10-Q 1 novalife20210331_10q.htm FORM 10-Q novalife20210331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-36259

 

NOVA LIFESTYLE, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

90-0746568

(State or other jurisdiction of incorporation

or organization)

 

(IRS Employer Identification No.)

 

6565 E. Washington Blvd. Commerce, CA

 

90040

(Address of principal executive offices)

 

(Zip Code)

 

(323) 888-9999

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

NVFY

Nasdaq Stock Market

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.

YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ☐   NO  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,567,544 shares of common stock outstanding as of May 14, 2021. 

 

 

 

 

Nova LifeStyle, Inc.

 

Table of Contents

 

   

Page

PART I. FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020

1

 

Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months ended March 31, 2021 and 2020 (unaudited)

3

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

5

 

Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2021 and 2020 (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

Item 4.

Controls and Procedures

36

     

PART II. OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

37

Item 6.

Exhibits

38

     
 

Signatures

39

     

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2021 (UNAUDITED) AND DECEMBER 31, 2020

 

   

March 31, 2021

   

December 31, 2020

 
                 

Assets

               
                 

Current Assets

               

Cash and cash equivalents

  $ 7,641,276     $ 8,744,784  

Accounts receivable, net

    172,346       514,939  

Advance to suppliers

    351,088       381,894  

Inventories

    32,940,465       32,814,520  

Prepaid expenses and other receivables

    219,361       349,746  

Tax receivable

    479,413       489,020  
                 

Total Current Assets

    41,803,949       43,294,903  
                 

Noncurrent Assets

               

Plant, property and equipment, net

    426,247       453,518  

Operating lease right-of-use assets, net

    2,120,657       2,319,742  

Lease deposit

    72,863       73,801  

Goodwill

    218,606       218,606  

Deferred tax asset

    117,952       117,952  
                 

Total Noncurrent Assets

    2,956,325       3,183,619  
                 

Total Assets

  $ 44,760,274     $ 46,478,522  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTD)

AS OF MARCH 31, 2021 (UNAUDITED) AND DECEMBER 31, 2020

 

   

March 31, 2021

   

December 31, 2020

 
                 

Liabilities and Stockholders' Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 490,623     $ 743,785  

Operating lease liability, current

    663,257       688,082  

Advance from customers

    34,218       266,243  

Accrued liabilities and other payables

    260,780       327,173  
                 

Total Current Liabilities

    1,448,878       2,025,283  
                 

Noncurrent Liabilities

               

Other Loan

    150,000       150,000  

Operating lease liability, non-current

    1,583,733       1,746,070  

Income tax payable

    1,628,702       1,628,694  
                 

Total Noncurrent Liabilities

    3,362,435       3,524,764  
                 

Total Liabilities

    4,811,313       5,550,047  
                 

Contingencies and Commitments

               
                 

Stockholders' Equity

               

Common stock, $0.001 par value; 15,000,000 shares authorized,

5,602,734 and 5,596,234 shares issued and outstanding;

as of March 31, 2021 and December 31, 2020, respectively

    5,602       5,596  

Additional paid-in capital

    39,779,842       39,766,978  

Statutory reserves

    -       6,241  

Accumulated other comprehensive income

    569,443       798,290  

(Accumulated deficits) Retained earnings

    (405,926

)

    351,370  
                 

Total Stockholders' Equity

    39,948,961       40,928,475  
                 

Total Liabilities and Stockholders' Equity

  $ 44,760,274     $ 46,478,522  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
   

(Unaudited)

 
                 

Net Sales

  $ 3,331,567     $ 2,203,220  
                 

Cost of Sales

    1,951,255       1,424,191  
                 

Gross Profit

    1,380,312       779,029  
                 

Operating Expenses

               

Selling expenses

    768,085       317,416  

General and administrative expenses

    1,378,330       1,282,719  
                 

Total Operating Expenses

    2,146,415       1,600,135  
                 

Loss From Operations

    (766,103

)

    (821,106

)

                 

Other Income (Expenses)

               

Foreign exchange transaction gain (loss)

    68,984       (156,013

)

Interest (expense) income, net

    (2,390

)

    20,825  

Financial expense

    (54,352

)

    (32,740

)

                 

Total Other Income (Expenses), Net

    12,242       (167,928

)

                 

Loss Before Income Taxes and Discontinued operations

    (753,861

)

    (989,034

)

                 

Income Tax Expense

    (9,676

)

    (23,879

)

                 

Loss From Continuing Operations

    (763,537

)

    (1,012,913

)

                 

Loss From Discontinued Operations

    -       (326,531

)

                 

Net Loss

    (763,537

)

    (1,339,444

)

                 

Other Comprehensive (Loss) Income

               

Foreign currency translation

    (228,847

)

    158,215  
                 

Net Loss and Comprehensive Loss

    (992,384

)

    (1,181,229

)

                 
                 

Basic and Diluted weighted average shares outstanding

    5,598,678       5,572,196  
                 

Loss from continuing operations per share of common stock

               

Basic and Diluted

  $ (0.14

)

  $ (0.18

)

                 

Loss from discontinued operations per share of common stock

               

Basic and Diluted

  $ -     $ (0.06

)

                 

Net loss per share of common stock

               

Basic and Diluted

  $ (0.14

)

  $ (0.24

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

Three Months Ended March 31, 2021

 

                           

Accumulated

           

(Accumulated

         
                   

Additional

   

Other

           

deficits)

   

Total

 
   

Common stock

   

Paid in

   

Comprehensive

   

Statutory

   

Retained

   

Stockholders

 
   

Shares

   

Amount

   

Capital

   

Income

   

Reserve

   

Earnings

   

Equity

 

Balance at beginning of period

    5,596,234     $ 5,596     $ 39,766,978     $ 798,290     $ 6,241     $ 351,370     $ 40,928,475  
                                                         

Stock issued to employees

    1,500       1       2,969       -       -       -       2,970  
                                                         

Stock issued to consultants

    5,000       5       9,895       -       -       -       9,900  
                                                         

Closure of Nova Macau

    -       -       -       -       (6,241

)

    6,241       -  
                                                         

Foreign currency translation loss

    -       -       -       (228,847

)

    -       -       (228,847

)

                                                         

Net loss

    -       -       -       -       -       (763,537

)

    (763,537

)

                                                         

Balance at end of period

    5,602,734     $ 5,602     $ 39,779,842     $ 569,443     $ -     $ (405,926

)

  $ 39,948,961  

 

Three Months Ended March 31, 2020

 

                           

Accumulated

                         
                   

Additional

   

Other

                   

Total

 
   

Common stock

   

Paid in

   

Comprehensive

   

Statutory

   

Retained

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Income

   

Reserve

   

Earnings

   

Equity

 
                                                         

Balance at beginning of period

    5,568,734     $ 5,568     $ 39,605,042     $ -     $ 6,241     $ 26,429,695     $ 66,046,546  
                                                         

Stock issued to employees

    3,000       3       6,387       -       -       -       6,390  
                                                         

Stock issued to consultants

    5,000       5       12,745       -       -       -       12,750  
                                                         

Stock options vested to board of directors and employees

    -       -       37,844       -       -       -       37,844  
                                                         

Foreign currency translation gain

    -       -       -       158,215       -       -       158,215  
                                                         

Net loss

    -       -       -       -       -       (1,339,444

)

