants. The fair value of the warrants issued to investors and placement
agent at grant date was $
Warrants
The following is a summary of the warrant activity for the three months ended March 31, 2024:
Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2024 | $ | |||||||||||
| Exercisable at January 1, 2024 | $ | 3.02 | ||||||||||
| Granted | - | |||||||||||
| Exercised / surrendered | - | |||||||||||
| Expired | - | |||||||||||
| Outstanding at March 31, 2024 | $ | |||||||||||
| Exercisable at March 31, 2024 | $ | |||||||||||
Shares Issued to Consultants
On
January 28, 2022, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development
effective on February 1, 2022 for
| 19 |
On
July 1, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
July 1, 2022 for a -year
term. The Company agreed to grant the consultant shares
of the Company’s common stock, vesting %
on July 1, 2022, %
on October 1, 2022, %
on January 1, 2023 and %
on April 1, 2023. The fair value of the shares
was $
On
November 16, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2022 for a -year
term. The Company agreed to grant the consultant shares of the Company’s common stock, vesting
%
on February 15, 2023, %
on May 15, 2023, %
on August 15, 2023 and %
on November 15, 2023. The fair value of the shares was $
On
January 28, 2023, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development
effective on February 1, 2023 for
On
July 3, 2023, the Company entered into an IT consulting service agreement with three consultants for analyzing the Company’s IT
infrastructure and system effective on July 3, 2023 for
On
November 9, 2023, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2023 for a . The Company agreed to grant the consultant shares of the Company’s
common stock, vesting % on February 15, 2024, % on May 15, 2024, % on August 15, 2024 and % on November 15,
2024. The fair value of the shares was $
On November
16, 2023, Nova Malaysia entered into an agreement with an IT consulting firm to acquire an Artificial Intelligent powered IT System for
$
On
January 23, 2024, Nova Malaysia entered into a purchase agreement with an IT consulting firm to acquire an AI-Calculation Engine System,
which includes Commission Management Calculation Module, Compiled and Encrypted Calculation Engine,
Membership Module, Sales Module and Maintenance and Support, etc. for $
On
January 28, 2024, the Company entered into an advisory service agreement with a designer for advising furniture design concept and
development effective on February 1, 2024 for
On
March 1, 2024, Nova Malaysia entered into a consulting agreement with a consultant for IT system related maintenance and services effective
on March 1, 2024 for a . The Company agreed to grant the consultant shares of the Company’s common
stock, vesting % on March 1, 2024, % on June 1, 2024, % on September 1, 2024 and % on December 1, 2024. The
fair value of the shares was $
Shares and Options Issued to Independent Directors
On
November 7, 2018 (the “Grant Date”), the Company entered into stock option agreements under the 2014 Omnibus Long-Term
Incentive Plan with the three independent members of the board of directors. The Company agreed to grant the Company’s three
independent directors’ options to purchase an aggregate of
shares of the Company’s common stock at an exercise price of $
per shares, with a term of
years. Twenty-five percent (%)
of those stock options vested on November 30, 2018, %
on will vest on February 28, 2019, %
on May 31, 2019, and the remaining %
will vest on August 31, 2019. The fair value of the stock options granted is estimated on the date of the grant using the
Black-Scholes option pricing model (“BSOPM”) as described above. The fair value of the options was calculated using the
following assumptions: estimated life of , volatility of %,
risk free interest rate of %,
and dividend yield of %.
The fair value of
stock options was $
On
November 4, 2019, the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three
independent members of the board of directors. The Company agreed to grant the Company’s three independent directors options
to purchase an aggregate of
shares of the Company’s common stock at an exercise price of $
per share, with a term of
years, vesting %
on November 30, 2019, %
on February 28, 2020, %
on May 31, 2020, and %
on August 31, 2020. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes
option pricing model. The fair value of the options was calculated using the following assumptions: estimated life of , volatility of %,
risk free interest rate of %,
and dividend yield of %.
The fair value of the
stock options was $
Shares Issued to Employees
On
November 11, 2022, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year
effective from November 14, 2022. The Company agreed to grant an award of restricted
Stock Units to the officer pursuant to the Company’s 2021 Omnibus Equity Plan. The
fair value of these shares was $
On
November 9, 2023, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective
from November 14, 2023. The Company agreed to grant an award of restricted Stock Units to the officer pursuant to the Company’s 2021
Omnibus Equity Plan. The fair value of these shares was $
| 20 |
Options Issued to Employees
On August 24, 2018, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (%) of those stock options vested immediately, and the remaining % vested on the six-month anniversary of the grant date.
