NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
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”) 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 March 31, 2023.
On
December 12, 2019, Nova LifeStyle acquired Nova Malaysia at cost of $1.00 which was incorporated in Malaysia on July 26, 2019. The purpose
of this acquisition was to market and sell high-end physiotherapeutic jade mats in Malaysia.
On
January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party,
for cash consideration of $2,500,000, pursuant to a formal agreement entered into on January 7, 2020. The Company received the payment
on May 11, 2020.
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 $1,290 which was incorporated in Hong Kong on November 6, 2019. This company
had minimal operations. In February 2023, Nova HK was
completed the process of de-registration and liquidation.
The
“Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture,
Nova Samoa, Nova Macao, Diamond Bar, i Design, Nova HK and Nova Malaysia.
COVID-19
Beginning
in 2020, a strain of novel coronavirus (“COVID-19”) has spread globally and, at this point, the Company’s operations
has been adversely impacted by the COVID-19 pandemic. In particular, Nova Malaysia had not been able to operate in normal condition due
to Malaysian government’s shut down orders which resulted in sales lagging and slow-moving inventories. The Company’s two
showrooms in Kuala Lumpur were closed from March 2020 to May 2020 and closed again from August 2020 to March 5, 2021. Malaysia government
imposed a new nationwide lockdown on May 12, 2021 until early June 2021, then the lockdown was extended to early October 2021. In October
2021, Malaysia government lifted lockdown order for people fully vaccinated against COVID-19 and our store has been reopened since then.
In April 2022, Malaysia has also reopened the border for foreign visitors. However,
COVID-19 in Malaysia increased financial vulnerability for those affected households and business, which contributed to significant decrease
of sales and risk of continuous sluggish sales. As a result, we further lowered the estimated sales quantities of the inventories during
the interim review. The Company expects that the impact of the COVID-19 outbreak on the United
States, Malaysia and world economies will also continue to have a material adverse impact on the demand for its products.
In
2022, there have been outbreaks of the Omicron variant of the COVID-19 in Hong Kong and many other cities in China, along with travel
restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities imposed by
local governments. In December 2022, the Chinese government
eased its strict zero COVID-19 policy which resulted in a surge of new COVID-19 cases during December 2022 and January 2023. Although
our suppliers in China have not been materially and negatively impacted by such outbreaks, the government authorities may issue new orders
of office closure, travel and transportation restrictions in China due to the resurgence of the COVID-19 and outbreak of new variants,
which could cause the delay of the delivery from our suppliers in China.
The
extent of the impact of the COVID-19 pandemic that will continue to have on the Company’s business is highly uncertain and difficult
to predict and quantify, as the actions that the Company, other businesses and governments may take to contain the spread of COVID-19
continue to evolve. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of
shipping from Asia have increased since the onset although the shipping cost has been back to normal since June 2022; and we have experienced
and may continue to experience shipping disruptions in the future. Because of the significant uncertainties surrounding the COVID-19
pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.
The
severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including,
but not limited to, the duration and severity of the pandemic, the new variants of COVID-19, the efficacy and distribution of COVID-19
vaccines and the extent and severity of the impact on the global supply chain and the Company’s customers, service providers and
suppliers, all of which are uncertain and cannot be reasonably predicted at this time. As of the date of issuance of the Company’s
financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition,
liquidity or results of operations is uncertain. The Company is monitoring and assessing the evolving situation closely and evaluating
its potential exposure.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying 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.
The
interim condensed consolidated financial information
as of March 31, 2023 and for the three month periods ended March 31, 2023 and 2022 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 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, 2022, previously filed with the SEC on April 17, 2023.
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 condensed consolidated financial position as of March 31, 2023, its interim condensed consolidated
results of operations and cash flows for the three month periods ended March 31, 2023 and 2022, 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.
Use
of Estimates
In
preparing 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
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 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.
Business
Combination
For
a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at
the acquisition date and measured at their fair values as of that date. In a business combination achieved in stages, the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values.
In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of
the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings is recognized as a gain attributable
to the acquirer.
Deferred
tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values
of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”)
Topic 740-10.
Goodwill
Goodwill
is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for
impairment, annually or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed
at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its
fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of
significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including
the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical
experience and all available information at the time the fair values of its reporting units are estimated.
ASC
Topic 350 also permits an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood
of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test
is required to be performed. Otherwise, no further testing is required. Performing the qualitative assessment involved identifying the
relevant drivers of fair value, evaluating the significance of all identified relevant events and circumstances, and weighing the factors
to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After evaluating
and weighing all these relevant events and circumstances, it was concluded that a positive assertion can be made from the qualitative
assessment that it is more likely than not that the fair value of Diamond Bar is greater than its carrying amount. As such, it is not
necessary to perform the two-step goodwill impairment test for the Diamond Bar reporting unit. Accordingly, as of March 31, 2023 and
December 31, 2022, the Company concluded there was no impairment of goodwill of Diamond Bar.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers cash, money market funds, investments in interest bearing demand deposit
accounts, time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts
Receivable
The
Company’s accounts receivable arises from product sales. The Company does not adjust its receivables for the effects of a significant
financing component at contract inception if it expects to collect the receivables in one year or less from the time of sale. The Company
does not expect to collect receivables greater than one year from the time of sale.
