Safe Harbor Declaration
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results could differ materially from
the results described in or implied by these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this
Annual Report on Form 10-K, particularly under the heading "Risk Factors."
Overview
Nova LifeStyle, Inc. is a distributor of contemporary styled residential and
commercial furniture incorporated into a dynamic marketing and sales platform
offering retail as well as online selection and global purchase fulfillment. We
monitor popular trends and products to create design elements that are then
integrated into our product lines that can be used as both stand-alone or
whole-room and home furnishing solutions. Through our global network of
retailers, e-commerce platforms, stagers and hospitality providers, Nova
LifeStyle also sells (through an exclusive third-party manufacturing partner) a
managed variety of high quality bedding foundation components.
Nova LifeStyle's brand family currently includes Nova LifeStyle, Diamond Sofa
(www.diamondsofa.com) and Nova Living.
Our customers principally consist of distributors and retailers with specific
geographic territories that deploy middle to high end private label home
furnishings which have very little competitive overlap with our specific
furnishing products or product lines. Nova LifeStyle is constantly seeking to
integrate new sources of distribution and manufacturing that are properly
aligned with our growth strategy. This allows us to continually focus on
building both our overall distribution and manufacturing relationships through a
deployment of popular, as well as trend-based, furnishing solutions worldwide.
We are a U.S. holding company with no material assets in the U.S. other than the
ownership interests of our wholly owned subsidiaries through which we market,
design and sell residential and commercial furniture worldwide: Nova Furniture
Limited domiciled in the British Virgin Islands ("Nova Furniture"), Nova
Furniture Ltd. domiciled in Samoa ("Nova Samoa"), Diamond Bar Outdoors, Inc.
domiciled in California ("Diamond Bar"), Nova Living (M) SDN. BHD. domiciled in
Malaysia ("Nova Malaysia") and Nova Living (HK) Group Limited domiciled in Hong
Kong ("Nova HK"). The Company had three former subsidiaries Bright Swallow
International Group Limited domiciled in Hong Kong ("Bright Swallow" or "BSI")
which was sold in January 2020, and Nova Furniture Macao Commercial Offshore
Limited domiciled in Macao ("Nova Macao") which was de-registration and
liquidation in January 2021. In February 2022, Nova HK entered a de-registration
process and transferred all its assets and business to Nova Malaysia. The
process of de-registration and liquidation was completed in February 2023.
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On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. ("i
Design") under the laws of the State of California. The purpose of i Design is
to build our own blockchain technology team. i Design is in the planning stage
and has had minimum operations to date. On December 12, 2019, we became the sole
shareholder of Nova Living (M) SDN. BHD. ("Nova Malaysia"), a company
incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia markets
and sells high-end physiotherapeutic jade mats for use in therapy clinics,
hospitality, and real estate projects in Malaysia and other regions in Southeast
Asia.
On January 7, 2020, we transferred our entire interest in Bright Swallow to
Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of
$2,500,000. We received the payment on May 11, 2020.
On October 14, 2020, Nova Macao's offshore license was invalidated by the Macao
Trade and Investment Promotion Institute under the order of Repeal of Legal
Regime of the Offshore Services by Macao Special Administrative Region. Nova
Macao was de-registration and liquidation in January 2021 and its business was
taken over by Nova HK. Nova Macao completed the de-registration and liquidation
process in January 2021.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group
Limited ("Nova HK") which was incorporated in Hong Kong on November 6, 2019.
This company had minimal operations. In February 2022, Nova HK entered a
de-registration process and transferred all its assets and business to Nova
Malaysia. The process of de-registration and liquidation was completed in
February 2023.
Our experience developing and marketing products for international markets has
enabled us to develop the scale, logistics, marketing, manufacturing
efficiencies and design expertise that serve as the foundation for us to expand
aggressively into the highly attractive U.S., Canada, Honduras, Guatemala, Guam,
Puerto Rico, Panama, Costa Rica, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait,
Kazakhstan, Malaysia, Asian and Middle Eastern markets.
Due to the 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 which was
subsequently extended to early October 2021. In October 2021, the Order was
lifted for people who are fully vaccinated and our store has been reopened
since. In April 2022, Malaysia has reopened the border for foreign visitors. We
have limited experience with operations in Southeast Asia and considerable
management attention and resources may be required to manage these new markets
and product lines. We may be subject to additional risks including credit risk,
currency exchange rate fluctuations, foreign exchange controls, import and
export requirements, potentially adverse tax consequences and higher costs
associated with doing business internationally.
