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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________to_______________
Commission file number: 333-36259
NOVA LIFESTYLE, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 90-0746568 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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6565 E. Washington Blvd. Commerce, CA |
90040 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (323) 888-9999
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | NVFY | Nasdaq Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
As of June 30, 2023, the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2.34 million, based upon the closing price of the Company’s common stock of $2.24 per share as reported on the same date.
As of April 11, 2024, there were 2,322,115 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2023. Portions of such definitive proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.
NOVA LIFESTYLE, INC.
Table of Contents
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, regarding our company that include, but are not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.
These forward-looking statements involve various risks and uncertainties. Although we believe our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and other sections in this report. You should read this report and the documents we refer to thoroughly with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this report include additional factors which could adversely impact our business and financial performance.
This report contains statistical data we obtained from various publicly available government publications and industry-specific third-party reports. Statistical data in these publications also include projections based on a number of assumptions. The markets for our products may not grow at the rate projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our securities. In addition, the rapidly changing nature of our customers’ industries results in significant uncertainties in any projections or estimates relating to the growth prospects or future condition of our markets. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of the independent industry publication market data cited in this report was prepared on our or our affiliates’ behalf.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.
As used in this report, “Nova LifeStyle,” “Nova,” the “Company,” “we,” “our” and similar terms refer to Nova LifeStyle, Inc. and its subsidiaries, unless the context indicates otherwise.
Our functional currency is the U.S. Dollar, or USD. See Note 2 of the consolidated financial statements included herein.
PART I
Item 1. Business
Our Company
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”) is a U.S.-headquartered innovative designer and marketer of contemporary styled residential and commercial furniture formerly known as Stevens Resources, Inc. We were incorporated in the State of Nevada on September 9, 2009. The Company’s products are marketed through wholesale and retail channels as well as various online platforms worldwide.
Nova LifeStyle’s family of brands includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.
Our business strength lies in our abilities to quickly adapt to changing market demand and stay ahead of the latest trends in modern furniture designs. Our customers principally consist of designers, distributors and retailers who cater to mid-level and high-end private label home furnishings that have little product overlap within our specific furnishings products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are aligned with our growth strategies, allowing us to continually focus on growing our customer base as well as driving the expansion of our overall distribution and manufacturing relationships worldwide, providing our customers with trendy furnishing solutions.
We generate the majority of our sales as a branding and marketing company with vertically integrated third-party manufacturing capabilities for global furniture distributors and large national retailers. We have established long term relationships with our worldwide customers by providing them with high quality, large scale and cost-effective sourcing solutions. Our worldwide logistics and delivery capabilities provide our customers with the flexibility to select from our extensive furniture collections tailored for their respective needs. Our experience marketing products to international customers have enabled us to fully integrate the supply scale, product delivery logistics, marketing efficiency and design expertise to address customer demand from established markets in the North America, Central America, South America, Asia, and the Middle East.
Reverse split
On December 18, 2019, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of December 20, 2019, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock, was effected. On May 22, 2023, the Company filed a Certificate of Change with the Nevada Secretary of State to effect a 1-for-5 reverse stock split, which became effective upon filing (the “Reverse Stock Split”). As a result of the reverse Stock Split, every 5 shares of the Company’s common stock issued and outstanding immediately prior to the filing of the Certificate of Change was consolidated into one issued and outstanding share. All stockholders who would be entitled to receive fractional shares as a result of the Reverse Stock Split received one whole share for their fractional share interest. There was no change in the par value of our common stock. All references to shares and per share data have been retroactively restated to reflect such splits.
On September 5, 2023, Nova LifeStyle, Inc., a Nevada corporation (the “Company”) filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 3,000,000 to 250,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
Human Capital Resources
We understand that our success depends on our ability to attract, train and retain our employees. We strive to attract, recruit, and retain employees through competitive compensation and benefit programs, learning and development opportunities that support career growth and advancement opportunities, and employee engagement initiatives that foster a strong Company culture. In addition to cash compensation, we offer customary benefits in accordance with local regulatory requirements as well as stock options to our employees. We also recognize the importance of keeping our employees safe. In response to the COVID-19 pandemic, we implemented changes that we determined were in the best interest of our employees and have followed local government orders to prevent the spread of COVID-19. As of December 31, 2023, we had 27 full time employees worldwide. Our U.S. corporate office and operations employed 24 full-time employees, our location in Malaysia employed 3 full-time employees, respectively. We believe that relations with our employees are satisfactory. We have no collective bargaining agreements with our employees.
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Our History
We are a U.S. holding company that operates through several wholly-owned subsidiaries. We design and market residential and commercial furniture products worldwide. Our subsidiaries include Nova Furniture Limited in the British Virgin Islands (“Nova Furniture”), Nova Furniture Limited in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. (“Diamond Bar”), I Design Blockchain Technology, Inc (“i Design”), Nova Living (M) SDN. BHD. (“Nova Malaysia”) and Nova Living (HK) Group Limited (“Nova HK”). Diamond Bar is a California corporation organized on June 15, 2000, which we acquired pursuant to a stock purchase agreement on August 31, 2011. On April 24, 2013, we acquired all of the outstanding stock of Bright Swallow International Group Limited (“Bright Swallow”).
On September 23, 2016, Nova Furniture, a wholly-owned subsidiary of the Company (the “Seller”), entered into a Share Transfer Agreement (the “Agreement”) with Kuka Design Limited, an unrelated company incorporated in British Virgin Islands (“Kuka Design BVI” or “Buyer”). Pursuant to the terms of the Agreement, the Seller sold all of the outstanding equity interests in Nova Furniture (Dongguan) Co., Ltd. (“Nova Dongguan”), a company incorporated in China and a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”). Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan.
On November 10, 2016, Nova Furniture entered into a Trademark Assignment Agreement with Kuka Design BVI (“Assignee”). Pursuant to the terms of the Trademark Assignment Agreement, Nova Furniture assigned the Assignee its full right to, and title in, the NOVA trademark in China for $6,000,000.
On December 7, 2017, Nova LifeStyle, Inc. incorporated i Design under the laws of the State of California, USA. The purpose of i Design is to build our own blockchain technology team. This new company will focus on application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building blockchain-powered platform that enables designers to showcase their products including current and future furniture designs. This company is in a planning stage and has had minimum operations to date.
On December 12, 2019, Nova LifeStyle, Inc. acquired Nova Malaysia which was incorporated in Malaysia on July 26, 2019. Nova Malaysia was acquired to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.
On January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”) was organized under the laws of Macao on May 20, 2006 as a wholly owned subsidiary of Nova Furniture. On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova Macao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao was de-registrated and liquidated in January 2021 and its business was taken over by Nova HK.
On November 5, 2020, Nova LifeStyle, Inc. acquired Nova HK from unrelated third party at cost of $1,290 which was incorporated in Hong Kong on November 6, 2019. Nova HK took over Nova Macao’s business upon its deregistration. Nova HK had minimum operations in 2021. On February 15, 2022, the Company transferred its entire assets and business in Nova HK to Nova Malaysia. In February 2023, Nova HK was completed the process of de-registration and liquidation. Operations of Nova HK were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
Our organizational structure as of December 31, 2023 is set forth in the diagram:
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Our Products
We design and market modern residential and commercial furniture in diverse markets worldwide. Our products feature urban and contemporary styles, combining comfort and functionality in matching furniture collections and upscale luxury pieces appealing to lifestyle-conscious middle and upper middle-income consumers. We also sell physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia. Many of our products are segments of multi-component furniture collections in distinctive design styles, attractively priced in the medium and upper-medium ranges. Our product lines feature upholstered, wood and metal-based furniture pieces. We classify our products by room, designation or series, such as living room, dining room, bedroom and home office series, and by category or product types such as sofas, chairs, dining tables, beds, entertainment consoles, cabinets and cupboards. Our largest selling product categories for the year ended December 31, 2023 were sofas, jade mats and beds, which accounted for approximately 37%, 18% and 13% of sales from continuing operations, respectively. For the year ended December 31, 2022, our largest selling product categories were sofas, beds and chairs, which accounted for approximately 41%, 15% and 11% of sales from continuing operations, respectively. Our products are manufactured primarily from medium-density fiberboard, or MDF board, and particleboard covered with veneers or lacquers and combined with other materials, including steel, glass, marble, leather, jade and fabrics.
Our product offerings consist of a mix of furnishings designed by us, and sourced from third party manufacturers that are supervised under our rigorous quality control processes. Through market research, customer feedback, and ongoing design development, we identify the latest trends and customer needs in target markets to develop new products, collections and brands. Our product collections are designed to appeal to consumer preferences in specific markets. We develop both individual furniture pieces and complete furniture collections that equip an entire home which feature matching furniture suites, providing convenient home furnishing options for lifestyle-conscious consumers.
We introduce new collections and launch new design styles at international furniture exhibitions or trade fairs. Our products are displayed in our showrooms. We further support our new product launches with product brochures and online marketing campaigns. Our staff collects customer feedback and collaborates with customers worldwide to design store and showroom layouts. In marketing materials, we highlight matching furniture collections by displaying complete and fully accessorized whole-room settings instead of individual furniture pieces. We believe that such in-store presentations provide convenient, one-stop solutions to customers, and thus incentivize clients to purchase an entire room of furniture from us instead of shopping for individual pieces offered by different brands or manufacturers. Our products are mainly designed by our own designers and we also used independent designers in the past for product design. Customer orders are filled by third party manufacturers under our direct quality control. We believe that our products feature superior materials, attractive appearances, superb functionalities and satisfying price points generally desired by today’s middle to upper middle-income consumers worldwide.
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International Markets
We have been selling products to the U.S., Canada, Honduras, Guam, Puerto Rico, Costa Rica, Colombia, Uruguay, Mexico, Cayman Islands, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait, Armenia and Middle Eastern markets under the Diamond Sofa brand and selling our Jade Mats in Malaysia through Nova Malaysia. We believe that discretionary purchases of furniture by middle to upper middle-income consumers will continue to increase in the furniture markets worldwide. We also believe that furniture products that feature contemporary design styles such as ours will continue to attract significant customer demand.
In 2023, our products were sold in 13 countries worldwide, with North America as our principal international market. Sales to North America accounted for 79.1% and 94.2% of our total sales from continuing operations for 2023 and 2022, respectively. Sales to other regions accounted for 20.9% and 5.8% of our total sales from continuing operations for 2023 and 2022, respectively. In 2023, via our subsidiary, Nova Malaysia, we marketed and sold high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia. Due to the negative impact caused by COVID-19 in 2021 and 2022, we eventually sold the entire jade mats inventory for $2.00 million in liquidation sales in June 2023 and existed from Jade Mats business. As we continue to broaden our distribution network, increase direct sales and grow in the emerging markets, we believe that we are well positioned to respond to changing market conditions that will allow us to take advantage of any upturns in the global and local economies of the markets that we serve.
Our expansion in Malaysia with health line products has also been disrupted due to COVID-19. Our initial plan was to establish showrooms in which consumers can interact with our products. Through research, we found that consumers were becoming more self-aware about their health and were willing to improve their lifestyles. Our showrooms were stocked and ready for local consumers to visit, however, due to government regulations these operations have been suspended until quarantines and travel restrictions are lifted. In October 2021, the Order was lifted for people who are fully vaccinated and our store has reopened since. We started the online sales of our jade mats products in Malaysia since 2021. In April 2022, Malaysia has reopened the border for foreign visitors. In June 2023, everything is back to normal in Malaysia. Due to the negative impact caused by COVID-19 from 2020 to 2022, the Company eventually sold the entire jade mats inventory for $2.00 million in liquidation sales in June 2023 and existed from Jade Mats business.
The furniture wholesale business faces several risks that can impact its operations and profitability. Some common risks include: (i) Economic Instability: Fluctuations in the economy can affect consumer spending on furniture, leading to decreased demand for products; (ii) Competition: Intense competition from other wholesalers, retailers, and online platforms can impact market share and pricing strategies; (iii) Supply Chain Disruptions: Interruptions in the supply chain, such as delays in shipping or shortages of raw materials or finished products, can hinder production and delivery schedules; (iv) Changing Consumer Preferences: Shifts in consumer preferences towards sustainable, trendy, or customized furniture may require wholesalers to adapt their product offerings; (v) Seasonal Demand: The furniture industry often experiences seasonal peaks and troughs, which can impact cash flow and inventory management; (vi) Regulatory Challenges: Compliance with regulations related to product safety, environmental standards, and labor practices can add complexity and costs to operations.
In order to mitigate these risks, we will continue to diversify our product range, build strong relationships with suppliers, closely monitor market trends, invest in technology for efficiency, and maintain a robust risk management strategy.
Our global logistics and delivery capabilities provide our customers with the flexibility to select from our extensive furniture collections to address their respective needs. We design and supply our products under our own brands. We also design and ship products for other major brands as their OEM designer or supplier. We offer a wide selection of stand-alone furniture pieces across a variety of product categories and approximately over 230 products developed exclusively for the international markets. We also sell products under the Diamond Sofa brand to distributors and retailers in North America, South America, Asia and Middle East and to end-user U.S. consumers our own online orders or through third-party shopping portals. Reflecting market demand, our research and development team works closely with customers to timely modify our existing product designs. We also offer custom-designed styles for specific market segments.
Sales and Marketing
Our sales and marketing strategies target middle and upper middle class, urban consumers, including: (1) direct sales to the U.S. and international customers; (2) internet sales and online marketing campaigns; and (3) participation in exhibitions and trade shows.
We diversify our customer base by increasing direct sales to a broad range of retailers and chain stores across the U.S. and international markets. We plan to continue to expand our direct sales and marketing efforts in North America, and in particular the U.S., which historically is the largest market worldwide for imported furniture. We intend to expand the “Diamond Sofa” brand and introduce new brands for direct sales in the U.S. and international markets while continuing to offer custom-made products under private label.
Diamond Bar also currently sells products under the Diamond Sofa brand in the U.S. through third party shopping portals, shipping orders received online directly to the end customer. We believe that our planned direct-to-consumer online sales and marketing strategies will increase our sales in the U.S. by building our brand awareness and acting as an effective advertising vehicle. We also support new product collections and brand launches with print and online advertising campaigns, participation in furniture exhibitions and by offering product brochures and samples. We provide samples and brochures of new products for international markets to distributors and buyers, as is common in the furniture industry.
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We gain new customers by attending many international furniture trade shows throughout the years. During these events, we introduce new product offerings and launch new design collections. We believe this marketing process helps us to develop and detect the latest-trends in the marketplace, allowing us to better understand the challenges and opportunities facing distributors and buyers with whom we have long–standing customer relationships. We exhibit new products under the “Diamond Sofa” brand during the Las Vegas Market (U.S.) and the High Point Market (U.S.) trade shows. Internationally, we participate in trade fairs in collaboration with our customers. We plan to expand our business in the Middle East by attending several furniture exhibitions in those markets, such as trade show in Dubai. To highlight our latest design collections, we maintain year-round showrooms at the Company’s headquarters in California as well as the High Point Market and Las Vegas Market.
In 2022 and 2023, via our subsidiary Nova Malaysia, we marketed and sold high-end physiotherapeutic jade mats to individuals and business companies in Malaysia.
Suppliers and Manufacturers
We source finished goods from third-party manufacturers to fulfill orders placed by customers through Diamond Bar and Nova Malaysia for the U.S. and international markets. Our two principal suppliers of finished goods in 2023 accounted for approximately 36% of our total purchases from continuing operations for 2023. By maintaining relationships with multiple suppliers, generally we benefit from a more stable supply chain and better pricing. Under ordinary circumstances, if a change of suppliers is necessary, we believe that we can quickly fulfill our requirements from other suppliers without interruptions in order fulfillment. We monitor our suppliers’ ability to meet our product needs and we participate in quality assurance activities to reinforce our high-quality standards. Our third-party manufacturing contracts are generally of annual or shorter durations. We issue production orders to manufacturers based on individual purchase orders. Our manufacturing relationships are non-exclusive, and we are permitted to procure products from other sources at our discretion. None of our manufacturing contracts include production volume or purchase commitments on the part of either party. Our third-party manufacturers are responsible for sourcing raw materials, agreeing to produce parts and finished products to our specifications. We hold our suppliers to high quality standards and delivery deadlines. Our quality control procedures may extend to stringent requirements for raw material suppliers.
Currently, the factories in China and India are in their normal 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 due to the pandemic, supply chain disruption and port congestion. In June 2022, all the shipping and related costs from Asia have been back to normal. It is possible that our overseas’ based manufacturers may experience future suspensions of operations as a result of any resurgence or new variants of COVID-19.
Customers
Our target end customer is the middle and upper middle-income consumer of residential and commercial furniture. In the U.S. and international markets, our sales principally are to furniture distributors and retailers who in turn offer our products under their own brands or under our Diamond Sofa brand. One customer accounted for 18% of the Company’s sales and no customer accounted for greater than 10% of our total sales from continuing operations for 2023 and 2022, respectively. We will increase direct sales to retailers and chain stores worldwide as we continue to diversify our customer base from global furniture distributors.
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We are focusing on establishing and growing long-term relationships with our customers. We believe that the majority of our customers view us as a strategic long-term supplier and value the quality of our products, our timely delivery and design capabilities. We generally negotiate renewable supplier agreements with firm pricing on our products, typically for a term of one year, as is customary in the furniture industry, with individual orders made on standard purchase orders. In 2023, we sold products into approximately 14 countries worldwide, with North America as our principal international market, while we expanded our sales in other regions. Sales to North America accounted for 79.1% and 94.2% of our total sales from continuing operations for 2023 and 2022, respectively. The change was attributed principally to our changing sales and marketing strategy to diversify international sales. Sales to other regions accounted for 20.9% and 5.8% of our total sales from continuing operations for 2023 and 2022, respectively. We expect that a majority of our revenues will continue to come from our sales to the U.S. and international markets. Diamond Bar has driven expansion of our sales to the U.S., Mexico, and South America through Diamond Bar’s longstanding customer relationships and distribution capabilities. Diamond Bar’s revenues accounted for 82.4% and 99.5% of our total sales from continuing operations for 2023 and 2022, respectively, and Nova Malaysia’s revenues accounted for 17.6% and 0.5% of our total sales from continuing operations for 2023 and 2022, respectively. In addition, we anticipate increasing internet sales under the Diamond Sofa brand through third-party shopping portals and Nova Malaysia’s website. We believe that as we expand our broad network of distributors and increase direct sales, we will be better positioned to capitalize on emerging market trends.
We typically used to experience stronger fourth calendar quarters as our product sales are subject to the seasonality and fluctuations typical of the furniture industry. This industry-based seasonality was generally caused by shipping lead-times to international markets combined with the real estate market slowdown and decrease in furniture consumption commonly experienced during the summer months in the Northern Hemisphere markets in which the majority of our customers are located and our products sell at retail. However, due to the shipping backlog, our fourth quarter’s sales were worse than the first three quarters in 2022. We believe that consumer demand for furniture generally reflects sensitivity to overall economic conditions, including, but not limited to, unemployment rates, housing market conditions and consumer confidence.
Competition
The furniture industry is large and highly competitive. The industry consists of many manufacturers, distributors and retailers, none of which dominates the fragmented and diverse market. Our products principally compete in the U.S., Canada, Honduras, Guam, Puerto Rico, Costa Rica, Colombia, Uruguay, Mexico, Cayman Islands, Saudi Arabia, Kingdom of Saudi Arabia, Kuwait, Armenia and Malaysia and Middle Eastern markets. The primary competitive factors in these markets for our products and target consumers are price, quality, style, marketing, functionality and availability.