The
Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition
of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends
and changes in customer payment patterns to evaluate the adequacy of these reserves. An analysis of the allowance for doubtful accounts
is as follows:
Schedule
of Allowance for Doubtful Accounts
Balance at January 1, 2023 | |
$ | 2,914 | |
Provision for the period | |
| (261 | ) |
Balance at March 31, 2023 | |
$ | 2,653 | |
The
bad debts (reversal) provision from continuing operations was ($261) and $1,880 for the three months ended March 31, 2023 and
2022, respectively. Bad debt provision and written off from discontinued operations
were $0
for the three months ended March 31, 2023 and 2022.
Advances
to Suppliers
Advances
to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits
are expected to flow to the Company within the normal operating cycle. Based on its historical record and in normal circumstances, the
Company receives goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, freight transportation
of products from the Company’s international suppliers has been delayed or suspended during the outbreak.
Inventories
Inventories
are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential
obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. The
Company wrote down $85,672 and $0 of slow-moving inventory from continuing operations for the three months ended March 31, 2023 and
2022, respectively. The inventory write-down is included in “Cost of Sales” in the condensed consolidated statements of
operations. There were no write-downs of inventories from the Company’s discontinued operations for the three months
ended March 31, 2023 and 2022.
Plant,
Property and Equipment
Plant,
property, and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures for maintenance
and repairs are expensed as incurred, while additions, renewals and improvements are capitalized. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and any gain or loss
is included in operations. Depreciation of
property
and equipment is provided using the straight-line method for substantially all assets with no salvage value and estimated lives as follows:
Schedule
of Plant, Property and Equipment Estimated Lives Under Straight-line Method
Computer
and office equipment |
5
- 10 years |
Decoration
and renovation |
5
- 10 years |
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair
value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying
amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment
or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against
the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable,
an impairment charge is measured as the amount by which the carrying amount of the asset group asset group exceeds its fair value based
on discounted cash flow analysis or appraisals. There was no impairment of long-lived assets for the three months ended March 31, 2023
and 2022.
Research
and Development
Research
and development costs are related primarily to the Company designing and testing its new products during the development stage.
Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and
development expenses from continuing operations were $118
and $8,663
for the three months ended March 31, 2023 and 2022, respectively. Research and development expenses from discontinued operations were $0 for the three months ended March 31, 2023
and 2022, respectively.
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, 2023 and 2022 are $0, and are primarily related to quarter-to-date income generated from
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.
Nova
Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and
Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s
condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where
Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at
the statutory rate of 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 three months ended March 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, 2023 and December 31, 2022, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately
$25.6 million and $ 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, 2023 and 2022, 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, 2023 and 2022.
A
reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the years ended March 31,
2023 and 2022, is as follows:
Schedule
of Unrecognized Tax Benefits
| |
Gross UTB | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Balance – January 1 and March 31 | |
$ | - | | |
$ | - | |
As
of March 31, 2023 and December 31, 2022, 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 for the three months ended March 31, 2023 and 2022, 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.
Nova
Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2019-2022 remain open to examination by tax
authorities in the U.S.
Revenue
Recognition
The
Company recognizes revenues when its customers obtain control of promised goods or services, in an amount that reflects the consideration
which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under
ASU No. 2014-09: (i) identifies contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines
the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenues
when (or as) it satisfies the performance obligation.
Revenues
from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time,
typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected
amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues
from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts
with the Company’s customers.
Product
revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts,
returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified
as reductions of accounts receivable as the amount is payable to the Company’s customer.
The
Company’s sales policy allows for product returns within the warranty period if the product is defective and the defects are the
Company’s fault. As alternatives to the product return option, the customers have the option of requesting a discount from the
Company for products with quality issues or of receiving replacement parts from the Company at no cost. The amount for product returns,
the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the three months ended
March 31, 2023 and 2022
In
February 2023, the Company entered into a
sales contract to transfer its entire inventory of Jade Mats, with the net realized value of $1.54
million to Shopants Sdn Bhd, an unrelated third party, for cash consideration of $2.00
million. The Company agreed to deliver the Jade Mats on May 20, 2023, May 31, 2023 and June 15, 2023. The Company will recognize the
sales when Jade Mats are delivered in the second quarter of 2023.
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,
2023 and 2022, shipping and handling credits from continuing operations were ($361)
and ($492),
respectively. During the three months ended March
31, 2023 and 2022, shipping and handling costs from discontinued operations were $0.
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 from
continuing operations was $411,575
and $298,132
for the three months ended March 31, 2023 and 2022, respectively. Advertising
expense from discontinued operations was $0
for the three months ended March 31, 2023 and 2022.
Share-based
Compensation
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.
Earnings
per Share (EPS)
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).