Beginning in early 2020, a strain of novel coronavirus ("COVID-19") has spread
globally including the U.S. and Malaysia. In March 2020, the World Health
Organization declared the COVID-19 a pandemic. In response to the evolving
dynamics related to the COVID-19 outbreak, the Company has been following the
guidelines of local authorities as it prioritizes the health and safety of its
employees, contractors, suppliers and retail partners. The Company's two
showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020.
The Los Angeles facility closed on March 16, 2020 and reopened in full operation
on June 1, 2020. On May 12, 2020, the Company's Kuala Lumpur office and
warehouse reopened for business. On August 28, 2020, the Malaysia government
extended the shutdown order to all business until March 5, 2021. After the
re-opening on March 5, 2021, Malaysia government imposed a new nationwide
lockdown on May 12, 2021 until early June 2021 which was subsequently extended
to early October 2021. In October 2021, the Order was lifted for people who are
fully vaccinated and our store has been reopened since. In April 2022, Malaysia
has reopened the border for foreign visitors. The third-party contract
manufacturers that the Company utilizes in China were closed from the beginning
of the Lunar New Year Holiday at the end of January 2020 through the beginning
of March 2020. Certain of the Company's new products are being sourced from
manufacturers in India starting in 2020. The factories in India suspended their
operations as a result of the COVID-19 pandemic during March through early May
2020. Currently, the factories in India are open for operations. Shipping of
products from Asia has experienced significant delays since the onset of the
pandemic and the costs of shipping from Asia have increased since the onset. In
June 2022, all the shipping and related costs from Asia have been back to
normal. Finally, the Company expects that the impact of the COVID-19 outbreak on
the United States and world economies will continue to have a material adverse
impact on the demand for its products. Because of the significant uncertainties
surrounding the COVID-19 pandemic, the extent of the future business
interruption and the related financial impact cannot be reasonably estimated at
this time.
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We do not have access to a revolving credit facility. On May 4, 2020, the
Company received loan proceeds in the amount of approximately $139,802 under the
Paycheck Protection Program ("PPP"). The PPP, established as part of the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for
loans to qualifying businesses for amounts up to 2.5 times of the average
monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar
Outdoors Inc. ("Diamond Bar") was granted a loan from Cathay Bank in the
aggregate amount of $176,294, pursuant to the Paycheck Protection Program. In
June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration
(SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury
Disaster Loan. In July 2021, we completed a registered direct offering of our
shares of common stock and received offering gross proceeds of $3,120,622. We
currently believe that our financial resources will be adequate to finance our
operations through the outbreak. However, in the event that we do need to raise
capital in the future, the outbreak-related instability in the securities
markets could adversely affect our ability to raise additional capital.
While there can be no assurance, at the present time we expect the
outbreak-related circumstances to result in material impairments of our
inventory of Jade Mattress in Malaysia that significantly affect management's
judgements in assessing the fair value of our assets.
Discontinued Operations
On February 15, 2022, we transferred our entire assets and business of Nova HK
to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported
as discontinued operations in the accompanying 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, will provide us
with significant long term growth opportunities. The transition has and is
expected to continue to adversely impact our revenue and our net profit in the
short-term as we roll out new products and market those products to our existing
client base and to new potential customers better suited for the higher end
products, and as we assess our new products' market acceptance. Significant
factors that we believe could affect our operating results are the (i) prices of
our products to our international retailer and wholesaler customers and their
markups to end consumers; (ii) general economic conditions in the U.S., Chinese,
and other international markets; and (iii) trade tariffs imposed by the United
States on certain products manufactured in China; and (iv) the consequences of
the COVID-19 outbreak throughout the world; and (v) delays in the receipt of
shipments of our products from Asia and increased costs of shipping from Asia.
