Safe Harbor Declaration
The following discussion and analysis are based upon our financial statements as
of the dates and for the periods presented in this section. You should read this
discussion and analysis in conjunction with the financial statements and notes
thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial
statements and notes thereto included in our annual report on Form 10-K for the
fiscal year ended December 31, 2021 (the "2021 Form 10-K"). All references to
the third quarter and first nine months of 2022 and 2021 mean the three and
nine-month periods ended September 30, 2022 and 2021. In addition to historical
information, the following discussion and other parts of this report contain
certain forward-looking information. When used in this discussion, the words,
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from projected results, due to a number of risks, uncertainties and factors
beyond our control. We do not undertake to publicly update or revise any of
these forward-looking statements, even if experience or future changes show that
the indicated results or events will not be realized. Furthermore, we cannot
guarantee future results, events, levels of activity, performance, or
achievements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Readers also
are urged to carefully review and consider our discussions regarding the various
factors that affect the company's business, which are described in this section
and elsewhere in this report. For more information, see our discussion of risk
factors located at Part I, Item 1A of our 2021 Form 10-K.
Overview
Nova LifeStyle, Inc. is a distributor of contemporary styled residential and
commercial furniture incorporated into a dynamic marketing and sales platform
offering retail and wholesale 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.
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Nova LifeStyle's brand family currently includes Nova LifeStyle, Diamond Sofa
(www.diamondsofa.com) and Nova Living.
Our customers principally consist of distributors and retailers with specific
geographic territories that deploy middle to high end private label home
furnishings which have very little competitive overlap with our specific
furnishing products or product lines. Nova LifeStyle is constantly seeking to
integrate new sources of distribution and manufacturing that are properly
aligned with our growth strategy. This allows us to continually focus on
building both our overall distribution and manufacturing relationships through a
deployment of popular, as well as trend-based, furnishing solutions worldwide.
We are a U.S. holding company with no material assets in the U.S. other than the
ownership interests of our wholly owned subsidiaries through which we market,
design and sell residential and commercial furniture worldwide: Nova Furniture
Limited domiciled in the British Virgin Islands ("Nova Furniture"), Nova
Furniture Ltd. domiciled in Samoa ("Nova Samoa"), Diamond Bar Outdoors, Inc.
domiciled in California ("Diamond Bar"), Nova Living (M) SDN. BHD. domiciled in
Malaysia ("Nova Malaysia") and Nova Living (HK) Group Limited domiciled in Hong
Kong ("Nova HK"). The Company had two former subsidiaries Bright Swallow
International Group Limited domiciled in Hong Kong ("Bright Swallow" or "BSI")
which was sold in January 2020 and Nova Furniture Macao Commercial Offshore
Limited domiciled in Macao ("Nova Macao") which completed the de-registration
and liquidation process in January 2021.
On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. ("i
Design") under the laws of the State of California. The purpose of i Design is
to build our own blockchain technology team. i Design is in the planning stage
and has had minimum operations to date. On December 12, 2019, we became the sole
shareholder of Nova Living (M) SDN. BHD. ("Nova Malaysia"), a company
incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia is to
market and sell high-end physiotherapeutic jade mats in Malaysia.
On January 7, 2020, we transferred our entire interest in Bright Swallow to
Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of
$2,500,000. We received the payment on May 11, 2020.
On October 14, 2020, Nova Macao's offshore license was invalidated by the Macao
Trade and Investment Promotion Institute under the order of Repeal of Legal
Regime of the Offshore Services by Macao Special Administrative Region. Nova
Macao completed de-registration and liquidation process in January 2021 and its
business was taken over by Nova HK.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group
Limited ("Nova HK") which was incorporated in Hong Kong on November 6, 2019.
This company has had minimal operations. In February 2022, Nova HK also entered
a de-registration process and transferred all its assets and business to Nova
Malaysia.
Our experience developing and marketing products for international markets has
enabled us to develop the scale, logistics, marketing, manufacturing
efficiencies and design expertise that serve as the foundation for us to expand
aggressively into the highly attractive U.S., Canada, Honduras, Panama,
Kazakhstan, Asian and Middle Eastern markets.
Due to the recent imposition of significant trade tariffs on importation from
China to the United States and the adverse effect such policies have on our
operations, we are actively pursuing alternative product lines with positive
growth potential. One such area pertains to the health-oriented furniture
segment which continues to experience popularity, particularly in Asia. Since
the second quarter of 2019, we have developed a line of high-end
physiotherapeutic jade mats with China-based manufacturing partners for use in
therapy clinics, hospitality, and real estate projects in Asia. We launched our
first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019,
which, after several COVID-19 related temporary closing, was reopened in October
2021. In April 2022, Malaysia has reopened the border for foreign visitors.
However, COVID-19 in Malaysia increased financial vulnerability for those
affected households and business, which contributed to significant decrease of
sales and risk of continuous sluggish sales. As a result, we further lowered the
estimated sales quantities of the inventories during the interim review. During
the nine months ended September 30, 2022, we wrote down the inventory of $5.12
million. We will regularly monitor the future demands and jade mats market for
impairment consideration. We expect that our flagship showroom/retail store will
serve as one of our primary distribution channels in Malaysia. Marketing of jade
mats will focus on their premium therapeutic qualities and target health
conscious general consumers and professionals. We have limited experience with
operations in Southeast Asia and considerable management attention and resources
may be required to manage these new markets and product lines. We may be subject
to additional risks including credit risk, currency exchange rate fluctuations,
foreign exchange controls, import and export requirements, potentially adverse
tax consequences and higher costs associated with doing business
internationally.
