Safe Harbor Statement
The following discussion and analysis are based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended
December 31, 2021(the "2021 Form 10-K"). All references to the first quarter and first three months of 2022 and 2021 mean the three-month periods ended March 31, 2022and 2021. In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the company's business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2021 Form 10-K. Overview Nova LifeStyle, Inc.is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail 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 LifeStylealso sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.
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 LifeStyleis 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 Limiteddomiciled 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 Limiteddomiciled in Hong Kong("Nova HK"). The Company had two former subsidiaries Bright Swallow International Group Limiteddomiciled in Hong Kong("Bright Swallow" or "BSI") which was sold in January 2020and Nova Furniture Macao Commercial Offshore Limiteddomiciled in Macao("Nova Macao") which completed the de-registration and liquidation process in January 2021. 22 Table of Contents 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, 2019under the laws of Malaysia. Nova Malaysiais to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysiaand other regions in Southeast Asia.
October 14, 2020, Nova Macao's offshore license was invalidated by the Macao Trade and Investment Promotion Instituteunder the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macaowas de-registration and liquidation in January 2021and its business was taken over by Nova HK. Nova Macaocompleted 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 Kongon November 6, 2019. This company has had minimal operations. In February 2022, Nova HK also entered a de-registration process and is in the process of transferring all its assets and business to Nova Malaysia. Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, Honduras, Panama, Kazakhstan, Asian and Middle Eastern markets. Due to the recent imposition of significant trade tariffs on importation from Chinato the United Statesand 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, Malaysiain late 2019, which, after a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysiagovernment extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysiaimposed a new nationwide lockdown on May 12, 2021until early June 2021which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people whoare fully vaccinated and our store is reopened now. In April 2022, Malaysiahas reopened the border for foreign visitors. 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 Asiaand 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 Organizationdeclared 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 Malaysiawas closed from March, 2020 to May, 2020. The Los Angelesfacility closed on March 16, 2020and reopened in full operation on June 1, 2020. On May 12, 2020, the Company's Kuala Lumpuroffice and warehouse reopened for business. On August 28, 2020, the Malaysiagovernment extended the shutdown order to all business until March 5, 2021After the re-opening on March 5, 2021, Malaysiagovernment imposed a new nationwide lockdown on May 12, 2021until early June 2021which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people whoare fully vaccinated and our store is reopened now. In April 2022, Malaysiahas reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in Chinawere closed from the beginning of the Lunar New YearHoliday at the end of January 2020through the beginning of March 2020. In 2022, there have been outbreaks of the Omicron variant of COVID-19 in Hong Kongand many other cities in China, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities have been imposed by local governments. Although our suppliers in Chinahave not been materially and negatively impacted by such outbreaks , the government authorities may issue new orders of office closure, travel and transportation restrictions in Chinadue to the resurgence of the COVID-19 and outbreak of new variants, which could cause the delay of the delivery from our suppliers in China.Certain of the Company's new products are being sourced from manufacturers in Indiastarting in 2020. The factories in Indiasuspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in Indiaare open for operations. Shipping of products from Asiahas experienced significant delays since the onset of the pandemic and the costs of shipping from Asiahave increased since the onset; and we have experienced and may continue to experience shipping disruptions in the future. Finally, the Company expects that the impact of the COVID-19 outbreak on the United Statesand 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. 23 Table of Contents We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802under 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 Bankin 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.
Although there is no assurance, at this time we expect that the circumstances related to the epidemic will lead to significant write-downs of our jade mattress inventory in
Main 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 Stateson certain products manufactured in China; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) continued significant delays in the receipt of shipments of our products from Asiaand 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 Stateson certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in Chinato third-party manufacturers located in other parts of Asia, such as Vietnam, Indiaand/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 Malaysiaand Indiastarting 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 Chinabecause 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 Europeremain challenging because such markets are experiencing a slow-down and may be entering a recession due to the COVID-19 pandemic and war in Ukraine. Critical Accounting Policies
While our significant accounting policies are described more fully in Note 2 to our accompanying unaudited condensed consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this Management's Discussion and Analysis.
There have been no material changes in our critical accounting policies and estimates from the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended
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 LifeStyleand its subsidiaries, Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia and Nova HK. Use of Estimates
In preparing condensed consolidated financial statements in conformity with
U.S.GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates. 24 Table of Contents 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 $2,924and $1,741as of March 31, 2022and 2021, respectively. During the three months ended March 31, 2022and 2021, bad debts provision (reversal) were $1,880and ( $3,460), respectively. As of March 31, 2022, we had gross receivable of $292,398of 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 operations. Income Taxes Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc.and Diamond Bar are subject to U.S.federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company's condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoatax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysiais incorporated in Malaysiaand is subject to Malaysiaincome taxes. Nova HK is incorporated in Hong Kongand is subject to Hong Kongincome taxes.