We believe most of our customers are willing to pay for our high quality and
stylish products, timely delivery, and strong production capacity at price
levels which we expect will allow us to maintain a relatively high gross profit
margin for our products. We do not manufacture our products, but instead we
utilize third-party manufacturers. In response to the tariffs imposed by the
United States on certain products manufactured in China, we are in the process
of shifting a portion of our product manufacturing from third-party
manufacturers located in China to third-party manufacturers located in other
parts of Asia, such as Vietnam, India and/or Malaysia, countries unaffected by
the tariffs. Implementation of a relocation of manufacturing (which by necessity
includes an assessment of the factory's ability to deliver the quantity of the
product, in accordance with the Company's specifications, and in accordance with
the Company's quality control requirements) is time-consuming, but a portion of
our manufacturing has been transitioned to Malaysia and India starting in 2020
and we expect that more of our manufacturing will be transitioned to one or more
of these venues. 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) remains
challenging because such markets are experiencing a slow-down and may be
entering a recession due to the COVID-19 pandemic.
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Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to
our accompanying 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, 2022.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") for Nova LifeStyle and its subsidiaries, Diamond Bar, i
Design, Nova Furniture, Nova Samoa, Nova Malaysia, Nova HK and its former
subsidiary, Nova Macao.
Use of Estimates
In preparing 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 consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Significant estimates and
assumptions made by us, include but are not limited to, revenue recognition, the
allowance for bad debt, valuation of inventories, the valuation of stock-based
compensation, income taxes and unrecognized tax benefits, valuation allowance
for deferred tax assets, assumptions used in assessing impairment of long-lived
assets and goodwill. Actual results could differ from those estimates.
Accounts Receivable
Our accounts receivable arises from product sales. We do not adjust receivables
for the effects of a significant financing component at contract inception if we
expect to collect the receivables in one year or less from the time of sale. We
do not expect to collect receivables greater than one year from the time of
sale. Our policy is to maintain an allowance for potential credit losses on
accounts receivable. We review the composition of accounts receivable and
analyze historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. We maintained an allowance for bad debt
of $2,914 and $1,044 as of December 31, 2022 and 2021, respectively. During the
years ended December 31, 2022 and 2021, bad debts provision (reversal) from
continuing operations were $1,870 and ($4,157), respectively. During the years
ended December 31, 2022 and 2021, bad debt expenses from discontinued operations
were $0. As of December 31, 2022, we had gross receivable of $291,392 of which
$208,134 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.
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Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods
that are yet to be delivered and from which future economic benefits are
expected to flow to the Company within the normal operating cycle. Based on our
historical records and in normal circumstances, we generally receive goods
within 4 to 6 months from the date the advance payment is made. Due to the
COVID-19 pandemic, the freight transportation of the products from our
international suppliers have been delayed or suspended during the outbreak.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates, applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC Topic 740 also provides guidance on
recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state
income taxes. Nova Furniture BVI was incorporated in the BVI, and Nova Samoa was
incorporated in Samoa. There is no income tax for companies domiciled in the BVI
and Samoa. Accordingly, the Company's 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 was
incorporated in Malaysia and is subject to Malaysia income taxes. Nova HK was
incorporated in Hong Kong and was 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, 2022, the
Company has calculated its best estimate of the impact of the GILTI in its
income tax provision in accordance with its understanding of the Act and
guidance available as of the date of this filing.
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which it expects to
receive in exchange for those goods. We recognize revenues following the five
step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as)
we satisfy the performance obligation.
Revenue from product sales is recognized when the customer obtains control of
our product, which typically occurs upon delivery to the customer. We expense
incremental costs of obtaining a contract as and when incurred if the expected
amortization period of the asset that it would have recognized is one year or
less or the amount is immaterial.
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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 years
ended December 31, 2022 and 2021.
We generally expense sales commissions when incurred because the amortization
period would have been one year or less. These costs are recorded within selling
expenses on our consolidated statements of operations.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in United
States Dollar ("$" or "USD"), which is also the functional currency of Nova
LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.
The Company's subsidiary with operations in Malaysia uses its local currency,
Malaysian Ringgit ("RM"), as its functional currency. An entity's functional
currency is the currency of the primary economic environment in which it
operates, which is normally the currency of the environment in which the entity
primarily generates and expends cash. Management's judgment is essential to
determine the functional currency by assessing various indicators, such as cash
flows, sales price and market, expenses, financing and inter-company
transactions and arrangements.
Foreign currency transactions denominated in currencies other than the
functional currency are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
re-measured at the applicable rates of exchange in effect at that date. Gains
and losses resulting from foreign currency re-measurement are included in the
statements of operations.