The
fair value of the option granted to the Chief Financial Officer in 2018 was recognized as compensation expense over the vesting
period of the stock option award. The fair value of the option was calculated using Black-Scholes model under the following
assumptions: estimated life of , volatility of %,
risk free interest rate of %,
and dividend yield of %.
The fair value of the
stock options was $
On August 12, 2019, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of shares of the Company’s common stock at an exercise price of $ per share, with a term of years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (%) of those stock options vested immediately, and the remaining % vested on the six-month anniversary of the grant date.
The
fair value of the option granted to the Chief Financial Officer in 2019 was recognized as compensation expense over the vesting
period of the stock option award. The fair value of the option was calculated using Black-Scholes model under the following
assumptions: estimated life of , volatility of %,
risk free interest rate of %,
and dividend yield of %.
The fair value of the
stock options was $
As of March 31, 2024, unrecognized share-based compensation expense was $.
Number of Shares | Average Exercise Price per Share | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2024 | $ | |||||||||||
| Exercisable at January 1, 2024 | ||||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Forfeited | - | |||||||||||
| Outstanding at March 31, 2024 | ||||||||||||
| Exercisable at March 31, 2024 | ||||||||||||
| (1) | The intrinsic value of the stock options at March 31, 2024 is the amount by which the market value of the Company’s common stock of $ as of March 28, 2024 exceeds the average exercise price of the option. As of March 31, 2024, the intrinsic value of the outstanding and exercisable stock options was $. |
| 21 |
Note 12 – Geographical Analysis
Geographical distribution of sales consisted of the following for the three months ended March 31, 2024 and 2023:
| 2024 | 2023 | |||||||
| Geographical Areas | ||||||||
| North America | $ | $ | ||||||
| Other countries | ||||||||
| $ | $ | |||||||
Geographical location of identifiable long-lived assets as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Geographical Areas | ||||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| $ | $ | |||||||
Note 13 – Lease
On
June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the United States
with a
The Company has entered into several lease agreements for office and warehouse space in Commerce, California and showroom space in Las Vegas, Nevada and High Point, North Carolina (see Note 10) on monthly or annual terms.
On
July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a -year
term, expiring on
On
October 29, 2019, Nova Malaysia entered into a lease agreement for a showroom with a -year term, commencing on December 1, 2019 and
expiring on
On
August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a -year term, commencing on
September 1, 2020 and expiring on
Operating lease expense for the three months ended March 31, 2024 and 2023 was as follows:
| 2024 | 2023 | |||||||
| Operating lease cost – straight line | $ | $ | ||||||
The following is a schedule, by years, of maturities of operating lease liabilities as of March 31, 2024:
| Operating Leases | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | ||||
| 22 |
Lease Term and Discount Rate
| March 31, 2024 | ||||
| Weighted-average remaining lease term – years | ||||
| Operating leases – USA | ||||
| Operating leases – Malaysia | ||||
| Weighted-average discount rate (%) | ||||
| Operating leases – USA | % | |||
| Operating leases – Malaysia | % | |||
Supplemental cash flow information related to leases where the Company was the lessee for the three months ended March 31, 2024 and 2023 was as follows:
| 2024 | 2023 | |||||||
| Operating cash outflows from operating leases | $ | $ | ||||||
Note 14 – Commitments and Contingencies
Legal Proceedings
The Company previously reported on a federal putative class action complaint George Barney filed against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”).
That action was resolved by a January 30, 2024 Order of the Court certifying a settlement class and approving a class settlement.
In the Barney action, Company shareholders sought to assert claims on behalf of all entities purchasing stock from December 21, 2015, through December 20, 2018, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5. In support of these claims, plaintiffs alleged that defendants artificially inflated the Company’s share price by issuing a press release announcing a strategic relationship with Shanxi Winqing Senior Care Service Group, claiming in the Company’s Annual Statements on Form 10-Ks for the 2017 and 2018 fiscal years that Shanxi Winqing and Merlino Lewis LLP were among the Company’s largest customers, and reporting revenues from sales transactions with these entities. Plaintiffs claimed that Shanxi Winqing was a fictitious entity and Merlno Lewis LLP dissolved in 2013, so that the announcement of a strategic alliance was false and the reported revenues non-existent.