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Beginning in early 2020, a strain of novel coronavirus ("COVID-19") has spread
globally including the U.S. and Malaysia. In March 2020, the World Health
Organization declared the COVID-19 a pandemic. In response to the evolving
dynamics related to the COVID-19 outbreak, the Company has been following the
guidelines of local authorities as it prioritizes the health and safety of its
employees, contractors, suppliers and retail partners. The Company's two
showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020.
The Los Angeles facility closed on March 16, 2020 and reopened in full operation
on June 1, 2020. On May 12, 2020, the Company's Kuala Lumpur office and
warehouse reopened for business. On August 28, 2020, the Malaysia government
extended the shutdown order to all business until March 5, 2021. After the
re-opening on March 5, 2021, Malaysia government imposed a new nationwide
lockdown on May 12, 2021 until early June 2021 which was subsequently extended
to early October 2021. In October 2021, the Order was lifted for people who are
fully vaccinated and our store has been reopened since then. In April 2022,
Malaysia has reopened the border for foreign visitors. The third-party contract
manufacturers that the Company utilizes in China were closed from the beginning
of the Lunar New Year Holiday at the end of January 2020 through the beginning
of March 2020. In 2022, there have been outbreaks of the Omicron variant of
COVID-19 in Hong Kong and many other cities in China, and travel restrictions,
mandatory COVID-19 tests, quarantine requirements and/or temporary closure of
office buildings and facilities have been imposed by local governments. Although
our suppliers in China have not been materially and negatively impacted by such
outbreaks, the government authorities may issue new orders of office closure,
travel and transportation restrictions in China due to the resurgence of the
COVID-19 and outbreak of new variants, which could cause the delay of the
delivery from our suppliers in China. Certain of the Company's new products are
being sourced from manufacturers in India starting in 2020. The factories in
India suspended their operations as a result of the COVID-19 pandemic during
March through early May 2020. Currently, the factories in India are open for
operations. Shipping of products from Asia has experienced significant delays
since the onset of the pandemic and the costs of shipping from Asia have
increased since the onset; and we have experienced and may continue to
experience shipping disruptions in the future. Finally, the Company expects that
the impact of the COVID-19 outbreak on the United States and world economies
will continue to have a material adverse impact on the demand for its products.
Because of the significant uncertainties surrounding the COVID-19 pandemic, the
extent of the future business interruption and the related financial impact
cannot be reasonably estimated at this time.
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. On
June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration
(SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury
Disaster Loan. In July 2021, we completed a registered direct offering of our
shares of common stock and received offering gross proceeds of $3,120,622. We
currently believe that our financial resources will be adequate to finance our
operations through the outbreak. However, in the event that we do need to raise
capital in the future, the outbreak-related instability in the securities
markets could adversely affect our ability to raise additional capital.
While there can be no assurance, at the present time we expect the
outbreak-related circumstances to result in material impairments of our
inventory of Jade Mattress in Malaysia that significantly affect management's
judgements in assessing the fair value of our assets.