The financial statements are presented in U.S. dollars. Assets and liabilities
are translated into U.S. dollars at the current exchange rate in effect at the
balance sheet date, and revenues and expenses are translated at the average of
the exchange rates in effect during the reporting period. Stockholders' equity
accounts are translated using the historical exchange rates at the date the
entry to stockholders' equity was recorded, except for the change in retained
earnings during the period, which is translated using the historical exchange
rates used to translate each period's income statement. Differences resulting
from translating functional currencies to the reporting currency are recorded in
accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following
exchange rates:
Balance sheet items, except for equity accounts
December 31, 2022 RM4.40 to 1
December 31, 2021 RM4.18 to 1
Income statement and cash flow items
For the year ended December 31, 2022 RM4.40 to 1
For the year ended December 31, 2021 RM4.14 to 1
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Segment Reporting
ASC Topic 280, "Segment Reporting," requires use of the "management approach"
model for segment reporting. The management approach model is based on the way a
company's chief operating decision maker organizes segments within the company
for making operating decisions, assessing performance and allocating resources.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company.
We determined that our operations constitute a single reportable segment in
accordance with ASC 280. We operate exclusively in one business and industry
segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond
Bar is a furniture distributor based in California focusing on customers in the
US, Nova Macao was 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
Recently Adopted Accounting Standards
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt -
Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock
Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or
Exchanges of Freestanding Equity-Classified Written Call Options ("ASU
2021-04"). ASU 2021-04 provides guidance as to how an issuer should account for
a modification of the terms or conditions or an exchange of a freestanding
equity-classified written call option (i.e., a warrant) that remains classified
after modification or exchange as an exchange of the original instrument for a
new instrument. An issuer should measure the effect of a modification or
exchange as the difference between the fair value of the modified or exchanged
warrant and the fair value of that warrant immediately before modification or
exchange and then apply a recognition model that comprises four categories of
transactions and the corresponding accounting treatment for each category
(equity issuance, debt origination, debt modification, and modifications
unrelated to equity issuance and debt origination or modification). ASU 2021-04
is effective for all entities for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. An entity should
apply the guidance provided in ASU 2021-04 prospectively to modifications or
exchanges occurring on or after the effective date. The Company applied the new
standard beginning January 1, 2022. The adoption of the new standard did not
have any impact on our condensed consolidated financial statement presentation
or disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic
832): Disclosures by Business Entities about Government Assistance. This update
requires certain annual disclosures about transactions with a government that
are accounted for by applying a grant or contribution accounting model by
analogy. This update is effective for annual periods beginning after December
15, 2021, and early application is permitted. This guidance should be applied
either prospectively to all transactions that are reflected in financial
statements at the date of initial application and new transactions that are
entered into after the date of initial application or retrospectively to those
transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The
adoption of ASU 2021-10 did not have any impact on our condensed consolidated
financial statements.
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Recently Issued But Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all
expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable
forecasts. ASU 2016-13 replaces the existing incurred loss model and is
applicable to the measurement of credit losses on financial assets measured at
amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis.
As a smaller reporting company, ASU 2016-13 will be effective for the Company
for interim and annual reporting periods beginning after December 15, 2022. We
are currently evaluating the impact that the adoption of ASU 2016-13 will have
on our consolidated financial statement presentations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04").
ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under
which a goodwill impairment loss was measured by comparing the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
ASU 2017-04 requires only a one-step quantitative impairment test, whereby a
goodwill impairment loss is measured as the excess of a reporting unit's
carrying amount over its fair value (not to exceed the total goodwill allocated
to that reporting unit). Adoption of the ASUs is on a modified retrospective
basis. As a smaller reporting company, the standard will be effective for the
Company for interim and annual reporting periods beginning after December 15,
2022. We are currently evaluating the impact that the adoption of ASU 2017-04
will have on our consolidated financial statement presentation or disclosures.
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 Years Ended December 31, 2022 and 2021
The following table sets forth the results of our operations for the years ended
December 31, 2022 and 2021. Certain columns may not add due to rounding.