In the U.S. and international markets, we compete against other furniture distributors and wholesalers which are mostly located in China and other Southeast Asian countries. We also compete against traditional distributors in North America and Europe. We believe that we have significant competitive advantages over North American and European distributors due to our superb customer service and a history of prompt delivery of high-quality products. Our contemporary product designs have styles and functionality that are better than, or at least comparable to, those offered by our higher-priced competitors. Our design team closely coordinates with our sales and marketing staff to include customer feedback as part of their ongoing R&D improvement process, thus allows the Company to develop and timely modify products to meet the changing stylistic and functional demands from our worldwide customers. We believe that our decades of product experience and proven performance record offer competitive edges over many other suppliers. In addition to our design and logistical capabilities, we believe that our experience from sourcing custom-made products for distributors presents significant benefits to our customers.
Environmental and Regulatory Matters
Our operations are subject to various laws and regulations both domestically and abroad. In the U.S., federal, state and local regulations impose standards on our workplace and our relationship with the environment. For example, the U.S. Environmental Protection Agency, Occupational Safety and Health Administration and other federal agencies have the authority to promulgate regulations that may impact our operations. In particular, we are subject to legislation placing restrictions on our generation, emission, treatment, storage and disposal of materials, substances and wastes. Such legislation includes: the Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Safe Drinking Water Act; and the Comprehensive Environmental Response and the Compensation and Liability Act (also known as Superfund). We are also subject to the requirements of the Consumer Product Safety Commission and the Federal Trade Commission, in addition to regulations concerning employee health and safety matters. We believe the Company has complied with the relevant federal, state, local and international requirements for environmental protection.
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Intellectual Property
We rely on the trademark protection laws in the U.S. to protect our intellectual property and maintain our competitive position in the marketplace. The Company and our subsidiaries currently hold two trademarks registered in the U.S. related to the “Diamond Sofa” brand. In addition, we have registered and maintained numerous internet domain names related to our business, including “novalifestyle.com”, “novaliving.com.my” and “diamondsofa.com.”
Research and Development
We believe that new product designs are important to our continued success. We actively seek to protect our product designs and brand names under the trademark protection laws in the U.S., but the copying of a product’s appearance is a common and ongoing issue in the furniture industry as manufacturers seek to capitalize on popular designs and features by copying those of their competitors and making subtle changes to avoid infringement claims. To remain competitive, we believe that we must constantly innovate to stay ahead of competitors. We have developed a design process that enables us to better manage the short product life cycles for furniture designs by anticipating and responding quickly to changing consumer preferences. Ordinarily, we strive to attend furniture exhibitions worldwide, conduct market research and solicit customer feedback to help us identify new trends and customer needs in our target markets. We then incorporate customer feedback into new product designs. We normally introduce new product collections annually for the U.S. and international markets. We anticipate introducing new products under the “Diamond Sofa” brand on a quarterly basis for the U.S. market. At least annually, we assess the marketing results for new designs in order to decide whether to continue with a particular line.
We use in-house designers and computer-aided modeling systems to generate design and related development work. We have used independent designers in the past for product design, from which we built prototype furniture pieces for refinement and testing. During 2023, Nova Malaysia spent $3.12 million on developing Virtual and Augmented reality software and AI system for potential consulting business. The entire system is far from complete as it requires to integrate with other components in order to be functional. It is still in development stage and not in operation. In 2023 and 2022, we invested $3.12 million and $10,917, respectively, on research and development expense. We may increase future investments in R&D based on our growth needs.
Furniture Industry Regulations and Standards
We and our products are subject to U.S. and international regulations related to the furniture industry.
Our products are subject to the mandatory and voluntary furniture test standards of the U.S. and international markets in which our products are distributed to end consumers, including those developed by the American National Standards Institute, or ANSI, Business and Institutional Furniture Manufacturer’s Association, or BIFMA, ASTM International, California Air Resources Board, or CARB, Furniture Industry Research Association, or FIRA, and the International Organization for Standardization, or ISO. These environmental, ecological and formaldehyde emission standards and source of origin labeling requirements are national or international, with the U.S. and European Union typically having the strictest standards for their markets. We source products from third party manufacturers and we rely on them to meet all local manufacturing standards.
Employees
As of December 31, 2023, we had 27 full time employees worldwide. Our U.S. corporate office and operations employed 24 full-time employees, our location in Malaysia employed 3 full-time employees, respectively. We believe that relations with our employees are satisfactory. We have no collective bargaining agreements with our employees.
Item 1A. Risk Factors
Our business and an investment in our securities are subject to a variety of risks. The following risk factors describe the most significant events, facts or circumstances that could have a material adverse effect upon our business, financial condition, results of operations, ability to implement our business plan and the market price for our securities. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. Many of these events are outside of our control. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.
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Risks Related to Our Business
Changes in economic conditions in the industries and markets served by our customers could adversely affect demand for our products.
The furniture industry is subject to cyclical variations in the global economy and to uncertainty regarding future economic prospects. Our business is affected by the number of orders we are able to secure from our customers, which is determined by the level of our customers’ business activity. Our customers’ level of business activity is in turn determined by the level of consumer spending in the markets our customers serve. Economic downturns could affect discretionary consumer spending habits by decreasing the overall demand for residential and commercial furniture. Any significant or prolonged decline of the economy or inflation in U.S., Malaysia, China or other international markets in which our products are sold will affect disposable income and spending by consumers in these markets, and may lead to a decrease in demand for our products. To the extent that decrease in demand for consumer products translates into a decline in the demand for residential and commercial furniture, our sales and financial performance could be adversely affected. Any economic downturn also could negatively impact our primary customers, furniture wholesalers, distributors and retailers, possibly resulting in a decrease in our sales or earnings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, inflation, the availability of consumer credit and geopolitical factors could have particularly significant effects on our consolidated financial condition, results of operations and cash flows. Any decline in economic activity and conditions in the industries and markets served by our customers and in which we operate may reduce demand for our products and could adversely affect our financial condition and results of operations. The COVID-19 pandemic has materially adversely impacted the global economy which in turn adversely affected the demand for our products.
We historically have derived a substantial part of our sales from a limited number of customers. If we lose any of these customers, or any of these customers reduce the amount of business they do with us, our sales may be adversely affected.
Historically, a substantial part of our sales was attributed to a limited number of customers. But we had no sales to a customer greater than 10% of our total sales from continuing operations for 2022 and 2021. If the demand for our products decreases in one or more of the markets supplied by our largest customers, or if there are any material social or regulatory changes in these markets, our sales could decline and we could lose market share, any of which could materially harm our business. We do not foresee relying on these same customers for sales generation as we expand our business to increase our internet sales and direct sales to the U.S. and other international markets. We cannot assure you, however, that we will be able to successfully implement these plans.
Our decision to move away from low margin products and to eliminate customers who generate low margin sales and that have slow payment histories could result in a decrease in our future sales and earnings.
As we implement our plan to transition to high profit margin products and fast paying clients, we cannot assure that the transition will be successful and that we will eventually develop enough new business to make up the loss of sales from the existing low margin products and slow paying clients. If we are unable to develop enough new clients for our high profit margin products, our sales and net income will be negatively impacted.
If we lose our key personnel, or are unable to attract and retain additional qualified personnel, the quality of our services may decline and our business may be adversely affected.
We rely heavily on the expertise, experience and continued services of our senior management, including our Chief Executive Officer, President, Director and Chairperson, Ms. Lam, and our Chief Financial Officer, Mr. Chuang. Loss of their services could adversely affect our ability to achieve our business objectives. Ms. Lam and Mr. Chuang are key factors in our success at establishing relationships within the furniture industry in the U.S. and international market and capital market because of their extensive industry and financial experience. The continued development of our business depends upon their continued employment. We have entered into employment agreements with Ms. Lam and Mr. Chuang that include provisions for non-competition and confidentiality.
We believe our future success will depend upon our ability to retain key employees and our ability to attract and retain other skilled personnel. We cannot guarantee that any employee will remain employed by us for any period of time or that we will be able to attract, train or retain qualified personnel in the future. Such loss of personnel could have a material adverse effect on our business and company. Furthermore, we will need to employ additional personnel to expand our business. Qualified employees are in great demand and may be unavailable in the time frame required to satisfy our customers’ requirements. There is no assurance we will be able to attract and retain sufficient numbers of highly skilled employees in the future. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates could impair the growth of our business.
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We may not be able to keep pace with competition in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.
The furniture industries in the U.S. and international markets are very competitive and fragmented. Our business is subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Many of our competitors and potential competitors may have substantially greater financial and government support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, style, functionality and availability. We cannot be sure we will have the resources or expertise to compete successfully in the future. Some of our competitors may also be able to provide customers with additional benefits at lower overall costs to increase market share. We cannot be sure we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to continue to differentiate our products through value, styling or functionality from those of our competitors. In addition, some of our customers are also performing more manufacturing services themselves. We may face competition from our customers as they seek to become more vertically integrated. As a result, we are continually subject to the risk of losing market share, which may lower our sales and earnings.
We will face different market dynamics and competition as we develop new products to expand our presence in our target markets. In some markets, our future competitors may have greater brand recognition and broader distribution than we currently enjoy. We may not be as successful as our competitors in generating revenues in those markets due to the lack of recognition of our brands, lack of customer acceptance, lack of product quality history and other factors. As a result, any new expansion efforts could be more costly and less profitable than our efforts in our existing markets. If we are not as successful as our competitors are in our target markets, our sales could decline, our margins could be impacted negatively and we could lose market share, any of which could materially harm our business.
We may lose U.S. market share due to competition and our dependence on production facilities located outside the U.S., which would result in a decrease in our future sales and earnings.
We compete in the U.S. market principally through our sales under the Diamond Sofa brand. The furniture industry in the U.S. is very competitive and fragmented. We compete with many domestic U.S. and international furniture sources, including national department stores, regional or independent specialty stores, dedicated franchises of furniture manufacturers and retailers marketing products through catalogs and over the internet. There are few barriers to entry in the U.S. furniture market, and new competitors may enter this market at any time. Some of our competitors have greater financial resources than we have and often offer extensively advertised and well-recognized branded products. We may not be able to meet price competition or otherwise respond to competitive pressures in the U.S. market. We also may not be able to continue to differentiate our products from those of our competitors in the U.S. through value, styling and functionality because of the large number of competitors and their wide range of product offerings. Furthermore, some large furniture retailers in the U.S. are sourcing products directly from furniture manufacturers located in China and other Southeast Asian countries instead of through distributors like us. Over time, this practice may expand to smaller retailers in the U.S. Accordingly, we are continually subject to the risk of losing U.S. market share, which may decrease our future sales and earnings. Because we source products from third party manufacturers that are located outside the U.S. and we are subject to risks caused by disruption of international transportation such as COVID-19 and other health pandemics as well as the increase of tariffs imposed by the U.S. customs. We might loss business and our reputation might be damaged if there is delay of delivery and shipment from our suppliers.
Failure to anticipate or timely respond to changes in fashion and consumer preferences could adversely impact our business.
Furniture is a styled product and is subject to rapidly changing fashion trends and consumer preferences, as well as to increasingly shorter product life cycles. We believe our past performance has been based on, and our future success will depend, in part, upon our ability to continue to improve our existing products through product innovation and to develop, market and produce new products. We cannot assure you that we will be successful in introducing, marketing and producing any new products or product innovations, or that we will develop and introduce in a timely manner innovations in our existing products that satisfy customer needs or achieve market acceptance. Our success also depends upon our ability to anticipate and respond in a timely manner to fashion trends related to residential and commercial furniture. If we fail to identify and respond to these changes, our sales could decline and we could lose market share, any of which could materially harm our business.
If we are unable to manage our growth, we may not be profitable.
Our continued success depends, in part, upon our ability to manage and expand our operations and facilities in the face of continued growth. This planned growth includes the expansion of our internet sales and diversifying our international sales by expanding our broad network of distributors, increasing direct sales in the U.S. and other international markets and entering emerging growth markets. The growth in our operations has placed, and may continue to place, significant demands on our management, operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could negatively affect our operating results. To manage this growth effectively, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of operations.
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We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.
In connection with the development and expansion of our business, we may incur significant capital and operational expenses. We believe that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing online sales and (ii) diversifying our international sales. We plan to increase and diversify our sales to the U.S. and international markets by establishing new brands for the international markets and to increase our online sales presence.
In the event that available funds are not sufficient to meet our operating needs and our plans for expansion, we intend to pursue alternative financing arrangements, including additional bank loans based on our good credit rating or funds raised through additional offerings of our equity or debt, if and when we determine such offerings are required. Our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties, including:
| ● | Investors’ perceptions of, and demand for, companies in our industry; |
| ● | Investors’ perceptions of, and demand for, companies sourcing from China and other Asian countries; |
| ● | Conditions of the U.S. and other capital markets in which we may seek to raise funds; |
| ● | Our future results of operations, financial condition and cash flows; |
| ● | Governmental regulation of foreign investment in companies in particular countries; |
| ● | Economic, political and other conditions in the U.S., China, and other countries; and |
| ● | Governmental policies relating to foreign currency. |
There is no assurance we will be successful in locating a suitable financing transaction in a timely fashion or at all. In addition, there is no assurance we will obtain the capital we require by any other means. Future financings through equity investments are likely to be dilutive to our existing shareholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly-issued securities may include preferences or superior voting rights, be combined with the issuance of warrants or other derivative securities, which may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our strategy to maintain our growth and competitiveness.
We may experience material disruptions to our ability to acquire sufficient inventory from third-party suppliers that could result in material delays, quality control issues, increased costs and loss of business opportunities, which may negatively impact our sales and financial results.
We rely upon our third-party suppliers to produce our products and maintain sufficient inventory to meet customer demand. A material disruption at our suppliers’ manufacturing facilities could prevent us from meeting customer demand, reduce our sales and negatively impact our financial results. We may also experience quality control issues as we seek out new suppliers or are forced to contract with new suppliers to meet customer demand. Any such material disruption may prevent us from shipping our products on a timely basis, reduce our sales and market share and negatively impact our financial results. Our third-party supplier contracts are generally of annual or shorter duration, or manufactured products are sourced on the basis of individual purchase orders. There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements with other third-party suppliers on commercially reasonable terms. Further, while we maintain an active quality control program, we cannot assure that their manufacturing and quality control processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of substandard products. While we believe that products manufactured by our current third-party suppliers could generally be procured from alternative sources, temporary or permanent loss of services from a significant manufacturer could cause disruption in our supply chain and operations.
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Our dependence on foreign suppliers and our increased global operations subject us to a variety of risks and uncertainties that could impact our operations and financial results.
In 2022 and 2023, the majority of our products were purchased from foreign suppliers and manufacturers, predominantly in Asia. Our dependence on foreign suppliers means that we may be affected by changes in the value of the U.S. dollar relative to other foreign currencies. For example, any upward valuation in the Chinese yuan or any other foreign currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This, in turn, might cause such foreign vendors to demand higher prices for products in their effort to offset any lost profits associated with any currency devaluation, delay product shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.
We, and our foreign suppliers, are also subject to other risks and uncertainties associated with changing economic and political conditions worldwide. These risks and uncertainties include import duties and quotas, compliance with anti-dumping regulations, port congestion, supply chain disruption, work stoppages, economic uncertainties and adverse economic conditions (including inflation and recession), government regulations, employment and labor matters, wars and fears of war, political unrest, natural disasters, public health issues, regulations to address climate change and other trade restrictions. We cannot predict whether any of the countries from which our raw materials or products are sourced, or in which our products are currently manufactured or may be manufactured in the future, will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign suppliers, including labor disputes resulting in work disruption, the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, could increase the cost, reduce the supply of merchandise available to us, or result in excess inventory if merchandise is received after the planned or appropriate selling season, all of which could adversely affect our business, financial condition and operating results.
A delay in getting non-U.S.-sourced products through port operations and customs in a timely manner could result in reduced sales, canceled sales orders and unanticipated inventory accumulation.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the free flow of goods through open and operational ports worldwide. Supply chain disruption and port congestions caused by COVID-19 have caused delay of shipment and delivery of our products. Any disruptions at ports create significant risks for our business, particularly if work slowdowns, quarantines, lockdowns, strikes or other disruptions occur during our peak importing seasons. Any of these factors could result in reduced sales, canceled sales orders and unanticipated inventory accumulation and have a material adverse effect on our operating results, financial position and cash flows.
Increases in income tax rates, changes in income tax laws or disagreements with tax authorities could adversely affect our business, financial condition or results of operations.
We are subject to income taxes in the United States and in certain foreign jurisdictions in which we operate. Increases in income tax rates or other changes in income tax laws that apply to our business could reduce our after-tax income from such jurisdiction and could adversely affect our business, financial condition or results of operations. In addition, the United States and many of the other countries in which our products are distributed or sold, including countries in which we have significant operations, have recently made or are actively considering changes to existing tax laws.
In October 2018, the Macao Legislative Assembly has approved a bill revoking the current offshore law, to abolish the relevant legislation on the Macao offshore business regime. Starting on January 1, 2021, the exemptions of stamp duty, professional tax (for individuals) and complementary tax (for corporations) will no longer be available to these offshore institutions. On October 14, 2020, the Macao Trade and Investment Promotion Institute approved that Nova Macao’s offshore license became invalid under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao was de-registered and liquidated in January 2021 and its business was taken over by Nova HK. In February 2022, Nova HK also entered into a de-registration and liquidation process and all of Nova HK’s inventory was transferred to Nova Malaysia on February 15, 2022. In February 2023, Nova HK completed the process of de-registration and liquidation.
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Additional changes in the U.S. tax regime or in how U.S. multinational corporations are taxed on foreign earnings, including changes in how existing tax laws are interpreted or enforced, could adversely affect our business, financial condition or results of operations.
We are also subject to regular reviews, examinations and audits by the IRS and other taxing authorities with respect to income and non-income based taxes both within and outside the United States. Economic and political pressures to increase tax revenues in jurisdictions in which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult and the final resolution of tax audits and any related litigation could differ from our historical provisions and accruals, resulting in an adverse impact on our business, financial condition or results of operations. In addition, in connection with the Organization for Economic Co-operation and Development Base Erosion and Profit Shifting project, companies are required to disclose more information to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in various countries.
We are subject to warranty claims for our products, which could result in unexpected expense.
Many of our products carry warranties for defects in quality and workmanship. Historically, the amount for return of products, the discount provided to the customers due to defects and cost for the replacement parts has been immaterial. However, we may experience significant expense as the result of future product quality issues, product recalls or product liability claims which may have a material adverse effect on our business. The actual costs of servicing future warranty claims may exceed our expectations and have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to periodic litigation, product liability risk and other regulatory proceedings, which could result in unexpected expense of time and resources.
From time to time, we may be a defendant in lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse effect on our business, financial condition and results of operations. In addition, any significant litigation, regardless of its merits, could divert management’s attention from our operations and may result in substantial legal costs. The Company has been named in a putative securities class action case and two derivatives cases, details See Item 3 Legal Proceedings. While the Company believes it has adequate defenses, the defense of those cases are costly and could significantly divert management attention from its business.
We may not be able to protect our product designs and other proprietary rights adequately, which could adversely affect our competitive position and reduce the value of our products and brands, and litigation to protect our intellectual property rights may be costly.