    (1,339,444

)

                                                         

Balance at end of period

    5,576,734     $ 5,576     $ 39,662,018     $ 158,215     $ 6,241     $ 25,090,251     $ 64,922,301  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

Three Months ended March 31,

 
   

2021

   

2020

 
                 

Cash Flows From Operating Activities

               

Net loss

  $ (763,537

)

  $ (1,339,444

)

Net loss from discontinued operations

    -       (326,531

)

Net loss from continuing operations

  $ (763,537

)

  $ (1,012,913

)

Adjustments to reconcile net income to net cash used in operating activities:

               

Depreciation and amortization

    17,751       15,442  

Amortization of operating lease right-of-use assets

    193,312       142,357  

Stock compensation expense

    12,870       53,789  

Changes in bad debt allowance

    (3,460

)

    (23

)

Changes in operating assets and liabilities:

               

Accounts receivable

    346,053       2,307  

Advance to suppliers

    30,806       (74,345

)

Inventories

    (125,945

)

    368,385  

Operating lease liabilities

    (181,328

)

    (136,337

)

Other current assets

    130,385       1,369  

Accounts payable

    (253,162

)

    (122,091

)

Advance from customers

    (229,860

)

    28,944  

Accrued liabilities and other payables

    (64,427

)

    33,024  

Taxes payable

    9,607       27,936  
                 

Net Cash Used in Continuing Operations

    (880,935

)

    (672,156

)

Net Cash Provided by Discontinued Operations

    -       -  

Net Cash Used in Operating Activities

    (880,935

)

    (672,156

)

                 

Cash Flows From Investing Activities

               

Cash received from sales of subsidiary, net of cash disposed of

    -       (1,462,200

)

                 

Net Cash Used in Continuing Operations

    -       (1,462,200

)

Net Cash Provided by Discontinued Operations

    -       -  

Net Cash Used in Investing Activities

    -       (1,462,200

)

                 

Cash Flows From Financing Activities

               

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

Three Months ended March 31,

 
   

2021

   

2020

 
                 
                 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

  $ (222,573

)

  $ 156,557  
                 

Net decrease in cash and cash equivalents

    (1,103,508

)

    (1,977,799

)

                 

Cash and cash equivalents, beginning of period

    8,744,784       8,885,398  
                 

Cash and cash equivalents, ending of period

  $ 7,641,276     $ 6,907,599  
                 

Analysis of cash and cash equivalents

               
                 

Included in cash and cash equivalents per consolidated balance sheets

    7,641,276     $ 6,907,599  

Included in assets of discontinued operations

    -       -  

Cash and cash equivalents, end of period

  $ 7,641,276     $ 6,907,599  
                 

Supplemental Disclosure of Cash Flow Information

               
                 

Continuing operations:

               

Cash paid during period for:

               

Income tax payments

  $ 62     $ -  

Interest expense

  $ 1,453     $ 1,596  
                 

Discontinued operations:

               

Cash paid during period for:

               

Income tax payments

  $ -     $ -  

Interest expense

  $ -     $ -  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOVA LIFESTYLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (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 in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. in Samoa (“Nova Samoa”), Bright Swallow International Group Limited (“Bright Swallow” or “BSI”), Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”), Diamond Bar Outdoors, Inc. (“Diamond Bar”), Nova Living (M) SDN. BHD. (“Nova Malaysia”) and Nova Living (HK) Group Limited (“Nova HK”).

 

Nova Macao was organized under the laws of Macao on May 20, 2006, and is a wholly owned subsidiary of Nova Furniture.  Diamond Bar was incorporated in California on June 15, 2000.  Nova Macao is a trading company, importing, marketing and selling products designed and manufactured by third-party manufacturers for the U.S. and international markets. 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, Inc. 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 new 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 minimum operations as of March 31, 2021.

 

On December 12, 2019, Nova LifeStyle, Inc. acquired Nova Malaysia at cost of $1 which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition is to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.

 

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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. The Company received the payment on May 11, 2020. As of December 31, 2020, operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. Accordingly, assets, liabilities, revenues, expenses and cash flows related to Bright Swallow have been reclassified in the consolidated financial statements as discontinued operations for all periods presented. Additional information with respect to the sale of Bright Swallow is presented at Note 3.

 

On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova Macao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered the de-registration procedure and the current business was taken over by Nova HK. Nova Macao completed de-registration procedure in January 2021.

 

On November 5, 2020, Nova LifeStyle, Inc. acquired Nova HK at cost of $1,290 which was incorporated in Hong Kong on November 6, 2019. Nova HK took over Nova Macao’s business. This company has had minimum operations as of March 31, 2021.

 

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, during the year ended December 31, 2020, Nova Malaysia had not been able to operate in full capacity 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 since August 2020 and re-opened on March 5, 2021. However, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. 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.

 

 

The extent of the impact of the COVID-19 pandemic will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, economies worldwide have also been negatively impacted by the COVID-19 pandemic. Policymakers around the globe have responded with fiscal policy actions intended to support the economy as a whole, but it is presently unknown whether and to what extent further fiscal actions will continue or be effective. The magnitude and overall effectiveness of these actions remain uncertain.

 

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 efficacy and distribution of COVID-19 vaccines and the extent and severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be predicted. 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, 2021 and for the three month periods ended March 31, 2021 and 2020 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, 2020, previously filed with the SEC on March 29, 2021.

 

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, 2021, its interim condensed consolidated results of operations and cash flows for the three month periods ended March 31, 2021 and 2020, 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.

 

The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for the Company’s products, and adversely impact its results of operations. During the three months ended March 31, 2021, the Company continued to face increasing uncertainties around its estimates of revenue collectability, accounts receivable credit losses and valuation of inventories. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in its unaudited condensed consolidated financial statements.

 

 

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 December 31, 2020 and 2019, 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: 

 

Balance at January 1, 2021

  $ 5,201  

Reversal

    (3,460 )

Balance at March 31, 2021

  $ 1,741  

 

 

During the three months ended March 31, 2021 and 2020, bad debts reversal from continuing operations was $3,460 and $23, respectively. During the three months ended March 31, 2021 and 2020, bad debt provision and written off from discontinued operations were $0.

 

Advances to Suppliers

 

Advances to suppliers are reported net of allowance when the Company determines that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on its historical record and in normal circumstances, the Company receives goods within 5 to 9 months from the date the advance payment is made. 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 the Company. Any provisions for allowance for advances to suppliers, if deemed necessary, are included in general and administrative expenses in the consolidated statements of comprehensive income (loss). During the three months ended March 31, 2021 and 2020, no provision was made on advances to suppliers.

 

Inventories

 

Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. There were no write-downs of inventories from the Company’s continuing operation for the three months ended March 31, 2021 and 2020. There were also no write-downs of inventories from the Company’s discontinued operations for the three months ended March 31, 2021 and 2020.

 

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:

 

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.

 

Treasury Stock

 

Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to additional paid-in capital using the average-cost method. Upon retirement of treasury stock, the amounts in excess of par value are charged entirely to retained earnings.