The
following table presents a reconciliation of basic and diluted loss per share for the three months ended March 31, 2023 and 2022:
Schedule
of Reconciliations of Basic and Diluted Loss Per Share
| |
March 31, 2023 | | |
March 31, 2022 | |
| |
| | |
| |
Net loss from continuing operations | |
$ | (1,222,315 | ) | |
$ | (872,293 | ) |
Net loss from discontinued operations | |
| - | | |
| (25,754 | ) |
Net loss | |
$ | (1,222,315 | ) | |
$ | (898,047 | ) |
| |
| | | |
| | |
Weighted average shares outstanding – Basic and Diluted * | |
| 7,170,060 | | |
| 6,845,683 | |
| |
| | | |
| | |
Net loss from continuing operations per share of common stock | |
| | | |
| | |
Basic and Diluted | |
| (0.17 | ) | |
| (0.13 | ) |
| |
| | | |
| | |
Net loss from discontinued operations income per share of common stock | |
| | | |
| | |
Basic and Diluted | |
| - | | |
| (0.00 | ) |
| |
| | | |
| | |
Net loss per share of common stock | |
| | | |
| | |
Basic and Diluted | |
$ | (0.17 | ) | |
$ | (0.13 | ) |
* |
Including
14,000 and 36,307 shares that were granted and vested but not yet issued for the three months ended March 31, 2023 and 2022, respectively. |
For
the three months ended March 31, 2023, 3,000 shares of unvested restricted stock, vested stock options to purchase 134,000 shares of
the Company’s stock, and 1,225,959 shares exercisable under warrants were excluded from the EPS calculation, as their effect were
anti-dilutive.
For
the three months ended March 31, 2022, 118,000 shares of unvested restricted stock, vested stock options to purchase 340,500 shares of
the Company’s stock, and 1,225,959 shares exercisable under warrants were excluded from EPS calculation, as their effects were
anti-dilutive.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does
not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition
and payment practices of its customers to minimize collection risk on accounts receivable.
No
customer accounted for 10% or more of the Company’s sales from continuing operations for the three months ended March 31, 2023
and 2022.
No
customer accounted for 10% of the Company’s sales from discontinued operations for the three months ended March 31, 2022.
The
Company purchased its products from three and four major vendors during the three months ended March 31, 2023 and 2022, respectively,
accounting for a total of 68%
for 2023 (35%,
19%,
and 14%)
and 69%
for 2022 (26%,
17%,
14%,
and 12%)
of the Company’s purchases from continuing operations, respectively.
Advances
made to these vendors were $0 as of March 31, 2023 and December 31, 2022. Accounts payable to these vendors were $28,570
and $62,251 as of March 31, 2023 and December 31, 2022, respectively.
No
vendor accounted for 10% of the Company’s purchases from discontinued operations for the three months ended March 31, 2022.
Fair
Value of Financial Instruments
ASC
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held
by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy
for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported
in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable
estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization
and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
● |
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The
carrying value of cash, accounts receivable, advances to suppliers, other receivables, accounts payable, advance from customers, other
payables and accrued liabilities approximate estimated fair values because of their short maturities.
Foreign
Currency Translation and Transactions
The
condensed consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also
the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The
Company’s subsidiary with operations in Malaysia uses its local currency, the Malaysian Ringgit (“RM”), as its functional
currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is the
currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine
the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company
transactions and arrangements.
Foreign
currency transactions denominated in currencies other than the functional currency are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at
the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign
currency re-measurement are included in the statements of operations.
The
financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate
in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the
reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’
equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange
rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting
currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation
of amounts from RM into U.S. dollars has been made at the following exchange rates:
Schedule
of Exchange Rates
Balance
sheet items, except for equity accounts |
|
|
|
|
March
31, 2023 |
|
|
RM
4.41 to 1 |
|
December
31, 2022 |
|
|
RM
4.40 to 1 |
|
|
|
|
|
|
Income
Statement and cash flow items |
|
|
|
|
For
the three months ended March 31, 2023 |
|
|
RM
4.39 to 1 |
|
For
the three months ended March 31, 2022 |
|
|
RM
4.19 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.
Management
determined that the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates
exclusively in one business and industry segment: the design and sale of furniture.
Management
concluded that the Company had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California
focusing on customers in the United States, Nova HK was a furniture distributor based in Hong Kong focusing on international customers,
and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. They are all operated under the
same senior management of the Company, and management views the operations of Diamond Bar, Nova HK and Nova Malaysia as one entity for
making business decisions.
All
of the Company’s long-lived assets are mainly property, plant and equipment located in the United States and Malaysia and are utilized
for administrative purposes.
Net
sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by the
customers. For example, if the products are delivered to a customer in the United States, the sales are recorded as generated in the
United States; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
Leases
The
Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on
the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the
rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate
based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use
(“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and
lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized
based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the
lease term.
ROU
assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject
to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU
assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent
from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used,
which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets
and liabilities.