We attempt to strengthen and differentiate our product portfolio by developing new and innovative brands and product designs and functionality. As a result, our trademarks and other intellectual property rights are important assets to our business. Our success will depend in part on our ability to obtain and protect our products, methods, processes and other technologies, to preserve our trade secrets, and to operate without infringing on the proprietary rights of third parties in China, the U.S. and other international markets. Despite our efforts, any of the following may reduce the value of our owned and used intellectual property:
| ● | Issued and trademarks that we own or have the right to use may not provide us with any competitive advantages; |
| ● | Our efforts to protect our proprietary rights may not be effective in preventing misappropriation of our intellectual property or that of those from whom we license our rights to use; |
| ● | Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we use or develop; or |
| ● | Another party may obtain a blocking patent and we or our licensors would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products. |
Effective protection of intellectual property rights may be unavailable or limited in China or certain other countries. Policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation might be necessary to protect our intellectual property rights, which may be costly and may divert our management’s attention away from our core business. Furthermore, there is no guarantee that litigation would result in an outcome favorable to us. If we are unable to protect our proprietary rights adequately, it would have a negative impact on our operations.
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We, or the owners of the intellectual property rights licensed to us, may be subject to claims that we or such licensors have infringed the proprietary rights of others, which could require us and our licensors to obtain a license or change designs.
Although we do not believe any of our products infringe upon the proprietary rights of others, there is no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or those from whom we have licenses or that any such assertions or prosecutions will not have a material adverse effect on our business. Regardless of whether any such claims are valid or can be asserted successfully, defending against such claims could cause us to incur significant costs and could divert resources away from our other activities. In addition, assertion of infringement claims could result in injunctions that prevent us from distributing our products. If any claims or actions are asserted against us or those from whom we have licenses, we may seek to obtain a license to the intellectual property rights that are in dispute. Such a license may not be available on reasonable terms, or at all, which could force us to change our designs.
We incur significant costs as a result of our operating as a public company and our management is required to devote substantial time to compliance with the regulatory requirements placed on a public company.
As a public company with substantial operations, we incur significant legal, accounting and other expenses. The costs of preparing and filing annual, quarterly and current reports, proxy statements and other information with the SEC and furnishing audited reports to shareholders is time-consuming and costly.
It has also been time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and this remains an ongoing process. Certain members of our management have limited or no experience operating a company whose securities are listed on a national securities exchange or with the rules and reporting practices required by the federal securities laws as applied to a publicly traded company. We have needed to recruit, hire, train and retain additional financial reporting, internal control and other personnel in order to develop and implement appropriate internal controls and reporting procedures.
Our ongoing investment in new products is inherently risky, and could disrupt our current operations.
We have invested and expect to continue to invest in new products. Our plan to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia is a reflection of our ongoing efforts to innovate and provide useful products in new geographical markets. Such endeavors including the investment of jade mats in Malaysia involve significant risks and uncertainties, including insufficient revenues from such investments to offset any new liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, distraction of management from current operations, and risks and competition not discovered in our due diligence and decision making of such strategy plans could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities. Due to the negative impact caused by COVID-19 in 2021 and 2022, we eventually sold the entire jade mats inventory for $2.00 million in liquidation sales and existed from Jade Mats business in June 2023. Because the development and investment in new products and markets are inherently risky, no assurance can be given that such plans will be successful and will not adversely affect our reputation, financial condition, and operating results.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information and adversely impact our reputation and results of operations.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (“IT”) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. While no cybersecurity attack to date has had a material impact on our financial condition, results of operations or liquidity, the threat remains and the potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately. Any inability to report and file our financial results accurately and timely could harm our business and adversely affect the trading price of our common stock.
We are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2023. See “Item 9A. Controls and Procedures.” However, our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
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We are a holding company that depends on cash flow from our wholly owned subsidiaries to meet our obligations, and any inability of our subsidiaries to pay us dividends or make other payments to us when needed could disrupt or have a negative impact on our business.
We are a holding company with no material assets other than the stock of our wholly owned subsidiaries, Diamond Bar, Nova Furniture, Nova Samoa and Nova Malaysia. We rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. If our subsidiaries are unable to pay us dividends and make other payments to us when needed because of regulatory restrictions or otherwise, we may be materially and adversely limited in our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.
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If relations between the U.S. and China worsen, our business could be adversely affected as we have to find new suppliers and manufacturers out of China.
Political tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by then U.S. President that prohibit certain transactions with certain Chinese companies and their applications. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Controversies may arise in the future between these two countries. These controversies also could make it more difficult for us to provide our products to our customers in the U.S. and China. The international trade policies of China and the U.S. could adversely affect our business, and the imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports from China, including those applied specifically to furniture products, or the imposition of taxes, import duties or other charges on exports to the U.S. could increase our costs and decrease our earnings. Due to an increase in tariffs imposed by the U.S., some customers are seeking alternative resources instead of China, which has negatively affected the purchase orders and our sales as we mainly resource our products from China. In order to avoid these new tariffs, the market has shifted towards an uncertain era. The Company started to source certain of its new products from manufacturers in India in 2020. Sales during this stage may also be impacted by this shift in behavior. The U.S. government currently has the increased tariffs of 25% for the furniture products from China. During this time period our company will continue to seek alternatives and new resources to increase the revenue. If and to the extent we are not able to mitigate the effects of such trade or tariff policies, our operations may be adversely affected.
Our compliance with the Foreign Corrupt Practices Act may put us at a competitive disadvantage, while our failure to comply with the Foreign Corrupt Practices Act may result in substantial penalties.
We are required to comply with the United States Foreign Corrupt Practices Act, or the FCPA, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties. Non-U.S. companies, including some of our competitors, are not subject to the provisions of the FCPA. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in Asian countries that we conduct business. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.
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Risks Related to Our Securities
Our shares may be delisted under the HFCA Act and related regulations if the PCAOB is unable to inspect our auditor, and the delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On June 22, 2021, the U.S. Senate passed the AHFCA Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On December 29, 2022, a legislation entitled the Consolidated Appropriations Act, was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to AHFCA Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, thus reducing the time period before our securities may be prohibited from trading or delisted if our auditor is unable to meet the PCAOB inspection requirement.
Our financial statements contained in the annual report on Form 10-K for the year ended December 31, 2021 have been audited by Centurion ZD CPA & Co. (“Centurion ZD”), an independent registered public accounting firm that is headquartered in Hong Kong. Centurion ZD, is a firm registered with the PCAOB, and is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. However, because Centurion ZD. is based in Hong Kong, a jurisdiction where the PCAOB was unable to conduct inspections without the approval before December 2022, Centurion ZD and its audit work were not inspected independently and fully by the PCAOB.
On December 16, 2021, the PCAOB issued its determinations (the “Determination”) that they are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong. The Determination includes lists of public accounting firms headquartered in mainland China and Hong Kong that the PCAOB is unable to inspect or investigate completely. Centurion ZD is headquartered in Hong Kong and was included in the PCAOB Determinations.
On October 7, 2022, the Company dismissed its independent accountant, Centurion ZD. On October 6, 2022, the Audit Committee of the Board of Directors of the Company and the Board of Directors of the Company, resolved to, and did, cause the Company to engage WW as the Company’s independent auditor for the fiscal year ending December 31, 2022. WWC is located in the United States and has not been identified by the PCAOB as a firm that the PCAOB is unable to fully inspect and investigate.
On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination.
If PCAOB is unable to inspect or investigate completely our auditor, it could cause the trading in our securities to be prohibited under the Holding Foreign Companies Accountable Act and related regulations, and as a result Nasdaq may delist our securities. If our securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase our securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares. Further, new laws and regulations or changes in laws and regulations could affect our ability to list our securities on Nasdaq, which could materially impair the market for and market price for our securities.
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The market price for our common stock may be volatile, which could make it more difficult or impossible for an investor to sell our common stock for a positive return on their investment.
The trading price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include, but are not limited to, our quarterly operating results or the operating results of other companies in our industry, announcements by us or our competitors of acquisitions, new products, product improvements, commercial relationships, intellectual property, legal, regulatory or other business developments and changes in financial estimates or recommendations by stock market analysts regarding us or our competitors. In addition, the stock market in general, and the market for companies that became public by means of a reverse acquisition with a public shell company in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated or disproportionate to their operating performance. These broad market fluctuations may materially affect our stock price, regardless of our operating results. Furthermore, the market for our common stock historically has been limited and we cannot assure you that a larger market will ever be developed or maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, these factors may make it more difficult or impossible for you to sell our common stock for a positive return on your investment.
Shares of our common stock lack a significant trading market, which could make it more difficult for an investor to sell our common stock.
Our common stock is traded on The NASDAQ Stock Market LLC. However, there is no assurance that an active trading market in our common stock will be sustained. As a result, an investor may find it more difficult to dispose of our common stock.
If we fail to continue to meet the listing standards of NASDAQ, our common stock may be delisted, which could have a material adverse effect on the liquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. The NASDAQ Stock Market LLC has requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us to maintain a minimum bid price of $1.00 per share of our common stock. The Company was notified on January 18, 2019 that pursuant to NASDAQ Listing Rule 5810(c)(3)(A), it was afforded 180 calendar days to regain compliance with the minimum bid price requirement and was also provided an additional 180 days grace period. On December 18, 2019, we filed a Certificate of Change with the Secretary of State of Nevada with an effective date of December 20, 2019 to effect a 1-for-5 reverse stock split of the Company’s common stock to meet the $1.00 per share minimum closing bid price requirement. On January 9, 2020, we received a written notification from the NASDAQ Stock Market Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum closing bid price requirement for continued listing on the NASDAQ Capital Market.
On June 24, 2022, the Company received a letter from Nasdaq notifying the Company that, because the closing bid price for the Company’s common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company no longer meets the minimum bid price requirement for continued listing on Nasdaq under Nasdaq Marketplace Rule 5550(a)(2), which requires a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The Company has a period of 180 calendar days from the date of notification, until December 21, 2022 (the “Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. On December 22, 2022, the Company received a written notification from the Nasdaq indicating that the Company has been granted an additional 180 calendar day period or until June 19, 2023, to regain compliance with the $1.00 minimum closing bid price requirement for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Listing Rule. On May 22, 2023, we filed a Certificate of Change with the Secretary of State of Nevada to effect a 1-for-5 reverse stock split of the Company’s common stock to meet the $1.00 per share minimum closing bid price requirement. On June 8, 2023, we received a written notification from the NASDAQ Stock Market Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum closing bid price requirement for continued listing on the NASDAQ Capital Market.
In addition, we may be unable to meet other applicable NASDAQ listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common stock in which case, our common stock could be delisted. If our common stock were to be delisted, the liquidity of our common stock would be materially adversely affected and the market price of our common stock could decrease.
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Future sales of shares of our common stock by our shareholders could cause our stock price to decline.
Future sales of shares of our common stock could adversely affect the prevailing market price of our stock. As of April 11, 2024, Steven Qiang Liu, our largest shareholder and vice president of the Company, owned approximately 17.3% of our outstanding shares of common stock. If Mr. Liu sells a large number of shares, or if we issue a large number of shares, the market price of our stock could decline. Moreover, the perception in the public market that significant shareholders might sell shares of our stock could depress the market for our shares. If such shareholders sell substantial amounts of our common stock in the public market, such sales could create a circumstance commonly referred to as an “overhang,” in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price we deem reasonable or appropriate.
We may issue additional shares of our common stock or debt securities to raise capital or complete acquisitions, which would reduce the equity interest of our shareholders.
Our Articles of Incorporation, as amended, authorize the issuance of up to 250,000,000 shares of common stock, par value $0.001 per share. As of April 11, 2024, there were 247,677,855 authorized and unissued shares of our common stock available for future issuance, based on 2,322,115 shares of our common stock issued and outstanding. Although we have no commitments as of the date of this report to issue our securities, we may issue a substantial number of additional shares of our common stock or debt securities to complete a business combination or to raise capital. On October 13, 2023, we renewed a shelf registration statement on Form S-3 under which we may, from time to time, sell securities in one or more offerings up to a total dollar amount of $55,000,000. The shelf registration statement was declared effective as of October 23, 2023.
The issuance of additional shares of our common stock may significantly reduce the equity interest of our existing shareholders and adversely affect prevailing market prices for our common stock.
We do not expect to pay dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant. We are a holding company that depends on cash flow from our wholly owned subsidiaries to meet our obligations, and any inability of our subsidiaries to pay us dividends or make other payments to us when needed could disrupt or have a negative impact on our business. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business. If we do not pay dividends, our common stock may be less valuable because a return on your investment will occur only if our stock price appreciates.
Our principal shareholders have the ability to exert significant control in matters requiring a shareholder vote and could delay, deter or prevent a change of control in our company.
As of April 11, 2024, Steven Qiang Liu, our largest shareholder, owned approximately 17.3% of our outstanding shares of common stock. Mr. Liu may exert significant influence over us, giving him the ability, among other things, to exercise significant control over the election of all or a majority of the Board of Directors and to approve significant corporate transactions that require the shareholders’ approval. Such share ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. Without the consent of Mr. Liu, we could be prevented from entering into potentially beneficial transactions if such transactions conflict with our principal shareholder’s interests. As an officer of the Company, Mr. Liu owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in the best interests of our shareholders. As a shareholder, Mr. Liu is entitled to vote his shares in his own interests, which may not always be in the interests of our shareholders.
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Provisions in the Nevada Revised Statutes and our Amended and Restated Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our Board of Directors and our officers may have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances, pursuant to provisions in the Nevada Revised Statutes and our Amended and Restated Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its shareholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. Accordingly, you may be unable to prevail in a legal action against our directors or officers even if they have breached their duty of care. In addition, our Amended and Restated Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely affect prevailing market prices for our common stock.
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. Since it is in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks. On December 21, 2018, Seeking Alpha published a report that contained various false allegations against the Company, which has driven down the market price of our common stock. The author of that article disclosed that he had accumulated a short position in the Company’s common stock prior to the publication of the article. As of December 31, 2018, the closing price of our common stock as reported on the NASDAQ Stock Market was $2.30 per share, representing a decrease of $1.55 per share compared to $3.85 per share, the closing price of our common stock as of December 20, 2018. The stock prices are all before our reverse stock splits in 2019 and 2023.
Although we have timely responded to the false allegations set forth in the Seeking Alpha article, we cannot assure you that false, misleading and/or defamatory articles will not be published again in the future. The publication of any such commentary regarding us in the future may bring about a temporary, or long term, decline in the market price of our common stock. No assurances can be made that similar declines in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 1C. Cybersecurity
Information technology (IT) is critical to many of our operating activities and is subject to security threats and increasingly sophisticated cyber-attacks. As a result, we have policies and processes in place to assess, identify, and manage the strategic and operational IT-related risks as an integrated part of our overall risk management system. These risks include the risk of cyber-attacks on IT infrastructure and intellectual property, as well as on cybersecurity for our online product offerings. The Company has adopted Risk Assessment Methodology Policy, Information Security Policy and Incident Response Plan Policy to managing material risks from cybersecurity threats and hired IT consultant to help managing cybersecurity risks. When the Company uses a third party service provider and shares sensitive data such service provider, it must adhere to the compliance requirements in the Service Agreement which includes an acknowledgement that the service provider is responsible for safeguard and the security of the sensitive data. As of date of this report, there has been no previous cybersecurity incidents, have materially affected the Company yet. The independent director of the Board Charlie La is responsible for the oversight of risks from cybersecurity threats on behalf of the Board. Mr. Teng Ai Leng, our IT consultant and Tawny Lam, Chief Executive Officer of the Company report to Mr. Charlie La and Board of Directors for cybersecurity risks and incidents. Teng AI Leng has 29 years of working experience in the Information technology industry. The Company has adopted Incident response plan policy, including Roles and Responsibilities, Incident Categories, Categories of Event, Incident Severity, Escalation Levels, and Incident Response Life Cycle, so that the weakness, events, alerts and incidents can be appropriately managed and escalated from IT personnel, IT consultant, Chief Executive Officer to independent director and the Board.
Item 2. Properties
Our principal executive offices and those of Diamond Bar are in leased office space with showroom, distribution and warehouse space in Commerce, California. Diamond Bar also maintains showrooms in leased space at Las Vegas Market in Nevada and High Point Market in North Carolina. Nova Malaysia is in leased office space with showroom, service center and warehouse space in Kuala Lumpur, Malaysia.
We believe that our existing office and distribution facilities are adequate for current and presently foreseeable operations. In general, our properties are well maintained, considered adequate and being utilized for their intended purposes. See Note 15 to our consolidated financial statements contained herein, which discloses lease agreements.
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Item 3. Legal Proceedings
The Company has reported a federal putative class action complaint George Barney filed the Company and former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”). That matter was resolved by the entry of an Order on January 30, 2024 certifying a settlement class and approving a class settlement.
In the Barney action, Company shareholders sought to assert claims on behalf of all entities purchasing stock from December 21, 2015, through December 20, 2018, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5. In support of these claims, plaintiffs alleged that defendants artificially inflated the Company’s share price by issuing a press release announcing a strategic relationship with Shanxi Winqing Senior Care Service Group, claiming in the Company’s Annual Statements on Form 10-Ks for the 2017 and 2018 fiscal years that Shanxi Winqing and Merlino Lewis LLP were among the Company’s largest customers, and reporting revenues from sales transactions with these entities. Plaintiffs claimed that Shanxi Winqing was a fictitious entity and Merlno Lewis LLP dissolved in 2013, so that the announcement of a strategic alliance was false and the reported revenues non-existent.
The Company denied these allegations and all liability. It asserted that the entities referenced in its public disclosures were actual companies and the revenues booked from those entities were genuine and actually collected. The Company alleged that no registration exists for Shanxi Winqing because the Company slightly mistranslated its Chinese name in its public disclosures. Similarly, the Company claimed to have previously sold products to Merlino Lewis LLP and failed to update its customer name when the customer restructured its business.
On March 31, 2023, the parties filed a Renewed Stipulation of Settlement (“Renewed Stipulation”) resolving all claims asserted in the matter. This Renewed Stipulation was executed and filed after the Court denied plaintiffs’ Motion to Certify a Settlement Class and Approve Class Action settlement in accordance with the parties’ original Stipulation of Settlement. The substantive terms of the settlement as they applied to the Company were not modified between the original Settlement Stipulation and the Renewed Settlement Stipulation. The Renewed Stipulation provided for the certification of a settlement class and the Company’s payment to the settlement class of $750,000. It also provided for the complete release of all claims by the settlement class against the Company and its directors, officers, and employees and the other named defendants with respect to any of the matters alleged in the litigation. The Company settled without in any manner admitting, and expressly denying, liability.
By Order entered July 10, 2023, the Court preliminarily approved a settlement class and the proposed settlement. The settlement escrow was then funded as specified in this Order. The funding was provided through a directors and officers liability insurance policy.
The Court thereafter certified a settlement class and finally approved the settlement by Order entered January 30, 2024. The entry of this Order resolved the matter as to the Company. The settlement payment was funded through insurance.
On March 8, 2019, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit in the United States District Court for the Central District of California, purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the Barney Action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a largely duplicative putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the settlement of the Barney action, it is expected that the stay of the derivative actions will be lifted.
While these derivative actions are purportedly asserted on behalf of the Company, when they are subsequently activated, it is possible that the Company may directly incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Since January 17, 2014, our common stock has been quoted on The NASDAQ Stock Market under the symbol “NVFY.” On April 11, 2024, the closing price for our common stock as reported on the NASDAQ Stock Market was $2.45 per share.
Holders of Record
On April 11, 2024, there were approximately 50 holders of record based on information provided by our transfer agent. Many of our shares of common stock are held in street or nominee name by brokers and other institutions on behalf of shareholders and we are unable to estimate the total number of shareholders represented by these record holders.
Dividend Policy
Dividends may be declared and paid out of legally available funds at the discretion of our Board of Directors. We do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. We currently intend to utilize all available funds to develop our business.