 

 

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 $3,264 and $12,266 for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021 and 2020, research and development costs from discontinued operations were $0. 

 

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, 2021 is $9,676 and is primarily related to quarter-to-date income generated from foreign operation. The income tax benefit for the three months ended March 31, 2020 is $6,000 and is primarily related to quarter-to-date losses 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, Nova Samoa was incorporated in Samoa, and Nova HK was incorporated in Hong Kong. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign‐sourced earnings such as global intangible low‐taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the year ended December 31, 2020, 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 March 27, 2020, the CARES Act were each 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.

 

As of March 31, 2021 and December 31, 2020, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $27.9 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.

 

 

A reconciliation of the three month ended March 31, 2021 and 2020 amount of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) is as follows:

 

   

Gross UTB

 
   

2021

   

2020

 
                 

Balance – January 1 and March 31

  $ 935       12,547  

 

At March 31, 2021 and December 31, 2020, the Company had cumulatively accrued approximately $100 and $131 for estimated interest and penalties related to unrecognized tax benefits, respectively, related to the Company’s continuing operations. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $100 and $125 for the three months ended March 31, 2021, and 2020, respectively. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.

 

At December 31, 2020, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits related to the Company’s discontinued operations. The Company did not record interest and penalties related to unrecognized tax benefits as a component of income tax expense for the three months ended March 31, 2021, and 2020 related to the Company’s discontinued operations.

 

As of March 31, 2021, unrecognized tax benefits were approximately $900. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $900 as of March 31, 2021. As of March 31, 2020, unrecognized tax benefits were approximately $12,500. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $14,000 as of March 31, 2020.

 

Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2018-2020 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, 2021 and 2020.

 

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on the Company’s consolidated statements of comprehensive income (loss).

 

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, 2021 and 2020, shipping and handling costs from continuing operations were $993 and $349, respectively. During the three months ended March 31, 2020, 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 $407,862 and $17,998 for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2020, advertising expense from discontinued operations were $0. 

 

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, 2021 and 2020: 

 

   

March 31, 2021

   

March 31, 2020

 
                 

Net loss from continuing operations

  $ (763,537

)

  $ (1,012,913

)

Net loss from discontinued operations

    -       (326,531

)

Net loss

    (763,537

)

    (1,339,444

)

                 

Weighted average shares outstanding – basic and diluted*

    5,598,678       5,572,196  
                 

Net loss from continuing operations per share of common stock

               

Basic and Diluted

  $ (0.14

)

  $ (0.18

)

                 

Net loss from discontinued operations income per share of common stock

               

Basic and Diluted

  $ -     $ (0.06

)

                 

Net loss per share of common stock

               

Basic and Diluted

  $ (0.14

)

  $ (0.24

)

 

*

Including 36,307 and 41,307 shares that were granted and vested but not yet issued for the three months ended March 31, 2021 and 2020, respectively.

 

 

For the three months ended March 31, 2021, 18,000 shares of unvested restricted stock and stock options to purchase 340,500 shares of the Company’s stock were excluded from the EPS calculation, as their effects were anti-dilutive.

 

For the three months ended March 31, 2020, 171,667 shares purchasable under warrants, 45,600 shares of unvested restricted stock and stock options to purchase 340,500 shares of the Company’s stock were anti-dilutive and were excluded from EPS calculation.

 

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 our continuing operations for the three months ended March 31, 2021. Two customers accounted for 19% and 18% of the Company’s gross accounts receivable as of March 31, 2021, respectively. Two customers accounted for 40% and 27% of the Company’s gross accounts receivable as of December 31, 2020, respectively. One customer accounted for 10% of the Company’s sales from our continuing operations for the three months ended March 31, 2020.

 

No customer accounted for 10% or more of the Company’s sales from our discontinued operations for the years ended March 31, 2021 and 2020.

 

The Company purchased its products from three and four major vendors during the three months ended March 31, 2021 and 2020, accounting for a total of 58% (32%, 13%, and 13% each) and 74% (38%, 15%, 11% and 10% each) of the Company’s purchases from continuing operations, respectively. Advances made to these vendors were $155,235 and $0 as of March 31, 2021 and December 31, 2020, respectively. Accounts payable to these vendors were $79,979 and $0 as of March 31, 2021 and December 31, 2020, respectively.

 

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, and its former subsidiaries, Nova Macao, Bright Swallow.

 

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 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 comprehensive loss.

 

 

The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.

 

Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:

 

Balance sheet items, except for equity accounts

       

March 31, 2021

   

RM4.15 to 1

 

December 31, 2020

   

RM4.02 to 1

 
         

Income statement and cash flows items

       

For the period ended March 31, 2021

   

RM4.07 to 1

 

For the period ended March 31, 2020

   

RM4.18 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 US, Bright Swallow is a furniture distributor focusing on customers in Canada, and Nova Macao is a furniture distributor based in Macao focusing on international customers, Nova HK is 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, Bright Swallow, Nova Macao, Nova HK and Nova Malaysia as a whole for making business decisions.

 

After the disposal of Nova Dongguan and its subsidiaries in October 2016, all of the Company’s 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 the customers. For example, if the products are delivered to a customer in the US, 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.

 

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. The lease has remaining lease term of approximately four years. Lease expense is recognized on a straight-line basis over the lease term. The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income 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, 2021 and December 31, 2020.

 

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.

 

New Accounting Pronouncements

 

Recent Adopted Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company applied the new standard beginning January 1, 2021.

 

In August 2020, the FASB issued ASU No. 2020-06 “ASU 2020-06”) “Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning of such fiscal year. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.

 

Recently issued accounting pronouncements not yet adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. Adoption of the ASUs is on a modified retrospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact that the standard will have on its condensed consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.

 

 

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 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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. The Company received the payment on May 11, 2020.

 

As of December 31, 2019, operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. Accordingly, assets, liabilities, revenues, expenses and cash flows related to Bright Swallow have been reclassified in the consolidated financial statements as discontinued operations for all periods presented.

 

The following table summarizes the net assets of Bright Swallow at the date of disposal (January 7, 2020):

 

Cash and cash equivalents

  $ 1,462,200  

Accounts receivable, net

    969,841  

Advance to suppliers

    609,935  

Accounts payable

    (948

)

Advance from customers

    (126,916

)

Accrued liabilities and other payables

    (2,553

)

Income tax payable

    (85,028

)

         

Net assets of Bright Swallow upon disposal

    2,826,531  

Cash received as of March 31, 2020

    (2,500,000

)

Loss on disposal of subsidiary

  $ (326,531

)

 

The following table presents the components of discontinued operations in relation to Bright Swallow reported in the consolidated statements of operations:

 

   

March 31, 2020

 
         

Sales

  $ -  

Cost of sales

    -  

Operating expenses

    -  

Other expense, net

    -  

Loss on disposal of subsidiary

    (326,531

)

Loss before income taxes

    (326,531

)

Income tax benefit

    -  

Loss from discontinued operations

  $ (326,531

)

 

 

Note 4 - Inventories

 

The inventories as of March 31, 2021 and December 31, 2020 totaled $32,940,465 and $32,814,520, respectively, and were all 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. There were no write-downs of inventories from the Company’s continuing operation for the three months ended March 31, 2021 and 2020. There were also no write-downs of inventories from the Company’s discontinued operations for the three months ended March 31, 2020

 

Note 5 - Plant, Property and Equipment, Net

 

As of March 31, 2021 and December 31, 2020, plant, property and equipment consisted of the following: 

 

   

March 31, 2021

   

December 31, 2020

 
                 

Computer and office equipment

  $ 396,041     $ 396,302  

Decoration and renovation

    438,521       448,641  

Less: accumulated depreciation

    (408,315

)

    (391,425

)

    $ 426,247     $ 453,518  

 

Depreciation expense from continuing operations was $17,751 and $15,442 for the three months ended March 31, 2021 and 2020, respectively. Depreciation expense from discontinued operations was $0 for the three months ended March 31, 2021 and 2020.