The Tax Cuts and Jobs Act 2017 (the “Act”) created new taxes on certain foreign source income, such as Global Low Tax Intangible Income (“GILTI”) under Section 951A of the IRC, which applies to the company for tax years. starting after
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. 25 Table of Contents
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.
Revenues from the sale of products are recognized net of reserves set aside for applicable discounts and rebates that are offered under 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, 2022. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on our condensed consolidated statements of operations.
Foreign Currency Conversion and Transactions
The accompanying unaudited condensed consolidated financial statements are presented in
United StatesDollar ("$" 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 Malaysiauses 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.
Conversion of RM amounts to
Balance sheet items, except for equity accounts
March 31, 2022 RM4.20to 1 December 31, 2021 RM4.18to 1 Income statement and cash flow items For the three months ended March 31, 2022 RM4.19to 1 For the three months ended March 31, 2021 RM4.07to 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 have determined that our business constitutes a single segment for reporting in accordance with ASC 280. We operate exclusively in one business and industry segment: the design and sale of furniture.
26 Table of Contents We concluded that we had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in
Californiafocusing on customers in the US, Nova HK was a furniture distributor based in Hong Kongfocusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Nova HK and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United Statesand Malaysiafor 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
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.
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.
Accounting pronouncements recently issued but not yet adopted
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. In March 2022, the FASB issued ASU 2022-02, Topic 326. The ASU eliminates the accounting guidance for trouble debt restructurings by creditors in Subtopic 310-40, and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, the ASU requires disclosure of gross writeoffs of receivables by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. This ASU is effective for periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2016-13 and ASU 2022-02 will have on our consolidated financial statement presentations and disclosures. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwilland 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 effect on the presentation or disclosure in our financial statements.
27 Table of Contents Results of Operations
Comparison of the three months ended
The following table sets forth the results of our operations for the three months ended
March 31, 2022and 2021. Certain columns may not add due to rounding. Three Months Ended March 31, 2022 2021 $ % of Sales $ % of Sales Net sales $ 3,665,946 $ 3,331,567Cost of sales (2,137,618 ) (58 )% (1,951,255 ) (59 )% Gross profit 1,528,328 42 % 1,380,312 41 % Operating expenses (2,393,291 ) (65 )% (2,146,415 ) (64 )% Loss from operations (864,963 ) (24 )% (766,103 ) (23 )% Other (expenses) income, net (33,084 ) (1 )% 12,242 0 % Income tax expenses - - % (9,676 ) - % Net loss (898,047 ) (25 )% (763,537 ) (23 )% Net Sales
Net sales for the three months ended
March 31, 2022were $3.67 million, an increase of 10.0% from $3.33 millionin the same period of 2021. This increase in net sales resulted primarily from a 16.2% increase in average selling price, partially offset by a 5.3% decrease in sales volume. Our three largest selling product categories in the three months ended March 31, 2022were sofas, beds and chairs, which accounted for approximately 45%, 14% and 10% of sales, respectively. In the three months ended March 31, 2021, the three largest selling categories were sofas, beds and coffee tables, which accounted for approximately 49%, 15% and 8% of sales, respectively. The $0.33 millionincrease in net sales in the three months ended March 31, 2022, compared to the same period of 2021, was mainly due to increased sales to North America. Sales to North Americaincreased by 20.0% to $3.61 millionin the three months ended March 31, 2022, as compared to $3.01 millionin the same period of 2021. It was primarily due to the change of our sales strategy to seek sales of products of higher margins. Sales to other countries decreased by $92,920to $53,934in the three months ended March 31, 2022from $146,854in the same period of 2021, primarily due to receiving less sales orders from our customers in other countries. Sales to Asiadecreased to $nil in the three months ended March 31, 2022, compared to $178,282in the same period of 2021, primarily due to no sales orders from our customers in Malaysiabecause of the rising of inflation rate that reduced consumers' purchasing power even though there were recent signs of economy recovery from the COVID-19 outbreak and
lockdowns. Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales increased by 9.6% to
$2.14 millionin the three months ended March 31, 2022, compared to $1.95 millionin the same period of 2021. Cost of sales as a percentage of sales decreased to 58% in the three months ended March 31, 2022, compared to 59% in the same period of 2021. The increase of cost of sales in dollar term primarily resulted from the increase of the sales. The decrease in cost of sales as a percentage of sales was a result that we focused on selling products with higher profit margin.