The Company denied these allegations and all liability. It asserted that the entities referenced in its public disclosures were actual companies and the revenues booked from those entities were genuine and actually collected. The Company alleged that no registration exists for Shanxi Winqing because the Company slightly mistranslated its Chinese name in its public disclosures. Similarly, the Company claimed to have previously sold products to Merlino Lewis LLP and failed to update its customer name when the customer restructured its business.
On
March 31, 2023, the parties filed a Renewed Stipulation of Settlement (“Renewed Stipulation”) resolving all claims asserted
in the matter. This Renewed Stipulation was executed and filed after the Court denied plaintiffs’ Motion to Certify a Settlement
Class and Approve Class Action settlement in accordance with the parties’ original Stipulation of Settlement. The substantive terms
of the settlement as they applied to the Company were not modified between the original Settlement Stipulation and the Renewed Settlement
Stipulation. The Renewed Stipulation provided for the certification of a settlement class and the Company’s payment to the settlement
class of $
By Order entered July 10, 2023, the Court preliminarily approved a settlement class and the proposed settlement. The settlement escrow was then funded as specified in this Order. The funding was provided through a directors and officers liability insurance policy.
The Court thereafter certified a settlement class and finally approved the settlement by Order entered January 30, 2024. The entry of this Order resolved the matter as to the Company. The settlement payment was funded through insurance.
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On March 8, 2019, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a largely duplicative putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the resolution of the Barney action, settlement of the action, the stay of the derivative actions will be lifted.
While these derivative actions are purportedly asserted on behalf of the Company, it is possible that the Company will incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Note 15 – Subsequent Events
The Company has evaluated subsequent events through May 15, 2024, the date of the issuance of the consolidated financial statements, and the following subsequent events have been identified.
On
April 18, 2024, Nova LifeStyle, Inc. (the “Company”) received written notice from the NASDAQ Stock Market (“NASDAQ”)
stating that the Company does not meet the requirement of maintaining a minimum of $
The NASDAQ notification letter provides the Company until June 6, 2024 to submit a plan to regain compliance. If the plan is accepted, NASDAQ can grant the Company an extension up to 180 calendar days from the date of NASDAQ letter to demonstrate compliance. If NASDAQ does not accept the Company’s compliance plan, the Company will have the opportunity to appeal that decision to a Hearing Panel per NASDAQ Listing Rule 5815(a).
The Company will submit a plan to regain compliance before June 6, 2024 and will consider the various options available to it to regain compliance with the NASDAQ Listing Rules.
On
April 11, 2024, the Company entered into a loan agreement in the aggregate amount of $
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CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” the negatives of such terms and other terms of similar meaning typically identify forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10K”). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 2023 Form 10-K. Unless the context otherwise requires, references in this report to “we,” “us,” “Nova,” “Nova Lifestyle” or the “Company” refer to Nova Lifestyle, Inc. and its subsidiaries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2023 (the “2023 Form 10-K”). All references to the first quarter and first three months of 2024 and 2023 mean the three-month periods ended March 31, 2024 and 2023. 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 2023 Form 10-K.
Overview
Nova LifeStyle, Inc. is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and global purchase fulfillment. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStyle also sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.
Nova LifeStyle’s brand family currently includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.
Our customers principally consist of distributors and retailers with specific geographic territories that deploy middle to high end private label home furnishings which have very little competitive overlap with our specific furnishing products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are properly aligned with our growth strategy. This allows us to continually focus on building both our overall distribution and manufacturing relationships through a deployment of popular, as well as trend-based, furnishing solutions worldwide.
We are a U.S. holding company with no material assets in the U.S. other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential and commercial furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020, and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registration and liquidation in January 2021. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation of Nova HK was completed in February 2023.
On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build our own blockchain technology team. i Design is in the planning stage and has had minimum operations to date. On December 12, 2019, we became the sole shareholder of Nova Living (M) SDN. BHD. (“Nova Malaysia”), a company incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia markets and sells high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.
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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 had minimal operations. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation of Nova HK was completed in February 2023.
Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, South America, Asia and Middle Easter markets.
In 2019, we developed a line of high-end physiotherapeutic jade mats with China-based manufacturing partners for use in therapy clinics, hospitality, and real estate projects in Asia. We launched our first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019, which, after a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysia government extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021 to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. In June 2023, everything is back to normal in Malaysia. Due to the negative impact caused by COVID-19 from 2020 to 2022, the Company eventually sold the entire jade mats inventory for $2.00 million in liquidation sales in June 2023. We existed from Jade Mats business in 2023. 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, inflation, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.