 

Note 6 - Advances to Suppliers

 

The Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $351,088 and $381,894 as of March 31, 2021 and December 31, 2020, respectively. No impairment charges were made on advances to suppliers for the three months ended March 31, 2021 and 2020.

 

Note 7 - Intangible Assets, net

 

The Company acquired a customer relationship with a fair value of $50,000 on August 31, 2011, as part of its acquisition of Diamond Bar. Concurrently with its acquisition of Diamond Bar, the Company entered into a trademark purchase and assignment agreement for all rights, title and interest in two trademarks (Diamond Sofa and Diamond Furniture) for $200,000 paid in full at the closing. Amortization of said customer relationship and the trademarks is provided using the straight-line method and estimated lives were 5 years each.

 

The Company acquired a customer relationship with a fair value of $6,100,559 on April 24, 2013, as part of its acquisition of Bright Swallow. Amortization of said customer relationship is provided using the straight-line method and its estimated life was 15 years.

 

Intangible assets consisted of the following as of March 31, 2021 and December 31, 2020:

 

   

March 31, 2021

   

December 31, 2020

 
                 

Customer relationship

  $ 50,000     $ 50,000  

Trademarks

    200,000       200,000  

Less: accumulated amortization

    (250,000

)

    (250,000

)

    $ -     $ -  

 

Amortization of intangible assets from continuing operations was $0 for the three months ended March 31, 2021 and 2020. Amortization of intangible assets from discontinued operations was $0 for the three months ended March 31, 2021 and 2020.

 

 

Note 8 - Prepaid Expenses and Other Receivables

 

Prepaid expenses and other receivables consisted of the following at March 31, 2021 and December 31, 2020:

 

   

March 31, 2021

   

December 31, 2020

 
                 

Prepaid expenses

  $ 99,425     $ 217,591  

Other receivables

    119,936       132,155  
    $ 219,361     $ 349,746  

 

As of March 31, 2021 and December 31, 2020, prepaid expenses and other receivables mainly represented prepaid insurance, credit card payments and a Paypal and Cardknox account balance. 

 

Note 9 - Accrued Liabilities and Other Payables

 

Accrued liabilities and other payables consisted of the following as of March 31, 2021 and December 31, 2020:

 

   

March 31, 2021

   

December 31, 2020

 
                 

Other payables

  $ 8,890     $ 6,428  

Salary payable

    13,462       6,731  

Financed insurance premiums

    -       103,104  

Accrued rents

    10,429       14,899  

Accrued marketing

    -       30,000  

Accrued commission

    95,269       112,673  

Accrued expenses, others

    132,730       53,338  
    $ 260,780     $ 327,173  

 

As of March 31, 2021 and December 31, 2020, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating expenses incurred in Malaysia. Other payables represented other tax payable and rebate.

 

Note 10 - Other Loans

 

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. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. On June 5, 2020, Congress passed a new law that allowed current PPP borrowers can choose to extend the eight-week period to 24 weeks to use the funds, but cannot extended beyond December 31, 2020. The Company had used the loans for eligible purposes and on December 28, 2020, the Company submitted the forgiveness application to the bank. No interest had been accrued for on this loan as of March 31, 2021.

 

The unforgiven portion of the PPP loan, if any, is payable over two years at an interest rate of 1% per annum, with a deferral of payments for the first six months.  Diamond Bar intends to use the proceeds for purposes consistent with the PPP.

 

On May 5, 2020, Diamond Bar was granted a loan from Cathay Bank in the aggregate amount of $176,294, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Loan, which was in the form of a Note dated May 5, 2020 matures on May 5, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on May 5, 2020. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. On June 5, 2020, Congress passed a new law that allowed current PPP borrowers can choose to extend the eight-week period to 24 weeks to use the funds, but cannot extended beyond December 31, 2020. The Company had used up all the PPP loan proceeds for qualifying purposes within 24 weeks, and is waiting for the forgiveness application from Cathay Bank. No interest had been accrued for on this loan as of March 31, 2021.

 

 

The Company used up all the PPP loan proceeds within 24 weeks.

 

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 the Diamond Bar. Interest of $6,036 had been accrued for on this loan as of March 31, 2021.

 

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 Chairman of the Board. The lease is to be renewed and has been renewed each year since 2011. On April 1, 2021, the Company renewed the lease for an additional one year term. The lease was for the amount of $34,561, with a term of one year. During the three months ended March 31, 2021 and 2020, the Company did not incur any rental on this lease.

 

On January 4, 2018, the Company entered into a sales representative agreement with a consulting firm, which is owned by the Chief Executive Officer and Chairman 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. The Company agreed to compensate the sales representative via commission at predetermined rates of the relevant sales amount. During the three months ended March 31, 2021 and 2020, the Company recorded $99,918 and $27,499 as commission expense to this sales representative consulting firm, respectively.

 

Note 12 - Stockholders Equity

 

Share repurchase program

 

On December 12, 2017, the Company issued a press release announcing that the Board of Directors of the Company had approved a 10b-18 share repurchase program to repurchase up to $5 million of its outstanding common stock. Under the repurchase program, shares of the Company’s common stock may be repurchased from time to time over the next 12 months. The program expired on December 8, 2018 and no shares have been repurchased under the program.

 

On June 4, 2019, the Board of Directors of the Company adopted a 10b-18 share repurchase program to repurchase up to $2 million of its common stock. The share repurchase authorization permits shares to be repurchased from time to time at the discretion of the Company’s management, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The program is effective as of June 5, 2019 and would expire on June 4, 2020. On December 11, 2019, the Company closed out this repurchase program. The Company repurchased a total of 172,740 shares of its common stock under this repurchase program. During the three months ended March 31, 2020, the Company did not repurchase its common stock.

 

Shares Issued to Consultants

 

On November 16, 2019, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2019 for a one year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock. Twenty-five percent (25%) of those shares vested on February 15, 2020, 25% vested on May 15, 2020; 25% vested on August 15, 2020 and the remaining 25% vested on November 15, 2020. The fair value of 20,000 shares was $51,000 which was calculated based on the stock price of $2.55 per share on November 18, 2019 and will be amortized over the service term. The shares were issued pursuant to Nova LifeStyle, Inc.’s 2014 Omnibus Long-Term Incentive Plan (the “Plan”). During the three months ended March 31, 2020, the Company amortized $12,750 as consulting expenses.