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Principal Factors Affecting Our Financial Performance
At the beginning of 2019, we commenced a transition of our business. We began
moving away from low margin products. This move was intended to improve our
gross profit margin, receivable collections and net profitability, and to
increase our return on long-term equity. We decided to terminate sales and
marketing efforts to customers that represented a high purchase volume but low
profit margin, and we adjusted our product line, which included the launch of
our Summer 2019 Collection in the Las Vegas Market, with a view to attracting a
higher-end ultimate customer. We believe these new strategies, will provide us
with significant long term growth opportunities. The transition has and is
expected to continue to adversely impact our revenue and our net profit in the
short-term as we roll out new products and market those products to our existing
client base and to new potential customers better suited for the higher end
products, and as we assess our new products' market acceptance. Significant
factors that we believe could affect our operating results are the (i) prices of
our products to our international retailer and wholesaler customers and their
markups to end consumers; (ii) general economic conditions in the U.S., Chinese,
and other international markets; and (iii) trade tariffs imposed by the United
States on certain products manufactured in China; and (iv) the consequences of
the COVID-19 outbreak throughout the world; and (v) continued significant delays
in the receipt of shipments of our products from Asia and increased costs of
shipping from Asia. We believe most of our customers are willing to pay for our
high quality and stylish products, timely delivery, and strong production
capacity at price levels which we expect will allow us to maintain a relatively
high gross profit margin for our products. We do not manufacture our products,
but instead we utilize third-party manufacturers. In response to the tariffs
imposed by the United States on certain products manufactured in China, we are
in the process of shifting a portion of our product manufacturing from
third-party manufacturers located in China to third-party manufacturers located
in other parts of Asia, such as Vietnam, India and/or Malaysia, countries
unaffected by the tariffs. Implementation of a relocation of manufacturing
(which by necessity includes an assessment of the factory's ability to deliver
the quantity of the product, in accordance with the Company's specifications,
and in accordance with the Company's quality control requirements) is
time-consuming, but a portion of our manufacturing has been transitioned to
Malaysia and India starting in 2020 and we expect that more of our manufacturing
will be transitioned to one or more of these venues once the COVID-19 outbreak
dissipates. Some of our manufacturing will continue to be performed in China
because the intellectual know-how necessary to manufacture certain products is
not generally available in other Asian countries. Consumer preference trends
favoring high quality and stylish products and lifestyle-based furniture suites
should also allow us at least to maintain our gross profit margins. The markets
in North America (excluding the United States) and particularly in Europe remain
challenging because such markets are experiencing a slow-down and may be
entering a recession due to the COVID-19 pandemic and war in Ukraine.
Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to
our accompanying unaudited condensed consolidated financial statements, we
believe the following accounting policies are the most critical to aid you in
fully understanding and evaluating this Management's Discussion and Analysis.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended December
31, 2021.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP") for Nova LifeStyle and its subsidiaries,
Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia and Nova HK.
Use of Estimates
In preparing condensed consolidated financial statements in conformity with U.S.
GAAP, we make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the condensed consolidated financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions made by us, include but are not limited
to, revenue recognition, the allowance for bad debt, valuation of inventories,
the valuation of stock-based compensation, income taxes and unrecognized tax
benefits, valuation allowance for deferred tax assets, assumptions used in
assessing impairment of long-lived assets and goodwill. Actual results could
differ from those estimates.
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Accounts Receivable
Our accounts receivable arises from product sales. We do not adjust receivables
for the effects of a significant financing component at contract inception if we
expect to collect the receivables in one year or less from the time of sale. We
do not expect to collect receivables greater than one year from the time of
sale. Our policy is to maintain an allowance for potential credit losses on
accounts receivable. We review the composition of accounts receivable and
analyze historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. We maintained an allowance for bad debt
of $3,420 and $1,873 as of September 30, 2022 and 2021, respectively. During the
nine months ended September 30, 2022 and 2021, bad debts provision (reversal)
were $2,376 and ($3,328), respectively; and $1,316 and $262 for the three months
ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we
had gross receivable of $393,363 of which no amount was over 90 days past due.
The allowance for doubtful accounts is our best estimate of the amount of
probable credit losses in our existing trade accounts receivable. We determine
the allowance based on historical bad debt experience, customer concentrations,
customer credit worthiness, current economic trends and changes in customer
payment patterns.
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods
that are yet to be delivered and from which future economic benefits are
expected to flow to the Company within the normal operating cycle. Based on our
historical records and in normal circumstances, we generally receive goods
within 4 to 6 months from the date the advance payment is made. Due to the
COVID-19 pandemic, the freight transportation of the products from our
international suppliers have been delayed or suspended during the outbreak.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates, applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC Topic 740 also provides guidance on
recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state
income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was
incorporated in Samoa. There is no income tax for companies domiciled in the BVI
and Samoa. Accordingly, the Company's condensed consolidated financial
statements do not present any income tax provisions related to the BVI and Samoa
tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova
Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes.
Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.
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The Tax Cuts and Jobs Act of 2017 (the "Act") created new taxes on certain
foreign-sourced earnings such as global intangible low-taxed income ("GILTI")
under IRC Section 951A, which is effective for the Company for tax years
beginning after January 1, 2018. For the quarter ended September 30, 2022, the
Company has calculated its best estimate of the impact of the GILTI in its
income tax provision in accordance with its understanding of the Act and
guidance available as of the date of this filing.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which it expects to
receive in exchange for those goods. We recognize revenues following the five
step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as)
we satisfy the performance obligation.
Revenue from product sales is recognized when the customer obtains control of
our product, which typically occurs upon delivery to the customer. We expense
incremental costs of obtaining a contract as and when incurred if the expected
amortization period of the asset that it would have recognized is one year or
less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for
applicable discounts and allowances that are offered within contracts with our
customers.
Product revenue reserves, which are classified as a reduction in product
revenues, are generally characterized in the following categories: discounts,
returns and rebates. These reserves are based on estimates of the amounts earned
or to be claimed on the related sales and are classified as reductions of
accounts receivable as the amount is payable to our customer.