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 in the next 12 months. However, in the event that we do need to raise capital in the future, the instability in the securities markets could adversely affect our ability to raise additional capital.
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Principal Factors Affecting Our Financial Performance
Since 2019, we have moved away from low margin products and 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 terminated 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 2023 Collection in the Las Vegas and High Point Markets, with a view to attracting a higher-end ultimate customer. The core focus of the Company’s direction today is entirely centered on product. Identifying a fashion-driven generational shift in the general perception and consumption of furniture and being more aware of actual consumer tastes and how best to fulfill and engage that need. Closely integrating product development alongside marketing results in appealing products that adheres to the scope of our target demographic of decision makers in the design, staging and retail fields. A process that is continually refined upon each release cycle, maintaining a singular, cohesive vision. In short, we have better identified our customers and how to cater to them – in the process gaining greater traction with every product launch considerably more so on an international level than ever previous. We believe these new strategies, will provide us with significant long term growth opportunities. Significant factors that we believe could affect our operating results are the (i) prices of our products to our domestic and 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 recovery from the COVID-19 outbreak throughout the world; and (v) high interest rate, inflation and slow- down in real estate market. We believe most of our customers are willing to pay for our high quality and stylish products, timely delivery, and strong production capacity at price levels which we expect will allow us to maintain a relatively high gross profit margin for our products. We do not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by the United States on certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in China to third-party manufacturers located in other parts of Asia, such as Vietnam, India and/or Malaysia, countries unaffected by the tariffs. Implementation of a relocation of manufacturing (which by necessity includes an assessment of the factory’s ability to deliver the quantity of the product, in accordance with the Company’s specifications, and in accordance with the Company’s quality control requirements) is time-consuming, but a portion of our manufacturing has been transitioned to Malaysia and India starting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues. Some of our manufacturing will continue to be performed in China because the intellectual know-how necessary to manufacture certain products is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also allow us at least to maintain our gross profit margins. The markets in North America is challenging because such markets are experiencing a slow-down and may be entering a recession due to high interest rate and inflation.
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 December 31, 2023.
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 its former subsidiary, Nova HK.
Reverse Split
On May 22, 2023, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of May 22, 2023, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), was effected. All references to shares and per share data have been retroactively restated to reflect such split.
Amendments to Articles of Incorporation
On September 5, 2023, the Company filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 3,000,000 to 250,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
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Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
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 expected 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 expected credit loss of $1,373 and $532 as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, expected credit losses provision (reversal) was $841 and ($261), respectively. As of March 31, 2024, we had gross receivable of $137,264 of which none was over 90 days past due. The allowance for expected credit losses is our best estimate of the amount of expected 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 represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on our historical records and in normal circumstances, we generally receive goods within 4 to 6 months from the date the advance payment is made.
Income Taxes
In its interim financial statements, the Company follows the guidance in ASC 270 “Interim Reporting” and ASC 740 “Income Taxes” whereby the Company utilizes the expected annual effective rate in determining its income tax provision. The income tax expense for the three months ended March 31, 2024 and 2023 are $0, respectively.
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
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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 unaudited condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at the statutory rate of 24%.
The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the year ended December 31, 2023, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As of March 31, 2024 and December 31, 2023, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $25.3 million and $25.4 million of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.
As of March 31, 2024 and 2023, unrecognized tax benefits were approximately $0. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 as of March 31, 2024 and 2023.
A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the year ended March 31, 2024 and 2023, is as follows:
| Gross UTB | ||||||||
| 2024 | 2023 | |||||||
| Balance – January 1 and March 31 | $ | - | $ | - | ||||
At March 31, 2024 and December 31, 2023, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $0 and $0 for the years ended March 31, 2024 and 2023, respectively, related to the Company’s continuing operations. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
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Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2020-2023 remain open to examination by tax authorities in the U.S.
Intangible Assets
Intangible assets consist primarily of computer software acquired for internal use. Acquired intangible assets are initially recorded at the acquisition-date fair value. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are carried at cost less accumulated amortization. The estimated useful life of computer software is generally 5 years.
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. 606: (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 shipment to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer.
Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the three months ended March 31, 2024 and 2023.
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 unaudited condensed consolidated statements of operations.