 

On November 16, 2020, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2020 for a one-year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock. Twenty-five percent (25%) of those shares vested on February 15, 2021, 25% will vest on May 15, 2021; 25% will vest on August 15, 2021 and the remaining 25% will vest on November 15, 2021. The fair value of 20,000 shares was $39,600 which was calculated based on the stock price of $1.98 per share on November 16, 2020 and will be amortized over the service term. The shares would be issued pursuant to the Plan. During the three months ended March 31, 2021, the Company amortized $9,900 as consulting expenses.

 

 

Shares and Warrants Issued through Private Placement

 

Private Placement on May 28, 2015

 

On May 28, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers (the “Purchasers”) pursuant to which the Company offered to the Purchasers, in a registered direct offering, an aggregate of 594,102 shares of common stock, par value $0.001 per share. Of these, 400,000 shares were sold to the Purchasers at a negotiated purchase price of $10.00 per share, for aggregate gross proceeds to the Company of $4,000,002, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. In accordance with the terms of the Purchase Agreement, the Company exchanged outstanding 2014 Series A Warrants with their holders for 132,006 shares of common stock, and exchanged the outstanding 2014 Series C Warrants with their holders for 62,096 shares of common stock.

 

In a concurrent private placement, the Company also sold to the Purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering, pursuant to that certain Common Stock Purchase Warrant, by and between the Company and each Purchaser (the “2015 Warrants”). The 2015 Warrants became exercisable beginning on the six month anniversary of the date of issuance (the “Initial Exercise Date”) at an exercise price of $13.55 per share and will expire on the five year anniversary of the Initial Exercise Date. The purchase price of one share of the Company’s common stock under the 2015 Warrants is equal to the exercise price. The 2015 Warrants expired on December 1, 2020.

 

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 2015 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 years, volatility of 107%, risk-free interest rate of 1.55% 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 at grant date was $3,147,530.

 

Shares and Options Issued to Independent Directors

 

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. Twenty-five percent (25%) of those stock options vested on November 30, 2019, 25% vested on February 28, 2020, 25% on May 31, 2020, and the remaining 25% vested on August 31, 2020. 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 87%, risk free interest rate of 1.60%, and dividend yield of 0%. The fair value of 60,000 stock options was $114,740 at the grant date. During the three months ended March 31, 2020, the Company recorded $28,685 as directors’ stock compensation expenses. 

 

Shares Issued to Employees and Service Providers

 

On January 31, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2019. The Company agreed to grant an award of 6,000 restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $12,780, which was calculated based on the stock price of $2.13 per share on January 31, 2020, the date the awards were determined by the Compensation Committee of the Board. Twenty-five percent (25%) of those shares vested on January 31, 2020, 25% on March 31, 2020, 25% on June 30, 2020 and the remaining 25% vested on September 30, 2020. During the three months ended March 31, 2020, the Company amortized $3,195 as stock compensation.

 

On November 10, 2020, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2020. The Company agreed to grant an award of 6,000 restricted Stock Units to the officer pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $11,880, which was calculated based on the stock price of $1.98 per share on November 10, 2020, the date the awards were determined by the Compensation Committee of the Board. Twenty-five percent (25%) of those shares vested on November 10, 2020, 25% on March 31, 2021, 25% on June 30, 2021 and the remaining 25% will vest on September 30, 2021. During the three months ended March 31, 2021, the Company amortized $2,970 as stock compensation. 

 

 

Options Issued to Employees

 

On August 12, 2019, the Board approved an option grant to the Company’s CFO 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 CFO in 2019 is recognized as compensation expense over the vesting period of the stock option award. 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 1.49%, and dividend yield of 0%. The fair value of 7,000 stock options was $18,318 at the grant date. During the three months ended March 30, 2020, the Company recorded $9,159 as stock compensation.

 

As of March 31, 2021, unrecognized share-based compensation expense was $32,057.

 

Stock option activity under the Company’s stock-based compensation plans is shown below:

 

   

Number of
Shares

   

Average
Exercise
Price per Share

   

Aggregate Intrinsic
Value(1)

   

Weighted
Average
Remaining
Contractual
Term in Years

 
                                 

Outstanding at January 1, 2021

   

340,500

   

$

5.97

   

$

-

     

2.33

 

Exercisable at January 1, 2021

   

340,500

     

5.97

   

$

-

     

2.33

 
                                 

Granted

   

-

     

-

     

-

     

-

 

Exercised

   

-

     

-

     

-

     

-

 

Forfeited

   

-

     

-

     

-

     

-

 

Outstanding at March 31, 2021

   

340,500

   

$

5.97

   

$

-

     

2.08

 

Exercisable at March 31, 2021

   

340,500

   

$

5.97

   

$

-

     

2.08

 

 

(1)

The intrinsic value of the stock options at March 31, 2021 is the amount by which the market value of the Company’s common stock of $3.24 as of March 31, 2021 exceeds the exercise price of the option.

 

Statutory Reserves

 

As a U.S. holding company, the Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiary, Nova Macao, only out of the subsidiary’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Nova Macao. Pursuant to the corporate laws of the PRC and Macao, including the PRC Regulations on Enterprises with Foreign Investment, Nova Macao is required to maintain a statutory reserve by appropriating from after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings. As a result of the Macau laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as a general statutory reserve fund until such reserve balance reaches 50% of the subsidiary’s registered capital. Nova Macao is restricted in its ability to transfer a portion of its net assets to the Company as a dividend.

 

Surplus Reserve Fund

 

Nova Macao dissolved in January 2021. At March 31, 2021 and December 31, 2020, it had surplus reserves of $0 and $6,241, representing 0% and 50% of its registered capital, respectively.

 

Common Welfare Fund

 

The common welfare fund is a voluntary fund to which Nova Macao can elect to transfer 5% to 10% of its net income. This fund can only be utilized on capital items for the collective benefit of the subsidiary’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. Nova Macao did not participate in this voluntary fund. 

 

 

Note 13 - Geographical Analysis

 

Geographical distribution of sales consisted of the following for the three months ended March 31, 2021 and 2020:

 

   

2021

   

2020

 
                 

Geographical Areas

               

North America

  $ 3,006,431     $ 2,184,856  

Asia*

    178,282       -  

Other countries

    146,854       18,364  
    $ 3,331,567     $ 2,203,220  

 

Geographical location of identifiable long-lived assets as of March 31, 2021 and December 31, 2020:

 

   

2021

   

2020

 
                 

Geographical Areas

               

North America

  $ 2,087,621     $ 2,236,709  

Asia*

    459,283       536,551  
    $ 2,546,904     $ 2,773,260  

 

* excluding China

 

Note 14 - Lease

 

On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the U.S. with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provides an option to extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another 36 months with an expiration date of October 31, 2021. The 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 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 monthly rental payment was 20,000 Malaysia Ringgit ($4,918) and has been adjusted to 35,000 Malaysia Ringgit ($8,607) since August 1, 2020. 