Item 6. Selected Financial Data
Not required.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 of Nova HK was completed in February 2023.
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 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 of Nova HK 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, South America, Asia and Middle Easter markets.
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In 2019, we 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. In June 2023, everything is back to normal in Malaysia. Due to the negative impact caused by COVID-19 from 2020 to 2022, the Company eventually sold the entire jade mats inventory for $2.00 million in liquidation sales in June 2023. We existed from Jade Mats business in 2023. 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, inflation, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.
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 in the next 12 months. However, in the event that we do need to raise capital in the future, the instability in the securities markets could adversely affect our ability to raise additional capital.
Discontinued Operations
On February 15, 2022, we transferred 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
Since 2019, we have moved away from low margin products and 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 terminated 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 2023 Collection in the Las Vegas and High Point Markets, with a view to attracting a higher-end ultimate customer. The core focus of the Company’s direction today is entirely centered on product. Identifying a fashion-driven generational shift in the general perception and consumption of furniture and being more aware of actual consumer tastes and how best to fulfill and engage that need. Closely integrating product development alongside marketing results in appealing products that adheres to the scope of our target demographic of decision makers in the design, staging and retail fields. A process that is continually refined upon each release cycle, maintaining a singular, cohesive vision. In short, we have better identified our customers and how to cater to them – in the process gaining greater traction with every product launch considerably more so on an international level than ever previous. We believe these new strategies, will provide us with significant long term growth opportunities. Significant factors that we believe could affect our operating results are the (i) prices of our products to our domestic and 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) high interest rate, inflation and slow- down in real estate market. 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 high interest rate and inflation.
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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, 2023.
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 and its former subsidiary, Nova HK.
Reverse Split
On May 22, 2023, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of May 22, 2023, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), was effected. All references to shares and per share data have been retroactively restated to reflect such split.
Amendments to Articles of Incorporation
On September 5, 2023, the Company filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 3,000,000 to 250,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
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 expected 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 expected credit loss of $532 and $2,914 as of December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, expected credit losses (reversal) provision from continuing operations was ($2,382) and $1,870, respectively. During the years ended December 31, 2023 and 2022, provision for allowance for expected credit losses from discontinued operations were $0. As of December 31, 2023, we had gross receivable of $47,530 of which none was over 90 days past due. The allowance for expected credit losses is our best estimate of the amount of expected 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.
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.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at the statutory rate of 24%. Nova Living (HK) Group Limited (“Nova HK”) is incorporated in Hong Kong and is subject to Hong Kong income taxes at the statutory rate of 16.5%. In February 2022, Nova HK was deregistered.
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, 2023, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
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On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As of December 31, 2023 and 2022, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $25.4 million and $25.6 million of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.
As of December 31, 2023 and 2022, unrecognized tax benefits were approximately $0. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 as of December 31, 2023 and 2022.
A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the years ended December 31, 2023 and 2022, is as follows:
| Gross UTB | ||||||||
| 2023 | 2022 | |||||||
| Balance – January 1 | $ | - | $ | - | ||||
Foreign exchange adjustment |
- | - | ||||||
| Balance – December 31 | - | - | ||||||
As of December 31, 2023 and 2022, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $0 for the years ended December 31, 2023 and 2022, respectively, related to the Company’s continuing operations. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2020-2023 remain open to examination by tax authorities in the U.S.
Intangible Assets
Intangible assets consist primarily of computer software acquired for internal use. Acquired intangible assets are initially recorded at the acquisition-date fair value. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are carried at cost less accumulated amortization. The estimated useful life of computer software are generally from 5 years.
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. 606: (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.
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Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs upon shipment to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer.
Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the years ended December 31, 2023 and 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 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, 2023 | RM4.59 to 1 | ||
| December 31, 2022 | RM4.40 to 1 | ||
| Income statement and cash flow items | |||
| For the year ended December 31, 2023 | RM4.56 to 1 | ||
| For the year ended December 31, 2022 | RM4.40 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 HK was a furniture distributor based in Hong Kong focusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Nova HK and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United States and Malaysia for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
New Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the probable, incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost basis. Am entity should apply ASU 2016-13 on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the balance sheets as of the date of adoption. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for trouble debt restructurings by creditors and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, ASU 2022-02 requires disclosure of gross writeoffs by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, which should be applied prospectively. Both ASU 2016-13 and ASU 2022-02 are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and ASU 2022-02 beginning January 1, 2023. The adoption of ASU 2016-13 and ASU 2022-02 did not have any impact on our condensed consolidated financial statement presentation or disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). This Update is effective for smaller reporting companies for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022, which is required to be applied prospectively from the date of adoption. The Company adopted ASU 2017-04 for its interim and annual goodwill impairment tests beginning January 1, 2023. The adoption of ASU 2017-04 did not have any impact on our condensed consolidated financial statements.
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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.
Recently Issued But Not Yet Adopted Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Lease (Topic 842): Common Control Arrangements, which clarifies the accounting for leasehold improvements associated with leases between entities under common control (hereinafter referred to as common control lease). ASU 2023-01 requires entities to amortize leasehold improvements associated with common control lease over the useful life to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease, and to account for any remaining leasehold improvements as a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the underlying asset. This ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. An entity may apply ASU 2023-01 either prospectively or retrospectively. The Company is currently evaluating the impact that the adoption of ASU 2023-01 will have on our consolidated financial statement presentations and disclosures.
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, 2023 and 2022
The following table sets forth the results of our operations for the years ended December 31, 2023 and 2022. Certain columns may not add due to rounding.
| Years Ended December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| $ |
% of Sales |
$ |
% of Sales |
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| Net sales | $ | 11,087,459 | $ | 12,744,871 | ||||||||||||
| Cost of sales | (6,913,902 | ) | 62 | % | (20,526,484 | ) | 161 | % | ||||||||
| Gross profit (loss) | 4,173,557 | 38 | % | (7,781,613 | ) | (61 | )% | |||||||||
| Operating expenses | (10,592,105 | ) | (96 | )% | (8,440,738 | ) | (66 | )% | ||||||||
| Loss from operations | (6,418,548 | ) | (58 | )% | (16,222,351 | ) | (127 | )% | ||||||||
| Other expenses, net | (573,617 | ) | (5 | )% | (851,166 | ) | (7 | )% | ||||||||
| Income tax expenses | (731,092 | ) | (7 | )% | (2,400 | ) | 0 | % | ||||||||
| Loss from continuing operations | (7,723,257 | ) | (70 | )% | (17,075,917 | ) | (134 | )% | ||||||||
| Loss from discontinued operations | - | - | % | (25,754 | ) | 0 | % | |||||||||
| Net loss | (7,723,257 | ) | (70 | )% | (17,101,671 | ) | (134 | )% | ||||||||
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Net Sales
Net sales from continuing operations for the year ended December 31, 2023 were $11.09 million, a decrease of 13% from $12.74 million for 2022. This decrease in net sales resulted primarily from a 33% decrease in average selling price, partially offset by a 31% increase in sales volume. Our three largest selling product categories for the year ended December 31, 2023 were sofas, jade mats and beds, which accounted for approximately 37%, 18% and 13% of sales from continuing operations, respectively. For the year ended December 31, 2022, the three largest selling categories were sofas, beds and chairs, which accounted for approximately 41%, 15% and 11% of sales from continuing operations, respectively.
The $1.66 million decrease in net sales from continuing operations for the year ended December 31, 2023, compared to the year of 2022, was mainly due to decreased sales to North America and other countries. Sales to North America decreased by 27% to $8.77 million for the year ended December 31, 2023, compared to $12.01 million for 2022, such decrease mainly due to inflation, U.S. tightening monetary policy, reducing the purchasing power of the customers and thus making them less willing to spend in nonfood categories. Sales to other countries decreased by $344,849 to $330,159 for the year ended December 31, 2023, from $675,008 for 2022, primarily due to less direct container sales in other countries. However, the decrease in net sales from continuing operations was partially offset by the increase in sales to Asia. Sales to Asia increased by $1.93 million to $1.99 million for the year ended December 31, 2023, compared to $0.06 million for 2022, such increase mainly due to our liquidation sales of the entire inventory of jade mats in Nova Malaysia for $1.95 million.
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 decreased by 66% to $6.91 million for the year ended December 31, 2023, compared to $20.53 million for 2022. Cost of sales as a percentage of sales decreased to 62% for the year ended December 31, 2023, compared to 161% for 2022. The decrease in cost of sales in dollar term and cost of sales as a percentage of sales was mainly a result of our decreased inventory write down of $0.14 million, primarily for the products in U.S., for the year ended December 31, 2023, compared to $12.90 million of inventory write down, primarily for the jade mats in Malaysia, for 2022.
Moreover, if total cost of sales from continuing operations excluded our inventory write down of $0.14 million and $12.90 million for the years ended December 31, 2023 and 2022, respectively, total cost of sales from continuing operations would decrease by 11% to $6.77 million for the year ended December 31, 2023, compared to $7.62 million for 2022, and cost of sales as a percentage of sales would increase to 61% for the year ended December 31, 2023, compared to 60% for 2022. The decrease in cost of sales in dollar term was mainly due to the decrease in our net sales for the year ended December 31, 2023. The increase in cost of sales as a percentage was mainly a result of liquidation sales of jade mats in Malaysia which came with low profit margin for the year ended December 31, 2023.
Gross Profit (Loss)
Gross profit from continuing operations was $4.17 million for the year ended December 31, 2023, compared to gross loss of $7.78 million for 2022, representing an increase in gross profit of $11.96 million. Our gross profit margin was 38% for the year ended December 31, 2023, compared to a gross loss margin of 61% for 2022. The increase in gross profit and gross profit margin was mainly a result of our decreased inventory write down of $0.14 million for the year ended December 31, 2023, compared to $12.90 million of inventory write down for 2022.
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Moreover, if total cost of sales from continuing operations excluded our inventory write down of $0.14 million and $12.90 million for the years ended December 31, 2023 and 2022, respectively, our gross profit would be $4.31 million for the year ended December 31, 2023, compared to $5.12 million for 2022, and our gross profit margin would be 39% for the year ended December 31, 2023, compared to 40% for 2022. The decrease in gross profit and gross profit margin was mainly a result of declining sales along with liquidation sales of jade mats for the year ended December 31, 2023.
Operating Expenses
Operating expenses from continuing operations consisted of selling, general and administrative expenses, and research and development. Operating expenses from continuing operations were $10.59 million for the year ended December 31, 2023, compared to $8.44 million for 2022. Selling expenses from continuing operations decreased by 16%, or $0.47 million, to $2.42 million for the year ended December 31, 2023, from $2.89 million for 2022, primarily due to decreased marketing and advertising expenses. In addition, general and administrative expenses from continuing operations decreased by 9%, or $0.49 million, to $5.06 million for the year ended December 31, 2023, from $5.54 million for 2022, primarily due to a decrease in technology service fees and consulting fees of $0.31 million and $0.29 million, respectively, while the decrease was partially offset by an increase in stock compensation expenses of $0.31 million. Research and development from continuing operations increased by 28,462%, or $3.11 million to $3.12 million for the year ended December 31, 2023, from $10,917 for 2022, primary due to we spent on virtual and augmented reality software and AI IT system for the uses of customer consultation, virtual assistance, data analysis, product and inventory tagging and subscription services, etc.
Other Expenses, Net
Other expenses, net, from continuing operations were $573,617 for the year ended December 31, 2023, compared to $851,166 for 2022, representing a decrease in other expenses of $277,549. The decrease in other expenses was due primarily to a decrease in foreign exchange loss of $221,742 to $417,690 for the year ended December 31, 2023, from $639,432 for 2022. The decrease in foreign exchange loss was mainly a result of the appreciation of U.S. dollar against Malaysian Ringgit on liquidation sales of jade mats in Malaysia as partial sales were collected in U.S. dollars.
Income Tax Expenses
Income tax expenses from continuing operations were $0.73 million for the year ended December 31, 2023, compared to $2,400 for 2022. The income tax expenses for 2023 were primary from Nova Malaysia. Nova Malaysia’s net taxable income primarily resulted from cancellation of debt income on debt forgiveness granted by Nova HK, which was partially offset by inventory impairment loss and net operating loss carryovers from prior years. The income tax expenses for 2022 were primarily related to minimum California state tax incurred from U.S. entities.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was $7.72 million for the year ended December 31, 2023, compared to $17.08 million for 2022.
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 no loss from discontinued operations for the year ended December 31, 2023 and loss of $0.03 million for the years ended December 31, 2022.
Net Loss
As a result of the foregoing, our net loss was $7.72 million for the year ended December 31, 2023, compared to $17.10 million for 2022.
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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, 2023, 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 $60,057 at December 31, 2023, a decrease of $6,497,572 from net working capital of $6,557,629 at December 31, 2022. The ratio of current assets to current liabilities was 1.02-to-1 at December 31, 2023.
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, 2023 and 2022:
| 2023 | 2022 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (1,580,247 | ) | $ | (5,367,650 | ) | ||
| Investing activities | 18,643 | (8,772 | ) | |||||
| Financing activities | - | - | ||||||
Net cash used in operating activities was $1.58 million for the year ended December 31, 2023, an increase in cash inflow of $3.79 million from $5.37 million of cash used in operating activities for 2022.
The increase in cash inflow was attributable primarily to (i) an increase in cash inflow of $3.41 million for inventories to $2.53 million cash inflow for the year ended December 31, 2023, from $0.88 million cash outflow for 2022, such increase in cash inflow being mainly due to less purchases made from our suppliers and liquidation sales of the entire inventory of jade mats in Nova Malaysia for 2023; (ii) an increase in cash inflow of $1.69 million for other current assets to $0.51 million cash inflow for the year ended December 31, 2023, from $1.19 million cash outflow for 2022, such increase in cash inflow being mainly a result of less prepayments to IT consulting firm due to the completion of our virtual tour and web augmented reality development project for 2023; and (iii) an increase in cash inflow of $0.64 million for accrued liabilities and other payables to $0.67 million cash inflow for the year ended December 31, 2023, from $0.04 million cash inflow for 2022, such increase in cash inflow being mainly due to delay the payments to our service providers. The increase in operating cash inflow was partially offset by an increase in cash outflow of $0.76 million for advance to supplier to $0.07 million cash outflow for the year ended December 31, 2023, from $0.69 million cash inflow for 2022, such increase in cash outflow being mainly due to less deposits paid to our suppliers with more goods received from them for 2023.
Net cash provided by investing activities was $0.02 million for the year ended December 31, 2023, an increase in cash inflow of $0.03 million from $8,772 of cash used in investing activities for 2022. For the year ended December 31, 2023, we incurred cash inflow of $0.02 million from disposal of fixed assets. For the year ended December 31, 2022, we incurred cash outflow of $8,772 from purchase of office equipment.
Net cash provided by financing activities was $0 for the years ended December 31, 2023 and 2022. During the year ended December 31, 2023, we received $0 from equity financing.
As of December 31, 2023, we had gross accounts receivable of $47,530 of which $28,362 was not yet past due and $19,168 was less than 90 days past due. We had an allowance for expected credit losses of $532. As of March 19, 2024, 99.7% of accounts receivable outstanding as of December 31, 2023 had been collected.
100% of our accounts receivable outstanding at December 31, 2022 had been collected during 2023.
As of December 31, 2023 and 2022, we had advances to suppliers of $93,740 and $21,173, respectively. These supplier prepayments are made for goods before we actually receive them.
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For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is 4-6 months after our advance payment. During 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 19, 2024, $57,842 or 62% of our advances to suppliers outstanding at December 31, 2023 had been delivered to us in the form of purchases of furniture.
Other Long-Term Liabilities
As of December 31, 2023, we recorded long-term taxes payable of $0.64 million, consisting of an income tax payable of $0.64 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
Our financial statements, together with the report thereon, appear in a separate section of this Annual Report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2023. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
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Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management, with oversight from our audit committee, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. In designing and evaluating internal controls, management recognizes that any internal controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of control systems must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2023, using the criteria set forth by the Committee of Sponsoring Organizations of the Tread way Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this annual report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
On May 13, 2022, the SEC added us to its conclusive list of issuers identified under the HFCAA following the filing of our annual report on Form 10-K for the year ended December 31, 2021 with the SEC on April 8, 2022, which annual report was audited by Centurion ZD CPA & Co., a registered public accounting firm in Hong Kong that the PCAOB previously was unable to inspect or investigate completely, because of a position taken by an authority in the foreign jurisdiction. As our business, revenues, management and control capabilities mostly in the U.S., the Company dismissed Centurion ZD CPA & Co. as its independent accountant on October 7, 2022, following a review process carried out by the audit committee of the Company. On October 6, 2022, our audit committee engaged WWC, P.C. (“WWC”) as the Company’s independent auditor for the fiscal year ending December 31, 2022. WWC is located in the United States and has not been identified by the PCAOB as a firm that the PCAOB is unable to fully inspect and investigate.
Furthermore, in August 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations from September to November 2022. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. As a result, SEC will not provisionally or conclusively identify an issuer as a Commission-Identified Issuer if it files an annual report with an audit report issued by a registered public accounting firm headquartered in China or Hong Kong on or after December 15, 2022, until such time as the PCAOB issues a new determination.
To the extent known by the Company, the Company is not aware of and has no reason to believe that: any governmental entity in the foreign jurisdiction in which the Company or any of its subsidiaries is incorporated or otherwise organized owns shares of any capital stock of record of the Company; any official of the Chinese government or Hong Kong is a board member or officer of the Company or its subsidiaries; or that the Company’s articles of incorporation, as amended, contain any provisions known by the Company to include any charter or charter provisions of the Chinese Communist Party. The Company has determined that no governmental entity in mainland China or Hong Kong, directly or indirectly, possesses the power to direct or cause the direction of the management and policies of the Company or has a controlling financial interest.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information relating to nominees for director of Nova LifeStyle, compliance with Section 16(a) of the Securities Exchange Act of 1934, and the Company’s code of ethics is set forth under the captions “Proposal 1–Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance,” and “Code of Ethics,” respectively, in the Proxy Statement for the 2024 Annual Meeting of Stockholders. Such information is incorporated herein by reference. The definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2023.
Item 11. Executive Compensation
Information required by this Item 11 relating to executive compensation and other matters is set forth under the captions “Executive Compensation,” “Non-Employee Director Compensation,” and “Corporate Governance” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information related to ownership of common stock of Nova LifeStyle by certain persons is set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to existing or proposed relationships or transactions between Nova LifeStyle and any affiliate of Nova LifeStyle, as well as matters related to director independence, is set forth under the caption “Certain Relationships and Related Transactions” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information relating to Nova LifeStyle’s principal accountant’s fees and services is set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of or are included in this Annual Report:
| 1. | Financial statements listed in the Index to Financial Statements, filed as part of this Annual Report beginning on page F-1; and |
| 2. | Exhibits |
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# Indicates management contract or compensatory plan, contract or arrangement.
†Filed herewith.
‡Furnished herewith.
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NOVA LIFESTYLE, INC.
Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
Index to Consolidated Financial Statements
| F- |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Shareholders of Nova Lifestyle, Inc. |
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Nova Lifestyle, Inc. and subsidiaries (collectively the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Emphasis Matter – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a net loss for the years ended December 31, 2023 and 2022, and the accumulated deficit increased from $36.71 million to $44.43 million from 2022 to 2023. These factors, raise substantial doubt about its ability to continue as a going concern. Management’s plan in regards to these matters are described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal controls over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
| F- |
Goodwill
We assessed the carrying value of goodwill as a critical audit matter. As discussed in Note 2 to the consolidated financial statements, the Company’s goodwill balance was $218,606 as of December 31, 2023. The account requires challenging, subjective, and complex judgment and assumptions regarding the estimation of future cash flows and finding the appropriate weighted average cost of capital to determine that the balance is reasonable, properly disclosed, and not materially misstated.