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, 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.
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The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:
| Balance sheet items, except for equity accounts | ||||
| March 31, 2024 | RM4.72 to 1 | |||
| December 31, 2023 | RM4.59 to 1 | |||
| Income statement and cash flow items | ||||
| For the three months ended March 31, 2024 | RM4.72 to 1 | |||
| For the three months ended March 31, 2023 | RM4.39 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 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 and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United States and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
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New Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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 probable, incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost basis. Am entity should apply ASU 2016-13 on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the balance sheets as of the date of adoption. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for trouble debt restructurings by creditors and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, ASU 2022-02 requires disclosure of gross writeoffs by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, which should be applied prospectively. Both ASU 2016-13 and ASU 2022-02 are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and ASU 2022-02 beginning January 1, 2023. The adoption of ASU 2016-13 and ASU 2022-02 did not have any impact on our unaudited condensed consolidated financial statement presentation or disclosures.
In January 2017, the FASB issued ASU 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). This Update is effective for smaller reporting companies for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022, which is required to be applied prospectively from the date of adoption. The Company adopted ASU 2017-04 for its interim and annual goodwill impairment tests beginning January 1, 2023. The adoption of ASU 2017-04 did not have any impact on our unaudited condensed consolidated financial statements.
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Recently Issued But Not Yet Adopted Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Lease (Topic 842): Common Control Arrangements, which clarifies the accounting for leasehold improvements associated with leases between entities under common control (hereinafter referred to as common control lease). ASU 2023-01 requires entities to amortize leasehold improvements associated with common control lease over the useful life to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease, and to account for any remaining leasehold improvements as a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the underlying asset. This ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. An entity may apply ASU 2023-01 either prospectively or retrospectively. The Company is currently evaluating the impact that the adoption of ASU 2023-01 will have on our consolidated financial statement presentations and disclosures.
ln December 2023, the FASB issued Accounting Standards Update No.2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation,(2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3)income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual period beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements and related 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 March 31, 2024 and 2023
The following table sets forth the results of our operations for the three months ended March 31, 2024 and 2023. Certain columns may not add due to rounding.
| Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| $ | % of Sales | $ | % of Sales | |||||||||||||
| Net sales | $ | 2,376,393 | $ | 1,874,565 | ||||||||||||
| Cost of sales | (1,360,233 | ) | (57 | )% | (1,213,263 | ) | (65 | )% | ||||||||
| Gross profit (loss) | 1,016,160 | 43 | % | 661,302 | 35 | % | ||||||||||
| Operating expenses | (2,504,551 | ) | (105 | )% | (1,844,912 | ) | (98 | )% | ||||||||
| Loss from operations | (1,488,391 | ) | (63 | )% | (1,183,610 | ) | (63 | )% | ||||||||
| Other income (expenses), net | 25,635 | 1 | % | (38,705 | ) | (2 | )% | |||||||||
| Income tax expenses | - | - | % | - | - | % | ||||||||||
| Net loss | (1,462,756 | ) | (62 | )% | (1,222,315 | ) | (65 | )% | ||||||||
Net Sales
Net sales for the three months ended March 31, 2024 were $2.38 million, an increase of 27% from $1.87 million for the same period of 2023. This increase in net sales resulted primarily from 30% increase in sales volume, while partially offset by 3% decrease in average selling price. Our three largest selling product categories for the three months ended March 31, 2024 were sofas, beds and chairs, which accounted for approximately 53%, 12% and 8% of sales, respectively. For the three months ended March 31, 2023, the three largest selling categories were sofas, beds and chairs, which accounted for approximately 42%, 19% and 13% of sales, respectively.
The $0.50 million increase in net sales for the three months ended March 31, 2024, compared to the same period of 2023, was mainly due to increased sales to North America. Sales to North America increased by 32% to $2.33 million for the three months ended March 31, 2024, compared to $1.76 million for the same period of 2023, such increase mainly due to more sales order received from our customers in North America. However, the increase in net sales was partially offset by the decrease in sales to other countries. Sales to other countries decreased by $67,237 to $50,663 for the three months ended March 31, 2024, from $117,900 for the same period of 2023, primarily due to less direct container sales in other countries.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales increased by 12% to $1.36 million for the three months ended March 31, 2024, compared to $1.21 million for the same period of 2023. Cost of sales as a percentage of sales decreased to 57% for the three months ended March 31, 2024, compared to 65% for the same period of 2023. The increase in cost of sales in dollar term was mainly due to increased net sales. The decrease in cost of sales as a percentage of sales is a result of two factors: (a) the decrease in average purchase cost; and (b) our decreased inventory write down of $38,982 for the three months ended March 31, 2024, compared to inventory write down of $85,672 for the same period of 2023.