Years Ended December 31,
2022 2021
% of % of
$ Sales $ Sales
Net sales $ 12,744,871 $ 12,556,219
Cost of sales (20,526,484 ) 161 % (7,034,482 ) 56 %
Gross (loss) profit (7,781,613 ) (61 )% 5,521,737 44 %
Operating expenses (8,440,738 ) (66 )% (9,382,285 ) (75 )%
Loss from operations (16,222,351 ) (127 )% (3,860,548 ) (31 )%
Other expenses, net (851,166 ) (7 )% (200,675 ) (2 )%
Income tax expenses (2,400 ) - % (163,893 ) (1 )%
Loss from continuing operations (17,075,917 ) (134 )% (4,225,116 ) (34 )%
Loss from discontinued operations (25,754 ) - % (15,737,377 ) (125 )%
Net loss
(17,101,671 ) (134 )% (19,962,493 ) (159 )%
Net Sales
Net sales from continuing operations for the year ended December 31, 2022 were
$12.74 million, an increase of 2% from $12.56 million in 2021. This increase in
net sales resulted primarily from a 13.30% increase in average selling price,
partially offset by a 10.41% decrease in sales volume. Our three largest selling
product categories for the year ended December 31, 2022 were sofas, beds and
chairs, which accounted for approximately 41%, 15% and 11% of sales from
continuing operations, respectively. For the year ended December 31, 2021, the
three largest selling categories were sofas, beds and coffee tables, which
accounted for approximately 46%, 15% and 7% of sales from continuing operations,
respectively.
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The $188,652 increase in net sales from continuing operations for the year ended
December 31, 2022, compared to the year of 2021, was mainly due to increased
sales to other countries. Sales to other countries increased by $408,150 to
$675,008 for the year ended December 31, 2022 from $266,858 for 2021, primarily
due to the increase in direct container sales in other countries. However, the
increase in net sales from continuing operations was partially offset by the
decrease in sales to North America. Sales to North America decreased by 2.3% to
$12.01 million for the year ended December 31, 2022, compared to $12.29 million
for 2021, such decrease being mainly a result of inflation, U.S. tightening
monetary policy, reducing the purchasing power of the customers and thus making
them less willing to spend in nonfood categories.
Cost of Sales
Cost of sales from continuing operations consists primarily of costs of finished
goods purchased from third-party manufacturers. Total cost of sales from
continuing operations increased by 192% to $20.53 million for the year ended
December 31, 2022, compared to $7.03 million for 2021. Cost of sales as a
percentage of sales increased to 161% for the year ended December 31, 2022,
compared to 56% for 2021. The increase in cost of sales in dollar term and cost
of sales as a percentage of sales, was mainly due to our write down of $12.90
million of the slow-moving inventory, primarily the jade mats in Malaysia, to
the lower of cost and net realizable value for 2022, compared to no inventory
write down for 2021. The substantial difference of the inventory write downs
between the years ended December 31, 2022 and 2021, was caused by the ownership
transfer of the jade mats in Malaysia from Nova HK to Nova Malaysia on February
15, 2022, as Nova HK entered a de-registration process in February 2022 and its
operations were reported as discontinued operations for all periods presented,
and thus the write down of $15.96 million of the jade mats in Malaysia was
reported from the Company's discontinued operations for 2021.
Moreover, if total cost of sales from continuing operations excluded our
inventory write down of $12.90 million for the year ended December 31, 2022,
total cost of sales from continuing operations would increase by 8% to $7.62
million for the year ended December 31, 2022, compared to $7.03 million for
2021, and cost of sales as a percentage of sales would increase to 60% for the
year ended December 31, 2022, compared to 56% for 2021. The increase in cost of
sales in dollar term and cost of sales as a percentage of sales, was a result of
the increase in our direct container sales which came with low profit margin.
Gross (Loss) Profit
Gross loss from continuing operations was $7.78 million for the year ended
December 31, 2022, compared to gross profit of $5.52 million for 2021,
representing a decrease in gross profit of $13.30 million. Our gross loss margin
was 61% for the year ended December 31, 2022, compared to a gross profit margin
of 44% for 2021. The decrease in gross profit and gross profit margin, was
mainly a result of our inventory write down of $12.90 million for 2022,
primarily for the jade mats in Malaysia, compared to no inventory write down for
2021.. The substantial difference of the inventory write downs in 2022 and 2021
mainly resulted from the ownership transfer of the jade mats inventories from
Nova HK to Nova Malaysia on February 15, 2022. Since the ownership of the jade
mats was with Nova HK for 2021, which operations were reported as discontinued
operations for all periods present, the write down of $15.96 million of the jade
mats was reported as the Company's discontinued operations for 2021.