Our principal audit procedures performed to address the goodwill impairment included the following:
| ● | Evaluated management of significant assumptions and estimates which is particularly related to future revenue growth rates, capital expenditures, operating margins on evaluating the impact on the fair values according to the changes in the assumptions. | |
| ● | Assessing the appropriateness of the methodology applied in estimating the fair values of the Company’s goodwill and evaluating the reasonableness of certain ratios and assumptions used in analysis. | |
| ● | Performed quantitative analysis by using valuation model to evaluate the fair value and test whether impairment exists. |
The accounts relevant to this critical audit matter include the gross value of the goodwill, and related impairment expense, and the related disclosure in the accompanying note 2 to the financial statements.
| F- |
Inventory Impairment
We assessed the carrying value of inventory as a critical audit matter. As described in Note 4 to the consolidated financial statements, as of December 31, 2023, the Company’s inventories balance was $2,213,311, which was an amount that was quantitatively material to the financial statements as a whole, and the account required challenging, subjective and complex judgement and assumptions in regards to the estimation of the net realizable value of those assets to determine that the balance was reasonable, and not materially misstated.
The Company’s inventories are stated at the lower of cost or net realizable value, with cost determined on a weighted-average basis. The write-down of potential obsolete or slow-moving inventories is recorded based on management’s assumptions about future demands derived and market conditions. For the year ended December 31, 2023, the Company wrote down $140,131 of slow-moving inventory. Inventories have been written down to the Company’s best estimate of their realizable value, which includes consideration of various factors.
Our principal audit procedures performed to address the net realizable value of the inventories and related the impairment expense included the following:
| ● | Observing the physical condition of the inventories during inventory counts. Performing independent analysis of significant assumptions provided by management, by researching wholesale and retail market prices, gaining an understanding of demand for the product by searching for comparable products in the market place. | |
| ● | Inquired with Company personnel to understand management’s model of estimates on selling price and cost of completion to calculate net realizable value and assess the appropriateness of the methodology applied in developing those estimates. | |
| ● | Performed quantitative analysis and recalculation on net realizable value to test if any impairment exists, and developed a range of independent estimates for assumptions for the valuation models and compared those estimates with those employed by management. |
The accounts relevant to this critical audit matter include the inventories and cost of sales, and the related disclosure in the accompanying notes 4 to the financial statements.
WWC, P.C.
Certified Public Accountants
PCAOB ID No.1171
We have served as the Company’s auditor since 2022.
San Mateo, California
April 12, 2024
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2023 AND 2022
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 369,137 | $ | 1,374,167 | ||||
| Accounts receivable, net | 46,998 | 288,478 | ||||||
| Advance to suppliers | 93,740 | 21,173 | ||||||
| Inventories | 2,213,311 | 4,932,642 | ||||||
| Prepaid expenses | 984,934 | 1,504,671 | ||||||
| Other receivables | 41,265 | 79,175 | ||||||
| Total Current Assets | 3,749,385 | 8,200,306 | ||||||
| Noncurrent Assets | ||||||||
| Plant, property and equipment, net | 287,673 | 368,624 | ||||||
| Operating lease right-of-use assets, net | 1,904,349 | 2,660,977 | ||||||
| Intangible assets, net | 8,473 | 13,837 | ||||||
| Lease deposit | 69,992 | 71,146 | ||||||
| Goodwill | 218,606 | 218,606 | ||||||
| Total Noncurrent Assets | 2,489,093 | 3,333,190 | ||||||
| Total Assets | $ | 6,238,478 | $ | 11,533,496 | ||||
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONT’D)
AS OF DECEMBER 31, 2023 AND 2022
| 2023 | 2022 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 430,045 | $ | 321,261 | ||||
| Operating lease liability, current | 701,985 | 736,428 | ||||||
| Advance from customers | 306,532 | 170,139 | ||||||
| Accrued liabilities and other payables | 1,100,661 | 413,599 | ||||||
| Income tax payable | 1,150,105 | 629 | ||||||
| Other loan interest payable | – | 621 | ||||||
| Current liabilities of discontinued operations | – | – | ||||||
| Total Current Liabilities | 3,689,328 | 1,642,677 | ||||||
| Noncurrent Liabilities | ||||||||
| Other Loan | 147,428 | 150,000 | ||||||
| Operating lease liability, non-current | 1,262,256 | 1,971,386 | ||||||
| Income tax payable | 643,112 | 1,157,603 | ||||||
| Total Noncurrent Liabilities | 2,052,796 | 3,278,989 | ||||||
| Total Liabilities | 5,742,124 | 4,921,666 | ||||||
| Contingencies and Commitments | - | - | ||||||
| Stockholders’ Equity | ||||||||
| Common stock, $0.001 par value; 250,000,000 shares authorized, 1,917,706 shares issued and outstanding as of December 31, 2023 and 3,000,000 shares authorized, 1,434,815 shares issued and outstanding as of December 31, 2022, respectively | 1,918 | 1,440 | ||||||
| Additional paid-in capital | 44,402,821 | 43,239,701 | ||||||
| Accumulated other comprehensive (loss) income | 521,425 | 77,242 | ||||||
| Accumulated deficits | (44,429,810 | ) | (36,706,553 | ) | ||||
| Total Stockholders’ Equity | 496,354 | 6,611,830 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 6,238,478 | $ | 11,533,496 | ||||
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| 2023 | 2022 | |||||||
| Net Sales | $ | 11,087,459 | $ | 12,744,871 | ||||
| Cost of Sales | 6,913,902 | 20,526,484 | ||||||
| Gross (Loss) Profit | 4,173,557 | (7,781,613 | ) | |||||
| Operating Expenses | ||||||||
| Selling expenses | 2,417,479 | 2,885,249 | ||||||
| General and administrative expenses | 5,056,500 | 5,544,572 | ||||||
| Research and development | 3,118,126 | 10,917 | ||||||
| Total Operating Expenses | 10,592,105 | 8,440,738 | ||||||
| Loss From Operations | (6,418,548 | ) | (16,222,351 | ) | ||||
| Other Income (Expenses) | ||||||||
| Non-operating income | 19,979 | 550 | ||||||
| Foreign exchange transaction (loss) income | (417,690 | ) | (639,432 | ) | ||||
| Interest (expense) income, net | (9,495 | ) | (25,216 | ) | ||||
| Financial expense | (166,411 | ) | (187,068 | ) | ||||
| Total Other Expenses, Net | (573,617 | ) | (851,166 | ) | ||||
| Loss Before Income Taxes and Discontinued Operations | (6,992,165 | ) | (17,073,517 | ) | ||||
| Income Tax Expense | (731,092 | ) | (2,400 | ) | ||||
| Loss From Continuing Operations | (7,723,257 | ) | (17,075,917 | ) | ||||
| Loss From Discontinued Operations | – | (25,754 | ) | |||||
| Net Loss | (7,723,257 | ) | (17,101,671 | ) | ||||
| Other Comprehensive Loss | ||||||||
| Foreign currency translation | 444,183 | (304,608 | ) | |||||
| Net Loss and Comprehensive Loss | (7,279,074 | ) | (17,406,279 | ) | ||||
| Weighted average shares outstanding - Basic and Diluted | 1,556,555 | 1,385,913 | ||||||
| Loss from continuing operations per share of common stock | ||||||||
| Basic and Diluted | $ | (4.96 | ) | $ | (12.32 | ) | ||
| Loss from discontinued operations per share of common stock | ||||||||
| Basic and Diluted | $ | – | $ | (0.02 | ) | |||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | (4.96 | ) | $ | (12.34 | ) | ||
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| Accumulated | Retained | |||||||||||||||||||||||||||
| Additional | Other | Earnings | Total | |||||||||||||||||||||||||
| Common stock | Paid-in | Comprehensive | Statutory | (Accumulated | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Reserve | Deficits) | Equity | ||||||||||||||||||||||
| Balance at January 1, 2022 | 1,365,880 | $ | 1,367 | $ | 42,665,853 | $ | 381,850 | $ | - | $ | (19,604,882 | ) | $ | 23,444,188 | ||||||||||||||
| Stock issued to employees | 2,100 | 2 | 13,438 | - | - | - | 13,440 | |||||||||||||||||||||
| Stock issued to consultants | 41,500 | 42 | 450,439 | - | - | - | 450,481 | |||||||||||||||||||||
| Issuance of common stock | 28,788 | 29 | 109,971 | - | - | - | 110,000 | |||||||||||||||||||||
| Foreign currency translation loss | - | - | - | (304,608 | ) | - | - | (304,608 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (17,101,671 | ) | (17,101,671 | ) | |||||||||||||||||||
| Balance at December 31, 2022 | 1,438,268 | $ | 1,440 | $ | 43,239,701 | $ | 77,242 | $ | - | $ | (36,706,553 | ) | $ | 6,611,830 | ||||||||||||||
| Stock issued to employees | 2,400 | 2 | 5,878 | - | - | - | 5,880 | |||||||||||||||||||||
| Stock issued to consultants | 15,000 | 15 | 45,985 | - | - | - | 46,000 | |||||||||||||||||||||
| Stock issued to designer | 45,491 | 45 | 119,918 | 119,963 | ||||||||||||||||||||||||
| Stock issued to IT consultants | 150,000 | 150 | 317,850 | 318,000 | ||||||||||||||||||||||||
| Acquisition of AI IT system | 270,000 | 270 | 674,730 | 675,000 | ||||||||||||||||||||||||
| Rounding due to 1:5 reversed stock split | (3,453 | ) | (4 | ) | (1,241 | ) | (1,245 | ) | ||||||||||||||||||||
| Foreign currency translation gain | - | - | - | 444,183 | - | - | 444,183 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (7,723,257 | ) | (7,723,257 | ) | |||||||||||||||||||
| Balance at December 31, 2023 | 1,917,706 | $ | 1,918 | $ | 44,402,821 | $ | 521,425 | $ | - | $ | (44,429,810 | ) | $ | 496,354 | ||||||||||||||
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (7,723,257 | ) | $ | (17,101,671 | ) | ||
| Net loss from discontinued operations | - | (25,754 | ) | |||||
| Net loss from continuing operations | (7,723,257 | ) | (17,075,917 | ) | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 55,446 | 88,285 | ||||||
| Amortization of operating lease right-of-use assets | 748,344 | 483,563 | ||||||
| Write down of inventories | 140,131 | 12,904,676 | ||||||
| Stock based compensation expense | 499,631 | 573,923 | ||||||
| Research and development | 675,000 | - | ||||||
| Changes in allowance for expected credit losses | (2,382 | ) | 1,870 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 243,862 | (186,951 | ) | |||||
| Advance to suppliers | (72,567 | ) | 686,091 | |||||
| Inventories | 2,525,732 | (879,527 | ) | |||||
| Other current assets | 506,133 | (1,186,439 | ) | |||||
| Operating lease liabilities | (735,151 | ) | (586,733 | ) | ||||
| Accounts payable | 108,784 | (37,101 | ) | |||||
| Advance from customers | 137,172 | (224,237 | ) | |||||
| Accrued liabilities and other payables | 672,715 | 35,305 | ||||||
| Taxes payable | 640,160 | (86,229 | ) | |||||
| Net Cash Provided by (Used in) Continuing Operations | (1,580,247 | ) | (5,489,421 | ) | ||||
| Net Cash Provided by Discontinued Operations | – | 121,771 | ||||||
| Net Cash Used in Operating Activities | (1,580,247 | ) | (5,367,650 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Disposal of fixed assets | 18,643 | – | ||||||
| Purchase of property and equipment | - | (8,772 | ) | |||||
| Net Cash Used in Continuing Operations | 18,643 | (8,772 | ) | |||||
| Net Cash Used in Discontinued Operations | – | – | ||||||
| Net Cash Used in Investing Activities | 18,643 | (8,772 | ) | |||||
| Cash Flows From Financing Activities | ||||||||
| Net Cash Provided by Continuing Operations | – | – | ||||||
| Net Cash Provided by Discontinued Operations | – | – | ||||||
| Net Cash Provided by Financing Activities | – | – | ||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | $ | 556,574 | $ | 474,483 | ||||
| Net Decrease in Cash and Cash Equivalents | (1,005,030 | ) | (4,901,939 | ) | ||||
| Cash and Cash Equivalents, Beginning of Period | 1,374,167 | 6,276,106 | ||||||
| Cash and Cash Equivalents, Ending of Period | $ | 369,137 | $ | 1,374,167 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Continuing operations: | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | 90,931 | $ | 248,720 | ||||
| Interest expense | $ | 6,176 | $ | 5,697 | ||||
| Discontinued operations: | ||||||||
| Cash paid during period for: | ||||||||
| Income tax payments | $ | – | $ | – | ||||
| Interest expense | $ | – | $ | – | ||||
| F- |
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
Note 1 - Organization and Description of Business
Organization and Business
Nova LifeStyle, Inc. (“Nova LifeStyle” or the “Company”), formerly known as Stevens Resources, Inc., was incorporated in the State of Nevada on September 9, 2009.
The Company is a U.S. holding company with no material assets other than the ownership interests of its subsidiaries through which it markets, designs and sells furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), i Design Blockchain Technology, Inc. domiciled in California (“i Design”) and Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020, Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registered and liquidated in January 2021 and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”) which was de-registered and liquidated in February 2023.
Nova Macao was organized under the laws of Macao on May 20, 2006, and was a wholly owned subsidiary of Nova Furniture. Nova Macao was a trading company, importing, marketing and selling products designed and manufactured by third-party manufacturers for the international market. Diamond Bar was incorporated in California on June 15, 2000. Diamond Bar markets and sells products manufactured by third-party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market.
On December 7, 2017, Nova LifeStyle incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build the Company’s own blockchain technology team. This company will focus on the application of blockchain technology in the furniture industry, including encouraging and facilitating interactions among designers and customers, and building a blockchain-powered platform that enables designers to showcase their products, including current and future furniture designs. This company is in the planning stage and has had minimal operations through December 31, 2023.
On December 12, 2019, Nova LifeStyle acquired Nova Malaysia at cost of $1.00 which was incorporated in Malaysia on July 26, 2019. The purpose of this acquisition was to market and sell high-end physiotherapeutic jade mats in Malaysia.
On January 7, 2020, the Company transferred its entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party, for cash consideration of $2,500,000, pursuant to a formal agreement entered into on January 7, 2020. The Company received the payment on May 11, 2020.
On October 14, 2020, the Macao Trade and Investment Promotion Institute invalidated licenses for offshore companies under an Order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered into a de-registration process and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.
On November 5, 2020, Nova LifeStyle acquired Nova HK at cost of $1,290 which was incorporated in Hong Kong on November 6, 2019. This company had minimal operations. On February 15, 2022, the Company transferred its entire assets and business in Nova HK to Nova Malaysia, a subsidiary of the Company. In February 2023, Nova HK was completed the process of de-registration and liquidation.
The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Diamond Bar, i Design, Nova HK and Nova Malaysia.
| F- |
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis and following GAAP in the U.S. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company incurred a net loss of $7.72 million and $17.10 million for the years ended December 31, 2023 and 2022. The accumulated deficit of the Company was $44.43 million and $36.71 million as of December 31, 2023 and 2022. Net cash balance decreased to $0.37 million for the year ended December 31, 2023 from $1.37 million for the year ended December 31, 2022. Continuation as a going concern is dependent upon the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due and ultimately upon its ability to achieve profitable operations. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern.
The Company has faced ongoing losses from operations, and significant cash outflows from cash used in operating activities in past years. The company lacks assurance regarding its ability to achieve profitability or secure essential financing for its operations. Considering these principal conditions, the Company’s management has determined that it is probable the company might encounter challenges in meeting its obligations within one year after the issuance of financial statements, primarily due to insufficient cash flow. Therefore, the Company must assess the probability that its plans will effectively alleviate the substantial doubt.
The Company management has the following plans to alleviate the substantial doubt: The Company will participate in four major U.S. furniture fairs every year to seek new customers to increase the company’s sales. To augment diversified revenue streams, The Company’s subsidiary Nova Malaysia is proactively engaged in the development of an innovative home decoration design IT software system. Besides, in the second quarter of this year, the company will raise money from the market to increase cash flow and investment capital.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding financial reporting. The audited consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Reverse split
On May 22, 2023, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of May 22, 2023, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), shall be effected. All references to shares and per share data have been retroactively restated to reflect such split.
Amendments to Articles of Incorporation
On September 5, 2023, the Company filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 3,000,000 to 250,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
| F- |
Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for expected credit losses, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.
Business Combination
For a business combination, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date and measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings is recognized as a gain attributable to the acquirer.
Deferred tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.
Goodwill
Goodwill is the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment, annually or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
ASC Topic 350 also permits an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test is required to be performed. Otherwise, no further testing is required. Performing the qualitative assessment involved identifying the relevant drivers of fair value, evaluating the significance of all identified relevant events and circumstances, and weighing the factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After evaluating and weighing all these relevant events and circumstances, it was concluded that a positive assertion can be made from the qualitative assessment that it is more likely than not that the fair value of Diamond Bar is greater than its carrying amount. As such, it is not necessary to perform the two-step goodwill impairment test for the Diamond Bar reporting unit. Accordingly, as of December 31, 2023 and 2022, the Company concluded there was no impairment of goodwill of Diamond Bar.
Intangible Assets
Intangible assets consist primarily of computer software acquired for internal use. Acquired intangible assets are initially recorded at the acquisition-date fair value. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are carried at cost less accumulated amortization. The estimated useful life of computer software are generally from 5 years.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash, money market funds, investments in interest bearing demand deposit accounts, time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
| F- |
Accounts Receivable
The Company’s accounts receivable arises from product sales. The Company does not adjust its receivables for the effects of a significant financing component at contract inception if it expects to collect the receivables in one year or less from the time of sale. The Company does not expect to collect receivables greater than one year from the time of sale.
The Company’s policy is to maintain an allowance for expected credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. An analysis of the allowance for expected credit losses accounts is as follows:
| Balance at January 1, 2023 | $ | 2,914 | ||
| (Reversal) Provision for the year | (2,382 | ) | ||
| Balance at December 31, 2023 | $ | 532 |
The expected credit losses (reversal) provision for the years ended December 31, 2023 and 2022 was ($2,382) and $1,870, respectively. During the years ended December 31, 2023 and 2022, provision for allowance for expected credit loss from discontinued operations were $0.
Advances to Suppliers
Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on its historical record and in normal circumstances, the Company receives goods within 4 to 6 months from the date the advance payment is made. During the year ended December 31, 2023 and 2022, no provision was made on advances to suppliers.
Inventories
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For the year ended December 31, 2023 and 2022, the Company wrote down $140,131 and $12.90 million of slow-moving inventory. The inventory write-down is included in “Cost of Sales” from continuing operations in the consolidated statements of comprehensive income. There were no write-downs of inventories from the Company’s discontinued operations for the year ended December 31, 2023 and 2022.
Plant, Property and Equipment
Plant, property, and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures for maintenance and repairs are expensed as incurred, while additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with no salvage value and estimated lives as follows:
Schedule of Plant, Property and Equipment Estimated Lives Under Straight - line Method
| Computer and office equipment | 5 - 10 years |
| Decoration and renovation | 5 - 10 years |
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
| F- |
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group asset group exceeds its fair value based on discounted cash flow analysis or appraisals. There was no impairment of long-lived assets for the years ended December 31, 2023 and 2022.