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Gross Profit (Loss)
Gross profit was $1.02 million for the three months ended March 31, 2024, compared to $0.66 million for the same period of 2023, representing an increase in gross profit of $0.35 million. Our gross profit margin was 43% for the three months ended March 31, 2024, compared to 35% for the same period of 2023. The increase in gross profit and gross profit margin was mainly a result of our increased sales of products with lower per-unit costs.
Operating Expenses
Operating expenses consisted of selling, general and administrative expenses, and research and development. Operating expenses were $2.50 million for the three months ended March 31, 2024, compared to $1.84 million for the same period of 2023. Selling expenses decreased by 22%, or $0.16 million, to $0.56 million for the three months ended March 31, 2024, from $0.71 million for the same period of 2023, primarily due to decreased marketing and advertising expenses. On the other hand, general and administrative expenses increased by 6%, or $0.06 million, to $1.19 million for the three months ended March 31, 2024, from $1.13 million for the same period of 2023, primarily due to an increase in consulting fees of $0.14 million, while the increase was partially offset by a decrease in auditing fee of $0.02 million and payroll of $0.02 million. In addition, research and development increased by 636,524%, or $0.75 million to $0.75 million for the three months ended March 31, 2024, from $118 for the same period of 2023, primary due to our spending on AI-Calculation engine which is for integrating with our AI and IT system.
Other Income (Expenses), Net
Other income, net was $25,635 for the three months ended March 31, 2024, compared to other expenses, net of $38,705 for the same period of 2023, representing an increase in other income of $64,340. The increase in other income was due primarily to an increase in foreign exchange gain by $78,415 to $73,032 for the three months ended March 31, 2024, from foreign exchange loss of $5,383 for the same period of 2023. The increase in foreign exchange gain was mainly a result of the appreciation of U.S. dollar against Malaysian Ringgit on acquisition of AI-Calculation engine in U.S. dollars.
Income Tax Expenses
Income tax expenses were $0 for the three months ended March 31, 2024 and 2023 due to net loss.
Net Loss
As a result of the foregoing, our net loss was $1.46 million for the three months ended March 31, 2024, compared to $1.22 million for the same period of 2023.
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 March 31, 2024, 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 working capital deficit of $441,348 at March 31, 2024, a decrease of $501,405 from net working capital of $60,057 at December 31, 2023. The ratio of current assets to current liabilities was 0.90-to-1 at March 31, 2024.
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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 three months ended March, 2024 and 2023:
| 2024 | 2023 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | $ | (221,702 | ) | $ | (732,421 | ) | ||
| Investing activities | - | - | ||||||
| Financing activities | 200,000 | - | ||||||
Net cash used in operating activities was $0.22 million for the three months ended March 31, 2024, a decrease in cash outflow by $0.51 million from $0.73 million of cash used in operating activities for the same period of 2023.
The decrease in cash outflow was attributable primarily to (i) an increase in cash inflow of $0.42 million for other current assets to $0.09 million cash inflow for the three months ended March 31, 2024, from $0.33 million cash outflow for the same period of 2023, such increase in cash inflow being mainly a result of less prepayments, as we made a substantial amount of prepayments for our virtual tour and web augmented reality development project during 2023; (ii) an increase in cash inflow of $0.17 million for accrued liabilities and other payables to $0.19 million cash inflow for the three months ended March 31, 2024, from $0.02 million cash inflow for the same period of 2023, such increase in cash inflow being mainly due to delay in payments to our service providers ; and (iii) an increase in cash inflow of $0.15 million for advance from customers to $0.15 million cash inflow for the three months ended March 31, 2024, from $0 for the same period of 2023, such increase in cash inflow being mainly due to more advance payments received from our customers. The decrease in operating cash outflow was partially offset by an increase in cash outflow of $1.02 million for inventories to $0.34 million cash outflow for the three months ended March 31, 2024, from $0.68 million cash inflow for the same period of 2023, such increase in cash outflow being mainly due to more purchases made from our suppliers.
Net cash provided by investing activities was $0 for the three months ended March 31, 2024 and 2023.