 

On October 29, 2019, Nova Malaysia entered into a lease agreement for showroom with a two-year term, commencing on December 1, 2019 and expiring on November 30, 2021. The monthly rental payment is 9,280 Malaysia Ringgit ($2,282). 

 

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. The monthly rental payment is $30,000 Malaysia Ringgit ($7,377).

 

The operating lease expense for the three months ended March 31, 2021 and 2020 were as follows:

 

   

2021

   

2020

 
                 

Operating lease cost – straight line

  $ 200,794     $ 176,252  
                 

Total lease expense

  $ 200,794     $ 176,252  

 

 

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2021:

 

   

Operating Leases

 
         

2022

  $ 757,699  

2023

    682,621  

2024

    665,826  

2025

    338,667  

Thereafter

    -  

Total undiscounted cash flows

    2,444,813  

Less: imputed interest

    (197,823

)

Present value of lease liabilities

    2,246,990  

 

Lease Term and Discount Rate 

 

   

March 31, 2021

 

Weighted-average remaining lease term - years

       

Operating leases - USA

    3.59  

Operating leases - Malaysia

    1.11  
         

Weighted-average discount rate (%)

       

Operating leases - USA

    5.00

%

Operating leases - Malaysia

    2.88

%

 

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 Security Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently substituted as plaintiffs and, on June 18, 2019, they filed an Amended Complaint. 

 

In an Amended Complaint, plaintiffs seek to represent a class of entities involved in any transaction in 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 its reported sales in 2016 and 2017 with two major 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.  Plaintiffs, however, have offered no evidence of falsity other than the Seeking Alpha blog.

 

Nova denies that there were any misstatements made in its public disclosures.  It also, inter alia, challenges plaintiffs’ ability to establish loss causation and damages. 

 

By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint Nova, Ms. Lam and Mr. Chuang filed (the “Nova Defendants”) The Nova Defendants accordingly answered the Amended Complaint.  The Court entered a scheduling order setting a final pretrial conference for July 20, 2020 that has now been extended until an unspecified date in August, 2021. On April 9, 2021, plaintiffs filed a Motion to Certify a Class.  A hearing on this Motion has been set for July 12, 2021.

 

Independent of the litigation, the Audit Committee engaged the Company’s independent auditor to perform special procedures to confirm the sales challenged in the Barney action. Those procedures included, but were not limited to, the examination and testing of relevant documentation relating to the sales made by the Company to the customers identified in the Seeking Alpha blog and 100% sampling of all transactions between the Company and the subject customers. The auditor finished its special procedures in March 2019 and reported to the Audit Committee that no evidence of fictitious sales or of fictitious customers was discovered regarding the customers mentioned in the Seeking Alpha blog,. Please see the details in the Form 8-K filed by the Company with SEC on March 29, 2019.

 

 

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 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.  He purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.

 

On March 3, 2020, defendants filed in 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 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 the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.

 

While these derivative actions are purportedly asserted on behalf of the Company, to the extent they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and is 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 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, 2020 (the 2020 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 2020 Form 10-K. Unless the context otherwise requires, references in this report to we, us, Nova, Nova Lifestyle or the Company refer to Nova Lifestyle, Inc. and its subsidiaries.

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

Safe Harbor Declaration

 

The following discussion and analysis are based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2020 (the 2020 Form 10-K). All references to the first quarter and first three months of 2021 and 2020 mean the three-month periods ended March 31, 2021 and 2020. In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, believes, anticipates, expects and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the companys business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2020 Form 10-K. 

 

Overview

 

Nova LifeStyle, Inc. is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and global purchase fulfillment. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStyle also sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.

 

Nova LifeStyle’s brand family currently includes Diamond Sofa (www.diamondsofa.com).

 

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 furniture worldwide: Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”), Bright Swallow International Group Limited (“Bright Swallow”), and Diamond Bar Outdoors, Inc. (“Diamond Bar”) Nova Macao was organized under the laws of Macao on May 20, 2006. Nova Macao was a wholly owned subsidiary of Nova Lifestyle. Diamond Bar is a California corporation organized on June 15, 2000. On April 24, 2013, we acquired all of the outstanding stock of Bright Swallow which we sold in January 2020. 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.

 

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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020.

 

On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova Macao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered the de-registration procedure and the current business was taken over by Nova HK. Nova Macao was dissolved in January 2021.

 

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. Nova HK took over Nova Macao’s business. This company has had minimum operations as of March 31, 2021.

 

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., Canadian, Mexico, Honduras, Dominican Republic, 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 a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysia government extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021 to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. We expect that our flagship showroom/retail store will serve as one of our primary distribution channels in Malaysia. Marketing of jade mats will focus on their premium therapeutic qualities and target health conscious general consumers and professionals. We have limited experience with operations in Southeast Asia and considerable management attention and resources may be required to manage these new markets and product lines. We may be subject to additional risks including credit risk, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.

 

Beginning in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, and the epidemic quickly spread to many provinces, autonomous regions, and cities in China as well as many parts of the world, 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 has been closed since 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, Malaysia government extended the shutdown order to all business until March 5, 2021 After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. 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. 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 still open for operations. Economic activities in Malaysia were reopened on March 5, 2021 after the six-month shutdown order imposed by Malaysia government on August 28, 2020. However, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021. 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 may 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. 

 

 

The COVID-19 outbreak precludes in person sales meetings or visits being made out of all of the Company’s offices or attendance at furniture trade shows, but the Company continues to receive orders and solicit business via telephone and email.  The Company has experienced reduced demand for its products and purchase order cancellations as a result of the COVID-19 pandemic, however, though in 2020 we have been experiencing a 39.59% increase in orders placed with us online compared with 2019.

 

We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the Paycheck Protection Program (“PPP”).  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar Outdoors Inc. (“Diamond Bar”) was granted a loan from Cathay Bank in the aggregate amount of $176,294, pursuant to the Paycheck Protection Program. In June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. 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.

 

Many of our employees are currently working remotely, and our systems appear adequate to address the current demands on our employees. We do not expect that the remote working arrangements will materially and adversely impact our internal control over financial reporting and disclosure controls and procedures. 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.

 

Discontinued Operations

 

Towards the end of 2019, our Board of Directors determined to discontinue its marketing efforts in Canada and committed to a plan to dispose of Bright Swallow. 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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment in full on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented.

 

Principal Factors Affecting Our Financial Performance

 

At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2019 Collection in the Las Vegas Market, with a view to attracting a higher-end ultimate customer. We believe these new strategies, and the recent launch of our Summer 2019 Collection, 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, Canadian, European 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. 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 attempting to shift 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.

 

 

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, 2020.

 

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, Nova Macao, i Design, Nova Furniture, Nova Samoa, Nova Malaysia, Nova HK and its former subsidiary, Bright Swallow.

 

Use of Estimates

 

In preparing condensed consolidated financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates. 

 

Accounts Receivable

 

Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We do not expect to collect receivables greater than one year from the time of sale. Our policy is to maintain an allowance for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  We maintained an allowance for bad debt of $1,741 and $3,919 as of March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021 and 2020, bad debts reversal from continuing operations were $3,460 and $23, respectively. During the three months ended March 31, 2021 and 2020, bad debt expenses from discontinued operations were $0. As of March 31, 2021, we had gross receivable of $174,087 of which no amount was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns. 