The
Company recognized no impairment of ROU assets as of March 31, 2023 and December 31, 2022.
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, 2023 and December 31, 2022.
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. 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 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 condensed consolidated financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an
exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange
as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as
the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification
or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did
not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.
In
November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.
This Update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution
accounting model by analogy. This Update is effective for annual periods beginning after December 15, 2021, and early application is
permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the
date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those
transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on the Company’s
condensed consolidated financial statements.
Recently
Issued But Not Yet Adopted Accounting Pronouncements
In 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.
The
Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently
adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note
3 - Discontinued Operations
On
February 15, 2022, the Company transferred its entire assets and
business in Nova HK to Nova Malaysia, a subsidiary of the Company.
As
of December 31, 2021 and subsequently, operations of Nova HK have been reported as discontinued operations in the Company’s consolidated
financial statements. Accordingly, assets, liabilities, revenues, expenses and cash flows related to Nova HK have been reclassified in
the consolidated financial statements as discontinued operations for all periods presented.
The
following table summarizes the net assets of Nova HK at the date of disposal (February 15, 2022):
Schedule
of Discontinued Operations
Inventory | |
$ | 15,029,724 | |
Equipment, net | |
| 36,549 | |
| |
| | |
Net assets of Nova HK upon disposal | |
| 15,066,273 | |
Interest transferred to Nova Malaysia | |
| (15,092,027 | ) |
Loss from discontinued operations of subsidiary | |
$ | (25,754 | ) |
The
following table presents the components of discontinued operations in relation to Nova HK reported in the consolidated statements of
operations:
| |
March 31, 2022 | |
| |
| |
Sales | |
$ | - | |
Cost of sales | |
| - | |
Operating expenses | |
| (3,671 | ) |
Other (expense) income, net | |
| (22,083 | ) |
Loss before income taxes | |
| (25,754 | ) |
Income tax benefit | |
| - | |
Loss from discontinued operations | |
$ | (25,754 | ) |
Note
4 - Inventories
The
inventories as of March 31, 2023 and December 31, 2022 totaled $4,165,449 and $4,932,642, respectively, and consisted entirely of finished
goods.
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. The
Company wrote down $85,672 and $0 of slow-moving inventory from continuing operations for the three months ended March 31, 2023 and
2022, respectively. The inventory write-down is included in “Cost of Sales” in the condensed consolidated statements of
operations. For the three months ended March 31, 2023
and 2022, there was no write-downs of inventories from the Company’s discontinued operations.
Note
5 - Plant, Property and Equipment, Net
As
of March 31, 2023 and December 31, 2022, plant, property and equipment consisted of the following:
Schedule of Plant, Property and Equipment
| |
March
31, 2023 | | |
December
31, 2022 | |
Computer and office equipment | |
$ | 276,387 | | |
$ | 276,567 | |
Decoration and renovation | |
| 391,689 | | |
| 392,703 | |
Property plant and equipment gross | |
| 668,076 | | |
| 669,270 | |
Less: accumulated depreciation | |
| (318,680 | ) | |
| (300,646 | ) |
Property plant and equipment
net | |
$ | 349,396 | | |
$ | 368,624 | |
Depreciation
expense was $18,418 and $20,748 for the three months ended March 31, 2023 and 2022, respectively. Depreciation
expense from discontinued operations was $1,107 for the three months ended March 31, 2022.
Note
6 – Intangible Assets
As
of March 31, 2023 and December 31, 2022, intangible assets consisted of the following:
Schedule
of Intangible Assets
| |
March
31, 2023 | | |
December
31, 2022 | |
Accounting software | |
$ | 26,800 | | |
$ | 26,800 | |
Intangible assets, Gross | |
| 26,800 | | |
| 26,800 | |
Less: accumulated depreciation | |
| (14,304 | ) | |
| (12,963 | ) |
Intangible assets, Net | |
$ | 12,496 | | |
$ | 13,837 | |
Amortization
expense was $1,341 for the three months ended March 31, 2023 and 2022. Amortization
of intangible assets from discontinued operations was $0 for the three months ended March 31, 2023 and 2022, respectively.
Note
7 - Advances to Suppliers
The
Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $62,880
and $21,173
as of March 31, 2023
and December 31, 2022, respectively.
Note
8 - Prepaid Expenses and Other Receivables
Prepaid
expenses and other receivables consisted of the following as of March 31, 2023 and December 31, 2022:
Schedule of Prepaid Expenses and Other Receivables
| |
March 31, 2023 | | |
December
31, 2022 | |
| |
| | |
| |
Prepaid expenses | |
$ | 1,873,600 | | |
$ | 1,504,671 | |
Other receivables | |
| 34,858 | | |
| 79,175 | |
Prepaid expenses and
other receivable | |
$ | 1,908,458 | | |
$ | 1,583,846 | |
As
of March 31, 2023 and December 31, 2022, prepaid expenses and other receivables mainly represented prepaid insurance, prepaid advertising
expense, and Celero and Cardknox account balances. In
October 2022, Nova Malaysia entered into a business agreement with an I.T. firm to develop a virtual reality and augmented reality development
project and related works. Nova Malaysia agreed to pay 10,000,000 Malaysia Ringgit ($2,110,640)
for developing the project. The payment would be paid as first phase for 40% of total payment, second phase for 20% of total payment,
third phase for 20% of total payment and fourth phase for 20% of total payment. As of March 31, 2023, the Nova Malaysia paid and recorded
prepayment of 8,000,000 Malyaia Ringgit ($1,812,826) due to the project was completed its third phase.