Our sales policy allows for the return of product within the warranty period if
the product is defective and the defects are our fault. As alternatives for the
product return option, the customers have the option of asking us for a discount
for products with quality issues, or of receiving replacement parts from us at
no cost. The amount of reserves for return of products, the discount provided to
the customers, and cost for the replacement parts were immaterial for the nine
months and three months ended September 30, 2022 and 2021.
We generally expense sales commissions when incurred because the amortization
period would have been one year or less. These costs are recorded within selling
expenses on our condensed consolidated statements of operations.
Foreign Currency Translation and Transactions
The accompanying unaudited condensed consolidated financial statements are
presented in United States Dollar ("$" or "USD"), which is also the functional
currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and
i Design.
The Company's subsidiary with operations in Malaysia uses its local currency,
Malaysian Ringgit ("RM"), as its functional currency. An entity's functional
currency is the currency of the primary economic environment in which it
operates, which is normally the currency of the environment in which the entity
primarily generates and expends cash. Management's judgment is essential to
determine the functional currency by assessing various indicators, such as cash
flows, sales price and market, expenses, financing and inter-company
transactions and arrangements.
Foreign currency transactions denominated in currencies other than the
functional currency are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
re-measured at the applicable rates of exchange in effect at that date. Gains
and losses resulting from foreign currency re-measurement are included in the
statements of operations.
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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
September 30, 2022 RM 4.64 to 1
December 31, 2021 RM 4.18 to 1
Income statement and cash flow items
For the nine months ended September 30, 2022 RM 4.34 to 1
For the nine months ended September 30, 2021 RM 4.13 to 1
Segment Reporting
ASC Topic 280, "Segment Reporting," requires use of the "management approach"
model for segment reporting. The management approach model is based on the way a
company's chief operating decision maker organizes segments within the company
for making operating decisions, assessing performance and allocating resources.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company.
We determined that our operations constitute a single reportable segment in
accordance with ASC 280. We operate exclusively in one business and industry
segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond
Bar is a furniture distributor based in California focusing on customers in the
US, Nova HK was a furniture distributor based in Hong Kong focusing on
international customers and Nova Malaysia is a furniture retailer and
distributor focusing on customers primarily in Malaysia. Each of our
subsidiaries is operated under the same senior management of our company, and we
view the operations of Diamond Bar, Nova HK and Nova Malaysia as a whole for
making business decisions. Our long-lived assets are mainly property, plant and
equipment located in the United States and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the
physical product shipment delivery locations requested by our customers. For
example, if the products are delivered to a customer in the U.S., the sales are
recorded as generated in the U.S.; if the customer directs us to ship its
products to China, the sales are recorded as sold in China.
New Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt -
Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock
Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or
Exchanges of Freestanding Equity-Classified Written Call Options ("ASU
2021-04"). ASU 2021-04 provides guidance as to how an issuer should account for
a modification of the terms or conditions or an exchange of a freestanding
equity-classified written call option (i.e., a warrant) that remains classified
after modification or exchange as an exchange of the original instrument for a
new instrument. An issuer should measure the effect of a modification or
exchange as the difference between the fair value of the modified or exchanged
warrant and the fair value of that warrant immediately before modification or
exchange and then apply a recognition model that comprises four categories of
transactions and the corresponding accounting treatment for each category
(equity issuance, debt origination, debt modification, and modifications
unrelated to equity issuance and debt origination or modification). ASU 2021-04
is effective for all entities for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. An entity should
apply the guidance provided in ASU 2021-04 prospectively to modifications or
exchanges occurring on or after the effective date. The Company applied the new
standard beginning January 1, 2022. The adoption of the new standard did not
have any impact on our condensed consolidated financial statement presentation
or disclosures.
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In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic
832): Disclosures by Business Entities about Government Assistance. This update
requires certain annual disclosures about transactions with a government that
are accounted for by applying a grant or contribution accounting model by
analogy. This update is effective for annual periods beginning after December
15, 2021, and early application is permitted. This guidance should be applied
either prospectively to all transactions that are reflected in financial
statements at the date of initial application and new transactions that are
entered into after the date of initial application or retrospectively to those
transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The
adoption of ASU 2021-10 did not have any impact on our condensed consolidated
financial statements.
Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all
expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable
forecasts. ASU 2016-13 replaces the existing incurred loss model and is
applicable to the measurement of credit losses on financial assets measured at
amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis.
As a smaller reporting company, ASU 2016-13 will be effective for the Company
for interim and annual reporting periods beginning after December 15, 2022. In
March 2022, the FASB issued ASU 2022-02, Topic 326. The ASU eliminates the
accounting guidance for trouble debt restructurings by creditors in Subtopic
310-40, and enhances the disclosure requirements for modifications of loans to
borrowers experiencing financial difficulty. Additionally, the ASU requires
disclosure of gross write offs of receivables by year of origination for
receivables within the scope of Subtopic 326-20, Financial Instruments - Credit
Losses - Measured at Amortized Cost. This ASU is effective for periods beginning
after December 15, 2022. We are currently evaluating the impact that the
adoption of ASU 2016-13 and ASU 2022-02 will have on our consolidated financial
statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04").
ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under
which a goodwill impairment loss was measured by comparing the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
ASU 2017-04 requires only a one-step quantitative impairment test, whereby a
goodwill impairment loss is measured as the excess of a reporting unit's
carrying amount over its fair value (not to exceed the total goodwill allocated
to that reporting unit). Adoption of the ASUs is on a modified retrospective
basis. As the Company qualifies as a smaller reporting company, the standard
will be effective for the Company for interim and annual reporting periods
beginning after December 15, 2022. We are currently evaluating the impact that
the adoption of ASU 2017-04 will have on our consolidated financial statement
presentation or disclosures.
We do not believe that any other recently issued, but not yet effective,
authoritative guidance, if currently adopted, would have a material impact on
our financial statement presentation or disclosures.
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Results of Operations
Comparison of Three Months Ended September 30, 2022 and 2021
The following table sets forth the results of our operations for the three
months ended September 30, 2022 and 2021. Certain columns may not add due to
rounding.
Three Months Ended September 30,
2022 2021
$ % of Sales $ % of Sales
Net sales $ 3,016,104 $ 2,916,571
Cost of sales (1,878,361 ) (62 )% (1,517,032 ) (52 )%
Gross Profit 1,137,743 38 % 1,399,539 48 %
Operating expenses (2,091,741 ) (69 )% (2,546,381 ) (87 )%
Loss from operations (953,998 ) (32 )% (1,146,842 ) (39 )%
Other expenses, net (758,994 ) (25 )% (82,258 ) (3 )%
Income tax expenses - 0 % (167,532 ) (6 )%
Net loss (1,712,992 ) (57 )% (1,396,632 ) (48 )%
Net Sales
Net sales for the three months ended September 30, 2022 were $3.02 million, an
increase of 3.4% from $2.92 million for the same period of 2021. This increase
in net sales resulted primarily from a 6.1% increase in average selling price,
partially offset by a 2.5% decrease in sales volume. Our three largest selling
product categories for the three months ended September 30, 2022 were sofas,
beds, and chairs, which accounted for approximately 38%, 15% and 12% of sales,
respectively. For the three months ended September 30, 2021, the three largest
selling categories were sofas, beds, and dining tables, which accounted for
approximately 40%, 14% and 8% of sales, respectively.
The $0.10 million increase in net sales for the three months ended September 30,
2022, compared to the same period of 2021, was mainly due to increased sales to
other countries. Sales to other countries increased by $182,315 to $250,652 for
the three months ended September 30, 2022 from $68,337 for the same period of
2021, primarily due to the increase in direct container sales in other
countries. The increase in net sales is partially offset by the decrease in
sales to North America of $83,776 to $2.77 million for the three months ended
September 30, 2022, compared to $2.85 million for the same period of 2021, such
decrease being mainly a result of U.S. tightening monetary policy, reducing the
purchasing power of the customers and thus making them less willing to spend in
nonfood categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from
third-party manufacturers. Total cost of sales increased by 23.8% to $1.88
million for the three months ended September 30, 2022, compared to $1.52 million
for the same period of 2021. Cost of sales as a percentage of sales increased to
62% for the three months ended September 30, 2022, compared to 52% for the same
period of 2021. The increase in cost of sales in dollar term and cost of sales
as a percentage of sales is a result of three related factors: (a) our write
down of $50,293 of our slow-moving inventory, primarily the products in U.S., to
the lower of cost and net realizable value for the three months ended September
30, 2022, compared to no inventory write down for the same period of 2021; (b)
the increase in our direct container sales which came with low profit margin;
(c) the increase in shipping costs due to global shipping container shortage.
Moreover, total cost of sales excluding our inventory write down of $50,293,
increased by 20.5% to $1.83 million for the three months ended September 30,
2022, compared to $1.52 million with no inventory write down for the same period
of 2021. Cost of sales as a percentage of sales, excluding our inventory write
down of $50,293, increased to 61% for the three months ended September 30, 2022,
compared to 52% with no inventory write down for the same period of 2021. This
increase primarily resulted from the increase in our direct container sales
which came with low profit margin and the increase in shipping costs due to
global shipping container shortage.
Gross Profit
Gross profit was $1.14 million for the three months ended September 30, 2022,
compared to gross profit of $1.40 million for the same period of 2021,
representing a decrease in gross profit of $0.26 million. Our gross profit
margin was 38% for the three months ended September 30, 2022, compared to a
gross profit margin of 48% for the same period of 2021. The decrease in gross
profit margin is a result of two factors: (a) our write down of $50,293 of our
slow-moving inventory, primarily the products in U.S., for the three months
ended September 30, 2022, compared to no inventory write-down for the same
period of 2021; (b) the increase in our direct containers sales which came with
low profit margin.