Research and Development
Research and development costs are related primarily to the Company designing and testing its new products during the development stage. In addition, during 2023, the Company has been developing Virtual and Augmented reality software and AI system for potential consulting business. The entire system is far from complete as it requires to integrate with other components in order to be functional. It is still in development stage and not in operation. Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and development expenses from continuing operations were $3.12 million and $10,917 for the years ended December 31, 2023 and 2022, respectively. Research and development expenses from discontinued operations were $0 for the year ended December 31, 2023 and 2022, respectively.
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.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at the statutory rate of 24%. Nova Living (HK) Group Limited (“Nova HK”) is incorporated in Hong Kong and is subject to Hong Kong income taxes at the statutory rate of 16.5%. In February 2022, Nova HK was deregistered.
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, 2023, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.
| F- |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.
As of December 31, 2023, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $25.4 million of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.
As of December 31, 2023 and 2022, unrecognized tax benefits were approximately $0. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 as of December 31, 2023 and 2022.
A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the year ended December 31, 2023 and 2022, is as follows:
Schedule of Unrecognized Tax Benefits
| Gross UTB | ||||||||
| 2023 | 2022 | |||||||
|
Balance – January 1 |
||||||||
| Foreign exchange adjustment | ||||||||
| Balance – December 31 | $ | - | $ | - | ||||
At December 31, 2023 and 2022, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $0 and $0 for the years ended December 31, 2023 and 2022, respectively, related to the Company’s continuing operations. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.
Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2020-2023 remain open to examination by tax authorities in the U.S.
Revenue Recognition
The Company recognizes revenues when its customers obtain control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC-606: (i) identifies contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenues when (or as) it satisfies the performance obligation.
| F- |
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
The Company’s sales policy allows for product returns within the warranty period if the product is defective and the defects are the Company’s fault. As alternatives to the product return option, the customers have the option of requesting a discount from the Company for products with quality issues or of receiving replacement parts from the Company at no cost. The amount for product returns, the discount provided to the Company’s customers, and the costs for replacement parts were immaterial for the years ended December 31, 2023 and 2022.
In February 2023, the Company entered into a sales contract to transfer its entire inventory of Jade Mats, with the net realized value of $1.54 million to Shopants Sdn Bhd, an unrelated third party, for cash consideration of $2.00 million. The Company agreed to deliver the Jade Mats on May 20, 2023, May 31, 2023 and June 15, 2023. On June 30, 2023, the Company delivered all the Jade Mats to Shopants Sdn Bhd and recorded as revenue accordingly.
Cost of Sales
Cost of sales consists primarily of costs of finished goods purchased from third-party manufacturers and write-downs of inventory.
Shipping and Handling Costs
Shipping and handling costs related to delivery of finished goods are included in selling expenses. During the years ended December 31, 2023 and 2022, shipping and handling costs were 1,682 and $2,096, respectively. During the years ended December 31, 2023 and 2022, shipping and handling costs from discontinued operations were $0.
Advertising
Advertising expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising, and are included in selling expenses. The Company expenses all advertising costs as incurred. Advertising expense was $1,053,197 and $1,213,836 for the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, advertising expense from discontinued operation were $0.
The Company accounts for share-based compensation awards to officers, directors, employees, and for acquiring goods and services from nonemployees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the vesting period. The Company accounts for forfeitures when they occur.
| F- |
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
Schedule of Reconciliations of Basic and Diluted Loss Per Share
| 2023 | 2022 | |||||||
| Net loss from continuing operations | $ | (7,723,257 | ) | $ | (17,075,917 | ) | ||
| Net loss from discontinued operations | - | (25,754 | ) | |||||
| Net loss | $ | (7,723,257 | ) | $ | (17,101,671 | ) | ||
| Weighted average shares outstanding – Basic and Diluted * | 1,556,555 | 1,385,913 | ||||||
| Net loss from continuing operations per share of common stock | ||||||||
| Basic and Diluted | (4.96 | ) | (12.32 | ) | ||||
| Net loss from discontinued operations income per share of common stock | ||||||||
| Basic and Diluted | - | (0.02 | ) | |||||
| Net loss per share of common stock | ||||||||
| Basic and Diluted | $ | (4.96 | ) | $ | (12.34 | ) | ||
| * | Including 0 shares that were granted and vested but not yet issued for the years ended December 31, 2023 and 2022, respectively. |
For the year ended December 31, 2023, 4,500 shares of unvested restricted stock, vested stock options to purchase 13,400 shares of the Company’s common stock, and 245,192 shares exercisable under warrants were excluded from the EPS calculation, as their effect were anti-dilutive.
For the year ended December 31, 2022, 4,500 shares of unvested restricted stock, vested stock options to purchase 134,000 shares of common stock of the Company, and 1,225,959 shares exercisable under warrants were excluded from the EPS calculation, as their effects were anti-dilutive.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
| F- |
One customer accounted for 18% of the Company’s sales from continuing operations for the year ended December 31, 2023. No customer accounted for 10% or more of the Company’s sales from continuing operations for the year ended December 31, 2022. Three customers accounted for 26%, 23% and 19% of the Company’s gross accounts receivable as of December 31, 2023. Two customers accounted for 66% and 13%, respectively, of the Company’s gross accounts receivable as of December 31, 2022.
No customer accounted for 10% of the Company’s sales from discontinued operations for the year ended December 31, 2023 and 2022.
The Company purchased its products from two major vendors during the years ended December 31, 2023 and 2022, respectively, accounting for a total of 44% for 2023 (26% and 18%) and 42% for 2022 (21% and 21%) of the Company’s purchases from continuing operations, respectively.
Advances made to these major vendors were $0 as of December 31, 2023 and 2022, respectively. Accounts payable to these major vendors were $266,652 and $62,251 as of December 31, 2023 and 2022, respectively.
No vendor accounted for 10% of the Company’s purchases from discontinued operations for the years ended December 31, 2023 and 2022.
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The carrying value of cash, accounts receivable, advances to suppliers, other receivables, accounts payable, advance from customers, other payables and accrued liabilities approximate estimated fair values because of their short maturities.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in United States Dollar (“$” 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, the Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.
| F- |
The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:
Schedule of Exchange Rates
| Balance sheet items, except for equity accounts | |||
| December 31, 2023 | RM 4.59 to 1 | ||
| December 31, 2022 | RM 4.40 to 1 | ||
| Income Statement and cash flow items | |||
| For the year ended December 31, 2023 | RM 4.56 to 1 | ||
| For the year ended December 31, 2022 | RM 4.39 to 1 |
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management determined that the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: the design and sale of furniture.
Management concluded that the Company had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the United States, Nova HK was a furniture distributor based in Hong Kong focusing on international customers, and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. They are all operated under the same senior management of the Company, and management views the operations of Diamond Bar, Nova HK and Nova Malaysia as one entity for making business decisions.
All of the Company’s long-lived assets are mainly property, plant and equipment located in the United States and Malaysia and are utilized for administrative purposes.
Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by the customers. For example, if the products are delivered to a customer in the United States, the sales are recorded as generated in the United States; if the customer directs us to ship its products to China, the sales are recorded as sold in China.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
| F- |
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company recognized no impairment of ROU assets as of December 31, 2023 and 2022.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the consolidated balance sheets at December 31, 2023 and 2022.
Reclassification
Certain prior period accounts have been reclassified in conformity with current period’s presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the probable, incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost basis. Am entity should apply ASU 2016-13 on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the balance sheets as of the date of adoption. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for trouble debt restructurings by creditors and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, ASU 2022-02 requires disclosure of gross write-offs by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, which should be applied prospectively. Both ASU 2016-13 and ASU 2022-02 are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and ASU 2022-02 beginning January 1, 2023. The adoption of ASU 2016-13 and ASU 2022-02 did not have any material impact on our condensed consolidated financial statement presentation or disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). This Update is effective for smaller reporting companies for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022, which is required to be applied prospectively from the date of adoption. The Company adopted ASU 2017-04 for its interim and annual goodwill impairment tests beginning January 1, 2023. The adoption of ASU 2017-04 did not have any impact on our condensed consolidated financial statements.
| F- |
Recently Issued But Not Yet Adopted Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Lease (Topic 842): Common Control Arrangements, which clarifies the accounting for leasehold improvements associated with leases between entities under common control (hereinafter referred to as common control lease). ASU 2023-01 requires entities to amortize leasehold improvements associated with common control lease over the useful life to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease, and to account for any remaining leasehold improvements as a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the underlying asset. This ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. An entity may apply ASU 2023-01 either prospectively or retrospectively. The Company is currently evaluating the impact that the adoption of ASU 2023-01 will have on our consolidated financial statement presentations and disclosures.
The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 3 - Discontinued Operations
On February 15, 2022, the Company transferred its entire assets and business in Nova HK to Nova Malaysia, a subsidiary of the Company. In February 2023, Nova HK was officially completed deregistration in Hong Kong.
As of December 31, 2021 and subsequently, operations of Nova HK have been reported as discontinued operations in the Company’s consolidated financial statements. Accordingly, assets, liabilities, revenues, expenses and cash flows related to Nova HK have been reclassified in the consolidated financial statements as discontinued operations for all periods presented.
The following table summarizes the net assets of Nova HK at the date of disposal (February 15, 2022):
Schedule of Discontinued Operations
| Inventory | $ | 15,029,724 | ||
| Equipment, net | 36,549 | |||
| Net assets of Nova HK upon disposal | 15,066,273 | |||
| Interest transferred to Nova Malaysia | (15,092,027 | ) | ||
| Loss from discontinued operations of subsidiary | $ | (25,754 | ) |
| F- |
The following table presents the components of discontinued operations in relation to Nova HK reported in the consolidated statements of operations:
| 2022 | ||||
| Sales | $ | - | ||
| Cost of sales | - | |||
| Operating expenses | (3,671 | ) | ||
| Other (expense) income, net | (22,083 | ) | ||
| Loss before income taxes | (25,754 | ) | ||
| Income tax benefit | - | |||
| Loss from discontinued operations | $ | (25,754 | ) | |
Note 4 - Inventories
The inventories as of December 31, 2023 and 2022 totaled $2,213,311 and $4,932,642, respectively, and consisted entirely of finished goods.
Inventories are stated at the lower of cost and net realizable value, with cost determined on a weighted-average basis. Write-down of potential obsolete or slow moving inventories is recorded based on management’s assumptions about future demands and market conditions. For the year ended December 31, 2023, the Company wrote-down $140,131 of slow-moving inventory. The inventory write-down is included in “Cost of Sales” in the consolidated statements of operations. For the year ended December 31, 2022, the Company wrote-down $12,904,676 of slow-moving inventories from the Company’s discontinued operations.
Note 5 - Plant, Property and Equipment, Net
As of December 31, 2023 and 2022, plant, property and equipment consisted of the following:
Schedule of Plant, Property and Equipment
|
December 31, 2023 |
December 31, 2022 |
|||||||
| Computer and office equipment | $ | 255,352 | $ | 276,567 | ||||
| Decoration and renovation | 378,237 | 392,703 | ||||||
| Property plant and equipment gross | 633,589 | 669,270 | ||||||
| Less: accumulated depreciation | (345,916 | ) | (300,646 | ) | ||||
| Property plant and equipment net | $ | 287,673 | $ | 368,624 | ||||
Depreciation expense was $68,401 and $63,218 for the years ended December 31, 2023 and 2022, respectively. Depreciation expense from discontinued operations was $0 and $1,107 for the years ended December 31, 2023 and 2022, respectively.
For years ended December 31, 2023 and 2022, the company disposed of $0 and $207,479 of office equipment and decoration and renovation, respectively.
Note 6 – Intangible Assets
As of December 31, 2023 and 2022, intangible assets consisted of the following:
Schedule of Intangible Assets
| December
31, 2023 |
December
31, 2022 |
|||||||
| Accounting software | $ | 26,800 | $ | 26,800 | ||||
| Less: accumulated amortization | (18,327 | ) | (12,963 | ) | ||||
| Intangible assets, net | $ | 8,473 | $ | 13,837 | ||||
| F- |
Amortization expense was $5,364 and $5,370 for the years ended December 31, 2023 and 2022. Amortization of intangible assets from discontinued operations was $0 for the years ended December 31, 2023 and 2022, respectively.
Note 7 – Advances to Suppliers
The Company makes advances to certain vendors for inventory purchases. The advances on inventory purchases were $93,740 and $21,173 as of December 31, 2023 and December 31, 2022, respectively. No impairment charges were made on advances to suppliers for the years ended December 31, 2023 and 2022.
Note 8 – Prepaid Expenses and Other Receivables
Prepaid expenses and other receivables consisted of the following as of December 31, 2023 and 2022:
Schedule of Prepaid Expenses and Other Receivables
| December
31, 2023 |
December
31, 2022 |
|||||||
| Prepaid expenses | $ | 984,934 | $ | 1,504,671 | ||||
| Other receivables | 41,265 | 79,175 | ||||||
| Prepaid expenses and other receivables | $ | 1,026,199 | $ | 1,583,846 | ||||
As of December 31, 2023 and 2022, prepaid expenses and other receivables mainly represented prepaid insurance, refund receivable from suppliers, prepaid advertising expense, and Celero and Cardknox account balances. On September 12, 2023, Nova Malaysia entered into an agreement with a consulting firm to deliver consultancy service for AI Trends and Tools. Nova Malaysia agreed to pay 5,000,000 Malaysia Ringgit ($1,065,235) for the service. During 2023, Nova Malaysia paid 3,800,000 Malyaia Ringgit ($827,833 to the consultant and was recorded as prepaid expense.
In October 2022, Nova Malaysia entered into a business agreement with an I.T. firm to develop a virtual reality and augmented reality development project and related works. The project was originally intended to be used internally to promote the sales. Nova Malaysia agreed to pay 10,000,000 Malaysia Ringgit ($2,110,640) for developing the project. The payment would be paid as first phase for 40% of total payment, second phase for 20% of total payment, third phase for 20% of total payment and fourth phase for 20% of total payment. On April 20, 2023, the Company entered into an amended agreement to update and test the project for additional 1,000,000 Malaysia Ringgit ($217,851). On May 10, 2023, the virtual reality and augmented reality development project was completed as a prototype testing model. Up to that point, the company believes this project could be utilized not only internally to promote sales, but also go external licensing for direct subscription in the future, which might help the company to convert to a software or APP provider. However, it is just a part of the ultimate software product to be functional. The ultimate software is still in development stage and not currently feasible to be functional. The total payment to IT firm was 11,000,000 Malyaia Ringgit ($2,413,498) and was recorded as research and development.
| F- |
Note 9 – Accrued Liabilities and Other Payables
Accrued liabilities and other payables consisted of the following as of December 31, 2023 and December 31, 2022:
Schedule of Accrued Liabilities and Other Payables
|
December 31, 2023 |
December 31, 2022 |
|||||||
| Other payables | $ | 139,722 | $ | 15,225 | ||||
| Salary payable | 7,511 | 6,612 | ||||||
| Financed insurance premiums | 69,337 | 71,415 | ||||||
| Auditing fee | 125,000 | 85,000 | ||||||
| Warranty liability | 27,545 | 38,349 | ||||||
| Accrued commission | 58,669 | 69,592 | ||||||
| Accrued expenses, others | 672,877 | 127,406 | ||||||
| Total accrued liabilities and other payable | $ | 1,100,661 | $ | 413,599 | ||||
As of December 31, 2023 and 2022, other accrued expenses mainly included legal and professional fees, utilities and unpaid operating expenses incurred in Malaysia. Other payables represented balance on credit card, other taxes payable and 401(k) payable.
Note 10 – Other Loans
On June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. The Loan, which was in the form of a promissory note dated June 19, 2020, matures on June 19, 2050 and bears interest at a rate of 3.75% per annum, payable monthly beginning 12 months from the date of the promissory note. Funds from the Loan may only be used for working capital. The loan was secured by all tangible and intangible property of Diamond Bar. It has accumulated interest of $5,580 and $5,697 for the years ended December 31, 2023 and 2022, respectively.
Note 11 – Income Taxes
Taxes recoverable (payable) consisted of the following at December 31, 2023 and 2022:
Schedule of Taxes Payable
| 2023 | 2022 | |||||||
| Income tax receivable – current | $ | - | $ | - | ||||
| Income tax payable - current | (1,150,105 |
) | (629 |
) | ||||
| Income tax payable – noncurrent | $ | (643,112 | ) | $ | (1,157,603 | ) | ||
As of December 31, 2023 and 2022, current tax payable were $1.15 million and $629, respectively. For 2023, current tax payable, $0.43 million was arising from a one-time transition tax recognized in the fourth quarter of 2017 on post-1986 foreign unremitted earnings (see below) and $0.72 million was primarily resulted from Nova Malaysia’s taxable income which incurred due to cancellation of debt income on debt forgiveness granted by Nova HK, which was partially offset by inventory impairment loss and net operating loss carryovers from prior years.
As of December 31, 2023 and 2022, noncurrent tax payable were $0.64 million and $1.16 million, respectively, arising from a one-time transition tax recognized in the fourth quarter of 2017 on post-1986 foreign unremitted earnings (see below).
The (benefit) provision for income taxes on loss from continuing operations consisted of the following:
Schedule of Components of Income Tax Expense (Benefit)
| 2023 | 2022 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 2,400 | 2,400 | ||||||
| Hong Kong | - | - | ||||||
| Malaysia | 728,692 |
- | ||||||
| Income Tax Expense (Benefit) Current | 731,092 | 2,400 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State | - | - | ||||||
| Total provision (benefit) for income taxes | $ | 731,092 | $ | 2,400 | ||||
| F- |
The following is a reconciliation of the difference between the actual (benefit) provision for income taxes and the (benefit) provision computed by applying the federal statutory rate on income before income taxes from continuing operations:
Schedule of Effective Income Tax Rate Reconciliation
| 2023 | 2022 | |||||||
| Tax at federal statutory rate | $ | (1,468,355 | ) | $ | (3,585,770 | ) | ||
| Foreign rate differential | 607,758 | (525,735 | ) | |||||
| ASC 740-10 uncertain tax position | - | - | ||||||
| Tax exemption | - | - | ||||||
| Global Intangible Low-Taxed Income | - | - | ||||||
| Stock based compensation | 66,045 | 90,645 | ||||||
| Non-deductible Expenses | 3,767,680 | - | ||||||
| Others | (204,526 | ) | (85,279 | ) | ||||
| Valuation allowance | (2,037,510 | ) | 4,108,539 | |||||
| Total provision (benefit) for income taxes | $ | 731,092 | $ | 2,400 | ||||
Schedule of Aggregate Dollar Effects of the Company’s Tax Exemption
| 2023 | 2022 | |||||||
| Aggregate dollar effect of tax holiday | $ | - | $ | - |
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are comprised of the following:
Schedule of Deferred Tax Assets And Liabilities
| 2023 | 2022 | |||||||
| Non-Current Deferred Tax Assets: | ||||||||
| Accrued liabilities | $ | 15,898 | $ | 28,130 | ||||
| Fed & CA amortization | 9,832 | 13,511 | ||||||
| Stock compensation | 160,522 | 155,111 | ||||||
| ASC 842 – lease liability | 522,840 | 685,136 | ||||||
| Inventory | - | 6,898,892 | ||||||
| U.S. NOL | 4,213,883 | 4,323,465 | ||||||
| Capital loss | 734,766 | 733,461 | ||||||
| Charitable Contribution | 1,748 | 1,332 | ||||||
| R&D Capitalization | 3,658 | 2,063 | ||||||
| Interest | 3,587 | 5,058 | ||||||
| Non-Current Deferred Tax Liabilities: | ||||||||
| Prepaid expenses | (423 | ) | - | |||||
| Fed & CA depreciation | (7,744 | ) | (3,405 | ) | ||||
| ASC 842- ROU Asset | (506,280 | ) | (673,292 | ) | ||||
| Net Non-Current Deferred Tax Assets before Valuation Allowance | 5,152,289 | 12,169,462 | ||||||
| Less: Valuation Allowance | (5,152,289 | ) | (12,169,462 | ) | ||||
| Non-Current Deferred Tax Assets, Net: | - | - | ||||||
| Total Deferred Assets, Net: | $ | - | $ | - | ||||
Nova LifeStyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI is incorporated in the BVI. There is no income tax for a company domiciled in the BVI. Accordingly, the Company’s consolidated financial statements do not present any income tax provision related to the BVI tax jurisdiction where Nova Furniture BVI is domiciled.