Note
9 - Accrued Liabilities and Other Payables
Accrued
liabilities and other payables consisted of the following as of March 31, 2023 and December 31, 2022:
Schedule of Accrued Liabilities and Other Payables
| |
March 31, 2023 | | |
December
31, 2022 | |
| |
| | |
| |
Other payables | |
$ | 5,310 | | |
$ | 15,225 | |
Salary payable | |
| 6,612 | | |
| 6,612 | |
Financed insurance premiums | |
| - | | |
| 71,415 | |
Auditing fee | |
| 20,000 | | |
| 85,000 | |
Warranty liability | |
| 23,296 | | |
| 38,349 | |
Accrued commission | |
| 56,901 | | |
| 69,592 | |
Accrued expenses, others | |
| 202,111 | | |
| 127,406 | |
Total accrued liabilities
and other payable | |
$ | 314,230 | | |
$ | 413,599 | |
As
of March 31, 2023 and December 31, 2022, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating
expenses incurred in Malaysia. Other payables represented other taxes payable and 401(k) payable.
Note
10 - Other Loans
On
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. The Loan, which was in the form of a promissory note dated June 19, 2020, matures on June 18, 2050
and bears interest at a rate of 3.75% per annum, payable monthly beginning 12 months from the date of the promissory note. Funds from
the Loan may only be used for working capital. The loan was secured by all tangible and intangible property of Diamond Bar. Interest
of $1,387 and $2,918 had been accrued for this loan for the three months ended March 31, 2023 and 2022, respectively.
Note
11 - Related Party Transactions
On
September 30, 2011, Diamond Bar leased a showroom in High Point, North Carolina from the Company’s President who is currently also
the Chief Executive Officer and Chairperson of the Board. The lease is renewable and has been renewed each year since 2011. On April
3, 2023, the Company renewed the lease for an additional one year term at a cost of $34,561. During the three months ended March 31,
2023 and 2022, the Company recorded rental amounts of $8,640 and $17,281, respectively, which were included in selling expenses.
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 two years. On
January 4, 2020, the Company renewed the agreement for an additional two years which was amended in July 2020. If not terminated during
the first year, the agreement will continue until one party or the other terminates the agreement with 30 days written notice. The Company
agreed to compensate the consulting firm via commission at predetermined rates of the relevant sales amount. During the three months
ended March 31, 2023 and 2022, the Company recorded $65,530 and $111,194 as commission expense to this consulting firm, respectively.
In
September 2021, Nova Malaysia entered into a consultancy agreement with an I.T. firm whose sole shareholder was a director of Nova Macao
to provide E-Commerce Web Application Setup, E-Commerce Essentials Implementation, E-Commerce UIUX and other related services. During
the three months ended March 31, 2023 and 2022, the Company recorded $0 and $153,894 as technology service expenses to this I.T.
firm, respectively.
Note
12 - 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 3,000,000
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 3,000,000 shares of the Company’s common stock under the 2021 Plan.
Shares
and Warrants issued through Private Placement
On
July 23, 2021, the Company conducted a registered direct offering of 1,114,508 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 1,114,508 shares of common stock in a concurrent private placement.
The combined purchase price for one share of common stock and a warrant to purchase one share of common stock was $2.80. The warrants
have an exercise price of $3.50 per share, are exercisable beginning six-months from the date of issuance, and will expire five and a
half years from the date of issuance. 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.
In
conjunction with this offering, the Company issued warrants to purchase 111,451 shares of common stock at an exercise price of $3.50
per share to the placement agent and its designees. The placement agent warrants are exercisable on the six-month anniversary of the
issuance date. The placement agent warrants are exercisable for four and a half years from the initial exercise date. The placement agent
warrants have piggy-back registration rights and have a termination date of July 23, 2026.
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 5.5 years, volatility of 107%, risk-free interest rate of 0.71% and dividend yield of 0%. 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 $2,018,597.