Gross Profit Gross profit was
$1.53 millionin the three months ended March 31, 2022, compared to gross profit of $1.38 millionin the same period of 2021, representing an increase in gross profit of $0.15 million. Our gross profit margin was 42% in the three months ended March 31, 2022, compared to a gross profit margin of 41% in the same period of 2021. The increase in gross profit margin was a result that we focused on selling products with higher profit
margin. Operating Expenses Operating expenses consisted of selling, general and administrative expenses and loss on disposal of fixed assets. Operating expenses were
$2.39 millionin the three months ended March 31, 2022, compared to $2.15 millionin the same period of 2021. Selling expenses were $768,333in the three months ended March 31, 2022, very close to $768,085in the same period of 2021. In addition, general and administrative expenses increased by 15.2%, or $0.21 million, to $1.59 millionin the three months ended March 31, 2022, from $1.38 millionin the same period of 2021, primarily due to an increase in technology services fee and consulting fees of $0.16 millionand $0.12 million, respectively, while the increase was partially offset by the decrease of $78,726in auditing expenses. Also, the increase in operating expenses was a result of a loss on disposal of fixed assets of $36,549due to the de-registration of our subsidiary Nova HK. 28 Table of Contents Other (Expenses) Income, Net
Other expenses, net, was
$33,084in the three months ended March 31, 2022, compared with other income, net, of $12,242in the same period of 2021, representing an increase in other expenses of $45,326. The increase in other expenses was due primarily to the decrease of foreign exchange gain to $17,763for the three months ended March 31, 2022from foreign exchange gain of $68,984in the same period of 2021. The decrease in gain in March 31, 2022was mainly a result of the depreciation of Malaysian Ringgit against U.S.dollars on the Company's assets in Malaysia. The increase in other expenses was partially offset by the decrease in financial expense. Income Tax Expenses Income tax expense was $nil in the three months ended March 31, 2022, compared with $9,676in the same period of 2021. The income tax expenses were primarily related to the foreign-sourced earnings from one of our subsidiaries, Nova HK for the three months ended March 31, 2021. Net Loss
As a result of the above, our net loss was
Cash and capital resources
Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks. We rely primarily on internally generated cash flow and available working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through offerings of our equity or debt, if and when we determine such offerings are required. As of
March 31, 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 a net working capital of
The following is a summary of the cash provided or used in each of the types of activities indicated during the three months ended
2022 2021 Cash provided by (used in): Operating activities
$ (856,595 ) $ (880,935 )Investing activities - - Financing activities - -
Net cash used in operating activities was
cash used in operating activities during the same period of 2021.
The decrease of cash outflow was attributable primarily to the increase in cash inflow for advance to suppliers of
$0.41 millionto $0.44 millioncash inflow in the three months ended March 31, 2022, compared to $30,806cash inflow in the same period of 2021, such increase in cash inflow being mainly due to less deposits paid to our suppliers with more goods being received from them. Also, the increase in cash inflow for accounts payable of $0.57 millionto $0.32 millioncash inflow in the three months ended March 31, 2022, compared to $0.25 millioncash outflow in the same period of 2021, such increase in cash inflow being mainly because more purchases were made on credit due to the increase of sales. The decrease of cash outflow in the first quarter of 2022 was also attributable to decreased cash outflow of $0.20 millionfrom advance from customers to $24,953in the three months ended March 31, 2022, compared to $0.23 millionin the same period of 2021. The change of cash outflow from accrued liabilities and other payables of $64,427in the three months ended March 31, 2021to cash inflow of $0.19 millionin the three months ended March 31, 2022. The decrease in operating cash outflow was partially offset by (i) an increased cash outflow of $0.54 millionin accounts receivable to $0.19 millioncash outflow in the three months ended March 31, 2022, compared to $0.35 millioncash inflow in the same period of 2021, such increase in cash outflow being mainly a result of the increase of our sales on credit in the first quarter of 2022, compared to the same period of 2021; (ii) the increase in cash outflow for inventories of $0.91 millionto $1.04 millioncash outflow in the three months ended March 31, 2022, compared to $0.13 millionin the same period of 2021, such increase in cash outflow being mainly due to more purchase was made in the
three months ended
March 31, 2022.
Net cash from investing activities was nil for the three months ended
Net cash provided by financing activities was nil during the three months ended
29 Table of Contents As of
March 31, 2022, we had gross accounts receivable of $292,398, of which $228,332was not yet past due and $64,066was less than 90 days past due. We had an allowance for bad debt of $2,924. As of May 9, 2022, accounts receivable of $264,988outstanding as of March 31, 2022had been collected.
All outstanding accounts receivable
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, 2022and December 31, 2021, no reserve on supplier prepayments had been made or recorded by us.
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 $3,120,622before 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
March 31, 2022, we recorded long-term taxes payable of $1.54 million, consisting of an income tax payable of $1.54 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 millionunrecognized 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 have chosen to pay the single transition tax over the eight years beginning
Off-balance sheet arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to shareholders. We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity or that are not reflected in our condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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