Moreover, if total cost of sales from continuing operations excluded our
inventory write down of $12.90 million for the year ended December 31, 2022,
gross profit would be $5.12 million for the year ended December 31, 2022,
compared to gross profit of $5.52 million for 2021, and our gross profit margin
would be 40% for the year ended December 31, 2022, compared to a gross profit
margin of 44% for 2021. The decrease in gross profit and gross profit margin,
was primarily due to the increasing direct container sales with low profit
margin.
Operating Expenses
Operating expenses from continuing operations consisted of selling, general and
administrative expenses. Operating expenses from continuing operations were
$8.44 million for the year ended December 31, 2022, compared to $9.38 million
for 2021. Selling expenses from continuing operations decreased by 23%, or $0.84
million, to $2.89 million for the year ended December 31, 2022, from $3.73
million for 2021, primarily due to decreased marketing and advertising expenses.
In addition, general and administrative expenses from continuing operations
decreased by 2%, or $0.09 million, to $5.56 million for the year ended December
31, 2022, from $5.65 million for 2021, primarily due to a decrease in legal and
professional fees, rent expenses, technology services fees and research and
development expenses of $0.26 million, $0.13 million, $0.13 million and $0.10
million, respectively, while the decrease was partially offset by an increase in
travel expenses and consulting fees of $0.25 million and $0.22 million,
respectively.
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Other Expenses, Net
Other expenses, net, from continuing operations were $851,166 for the year ended
December 31, 2022, compared to $200,675 for 2021, representing an increase in
other expenses of $650,491. The increase in other expenses was due primarily to
an increase in foreign exchange loss of $737,507 to $639,432 for the year ended
December 31, 2022 from foreign exchange gain of $98,075 for 2021. The increase
in foreign exchange loss was mainly a result of the depreciation of Malaysian
Ringgit against U.S. dollars on the Company's assets in Malaysia. However, the
increase in other expenses was partially offset by a decrease in interest
expenses of $97,928 to $25,216 for the year ended December 31, 2022, compared to
$123,144 for 2021.
Income Tax Expenses
Income tax expenses from continuing operations were $2,400 for the year ended
December 31, 2022, compared to $163,893 for 2021. The income tax expenses for
2021 were primarily related to payable true up for the one-time transition tax
commencing in April 2018 as the result of the tax examination of Internal
Revenue Service.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was $17.08
million for the year ended December 31, 2022, compared to $4.23 million for
2021.
Loss from Discontinued Operations
On February 15, 2022, we transferred our entire assets and business in Nova HK
to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported
as discontinued operations in the accompanying consolidated financial statements
for all periods presented. We had loss from discontinued operations of $0.03
million and $15.74 million for the years ended December 31, 2022 and 2021,
respectively.
Net Loss
As a result of the foregoing, our net loss was $17.10 million for the year ended
December 31, 2022, compared to $19.96 million for 2021.
Liquidity and Capital Resources
Our principal demands for liquidity are related to our efforts to increase sales
and purchase inventory, and for expenditures related to sales distribution and
general corporate purposes. We intend to meet our liquidity requirements,
including capital expenditures related to purchase of inventories and the
expansion of our business, primarily through cash flow provided by operations,
collections of accounts receivable, and credit facilities from banks.
We rely primarily on internally generated cash flow and available working
capital to support growth. We may seek additional financing in the form of bank
loans or other credit facilities or funds raised through offerings of our equity
or debt, if and when we determine such offerings are required. As of December
31, 2022, we do not have any credit facilities. We believe that our current cash
and cash equivalents and anticipated cash receipts from sales of products will
be sufficient to meet our anticipated working capital requirements and capital
expenditures for the next 12 months.
We had net working capital of $6,557,629 at December 31, 2022, a decrease of
$17,196,927 from net working capital of $23,754,556 at December 31, 2021. The
ratio of current assets to current liabilities was 4.99-to-1 at December 31,
2022.