Warrants
The
following is a summary of the warrant activity for the three months ended March 31, 2023:
Summary of Warrant Activity
| |
Number of Warrants | | |
Average Exercise Price | | |
Weighted Average Remaining Contractual Term in Years | |
| |
| | |
| | |
| |
Outstanding at January 1, 2023 | |
| 1,225,959 | | |
$ | 3.50 | | |
| 4.02 | |
Exercisable at January 1, 2023 | |
| - | | |
$ | - | | |
| - | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised / surrendered | |
| - | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | |
Outstanding at March 31, 2023 | |
| 1,225,959 | | |
$ | 3.50 | | |
| 3.77 | |
Exercisable at March 31, 2023 | |
| 1,225,959 | | |
$ | 3.50 | | |
| 3.77 | |
Shares
Issued to Consultants
On
November 2, 2021, the Company entered into an information technology consulting agreement with a consultant for analyzing and
developing the Company’s information technology infrastructure and system, and related general business advisory services
effective on November 2, 2021 for a one-year
term. The Company agreed to grant the consultant 100,000
shares of the Company’s common stock, 50,000
shares issued before the end of November 2021 and remaining 50,000
shares will be issued on the one-year anniversary of the agreement. The fair value of the 100,000
shares was $236,000,
which was calculated based on the stock price of $2.36
per share on November 2, 2021 and is being amortized over the service term. The shares were issued pursuant to Nova Lifestyle, Inc.
2021 Omnibus Equity Plan (the “2021 Plan”). During the three months ended March 31, 2022, the Company charged
$58,191 to
operations as consulting expenses.
On
November 2, 2021, the Company entered into a marketing consulting agreement with a consultant for developing branding and marketing strategies,
analyzing and evaluating consumer data services effective on November 2, 2021 for a one-year term. The Company agreed to grant the consultant
100,000 shares of the Company’s common stock, 50,000 shares issued before the end of November 2021 and remaining 50,000 shares
were issued on the one-year anniversary of the agreement. The fair value of the 100,000 shares was $236,000, which was calculated
based on the stock price of $2.36 per share on November 2, 2021 and is being amortized over the service term. The shares were issued
pursuant to the 2021 Plan. During the three months ended March 31, 2022, the Company charged $58,191 to operations as consulting expenses.
On
November 11, 2021, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on
November 16, 2021 for a one-year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock,
vesting 25% on February 15, 2022, 25% on May 15, 2022, 25% on August 15, 2022 and 25% on November 15, 2022. The fair value of the 20,000
shares was $46,600, which was calculated based on the stock price of $2.33 per share on November 16, 2021 and is being amortized over
the service term. The shares were issued pursuant to the 2021 Plan. During the three months ended March 31, 2022, the Company charged
$11,650 to operations as consulting expenses.
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 twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2022
for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading
day of the corresponding month. The shares were issued pursuant to the 2021 Plan. During
the three months ended March 31, 2023 and 2022, the company issued 21,739 and 13,657 shares to the designer and charged $10,000 and $20,000,
respectively, to operations as designer fee.
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 one-year term. The Company agreed to grant the consultant 50,000 shares of the Company’s common stock, vesting 25%
on July 1, 2022, 25% on October 1, 2022, 25% on January 1, 2023 and 25% on April 1, 2023. The fair value of the 50,000 shares was $36,000,
which was calculated based on the stock price of $0.72 per share on July 1, 2022 and is being amortized over the service term. The shares
were issued pursuant to the 2021 Plan. During the three months ended March 31, 2023 and 2022, the Company charged $9,000 and $0, respectively,
to operations as consulting expenses.
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 one-year term. The Company agreed to grant the consultant 50,000 shares of the Company’s common stock,
vesting 25% on February 15, 2023, 25% on May 15, 2023, 25% on August 15, 2023 and 25% on November 15, 2023. The fair value of the 50,000
shares was $28,000, which was calculated based on the stock price of $0.56 per share on November 16, 2022. The shares were issued pursuant
to the 2021 Plan. During the three months ended March 31, 2023 and 2022, the Company charged $7,000 and $0, respectively, to operations
as consulting expenses.
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 twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2023
for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading
day of the corresponding month. The shares were issued pursuant to the 2021 Plan. During
the three months ended March 31, 2023, the company issued 23,927 shares to the designer and charged $20,000 to operations as designer
fee.
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 60,000 shares of the Company’s common stock at an exercise price of $5.9 per
shares, with a term of 5 years. Twenty-five percent (25%) of those stock options vested on November 30, 2018, 25% on will vest on February
28, 2019, 25% on May 31, 2019, and the remaining 25% 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 ten years, volatility of 84%, risk free interest rate of 3.07%,
and dividend yield of 0%. The fair value of 60,000 stock options was $240,105 at the grant date.
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 60,000 shares of the Company’s common stock at an exercise price of $2.80 per share, with a term of 5 years, vesting
25% on November 30, 2019, 25% on February 28, 2020, 25% on May 31, 2020, and 25% 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 ten years, volatility of 87%, risk free interest rate of 1.60%, and dividend yield
of 0%. The fair value of the 60,000 stock options was $114,740 at the grant date.
Shares
Issued to Employees
On
November 11, 2021, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective
from November 14, 2021. The Company agreed to grant an award of 6,000 restricted Stock Units to the officer pursuant to the Company’s
2021 Omnibus Equity Plan. The fair value of these shares was $13,200, which was calculated based
on the stock price of $2.20 per share on November 11, 2021, the date the award was determined by the Compensation Committee of the Board
of Directors, vesting 25% on November 10, 2021, 25% on March 31, 2022, 25% on June 30, 2022 and 25% on September 30, 2022. During the
three months ended March 31, 2022, the Company amortized $3,300 to operations as stock compensation expense.