 

Advances to Suppliers

 

Advances to suppliers are reported net of allowance when we determine that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on our historical records and in normal circumstances, we generally receive goods within 5 to 9 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers have been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments has been made or recorded by us. Any provisions for allowance for advance to suppliers, if deemed necessary, will be included in general and administrative expenses in the consolidated statements of comprehensive income (loss).

 

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 and Bright Swallow were incorporated in the BVI, Nova Samoa was incorporated in Samoa and Nova Macao was incorporated in Macau. There is no income tax for companies domiciled in the BVI, Samoa and Macau. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI, Samoa and Macau tax jurisdictions where Nova Furniture BVI and Bright Swallow, Nova Samoa and Nova Macao are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes.

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. 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 three months ended March 31, 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 consolidated statements of comprehensive income (loss).

 

 

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, Nova Macao, Bright Swallow, 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 comprehensive loss.

 

The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.

 

Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:

 

Balance sheet items, except for equity accounts

       

March 31, 2021

   

RM4.15 to 1

 

December 31, 2020

   

RM4.02 to 1

 
         

Income statement and cash flow items

       

For the period ended March 31, 2021

   

RM4.07 to 1

 

For the period ended March 31, 2020

   

RM4.18 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, Bright Swallow is a furniture distributor focusing on customers primarily in Canada, Nova Macao is a furniture distributor based in Macao focusing on international customers, Nova HK is 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, Bright Swallow, Nova Macao, 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 

 

Recent Adopted Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. Upon adoption, we must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We applied the new standard beginning January 1, 2021.

 

In August 2020, the FASB issued ASU No. 2020-06 “ASU 2020-06”) “Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning of such fiscal year. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have any impact on the Company’s condensed consolidated financial statement presentation or disclosures.

 

Recently issued accounting pronouncements not yet adopted 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. Adoption of the ASUs is on a modified retrospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the standard will have on our condensed consolidated financial statements and related disclosures. 

 

In January 2017, the FASB issued ASU No. 2017-04, simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of adopting this standard on our condensed consolidated financial statements.

 

We do not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on our financial statement presentation or disclosures.

 

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2021 and 2020

 

The following table sets forth the results of our operations for the three months ended March 31, 2021 and 2020. Certain columns may not add due to rounding.

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
    $    

% of Sales

    $    

% of Sales

 

Net sales

  $ 3,331,567             $ 2,203,220          

Cost of sales

    (1,951,255

)

    (59

%)

    (1,424,191

)

    (65

%)

Gross profit

    1,380,312       41

%

    779,029       35

%

Operating expenses

    (2,146,415

)

    (64

%)

    (1,600,135

)

    (73

%)

Loss from operations

    (766,103

)

    (23

%)

    (821,106

)

    (37

%)

Other income (expenses), net

    12,242       0

%

    (167,928

)

    (8

%)

Income tax expenses

    (9,676

)

    -

%

    (23,879

)

    (1

%)

Loss from continuing operations

    (763,537

)

    (23

%)

    (1,012,913

)

    (46

%)

Loss from discontinued operations

    -       -

%

    (326,531

)

    (15

%)

Net loss

    (763,537

)

    (23

%)

    (1,339,444

)

    (61

%)

 

Net Sales

 

Net sales from continuing operations for the three months ended March 31, 2021 were $3.33 million, an increase of 51% from $2.20 million in the same period of 2020. This increase in net sales resulted primarily from a 13.25% increase in sales volume, simultaneously with a 33.52% increase in average selling price. Our three largest selling product categories in the three months ended March 31, 2021 were sofas, beds and coffee table, which accounted for approximately 49%, 15% and 8% of sales from our continuing operations, respectively. In the three months ended March 31, 2020, the three largest selling categories were sofas, beds and coffee table, which accounted for approximately 56%, 12% and 9% of sales from our continuing operations, respectively.

 

The $1.13 million increase in net sales from continuing operations in the three months ended March 31, 2021, compared to the same period of 2020, was mainly due to increased sales to North America, Asia, Europe and South America. Sales to North America, increased 37.6% to $3.01 million in the three months ended March 31, 2021, as compared to $2.18 million in 2020, primarily due to receiving more sales orders from our customers in North America. Sales to Asia (excluding China) increased to $0.18 million in the three months ended March 31, 2021 from $0 in the same period of 2020, primarily due to sales orders received from new customers for jade mats in Malaysia. Sales to other countries increased to $0.15 million in the three months ended March 31, 2021, compared to $18,364 in the same period of 2020.

 

Cost of Sales

 

Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations increased by 37% to $1.95 million in the three months ended March 31, 2021, compared to $1.42 million in the same period of 2020. Cost of sales as a percentage of sales decreased to 59% in the three months ended March 31, 2021, compared to 65% in 2020. The increase of cost of sales in dollar term is primary due to increase of the sales. The decrease in cost of sales as a percentage of sales is a result that we focus on selling products at high margin.

 

 

Gross Profit 

 

Gross profit from continuing operations was $1.38 million in the three months ended March 31, 2021, compared to gross profit of $0.78 million in the same period of 2020. Our gross profit margin was 41% in the three months ended March 31, 2021, compared to 35% in the same period of 2020. The increase in gross profit margin is a result that we focus on selling products at higher margin. 

 

Operating Expenses

 

Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses were $2.15 million in the three months ended March 31, 2021, compared to $1.6 million in same period of 2020. Selling expenses increased by 142%, or $450,669, to $0.77 million in the three months ended March 31, 2021, from $0.32 million in the same period of 2020, primarily due to increased marketing and advertising expenses and commission expenses. On the other hand, general and administrative expenses increased by 7%, or $95,611, to $1.38 million in the three months ended March 31, 2021, from $1.28 million in the same period of 2020, primarily due to an increase in auditing expenses and rent expenses of $0.17 million and $0.03 million, respectively.

 

Other Income (Expenses), Net

 

Other income, net, from continuing operations was $12,242 in the three months ended March 31, 2021, compared with other expenses, net, of $167,928 in the same period of 2020, representing a decrease in other expenses of $180,170. The decrease in other expenses was due primarily to the increase of foreign exchange gain to $68,984 for the three months ended March 31, 2021 from foreign exchange loss of $156,013 in the same period of 2020. The gain in March 31, 2021 was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the Company's assets in Malaysia. Also, there was a decrease in interest income of $23,215 to ($2,390) for the three months ended March 31, 2021, from $20,825 in the same period of 2020. The increase in financial expenses of $21,612 to 54,352 for the three months ended March 31, 2021, compared with $32,740 in the same period of 2020.

 

Income Tax Expenses

 

Income tax expenses from continuing operations was $9,676 in the three months ended March 31, 2021, compared with $23,879 of income tax expense in the same period of 2020. The income tax expenses were primarily related to the foreign-sourced earnings from one of our subsidiaries, Nova HK for the three months ended March 31, 2021.

 

Loss from Continuing Operations

 

As a result of the foregoing, our loss from continuing operations was $0.77 million in the three months ended March 31, 2021, compared with $1.01 million of loss for the same period of 2020.