For U.S. Federal income tax purpose, the Company has net operating loss, or NOL carryforwards of approximately $13.6 million and $10.4 million at December 31, 2023 and 2022, respectively. The Company has capital loss carryforwards of approximately $3.5 million at December 31, 2023.
For U.S. California income tax purpose, the Company has net operating loss, or NOL carryforwards of approximately $19.5 million and $16.2 million, at December 31, 2023 and 2022, respectively.
| F- |
Malaysia has net operating loss, or NOL carryforwards of approximately $0 million at December 31, 2023. The Company has disposed prior year’s inventory and utilized all prior year’s NOL. The Company has approximately $0.73 million income tax expense at December 31, 2023.
Corporate income tax in Malaysia is calculated at the statutory rate of 24% of the estimated taxable profit for the year ended December 31, 2023.
Nova HK has net operating loss, or NOL carryforward of approximately $0 and $0.03 million at December 31, 2023, 2022, respectively. The Company has recorded full valuation allowance against the Nova HK NOL carryforwards. Nova HK is incorporated in Hong Kong and is subject to Hong Kong income taxes at the statutory rate of 16.5%. In February 2022, Nova HK was deregistered.
Note 12 – Related Party Transactions
On September 30, 2011, Diamond Bar leased a showroom in High Point, North Carolina from the Company’s President who is currently also the Chief Executive Officer and Chairperson of the Board. The lease is renewable and has been renewed each year since 2011. On April 3, 2023, the Company renewed the lease for an additional one year term at a cost of $34,561. During the years ended December 31, 2023 and 2022, the Company recorded rental amounts of $34,561 and $25,921, respectively, which were included in selling expenses.
On January 4, 2018, the Company entered into a sales representative agreement with a consulting firm, which is owned by the President, Chief Executive Officer and Chairperson of the Board, for sales representative service for a term of two years. On January 4, 2020, the Company renewed the agreement for an additional two years which was amended in July 2020. If not terminated during the first year, the agreement will continue until one party or the other terminates the agreement with 30 days written notice. The Company agreed to compensate the consulting firm via commission at predetermined rates of the relevant sales amount. During the years ended December 31, 2023 and 2022, the Company recorded $321,030 and $392,755 as commission expense to this consulting firm, respectively.
Note 13 – Stockholders’ Equity
On May 28, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) at its annual meeting. The 2021 Plan was approved by the Board of Directors of the Company on April 12, 2021 and has a total of 600,000 shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On June 16, 2021, the Company filed Form S-8 to register the 600,000 shares of the Company’s common stock under the 2021 Plan.
On August 31, 2023, the Company’s stockholders approved the Company’s 2023 Equity Incentive Plan (the “2023 Plan”) at its special shareholders’ meeting. The 2023 Plan was approved by the Board of Directors of the Company on June 28, 2023 and has a total of 800,000 shares of the Company’s common stock which may be granted as stock reward to attract and retain personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. On December 15, 2023, the Company filed Form S-8 to register the 800,000 shares of the Company’s common stock under the 2023 Plan.
Shares and Warrants issued through Private Placement
On July 23, 2021, the Company conducted a registered direct offering of 222,902 shares of common stock. The shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on October 8, 2020 and subsequently declared effective on October 15, 2020. Additionally, the Company issued to the investors unregistered warrants to purchase up to an aggregate of 222,902 shares of common stock in a concurrent private placement. The combined purchase price for one share of common stock and a warrant to purchase one share of common stock was $14.00. The warrants have an exercise price of $17.50 per share, are exercisable beginning six-months from the date of issuance, and will expire five and a half years from the date of issuance. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021.
| F- |
In conjunction with this offering, the Company issued warrants to purchase 22,290 shares of common stock at an exercise price of $17.50 per share to the placement agent and its designees. The placement agent warrants are exercisable on the six-month anniversary of the issuance date. The placement agent warrants are exercisable for four and a half years from the initial exercise date. The placement agent warrants have piggy-back registration rights and have a termination date of July 23, 2026.
The warrants issued in the private placement described above are exercisable for a fixed number of shares, and are classified as equity instruments under ASC 815-40-25-10. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated life of 5.5 years, volatility of 107%, risk-free interest rate of 0.71% and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options and warrants. The fair value of the warrants issued to investors and placement agent at grant date was $2,018,597.
Warrants
The following is a summary of the warrant activity for the year ended December 31, 2023:
Summary of Warrant Activity
|
Number of Warrants |
Average Exercise Price |
Weighted Average Remaining Contractual Term in Years |
||||||||||
| Outstanding at January 1, 2023 | 245,192 | $ | 17.50 | 4.02 | ||||||||
| Exercisable at January 1, 2023 | 245,192 | $ | 17.50 | 4.02 | ||||||||
| Granted | - | - | - | |||||||||
| Exercised / surrendered | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Outstanding at December 31, 2023 | 245,192 | $ | 17.50 | 3.02 | ||||||||
| Exercisable at December 31, 2023 | 245,192 | $ | 17.50 | 3.02 | ||||||||
Shares Issued to Consultants
On November 2, 2021, the Company entered into an information technology consulting agreement with a consultant for analyzing and developing the Company’s information technology infrastructure and system, and related general business advisory services effective on November 2, 2021 for a one-year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock, 10,000 shares issued before the end of November 2021 and remaining 10,000 shares were issued on the one-year anniversary of the agreement. The fair value of the 20,000 shares was $236,000, which was calculated based on the stock price of $11.80 per share on November 2, 2021 and has been amortized over the service term. The shares were issued pursuant to Nova Lifestyle, Inc. 2021 Omnibus Equity Plan (the “2021 Plan”). During the years ended December 31, 2023 and 2022, the Company charged $0 and $197,205 to operations as consulting expenses.
On November 2, 2021, the Company entered into a marketing consulting agreement with a consultant for developing branding and marketing strategies, analyzing and evaluating consumer data services effective on November 2, 2021 for a one-year term. The Company agreed to grant the consultant 20,000 shares of the Company’s common stock, 10,000 shares issued before the end of November 2021 and remaining 10,000 shares were issued on the one-year anniversary of the agreement. The fair value of the 20,000 shares was $236,000, which was calculated based on the stock price of $11.80 per share on November 2, 2021 and is being amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the years ended December 31, 2023 and 2022, the Company charged $0 and $197,205 to operations as consulting expenses.
| F- |
On November 11, 2021, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2021 for a one-year term. The Company agreed to grant the consultant 4,000 shares of the Company’s common stock, vesting 25% on February 15, 2022, 25% on May 15, 2022, 25% on August 15, 2022 and 25% on November 15, 2022. The fair value of the 4,000 shares was $46,600, which was calculated based on the stock price of $11.65 per share on November 16, 2021 and have been amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the years ended December 31, 2023 and 2022, the Company charged $0 and $40,727 to operations as consulting expenses.
On January 28, 2022, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development effective on February 1, 2022 for twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2022 for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading day of the corresponding month. The shares were issued pursuant to the 2021 Plan. During the years ended December 31, 2023 and 2022, the Company issued 4,347 and 131,444 shares to the designer and charged $10,000 and $110,000, respectively to operations as designer fee.
On July 1, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on July 1, 2022 for a one-year term. The Company agreed to grant the consultant 10,000 shares of the Company’s common stock, vesting 25% on July 1, 2022, 25% on October 1, 2022, 25% on January 1, 2023 and 25% on April 1, 2023. The fair value of the 10,000 shares was $36,000, which was calculated based on the stock price of $3.60 per share on July 1, 2022 and has been amortized over the service term. The shares were issued pursuant to the 2021 Plan. During the years ended December 31, 2023 and 2022, the Company charged $18,000 and $18,000 to operations as consulting expenses, respectively.
On November 16, 2022, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2022 for a one-year term. The Company agreed to grant the consultant 10,000 shares of the Company’s common stock, vesting 25% on February 15, 2023, 25% on May 15, 2023, 25% on August 15, 2023 and 25% on November 15, 2023. The fair value of the 10,000 shares was $28,000, which was calculated based on the stock price of $2.80 per share on November 16, 2022. The shares were issued pursuant to the 2021 Plan. During the year ended December 31, 2023 and 2022, the Company charged $28,000 and $0, respectively, to operations as consulting expenses.
On January 28, 2023, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development effective on February 1, 2023 for twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2023 for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading day of the corresponding month. The shares were issued pursuant to the 2021 Plan. During the years ended December 31, 2023, the company issued 41,144 shares to the designer and charged $110,000 to operations as designer fee.
On July 3, 2023, the Company entered into an IT consulting service agreement with three consultants for analyzing the Company’s IT infrastructure and system effective on July 3, 2023 for twelve months. The Company agreed to grant the consultant 300,000 shares of the Company’s common stock, vesting 25% on July 3, 2023, 25% on October 3, 2023, 25% on January 3, 2024 and 25% on April 3, 2024. The fair value of the 300,000 shares was $636,000, which was calculated based on the stock price of $2.12 per share on July 3, 2023. The shares were issued pursuant to the 2021 Plan. During the year ended December 31, 2023, the Company charged $318,000 to operations as consulting expenses.
On November 9, 2023, the Company entered into a consulting agreement with a consultant for consulting and strategy services effective on November 16, 2023 for a one-year term. The Company agreed to grant the consultant 50,000 shares of the Company’s common stock, vesting 25% on February 15, 2024, 25% on May 15, 2024, 25% on August 15, 2024 and 25% on November 15, 2024. The fair value of the 50,000 shares was $117,500, which was calculated based on the stock price of $2.35 per share on November 16, 2023. The shares were issued pursuant to the 2021 Plan. During the year ended December 31, 2023, the Company charged $14,808 to operations as consulting expenses.
On November 16, 2023, Nova Malaysia entered into an agreement with an IT consulting firm to acquire an Artificial Intelligent IT System for $675,000. The Company agreed to issue 270,000 shares of common stocks at the price of $2.50 per share which was in equivalent to $675,000 (3,161,970 in Malaysia Ringgit on November 16, 2023) to the IT consulting firm. Artificial Intelligent IT System is just a part of the ultimate software product. The ultimate software is still in developing stage and not feasible to be functional. During the year ended December 31, 2023, the Company recorded $675,000 as research and development expense.
| F- |
Shares and Options Issued to Independent Directors
On November 7, 2018 (the “Grant Date”), the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three independent members of the board of directors. The Company agreed to grant the Company’s three independent directors’ options to purchase an aggregate of 12,000 shares of the Company’s common stock at an exercise price of $29.50 per shares, with a term of 5 years. Twenty-five percent (25%) of those stock options vested on November 30, 2018, 25% on will vest on February 28, 2019, 25% on May 31, 2019, and the remaining 25% will vest on August 31, 2019. The fair value of the stock options granted is estimated on the date of the grant using the Black-Scholes option pricing model (“BSOPM”) as described above. The fair value of the options was calculated using the following assumptions: estimated life of ten years, volatility of 84%, risk free interest rate of 3.07%, and dividend yield of 0%. The fair value of 60,000 stock options was $240,105 at the grant date.
On November 4, 2019, the Company entered into stock option agreements under the 2014 Omnibus Long-Term Incentive Plan with the three independent members of the board of directors. The Company agreed to grant the Company’s three independent directors options to purchase an aggregate of 12,000 shares of the Company’s common stock at an exercise price of $14.00 per share, with a term of 5 years, vesting 25% on November 30, 2019, 25% on February 28, 2020, 25% on May 31, 2020, and 25% on August 31, 2020. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes option pricing model. The fair value of the options was calculated using the following assumptions: estimated life of ten years, volatility of 87%, risk free interest rate of 1.60%, and dividend yield of 0%. The fair value of the 12,000 stock options was $114,740 at the grant date.
Shares Issued to Employees
On November 11, 2021, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2021. The Company agreed to grant an award of 1,200 restricted Stock Units to the officer pursuant to the Company’s 2021 Omnibus Equity Plan. The fair value of these shares was $13,200, which was calculated based on the stock price of $11.00 per share on November 11, 2021, the date the award was determined by the Compensation Committee of the Board of Directors, vesting 25% on November 10, 2021, 25% on March 31, 2022, 25% on June 30, 2022 and 25% on September 30, 2022. During the years ended December 31, 2022, the Company amortized $11,501 to operations as stock compensation expense.
On November 11, 2022, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2022. The Company agreed to grant an award of 1,200 restricted Stock Units to the officer pursuant to the Company’s 2021 Omnibus Equity Plan. The fair value of these shares was $3,540, which was calculated based on the stock price of $2.95 per share on November 11, 2022, the date the award was determined by the Compensation Committee of the Board of Directors, vesting 25% on November 11, 2022, 25% on March 31, 2023, 25% on June 30, 2023 and 25% on September 30, 2023. During the year ended December 31, 2023 and 2022, the Company record $2,665 and $885 to operations as stock compensation expense, respectively.
On November 9, 2023, the Company extended an employment agreement with the Company’s Corporate Secretary for a term of one year effective from November 14, 2023. The Company agreed to grant an award of 6,000 restricted Stock Units to the officer pursuant to the Company’s 2021 Omnibus Equity Plan. The fair value of these shares was $12,900, which was calculated based on the stock price of $2.15 per share on November 9, 2023, the date the award was determined by the Compensation Committee of the Board of Directors, vesting 25% on November 9, 2023, 25% on March 31, 2024, 25% on June 30, 2024 and 25% on September 30, 2024. During the year ended December 31, 2023, the Company record $3,225 to operations as stock compensation expense.
Options Issued to Employees
On August 24, 2018, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of 1,400 shares of the Company’s common stock at an exercise price of $46.25 per share, with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (50%) of those stock options vested immediately, and the remaining 50% vested on the six-month anniversary of the grant date.
| F- |
The fair value of the option granted to the Chief Financial Officer in 2018 was recognized as compensation expense over the vesting period of the stock option award. The fair value of the option was calculated using the following assumptions: estimated life of five years, volatility of 84%, risk free interest rate of 2.72%, and dividend yield of 0%. The fair value of the 1,400 stock options was $43,680 at the grant date.
On August 12, 2019, the compensation committee of the Board approved an option grant to the Company’s Chief Financial Officer to purchase an aggregate of 1,400 shares of the Company’s common stock at an exercise price of $19.25 per share, with a term of 5 years, pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. Fifty percent (50%) of those stock options vested immediately, and the remaining 50% vested on the six-month anniversary of the grant date.
The fair value of the option granted to the Chief Financial Officer in 2019 was recognized as compensation expense over the vesting period of the stock option award. The fair value of the option was calculated using the following assumptions: estimated life of five years, volatility of 87%, risk free interest rate of 1.49%, and dividend yield of 0%. The fair value of the 1,400 stock options was $18,318 at the grant date.
As of December 31, 2023, unrecognized share-based compensation expense was $455,175.
Schedule of Stock Option Activity
|
Number of Shares |
Average Exercise Price per Share |
Weighted Average Remaining Contractual Term in Years |
||||||||||
| Outstanding at January 1, 2023 | 26,800 | $ | 22.90 | 1.33 | ||||||||
| Exercisable at January 1, 2023 | 26,800 | 22.90 | 1.33 | |||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | 13,400 | 31.25 | - | |||||||||
| Outstanding at December 31, 2023 | 13,400 | 14.55 | 0.82 | |||||||||
| Exercisable at December 31, 2023 | 13,400 | 14.55 | 0.82 | |||||||||
| (1) | The intrinsic value of the stock options at December 31, 2023 is the amount by which the market value of the Company’s common stock of $3.77 as of December 29, 2023 exceeds the average exercise price of the option. As of December 31, 2023, the intrinsic value of the outstanding and exercisable stock options was $0. |
Note 14 – Geographical Analysis
Geographical distribution of sales consisted of the following for the years ended December 31, 2023 and 2022:
Schedule of Revenue by Geographic Areas
| 2023 | 2022 | |||||||
| Geographical Areas | ||||||||
| North America | $ | 8,772,170 | $ | 12,009,384 | ||||
| Asia | 1,985,130 | 60,479 | ||||||
| Other countries | 330,159 | 675,008 | ||||||
| Revenues | $ | 11,087,459 | $ | 12,744,871 | ||||
| F- |
Geographical location of identifiable long-lived assets as of December 31, 2023 and December 31, 2022:
Schedule of Long-lived Assets by Geographic Areas
|
2023 |
2022 |
|||||||
| Geographical Areas | ||||||||
| North America | $ | 1,873,623 | $ | 2,502,010 | ||||
| Asia | 318,398 | 531,703 | ||||||
| Total | $ | 2,192,021 | $ | 3,033,713 | ||||
Note 15 – Lease
On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space in the United States with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provided an option to extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another three years with an expiration date of October 31, 2021. On October 15, 2021, the Company extended the lease for another five years with an expiration date of October 31, 2026. The initial monthly rental payment is $42,000 with an annual 3% increase.
The Company has entered into several lease agreements for office and warehouse space in Commerce, California and showroom space in Las Vegas, Nevada and High Point, North Carolina (see Note 12) on monthly or annual terms.
On July 15, 2019, Nova Malaysia entered into a sublease agreement for warehouse space with a two-year term, expiring on July 14, 2021. The initial monthly rental payment was 20,000 Malaysia Ringgit ($4,547) and was increased to 35,000 Malaysia Ringgit ($7,958) effective August 1, 2020. On July 15, 2021, Nova Malaysia extended the lease for another two years with an expiration date of July 31, 2023. Nova Malaysia did not extend this lease after July 31, 2023.
On October 29, 2019, Nova Malaysia entered into a lease agreement for a showroom with a two-year term, commencing on December 1, 2019 and expiring on November 30, 2021. On November 26, 2021, Nova Malaysia extended the lease to November 30, 2022 with an option for renewal for another term of 24 months. On October 4, 2022, Nova Malaysia renewed the lease for two years to November 30, 2024. The monthly rental payment is 9,280 Malaysia Ringgit ($2,110).
On August 20, 2020, Nova Malaysia entered into a sublease agreement for an office and service center with a two-year term, commencing on September 1, 2020 and expiring on August 31, 2022. On July 29, 2022, Nova Malaysia extended the lease for another two years with an expiration date of August 31, 2024. The monthly rental payment is 30,000 Malaysia Ringgit ($6,821).