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 6,000 restricted Stock Units to the officer pursuant to the Company’s
2021 Omnibus Equity Plan. The fair value of these shares was $3,540, which was calculated based
on the stock price of $0.59 per share on November 11, 2022, the date the award was determined by the Compensation Committee of the Board
of Directors, vesting 25% on November 11, 2022, 25% on March 31, 2023, 25% on June 30, 2023 and 25% on September 30, 2023. During the
three months March 31, 2023, the Company record $885 to operations as stock compensation expense.
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 7,000 shares of the Company’s common stock at an exercise price of $9.25 per share,
with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan.
Fifty percent (50%) of those stock options vested immediately, and the remaining 50% 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 the following assumptions: estimated life of five years,
volatility of 84%, risk free interest rate of 2.72%, and dividend yield of 0%. The fair value of the 7,000 stock options was $43,680
at the grant date.
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 7,000 shares of the Company’s common stock at an exercise price of $3.85 per share,
with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan.
Fifty percent (50%) of those stock options vested immediately, and the remaining 50% 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 the following assumptions: estimated life of five years,
volatility of 87%, risk free interest rate of 1.49%, and dividend yield of 0%. The fair value of the 7,000 stock options was $18,318
at the grant date.
As
of March 31, 2023, unrecognized share-based compensation expense was $131,770.
Stock
option activity under the Company’s stock-based compensation plans is shown below:
Schedule of Stock Option Activity
| |
Number of Shares | | |
Average Exercise Price per Share | | |
Weighted Average Remaining Contractual Term in Years | |
| |
| | |
| | |
| |
Outstanding at January 1, 2023 | |
| 134,000 | | |
$ | 4.58 | | |
| 1.33 | |
Exercisable at January 1, 2023 | |
| 134,000 | | |
| 4.58 | | |
| 1.33 | |
| |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | |
Outstanding at March 31, 2023 | |
| 134,000 | | |
| 4.58 | | |
| 1.08 | |
Exercisable at March 31, 2023 | |
| 134,000 | | |
| 4.58 | | |
| 1.08 | |
(1) |
The intrinsic
value of the stock options at March 31, 2023 is the amount by which the market value of the Company’s common stock of $0.60
as of March 31, 2023 exceeds the average exercise price of the option. As of March 31, 2023, the intrinsic value of the outstanding
and exercisable stock options was $0. |
Note
13 - Geographical Analysis
Geographical
distribution of sales consisted of the following for the three months ended March 31, 2023 and 2022:
Schedule of Revenue From External Customers by Geographic Area
| |
2023 | | |
2022 | |
Geographical Areas | |
| | | |
| | |
North America | |
$ | 1,756,665 | | |
$ | 3,612,012 | |
Other countries | |
| 117,900 | | |
| 53,934 | |
Revenues | |
$ | 1,874,565 | | |
$ | 3,665,946 | |
Geographical
location of identifiable long-lived assets as of March 31, 2023 and December 31, 2022:
Schedule of Long-lived Assets by Geographic Areas
| |
March 31, 2023 | | |
December 31, 2022 | |
Geographical Areas | |
| | | |
| | |
North America | |
$ | 2,389,221 | | |
$ | 2,545,270 | |
Asia | |
| 497,886 | | |
| 555,477 | |
Total | |
$ | 2,887,107 | | |
$ | 3,100,747 | |
Note
14 - 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 five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provided an option to
extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another three years with an expiration
date of October 31, 2021. On October 15, 2021, the Company extended the lease for another five years with an expiration date of October
31, 2026. The initial monthly rental payment is $42,000 with an annual 3% increase.
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 11) on monthly or annual terms.
On
July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a two-year term, expiring on July 14, 2021. The
initial monthly rental payment was 20,000 Malaysia Ringgit ($4,506) and was increased to 35,000 Malaysia Ringgit ($7,885) effective August
1, 2020. On July 15, 2021, Nova Malaysia extended the lease for another two years with an expiration date of July 31, 2023.
On
October 29, 2019, Nova Malaysia entered into a lease agreement for a showroom with a two-year term, commencing on December 1, 2019 and
expiring on November 30, 2021. On November 26, 2021, Nova Malaysia extended the lease to November 30, 2022 with an option for renewal
for another term of 24 months. On October 4, 2022, Nova Malaysia renewed the lease for one year to November 30, 2023. The monthly rental
payment is 9,280 Malaysia Ringgit ($2,091).
On
August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a two-year term, commencing on
September 1, 2020 and expiring on August 31, 2022. On July 29, 2022, Nova Malaysia extended the lease for another two years with an expiration
date of August 31, 2024. The monthly rental payment is 30,000 Malaysia Ringgit ($6,759).