 

Loss from Discontinued Operations

 

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 $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had loss from discontinued operations of $0.33 million in the three months ended March 31, 2020.

 

Net Loss

 

As a result of the foregoing, our net loss was $0.77 million in the three months ended March 31, 2021, compared with $1.34 million of net loss for the same period of 2020.

 

Liquidity and Capital Resources

 

Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks. In May 2020, we received loans under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act. In June 2020, we obtained a loan pursuant to the Economic Injury Disaster Loan Program.

 

 

We rely primarily on internally generated cash flow and available working capital to support growth.  We may seek additional financing in the form of bank loans or other credit facilities or funds raised through future offerings of our equity or debt, if and when we determine such offerings are required. As of March 31, 2021, we do not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from sales of products will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months.

 

We had net working capital of $40,355,071 at March 31, 2021, a decrease of $914,549 from net working capital of $41,269,620 at December 31, 2020. The ratio of current assets to current liabilities was 28.85-to-1 at March 31, 2021.

 

The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2021 and 2020:

 

   

2021

   

2020

 

Cash provided by (used in):

               

Operating activities

  $ (880,935

)

  $ (672,156

)

Investing activities

    -       (1,462,200

)

Financing activities

    -       -  

 

Net cash used in operating activities was $0.88 million in the three months ended March 31, 2021, an increase of cash outflow of $0.21 million from $0.67 million of cash used in operating activities in the same period of 2020. The increase of cash outflow was attributable primarily to the increase in cash outflow for inventory of $0.49 million to $0.13 million outflow in the three months ended March 31, 2021, compared to $0.37 million cash inflow in the same period, such increase in cash outflows being mainly due to more purchase made for an increase of our sales in the three months ended March 31, 2021. The increase in operating cash outflow was partially offset by (i) an increase cash inflow of $0.34 million from accounts receivable to $0.35 million cash inflow in the three months ended March 31, 2021, compared to $2,307 cash inflow in the same period of 2020, such increase being primarily due to collect from our customers in timely fashion in the three month ended March 31, 2021; (ii) an increase cash inflow of $0.13 million from other current assets to $0.13 million, compared to $1,369 cash inflow in the same period due to we made our payments to our service providers in advance basis.

 

Net cash used in investing activities was $0 in the three months ended March 31, 2021 since we have no investing activities. Net cash used in investing activities was $1.46 million in the three months ended March 31, 2020 related to cash of Bright Swallow disposed of in January 2020 while we received $2.50 million cash consideration for this sale transaction.

 

Net cash provided by financing activities was $0 in the three months ended March 31, 2021 and 2020.

 

As of March 31, 2021, we had gross accounts receivable of $174,087, of which $142,181 was not yet past due and $32,100 was less than 90 days past due. We had an allowance for bad debt of $1,741. As of May 4, 2021, $134,601 of accounts receivable outstanding as of March 31, 2021 had been collected.

 

All accounts receivable outstanding at December 31, 2020 had been collected during 2021.

 

As of March 31, 2021 and December 31, 2020, we had advances to suppliers of $351,088 and $381,894, respectively. These supplier prepayments are made for goods before we actually receive them.

 

For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is five months after our advance payment. Due to the COVID-19 pandemic, freight transportation of products from our international suppliers has been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments had been made or recorded by us. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts. As of March 31, 2021, and December 31, 2020, no reserve on supplier prepayments had been made or recorded by us.

 

As of May 4, 2021, 52% of our advances to suppliers outstanding at March 31, 2021 had been delivered to us in the form of purchases of furniture.

 

 

Shelf Registration

 

On July 13, 2017, 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 as of October 12, 2017 and has expired on October 12, 2020. On October 8, 2020, the Company filed a new 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 new shelf registration statement was declared effective on October 15, 2020.

 

Other Long-Term Liabilities

 

As of March 31, 2021, we recorded long-term taxes payable of $1.63 million, consisting of an income tax payable of $1.63 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, and a $0.01 million unrecognized tax benefit, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.

 

We elected to pay the one-time transition tax over the eight years commencing April 2018.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our unaudited condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of March 31, 2021. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. 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 Security Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). Richard Deutner and ITENT EDV were subsequently substituted as plaintiffs and, on June 18, 2019, they filed an Amended Complaint. 

 

In an Amended Complaint, plaintiffs seek to represent a class of entities involved in any transaction in 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 its reported sales in 2016 and 2017 with that same customer and another major customer.  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.  Plaintiffs, however, have offered no evidence of falsity other than the Seeking Alpha blog.

 

Nova denies that there were any misstatements made in its public disclosures.  It also, inter alia, challenges plaintiffs’ ability to establish loss causation and damages. 

 

By Order entered December 2, 2019, the Court denied a Motion to Dismiss the Amended Complaint Nova, Ms. Lam and Mr. Chuang filed (the “Nova Defendants”) The Nova Defendants accordingly answered the Amended Complaint.  The Court entered a scheduling order setting a final pretrial conference for July 20, 2020 that has now been extended until an unspecified date in August, 2021. On April 9, 2021, plaintiffs filed a Motion to Certify a Class.  A hearing on this Motion has been set for July 12, 2021.

 

Independent of the litigation, the Audit Committee engaged the Company’s independent auditor to perform special procedures to confirm the sales challenged in the Barney action. Those procedures included, but were not limited to, the examination and testing of relevant documentation relating to the sales made by the Company to the customers identified in the Seeking Alpha blog and 100% sampling of all transactions between the Company and the subject customers. The auditor finished its special procedures in March 2019 and reported to the Audit Committee that no evidence of fictitious sales or of fictitious customers was discovered regarding the customers mentioned in the Seeking Alpha blog,. Please see the details in the Form 8-K filed by the Company with SEC on March 29, 2019.

 

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 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.  He purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.

 

 

On March 3, 2020, defendants filed in each of the derivative actions motions to stay those proceedings until the Barney action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board 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 the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.

 

While these derivative actions are purportedly asserted on behalf of the Company, if they are reactivated, it is possible that the Company may directly incur attorneys’ fees and is 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.

 

While these derivative actions are purportedly asserted on behalf of the Company, it is possible that the Company may directly incur attorneys’ fees and is 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.

 

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.

 

Item 6. Exhibits

 

EXHIBIT INDEX

 

Exhibit No.

 

Document Description

31.1 †

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 †

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 ‡

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by the Chief Executive Officer

32.2 ‡

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by the Chief Financial Officer

     

101.INS†

 

XBRL Instance Document

101.SCH†

 

XBRL Schema Document

101.CAL†

 

XBRL Calculation Linkbase Document

101.DEF†

 

XBRL Definition Linkbase Document

101.LAB†

 

XBRL Label Linkbase Document

101.PRE†

 

XBRL Presentation Linkbase Document

 

† Filed herewith

‡ Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

NOVA LIFESTYLE, INC.

   

(Registrant)

     

Date: May 17, 2021

By:

/s/ Thanh H. Lam                                

 
   

Thanh H. Lam

Chairperson and Chief Executive Officer

(Principal Executive Officer)

     

Date: May 17, 2021

 

/s/ Jeffery Chuang

 
   

Jeffery Chuang

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

39