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Operating Expenses
Operating expenses consisted of selling and general and administrative expenses.
Operating expenses were $2.09 million for the three months ended September 30,
2022, compared to $2.55 million for the same period of 2021. Selling expenses
decreased by 51.4%, or $0.68 million, to $0.64 million for the three months
ended September 30, 2022, from $1.32 million for the same period of 2021,
primarily due to decreased marketing and advertising expenses. In addition,
general and administrative expenses increased by 18.5%, or $0.23 million, to
$1.45 million for the three months ended September 30, 2022, from $1.22 million
for the same period of 2021, primarily due to an increase in travel expense and
consulting fee of $0.26 million and $0.13 million, respectively, while the
increase was partially offset by a decrease in legal fees and research and
development expenses of $0.16 million and $0.10 million, respectively.
Other Expenses, Net
Other expenses, net, was $0.76 million for the three months ended September 30,
2022, compared to other expenses, net of $82,258 for the same period of 2021,
representing an increase in other expenses of $676,736. The increase in other
expenses was due primarily to the increase in foreign exchange loss of $706,398
to $708,169 for the three months ended September 30, 2022 from foreign exchange
loss of $1,771 for the same period of 2021. The increase in foreign exchange
loss was mainly a result of the depreciation of Malaysian Ringgit against U.S.
dollars on the Company's assets in Malaysia. However, the increase in other
expenses was partially offset by a decrease in interest expense, net of $29,494
to $2,261 for the three months ended September 30, 2022, compared with $31,755
for the same period of 2021. The decrease in interest expense was mainly
because, during the three months ended September 30, 2021, we wrote off interest
income for the loan of $1.21 million to an unrelated party with 6% annual
interest rate which principal has been fully repaid by such third party on
August 13, 2021.
Income Tax Expenses
Income tax expense was $0 for the three months ended September 30, 2022,
compared to $167,532 for the same period of 2021. The income tax expenses were
primarily related to the foreign-sourced earnings from one of our subsidiaries,
Nova HK for the three months ended September 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $1.71 million for the three
months ended September 30, 2022, compared to net loss of $1.40 million for the
same period of 2021.
Comparison of Nine Months Ended September 30, 2022 and 2021
The following table sets forth the results of our operations for the nine months
ended September 30, 2022 and 2021. Certain columns may not add due to rounding.
Nine Months Ended September 30,
2022 2021
$ % of Sales $ % of Sales
Net sales $ 10,495,097 $ 9,798,154
Cost of sales (11,377,203 ) (108 )% (11,025,436 ) (113 )%
Gross loss (882,106 ) (8 )% (1,227,282 ) (13 )%
Operating expenses (6,583,022 ) (63 )% (6,964,266 ) (71 )%
Loss from operations (7,465,128 ) (71 )% (8,191,548 ) (84 )%
Other expenses, net (837,418 ) (8 )% (133,555 ) (1 )%
Income tax expenses - 0 % (180,593 ) (2 )%
Net loss (8,302,546 ) (79 )% (8,505,696 ) (87 )%
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Net Sales
Net sales for the nine months ended September 30, 2022 were $10.50 million, an
increase of 7.1% from $9.80 million for the same period of 2021. This increase
in net sales resulted primarily from a 12.8% increase in average selling price,
partially offset by a 5.1% decrease in sales volume. Our three largest selling
product categories for the nine months ended September 30, 2022 were sofas,
beds, and chairs, which accounted for approximately 40%, 14% and 11% of sales,
respectively. For the nine months ended September 30, 2021, the three largest
selling categories were sofas, beds and coffee tables, which accounted for
approximately 47%, 15% and 7% of sales, respectively.
The $0.70 million increase in net sales for the nine months ended September 30,
2022, compared to the same period of 2021, was mainly due to increased sales to
North America and other countries. Sales to North America increased by 6.8% to
$9.86 million for the nine months ended September 30, 2022, compared to $9.24
million for the same period of 2021. It was primarily due to the increase in
direct container sales as we received more sales orders from our existing
customers during nine months ended September 30, 2022. Sales to other countries
increased by $0.26 million to $570,683 for the nine months ended September 30,
2022 from $312,601 for the same period of 2021, primarily due to the increase in
direct container sales in other countries. However, the increase in net sales
was partially offset bythe decrease in sales to Asia. Sales to Asia decreased by
$186,871 to $61,247 for the nine months ended September 30, 2022, compared to
$248,118 for the same period of 2021, primarily due to less sales orders from
our customers in Malaysia, as Malaysia has tightened its monetary policy to
maintain the stability of Ringgit, which reduced the purchasing power of the
consumers and thus making them less willing to spend in nonfood categories.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from
third-party manufacturers. Total cost of sales increased by $0.35 million to
$11.38 million for the nine months ended September 30, 2022, compared to $11.03
million for the same period of 2021. Cost of sales as a percentage of sales
decreased to 108% for the nine months ended September 30, 2022, compared to 113%
for the same period of 2021. The increase in cost of sales in dollar term
primarily resulted from the increase in our direct container sales which came
with low profit margin and the increase in shipping costs due to global shipping
container shortage. The decrease in cost of sales as a percentage of sales was
due to the decrease in our inventory write down of $0.36 million to $5.17
million for the nine months ended September 30, 2022, compared with $5.53
million for the same period of 2021.