Net cash provided by financing activities was $0.20 million for the three months ended March 31, 2024, compared to $0 for the same period of 2023. During the three months ended March 31, 2024, we borrowed $0.20 million from an unrelated third party.
As of March 31, 2024, we had gross accounts receivable of $137,264 of which $129,737 was not yet past due and $7,527 was less than 90 days past due. We had an allowance for expected credit losses of $1,373. As of May 6, 2024, 85.3% of accounts receivable outstanding as of March 31, 2024 had been collected.
100% of our accounts receivable outstanding at December 31, 2023 had been collected during the three months ended March 31, 2024.
As of March 31, 2024 and December 31, 2023, we had advances to suppliers of $49,458 and $93,740, 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. 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 May 6, 2024, $4,583 or 9% and $92,856 or 99% of our advances to suppliers outstanding at March 31, 2024 and December 31, 2023 had been delivered to us in the form of purchases of furniture.
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Other Long-Term Liabilities
As of March 31, 2024, we recorded long-term taxes payable of $0.64 million, consisting of an income tax payable of $0.64 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.
We elected to pay the one-time transition tax over the eight years commencing April 2018.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of March 31, 2024. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during or subsequent to the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has reported a federal putative class action complaint George Barney filed the Company and former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). That matter was resolved by the entry of an Order on January 30, 2024 certifying a settlement class and approving a class settlement.
In the Barney action, Company shareholders sought to assert claims on behalf of all entities purchasing stock from December 21, 2015, through December 20, 2018, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5. In support of these claims, plaintiffs alleged that defendants artificially inflated the Company’s share price by issuing a press release announcing a strategic relationship with Shanxi Winqing Senior Care Service Group, claiming in the Company’s Annual Statements on Form 10-Ks for the 2017 and 2018 fiscal years that Shanxi Winqing and Merlino Lewis LLP were among the Company’s largest customers, and reporting revenues from sales transactions with these entities. Plaintiffs claimed that Shanxi Winqing was a fictitious entity and Merlno Lewis LLP dissolved in 2013, so that the announcement of a strategic alliance was false and the reported revenues non-existent.
The Company denied these allegations and all liability. It asserted that the entities referenced in its public disclosures were actual companies and the revenues booked from those entities were genuine and actually collected. The Company alleged that no registration exists for Shanxi Winqing because the Company slightly mistranslated its Chinese name in its public disclosures. Similarly, the Company claimed to have previously sold products to Merlino Lewis LLP and failed to update its customer name when the customer restructured its business.
On March 31, 2023, the parties filed a Renewed Stipulation of Settlement (“Renewed Stipulation”) resolving all claims asserted in the matter. This Renewed Stipulation was executed and filed after the Court denied plaintiffs’ Motion to Certify a Settlement Class and Approve Class Action settlement in accordance with the parties’ original Stipulation of Settlement. The substantive terms of the settlement as they applied to the Company were not modified between the original Settlement Stipulation and the Renewed Settlement Stipulation. The Renewed Stipulation provided for the certification of a settlement class and the Company’s payment to the settlement class of $750,000. It also provided for the complete release of all claims by the settlement class against the Company and its directors, officers, and employees and the other named defendants with respect to any of the matters alleged in the litigation. The Company settled without in any manner admitting, and expressly denying, liability.
By Order entered July 10, 2023, the Court preliminarily approved a settlement class and the proposed settlement. The settlement escrow was then funded as specified in this Order. The funding was provided through a directors and officers liability insurance policy.
The Court thereafter certified a settlement class and finally approved the settlement by Order entered January 30, 2024. The entry of this Order resolved the matter as to the Company. The settlement payment was funded through insurance.
On March 8, 2019, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit in the United States District Court for the Central District of California, purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the Barney Action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a largely duplicative putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, it is expected that the stay of the derivative actions will be lifted.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
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Item 1A. Risk Factors
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 5. Other Information
Insider Trading Arrangements
During
the three months ended March 31, 2024, none of the Company’s directors or executive officers
Item 6. Exhibits
EXHIBIT INDEX
† Filed herewith
‡ Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NOVA LIFESTYLE, INC. | ||
| (Registrant) | ||
| Date: May 15, 2024 | By: | /s/ Thanh H. Lam |
Thanh H. Lam Chairperson and Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 15, 2024 | /s/ Jeffery Chuang | |
Jeffery Chuang Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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