Operating
lease expense for the three months ended March 31, 2023 and 2022 was as follows:
Schedule of Lease Cost
| |
2023 | | |
2022 | |
| |
| | |
| |
Operating lease cost – straight line | |
$ | 219,685 | | |
$ | 215,542 | |
The
following is a schedule, by years, of maturities of operating lease liabilities as of March 31, 2023:
Schedule of Operating Lease Liability Maturity
| |
Operating Leases | |
2023 | |
$ | 600,394 | |
2024 | |
| 758,237 | |
2025 | |
| 701,142 | |
Thereafter | |
| 598,820 | |
Total undiscounted cash flows | |
| 2,658,593 | |
Less: imputed interest | |
| (147,973 | ) |
Present value of lease liabilities | |
| 2,510,620 | |
Lease
Term and Discount Rate
Supplemental
cash flow information related to leases where the Company was the lessee for the three months ended March 31, 2023 and 2022 was as follows:
Schedule of Supplemental Cash Flow Information Related to Leases
| |
2023 | | |
2022 | |
| |
| | |
| |
Operating cash outflows from operating leases | |
$ | 215,193 | | |
$ | 212,771 | |
Note
15 - Commitments and Contingencies
Legal
Proceedings
On
December 28, 2018, a federal putative class action complaint was filed by George Barney against the Company and its former and current
CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District
of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently appointed as lead
plaintiffs and, on June 18, 2019, filed an Amended Complaint.
Plaintiffs
seek to represent a class of entities acquiring Nova’s stock from December 3, 2015 through December 20, 2018. They claim that during
this period the Company: (1) overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer
for all furnishings in its planned $460 million senior care center in China; and (2) inflated sales in 2016 and 2017 by recognizing significant
sales to two allegedly non-existent customers. Plaintiffs claim that the falsity of these representations was exposed in a blog posted
on the Seeking Alpha website in which it was claimed that an investigation failed to confirm the existence of several entities
identified as significant customers.
On
March 8, 2022, the parties to the Barney Action filed a Stipulation of Settlement (“Settlement”) with the Court. Under the
terms of the Settlement, and without admitting to any wrongdoing, fault, or liability, the Company agreed to a payment of $750,000 to
completely resolve the Barney Action. The $750,000 would be funded by the remainder of any retention under applicable directors and officer
liability insurance with the remainder paid by the directors and officer liability insurer. The settlement provided for the class members’
complete release of all claims against the Company and the named defendants with respect to any of the matters alleged in the litigation.
The Settlement was subject to various conditions, including preliminary approval by the Court, notice to all class members, an opt-out
period, and a final hearing and approval by the Court.
By
Memorandum Opinion and Order dated August 29, 2022, the Court denied the Barney plaintiffs’ unopposed Motion to Certify
a Settlement Class and to Approve the Settlement. The Court held that plaintiffs had not met their burden of establishing the prerequisites
to class certification of adequacy of class counsel, numerosity, and the superiority of class certification in fairly and efficiently
adjudicating the controversy. The Court similarly concluded that plaintiffs had failed to make a threshold showing that the settlement
was fair and adequate. Finally, the Court rejected plaintiffs’ proposed plan for providing notice of the settlement to putative
class members, finding that it was inadequate under the circumstances.
On March 31, 2023, the Barney plaintiffs filed
a Renewed Motion for Preliminary Approval of Class Action Settlement, Renewed Stipulation of Settlement (“Renewed Settlement”),
and accompanying Memorandum of Points and Authorities, which sought to address the Court’s concerns in the August 29, 2022, ruling.
The Revised Settlement contains the same essential terms as the Settlement and is subject to the same conditions, including preliminary
approval by the Court, notice to all class members, an opt-out period, and a final hearing and approval by the Court. The Renewed Motion
for Preliminary Approval of Class Action Settlement is pending before the Court.
On
March 8, 2019, in the United States District Court for the Central District of California, Jie Yuan (the “Jie Action”) filed
a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H.
Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president
(Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged
securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the
derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise
to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by
leasing
her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong,
former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or
misleading statements were made “with knowledge of material non-public information.”
On
May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a putative derivative complaint purportedly on behalf of the Company
against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed
in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie
Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this
change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing
that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the
Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported
fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b)
and 20 of the Exchange Act and SEC Rule 10b-5.
On
March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss
on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise
fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to
Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action.
It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With
the settlement of the Barney action, the derivative actions will be activated. The parties disagree as to when that will occur. Defendants
have asserted that the Action must remained stayed until the final disposition of the Barney Action, meaning, the Court’s final
approval of the Settlement. Plaintiff’s position is that the Court should lift the stay because the class action plaintiffs agreed
to settle the case. The Court has yet to address this issue.
While
these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that
the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers
pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they
will be vigorously defended if necessary.
Other
than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management,
is likely to have a material adverse effect on the business, financial condition or results of operations.
Note
16 - Subsequent Events
The
Company has evaluated subsequent events through May 15, 2023, the date of the issuance of the condensed consolidated financial statements,
and no subsequent event is identified.
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, 2022 (the “2022 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 2022 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.