Moreover, total cost of sales excluding our inventory write down of $5.17
million, increased by 12.9% to $6.21 million for the nine months ended September
30, 2022, compared to $5.50 million which excluded our inventory write down of
$5.53 million for the same period of 2021. Cost of sales as a percentage of
sales, excluding our inventory write down of $5.17 million, increased to 59% for
the nine months ended September 30, 2022, compared to 56% which excluded our
inventory write down of $5.53 million for the same period of 2021. This increase
primarily resulted from the increase in our direct container sales which came
with low profit margin and the increase in shipping costs due to global shipping
container shortage.
Gross Loss
Gross loss was $0.88 million for the nine months ended September 30, 2022,
compared to gross loss of $1.23 million for the same period of 2021,
representing a decrease in gross loss of $0.35 million. Our gross loss margin
was 8% for the nine months ended September 30, 2022, compared to a gross loss
margin of 13% for the same period of 2021. The decrease in gross loss margin is
mainly a result of our inventory write down of $5.17 million for the nine months
ended September 30, 2022, which was less than our inventory write down of $5.53
million for the same period of 2021. We sold more Jade Mats in Malaysia during
the nine months ended September 30, 2022, compared to the same period of 2021.
Operating Expenses
Operating expenses consisted of selling, general and administrative expenses.
Operating expenses were $6.58 million for the nine months ended September 30,
2022, compared to $6.96 million for the same period of 2021. Selling expenses
decreased by 26.6%, or $0.79 million, to $2.18 million for the nine months ended
September 30, 2022, from $2.97 million for the same period of 2021, primarily
due to decreased marketing and advertising expenses. The general and
administrative expenses increased by 10.2%, or $0.41 million, to $4.40 million
for the nine months ended September 30, 2022, from $3.99 million for the same
period of 2021, primarily due to an increase in consulting fee and travel
expense of $0.37 million and $0.27 million, respectively, while the increase was
partially offset by a decrease in legal fees and research and development
expenses of $0.23 million and $0.10 million, respectively.
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Other Expenses, Net
Other expenses, net, was $837,418 for the nine months ended September 30, 2022,
compared to $133,555 for the same period of 2021, representing an increase in
other expenses of $703,863. The increase in other expenses was due primarily to
the increase in foreign exchange loss of $677,182 to $644,525 for the nine
months ended September 30, 2022 from foreign exchange gain of $32,657 for the
same period of 2021. The increase in foreign exchange loss was mainly a result
of the depreciation of Malaysian Ringgit against U.S. dollars on the Company's
assets in Malaysia. Besides, the increase in other expenses resulted from a loss
on disposal of fixed assets of $36,549 for the nine months ended September 30,
2022, compared to zero loss for the same period of 2021, such loss on disposal
of fixed assets being due to the de-registration of our subsidiary Nova HK.
However, the increase in other expenses was partially offset by a decrease in
financial expense of $12,160 to $148,208 for the nine months ended September 30,
2022, compared with $160,368 for the same period of 2021. The decrease in
financial expense was mainly because the Company has stopped accepting PayPal
payments from customers since PayPal increased its transaction fees during the
nine months ended September 30, 2022.
Income Tax Expenses
Income tax expense was $0 for the nine months ended September 30, 2022, compared
to $180,593 for the same period of 2021. The income tax expenses were primarily
related to the foreign-sourced earnings from one of our subsidiaries, Nova HK
for the nine months ended September 30, 2021.
Net Loss
As a result of the foregoing, our net loss was $8.30 million for the nine months
ended September 30, 2022, compared to net loss of $8.51 million for the same
period of 2021.
Liquidity and Capital Resources
Our principal demands for liquidity are related to our efforts to increase sales
and purchase inventory, and for expenditures related to sales distribution and
general corporate purposes. We intend to meet our liquidity requirements,
including capital expenditures related to purchase of inventories and the
expansion of our business, primarily through cash flow provided by operations,
collections of accounts receivable, and credit facilities from banks.
We rely primarily on internally generated cash flow and available working
capital to support growth. We may seek additional financing in the form of bank
loans or other credit facilities or funds raised through offerings of our equity
or debt, if and when we determine such offerings are required. As of September
30, 2022, we do not have any credit facilities. We believe that our current cash
and cash equivalents and anticipated cash receipts from sales of products will
be sufficient to meet our anticipated working capital requirements and capital
expenditures for the next 12 months.