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The following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended December 31, 2022 and 2021:
2022 2021
Cash (used in) provided by:
Operating activities $ (5,367,650 ) $ (4,782,354 )
Investing activities (8,772 ) (154,820 )
Financing activities - 2,760,974
Net cash used in operating activities was $5.37 million for the year ended
December 31, 2022, an increase in cash outflow of $0.59 million from $4.78
million of cash used in operating activities for 2021.
The increase in cash outflow was attributable primarily to (i) an increase in
cash outflow of $1.01 million for other current assets to $1.19 million cash
outflow for the year ended December 31, 2022, compared to $0.18 million cash
outflow for 2021, such increase in cash outflow being mainly due to the
increasing prepaid expenses regarding technology services incurred for 2022;
(ii) an increase in cash outflow of $0.60 million for accounts receivable to
$0.19 million cash outflow for the year ended December 31, 2022, compared to
$0.42 million cash inflow for 2021, such increase in cash outflow being mainly a
result of more credit sales for 2022; (iii) an increase in cash outflow of $0.36
million for advance from customers to $0.22 million cash outflow for the year
ended December 31, 2022, compared to $0.13 million cash inflow for 2021, such
increase in cash outflow being mainly due to more goods delivered to our
customers with less deposits received from them for 2022. The increase in
operating cash outflow was partially offset by (i) an increase in cash inflow of
$1.01 million for advance to suppliers to $0.69 million cash inflow for the year
ended December 31, 2022, compared to $0.33 million cash outflow for 2021, such
increase in cash inflow being mainly due to less deposits paid to our suppliers
with more goods received from them for 2022; (ii) an increase in cash inflow of
$0.35 million for accounts payable to $0.04 million cash outflow for the year
ended December 31, 2022, compared to $0.39 million cash outflow for 2021, such
increase in cash inflow being mainly a result of more purchases made on credit
for 2022.
Net cash used in investing activities was $8,772 for the year ended December 31,
2022, a decrease in cash outflow of $146,048 from $154,820 of cash used in
investing activities for 2021. We incurred cash outflow of $8,772 from purchase
of office equipment for the year ended December 31, 2022, while we incurred cash
outflow of $154,820 from purchase of office equipment and leasehold improvement
for the year ended December 31, 2021.
Net cash provided by financing activities was $0 for the year ended December 31,
2022, compared to $2.76 million of cash provided by financing activities for
2021. During the year ended December 31, 2021, we received $2.76 million from
equity financing.
As of December 31, 2022, we had gross accounts receivable of $291,392, of which
$63,833 was not yet past due and $19,425 was less than 90 days past due. We had
an allowance for bad debt of $2,914. As of March 17, 2023, 28% of accounts
receivable outstanding as of December 31, 2022 had been collected.
All accounts receivable outstanding at December 31, 2021 had been collected
during 2022.
As of December 31, 2022 and 2021, we had advances to suppliers of $21,173 and
$707,264, respectively. These supplier prepayments are made for goods before we
actually receive them.
For a new product, the normal lead time from new product R&D, prototype, and
mass production to delivery of goods from our suppliers to us is approximately
six to nine months after we make advance payments to our suppliers. For other
products, the typical time is 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. 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 17, 2023, 30% of our advances to suppliers outstanding at December
31, 2022 had been delivered to us in the form of purchases of furniture.
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Shelf Registration
On October 8, 2020, the Company filed a shelf registration statement on Form S-3
under which the Company may, from time to time, sell securities in one or more
offerings up to a total dollar amount of $60,000,000. The shelf registration
statement was declared effective on October 15, 2020. On July 23, 2021, the
Company entered into a Securities Purchase Agreement with certain institutional
investors for the sale by the Company of 1,114,508 shares of common stock. The
shares were offered and sold by the Company pursuant to the effective shelf
registration statement on Form S-3. The offering gross proceeds were $3,120,622
before deducting placement agent's commissions and other offering costs, and the
net proceeds of the offering were approximately $2,760,000. The offering closed
on July 27, 2021.
Other Long-Term Liabilities
As of December 31, 2022, we recorded long-term taxes payable of $1.16 million,
consisting of an income tax payable of $1.16 million, primarily arising from a
one-time transition tax recognized in the fourth quarter of 2017 on our
post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions
for which the timing of the ultimate resolution is uncertain should be
recognized as long-term liabilities.
We elected to pay the one-time transition tax over the eight years commencing
April 2018.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that
have, or are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to shareholders.
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholders' equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
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