We had net working capital of $14,492,833 at September 30, 2022, a decrease of
$9,261,723 from net working capital of $23,754,556 at December 31, 2021. The
ratio of current assets to current liabilities was 7.55-to-1 at September 30,
2022.
The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2022 and 2021:
2022 2021
Cash provided by (used in):
Operating activities $ (3,453,559 ) $ (3,129,345 )
Investing activities (5,771 ) (155,156 )
Financing activities - 2,760,973
Net cash used in operating activities was $3.45 million for the nine months
ended September 30, 2022, an increase in cash outflow of $0.32 million from
$3.13 million of cash used in operating activities for the same period of 2021.
The increase in cash outflow was attributable primarily to an increase in cash
outflow of $1.22 million for inventory to $1.71 million cash outflow for the
nine months ended September 30, 2022, compared to $0.49 million cash outflow for
the same period of 2021, such increase in cash outflow being mainly due to more
product purchases made from our suppliers. Also, there was an increase in cash
outflow of $0.63 million for accounts receivable to $0.30 million cash outflow
for the nine months ended September 30, 2022, compared to $0.33 million cash
inflow for the same period of 2021, such increase in cash outflow being mainly a
result of more credit sales in the nine months ended September 30, 2022. The
increase in operating cash outflow was partially offset by (i) an increase in
cash inflow of $0.61 million for advance to suppliers to $0.66 million cash
inflow for the nine months ended September 30, 2022, compared to $56,440 cash
inflow for the same period of 2021, such increase in cash inflow being mainly
due to less deposits paid to our suppliers with more goods being received from
them in the nine months ended September 30, 2022 comparing to the same period in
2021; (ii) an increase in cash inflow of $0.60 million for accounts payable to
$0.57 million cash inflow for the nine months ended September 30, 2022, compared
to $27,270 cash outflow for the same period of 2021, such increase in cash
inflow being mainly due to more purchases made on credit in the nine months
ended September 30, 2022.
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Net cash used in investing activities was $5,771 for the nine months ended
September 30, 2022, compared to $155,156 for the same period of 2021. We
incurred cash outflow of $5,771 from purchase of office equipment during the
nine months ended September 30, 2022. For the same period of 2021, we incurred
cash outflow of $155,156 from purchase of office equipment and leasehold
improvement.
Net cash provided by financing activities was $0 for the nine months ended
September 30, 2022, compared to $2.76 million cash inflow for the same period of
2021. During the nine months ended September 30, 2021, we received $2.76 million
from equity financing.
As of September 30, 2022, we had gross accounts receivable of $393,363, of which
$52,301 was not yet past due and $341,062 was less than 90 days past due. We had
an allowance for bad debt of $3,420. As of November 9, 2022, accounts receivable
of $98,819 outstanding as of September 30, 2022 had been collected.
All accounts receivable outstanding at December 31, 2021 had been collected
during 2022.
As of September 30, 2022 and December 31, 2021, we had advances to suppliers of
$42,802 and $707,264, respectively. These supplier prepayments are made for
goods before we actually receive them.
For a new product, the normal lead time from new product R&D, prototype, and
mass production to delivery of goods from our suppliers to us is approximately
six to nine months after we make advance payments to our suppliers. For other
products, the typical time is 4-6 months after our advance payment. Due to the
COVID-19 pandemic, freight transportation of products from our international
suppliers has been delayed or suspended during the outbreak. As such, no reserve
on supplier prepayments had been made or recorded by us. We will consider the
need for a reserve when and if a supplier fails to fulfill our orders within the
time frame as stipulated in the purchase contracts. As of September 30, 2022 and
December 31, 2021, no reserve on supplier prepayments had been made or recorded
by us.
As of November 9, 2022, 36% of our advances to suppliers outstanding at
September 30, 2022 had been delivered to us in the form of purchases of
furniture.
Shelf Registration
On October 8, 2020, the Company filed a shelf registration statement on Form S-3
under which the Company may, from time to time, sell securities in one or more
offerings up to a total dollar amount of $60,000,000. The shelf registration
statement was declared effective on October 15, 2020. On July 23, 2021, the
Company entered into a Securities Purchase Agreement with certain institutional
investors for the sale by the Company of 1,114,508 shares of common stock. The
shares were offered and sold by the Company pursuant to the effective shelf
registration statement on Form S-3. The offering gross proceeds were $3,120,622
before deducting placement agent's commissions and other offering costs, and the
net proceeds of the offering were approximately $2,760,000. The offering closed
on July 27, 2021.
Other Long-Term Liabilities
As of September 30, 2022, we recorded long-term taxes payable of $1.16 million,
consisting of an income tax payable of $1.16 million, primarily arising from a
one-time transition tax recognized in the fourth quarter of 2017 on our
post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions
for which the timing of the ultimate resolution is uncertain should be
recognized as long-term liabilities.
We elected to pay the one-time transition tax over the eight years commencing
April 2018.
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Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that
have, or are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to shareholders.
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholders' equity or that are not reflected in our condensed consolidated
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
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