Operating lease expense for the years ended December 31, 2023 and 2022 was as follows:
Schedule of Lease Cost
| 2023 | 2022 | |||||||
| Operating lease cost – straight line | $ | 831,262 | $ | 880,590 | ||||
The following is a schedule, by years, of maturities of operating lease liabilities as of December 31, 2023:
Schedule of Operating Lease Liability Maturity
| Operating Leases | ||||
| 2024 | $ | 755,243 | ||
| 2025 | 701,142 | |||
| 2026 | 598,820 | |||
| Thereafter | 0 | |||
| Total undiscounted cash flows | 2,055,205 | |||
| Less: imputed interest | (90,963 | ) | ||
| Present value of lease liabilities | 1,964,242 | |||
| F- |
Lease Term and Discount Rate
Schedule of Lease Term and Discount Rate
| December 31, 2023 | ||||
| Weighted-average remaining lease term – years | ||||
| Operating leases – USA | 2.84 | |||
| Operating leases – Malaysia | 0.69 | |||
| Weighted-average discount rate (%) | ||||
| Operating leases – USA | 3.36 | % | ||
| Operating leases – Malaysia | 5.21 | % | ||
Supplemental cash flow information related to leases where the Company was the lessee for the years ended December 31, 2023 and 2022 was as follows:
Schedule of Supplemental Cash Flow Information Related to Leases
| 2023 | 2022 | |||||||
| Operating cash outflows from operating leases | $ | 814,230 | $ | 844,309 | ||||
Note 16 – Commitments and Contingencies
Legal Proceedings
The Company previously reported on a federal putative class action complaint George Barney filed against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (the “Barney Action”).
That action was resolved by a January 30, 2024 Order of the Court certifying a settlement class and approving a class settlement.
In the Barney action, Company shareholders sought to assert claims on behalf of all entities purchasing stock from December 21, 2015, through December 20, 2018, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10b-5. In support of these claims, plaintiffs alleged that defendants artificially inflated the Company’s share price by issuing a press release announcing a strategic relationship with Shanxi Winqing Senior Care Service Group, claiming in the Company’s Annual Statements on Form 10-Ks for the 2017 and 2018 fiscal years that Shanxi Winqing and Merlino Lewis LLP were among the Company’s largest customers, and reporting revenues from sales transactions with these entities. Plaintiffs claimed that Shanxi Winqing was a fictitious entity and Merlno Lewis LLP dissolved in 2013, so that the announcement of a strategic alliance was false and the reported revenues non-existent.
The Company denied these allegations and all liability. It asserted that the entities referenced in its public disclosures were actual companies and the revenues booked from those entities were genuine and actually collected. The Company alleged that no registration exists for Shanxi Winqing because the Company slightly mistranslated its Chinese name in its public disclosures. Similarly, the Company claimed to have previously sold products to Merlino Lewis LLP and failed to update its customer name when the customer restructured its business.
On March 31, 2023, the parties filed a Renewed Stipulation of Settlement (“Renewed Stipulation”) resolving all claims asserted in the matter. This Renewed Stipulation was executed and filed after the Court denied plaintiffs’ Motion to Certify a Settlement Class and Approve Class Action settlement in accordance with the parties’ original Stipulation of Settlement. The substantive terms of the settlement as they applied to the Company were not modified between the original Settlement Stipulation and the Renewed Settlement Stipulation. The Renewed Stipulation provided for the certification of a settlement class and the Company’s payment to the settlement class of $750,000. It also provided for the complete release of all claims by the settlement class against the Company and its directors, officers, and employees and the other named defendants with respect to any of the matters alleged in the litigation. The Company settled without in any manner admitting, and expressly denying, liability.
By Order entered July 10, 2023, the Court preliminarily approved a settlement class and the proposed settlement. The settlement escrow was then funded as specified in this Order. The funding was provided through a directors and officers liability insurance policy.
The Court thereafter certified a settlement class and finally approved the settlement by Order entered January 30, 2024. The entry of this Order resolved the matter as to the Company. The settlement payment was funded through insurance.
| F- |
On March 8, 2019, Jie Yuan (the “Jie Action”) filed a putative shareholder derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Umesh Patel, and Min Su) and vice president (Steven Qiang Liu) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Seeking Alpha blog and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing transactions by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information.”
On May 15, 2019, Wilson Samuels (the “Samuels Action”) filed a largely duplicative putative derivative complaint purportedly on behalf of the Company against the same current and former directors and officers named in the Jie Action other than Steven Qiang Liu. That action was filed in the United States District Court for the Central District of California. Samuels repeats the allegations of the Complaint in the Jie Action. Additionally, Samuels claims that, in announcing its change of auditing firms in September 2016, the Company asserted that this change was made because its existing auditor ceased auditing public companies subject to regulation in the United States without disclosing that its new auditing firm was created in a merger of three accounting firms, including a firm whose registration was revoked by the Public Company Accounting Oversight Board. Samuels also claims that the Company redeemed its stock in reliance upon the same purported fraudulent recognition of revenues claimed in the putative class action. Samuels purports to state direct claims under Sections 10(b) and 20 of the Exchange Act and SEC Rule 10b-5.
On March 3, 2020, the defendants filed motions to stay the derivative actions until the Barney Action is resolved or alternatively to dismiss on the grounds that plaintiffs’ failure to make demand upon the Board of Directors was not excused and the Complaints otherwise fail to state a claim upon which relief can be granted. By Order entered April 7, 2020, the Court granted defendants’ Motion to Stay and stayed the Jie Action until the Barney Action is resolved. The Court subsequently entered a similar Order in the Samuels Action. It also took a motion that the derivative plaintiffs filed to consolidate the proceedings and appoint lead counsel off calendar.
With the resolution of the Barney action, settlement of the action, the stay of the derivative actions will be lifted.
While these derivative actions are purportedly asserted on behalf of the Company, it is possible that the Company will incur attorneys’ fees and costs in advancing the costs of defense for its current directors and officers pursuant to contractual and legal indemnity obligations. The Company believes there is no basis to the derivative complaints and they will be vigorously defended if necessary.
Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
Note 17 – Subsequent Events
The Company has evaluated subsequent events through April 12, 2024, the date of the issuance of the consolidated financial statements, and the following subsequent events have been identified.
On January 23, 2024, Nova LifeStyle, Inc. (the “Company”), Nova Living (M) Sdn Bhd, a wholly owned subsidiary of the Company (“Nova Malaysia”) and ATS Brand Sdn Bhd (“ATS Brand”), a company incorporated in Malaysia entered into a Sale and Purchase Agreement (the “Agreement”). Pursuant to the Agreement, the parties agree: (i) Nova Malaysia will purchase an AI-Calculation Engine System from ATS Brand for $750,000 (the “Purchase Price”) and (ii) the Purchase Price shall be paid in 300,000 shares of common stock (“Shares”) of the Company at $2.5 per share. The AI-Calculation Engine includes Commission Management Calculation Module, Compiled and Encrypted Calculation Engine, Membership Module, Sales Module and Maintenance and Support, etc. The Shares will be issued pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On January 28, 2024, the Company entered into an advisory service agreement with a designer for advising furniture design concept and development effective on February 1, 2024 for twelve months. The Company shall pay the designer $10,000 per month starting from February 1, 2024 for twelve months, in the form of the Company’s Common Stock, calculated based on the closing stock price on the first trading day of the corresponding month. The shares were issued pursuant to the 2021 Plan.
On February 2024, the Company entered into a loan agreement in the aggregate amount of $200,000 with an unrelated third party. The loan was in the form of a promissory note dated on February 21, 2024, matures on February 20, 2025, and bears interest at a rate of 8.5% per annum.
On March 1, 2024, Nova Malaysia entered into a consulting agreement with a consultant for IT system related maintenance and services effective on March 1, 2024 for a one-year term. The Company agreed to grant the consultant 100,000 shares of the Company’s common stock, vesting 25% on March 1, 2024, 25% on June 1, 2024, 25% on September 1, 2024 and 25% on December 1, 2024. The fair value of the 100,000 shares was $163,000, which was calculated based on the stock price of $1.63 per share on March 1, 2024. The shares were issued pursuant to the 2023 Omnibus Long-Term Incentive Plan.
| F- |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NOVA LIFESTYLE, INC. | ||
| (Registrant) | ||
| Date: April 12, 2024 | By: | /s/ Thanh H. Lam |
|
Thanh H. Lam Chairperson and Chief Executive Officer (Principal Executive Officer) |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thanh H. Lam and Jeffery Chuang, jointly and severally, his or her attorneys-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Thanh H. Lam | Chief Executive Officer, President, Director and Chairperson | April 12, 2024 | ||
| Thanh H. Lam | (Principal Executive Officer) | |||
| /s/ Jeffery Chuang | Chief Financial Officer | April 12, 2024 | ||
| Jeffery Chuang | (Principal Financial and Accounting Officer) | |||
| /s/ Min Su | Director | April 12, 2024 | ||
| Min Su | ||||
| /s/ Ming-Cherng Sky Tsai | Director | April 12, 2024 | ||
| Ming-Cherng Sky Tsai | ||||
| /s/ Umesh Patel | Director | April 12, 2024 | ||
| Umesh Patel | ||||
| /s/ Huy P. La | Director | April 12, 2024 | ||
| Huy P. La |
|
|
Exhibit 4.4
Description of the Company’s Common Stock Registered Under Section 12 of the Exchange Act of 1934, as amended
Nova LifeStyle, Inc. (the “Company”, “we”, “us” or “our”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) which consists of common stock, $0.001 par value per share (the “Common Stock”). The following is a summary of information concerning our Common Stock. This summary does not purport to be a complete statement of the relevant provisions of the Common Stock and is qualified in its entirety by the provisions of our Articles of Incorporation, as amended (the “Articles of Incorporation”), our Amended and Restated Bylaws (“Bylaws”), and applicable provisions of the Nevada Revised Statutes (the “NRS”).
Our authorized capital stock consists of 250,000,000 shares of Common Stock, par value $0.001 per share. Currently, we have no other authorized class of stock.
As of April 11, 2024, there were 2,322,115 shares of our Common Stock outstanding, held by approximately 50 stockholders of record. In addition, there are 13,400 option shares that were granted and vested but not yet issued, 4,500 shares of unvested restricted stock of the Company’s common stock and the warrants to purchase 245,192 shares of common stock of the Company as of April 11, 2024. Our Common Stock is currently traded on The NASDAQ Stock Market LLC under the symbol “NVFY”. The transfer agent and registrar for our common stock is Issuer Direct Corporation.
The holders of our Common Stock are entitled to one vote per share. Our Articles of Incorporation do not provide for cumulative voting. The holders of our Common Stock are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of legally available funds; however, the current policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our Common Stock are entitled to share ratably in all assets that are legally available for distribution. The holders of our Common Stock have no preemptive, subscription, redemption or conversion rights.
All issued and outstanding shares of Common Stock are fully paid and nonassessable. Shares of our Common Stock that may be offered for resale, from time to time, under this prospectus will be fully paid and nonassessable.
As a Nevada corporation, we are also subject to certain provisions of the Nevada Revised Statutes (the “NRS”) that have anti-takeover effects and may inhibit a non-negotiated merger or other business combination. These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval of, our board of directors in connection with such a transaction. However, certain of these provisions may discourage a future acquisition of us, including an acquisition in which the stockholders might otherwise receive a premium for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so. The NRS provides that specified persons who, with or through their affiliates or associates, own, or affiliates and associates of the subject corporation at any time within two years own or did own, 10% or more of the outstanding voting stock of a corporation cannot engage in specified business combinations with the corporation for a period of two years after the date on which the person became an interested stockholder, unless the combination meets all of the requirements of the articles of incorporation of the company, and: (i) the combination or transaction by which such person first became an interested stockholder was approved by the board of directors before they first became an interested stockholder; or (ii) such combination is approved by: (x) the board of directors; and (y) at an annual or special meeting of the stockholders (not by written consent), the affirmative vote of stockholders representing at least 60% of the outstanding voting power not beneficially owned by such interested stockholder. The law defines the term “business combination” to encompass a wide variety of transactions with or caused by an interested stockholder, including mergers, asset sales and other transactions in which the interested stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders.
Exhibit 10.11
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this 8th day of May, 2023 (the “Effective Date”), by and between Nova Lifestyle Inc., a Nevada corporation (the “Company”), and Thanh H. Lam (the “Executive”).
WITNESSETH:
WHEREAS, the parties desire to enter into this Agreement setting forth terms and conditions of the employment relationship between the Executive and the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows:
1. EMPLOYMENT.
1.1 Agreement to Employ. The Company hereby agrees to employ Executive, and Executive hereby agrees to serve, subject to the provisions of this Agreement, as an officer and employee of the Company.
1.2 Duties and Schedule. Executive shall serve as the Company’s Chief Executive Officer (“CEO”) and President. The responsibilities of the Executive shall be subject to the bylaws of the Company and determined by the Board of Directors of the Company (the “Board”). The Executive shall report directly to the Board and shall have such responsibilities as designated by the Board of the Company to the extent that such responsibilities are not inconsistent with all applicable laws, regulations and rules. Executive shall devote her best efforts and all of her business time to her position with the Company.
2. TERM OF EMPLOYMENT. Unless Executive’s employment shall sooner terminate pursuant to Section 4, the Company shall employ Executive for a five-year term commencing on the Effective Date (the “Term”), which Term shall be renewable upon mutual agreement of the Company and the Executive.
3. COMPENSATION.
3.1 Salary. Executive’s salary during the Term shall be $110,000 per year (the “Salary”), payable monthly.
3.2 Bonus. At the sole discretion of the Board, or any committee duly designated by the Board and authorized to act thereto, the Executive shall be eligible for an annual cash bonus.
3.3 Vacation. Executive shall be entitled to 12 days of paid vacation per year.
3.4 Business Expenses. Executive shall be reimbursed by the Company for all ordinary and necessary expenses incurred by Executive; provided that they are incurred and approved in writing in accordance with the Company’s expense policy.
3.5 Benefits. During the Term, Executive shall be allowed to participate, on the same basis generally as other employees of the Company, in all general employee benefit plans and programs, including improvements or modifications of the same, which may exist as of the Effective Date or thereafter and which are made available by the Company to all or substantially all of its employees. Such benefits, plans, and programs may include, without limitation, any health, and dental insurance or 401K programs, if and when instituted. Any benefit plan currently existing or instituted by the Company after the Effective Date may be altered, change or discontinued by the Company at its sole discretion and at any time without obligation of any nature to Executive. Except as specifically provided herein, nothing in this Agreement is to be construed or interpreted to increase or alter in any way the rights, participation, coverage, or benefits under such benefit plans or programs to other than those provided to other employees pursuant to the terms and conditions of such benefit plans and programs.
4. TERMINATION.
4.1 Death. This Agreement shall terminate immediately upon the death of Executive and Executive’s estate or Executive’s legal representative, as the case may be, shall be entitled to Executive’s accrued and unpaid Salary and vacation as of the date of Executive’s death, plus all other compensation and benefits that were vested through the date of Executive’s death.
4.2 Disability. In the event of Executive’s Disability, this Agreement shall terminate and Executive shall be entitled to (a) accrued and unpaid Salary and vacation through the first date that a Disability is determined; and (b) all other compensation and benefits that were vested through the first date that a Disability has been determined. “Disability” means the good faith determination of the Board that Executive has become so physically or mentally incapacitated or disabled as to be unable to satisfactorily perform her duties hereunder for a period of ninety (90) consecutive calendar days or for one- hundred twenty (120) days in any three-hundred sixty (360) day period, such determination based upon a certificate as to such physical or mental disability issued by a licensed physician and/or psychiatrist (as the case may be) mutually agreed upon by Executive and the Company.
4.3 Termination by Company for Cause. The Company may terminate the Executive for Cause at any time and such termination shall take effect upon the receipt by Executive of the Notice of Termination. Upon the effective date of the termination for Cause, Executive shall be solely entitled to accrued and unpaid Salary through such effective date. “Cause” means: (i) engaging in any act, omission or misconduct that is injurious to the Company or an affiliate; (ii) gross negligence or willful misconduct in connection with the performance of duties; (iii) conviction of a criminal offense (other than minor traffic offenses); (iv) fraud, embezzlement or misappropriation of funds or property of the Company or an affiliate; (v) material breach of any term of any employment or other services, confidentiality, intellectual property or non-competition agreements, if any, between the Executive and the Company or an affiliate; (vi) the entry of an order duly issued by any regulatory agency (including federal, state and local regulatory agencies and self-regulatory bodies) having jurisdiction over the Company or an affiliate requiring the removal of the Executive from any office held with the Company or prohibiting the Executive from participating in the business or affairs of the Company or any affiliate; or (vii) the revocation or threatened revocation of any of the Company’s or an affiliate’s government licenses, permits or approvals, which is primarily due to the Executive’s action or inaction and such revocation or threatened revocation would be alleviated or mitigated in any material respect by the termination of the Executive’s employment or services with the Company or an affiliate.
4.4 Voluntary Termination by Executive. The Executive may voluntarily terminate her employment for any reason and such termination shall take effect 30 days after the receipt by Company of the Notice of Termination. Upon the effective date of such termination, Executive shall be entitled to (a) accrued and unpaid Salary and vacation through such termination date; and (b) all other compensation and benefits that were vested through such termination date. In the event Executive is terminated without notice, it shall be deemed a termination by the Company for Cause.
4.5 Notice of Termination. Any termination of the employment by the Company or the Executive shall be communicated by a notice in accordance with Section 8.4 of this Agreement (the “Notice of Termination”). Such notice shall (a) indicate the specific termination provision in this Agreement relied upon and (b) if the termination is for Cause, the date on which the Executive’s employment is to be terminated.
4.6 Severance. The Executive shall not be entitled to severance payments upon any termination provided in Section 4 herein.
5. EXECUTIVE’S REPRESENTATION. The Executive represents and warrants to the Company that: (a) she is subject to no contractual, fiduciary or other obligation which may affect the performance of her duties under this Agreement; (b) she has terminated, in accordance with their terms, any contractual obligation which may affect her performance under this Agreement; and (c) her employment with the Company will not require her to use or disclose proprietary or confidential information of any other person or entity.
6. CONFIDENTIAL INFORMATION Except as permitted or directed by the Board of Directors of the Company in writing, during the time the Executive is employed by the Company or at any time thereafter, the Executive shall not use for her personal purposes nor divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret information or knowledge of the Company, whether developed by herself or by others. Such confidential and/or secret information encompassed by this Section 6 includes, but is not limited to, the Company’s customer and supplier lists, business plans, software, systems, trade secret, design, and financial, marketing, and personnel information. The Executive agrees to refrain from any acts or omissions that would reduce the value of any confidential or secret knowledge or information to the Company, both during her employment hereunder and at any time after the termination of her employment. The Executive’s obligations of confidentiality under this Section 6 shall not apply to any knowledge or information that is now published publicly or that subsequently becomes generally publicly known, other than as a direct or indirect result of a breach of this Agreement by the Executive.
7. NON-COMPETITION: NON-SOLICITATION; INVENTIONS.
7.1 Non-Competition. During the employment of the Executive under this Agreement and for a period of six (6) months after termination of such employment, the Executive shall not at any time compete on her own behalf, or on behalf of any other person or entity, with the Company or any of its affiliates within all territories in which the Company does business with respect to the business of the Company or any of its affiliates as such business shall be conducted on the date hereof or during the employment of the Executive under this Agreement. The ownership by the Executive of not more than 5% of a corporation, partnership or other enterprise shall not constitute a violation hereof.
7.2 Non-Solicitation. During the employment of the Executive under this Agreement and thereafter Executive shall not at any time (i) solicit or induce, on her own behalf or on behalf of any other person or entity, any employee of the Company or any of its affiliates to leave the employ of the Company or any of its affiliates; or (ii) solicit or induce, on her own behalf or on behalf of any other person or entity, any customer or Prospective Customer of the Company or any of their respective affiliates to reduce its business with the Company or any of its affiliates. For the purposes of this Agreement, “Prospective Customer” shall mean any individual, corporation, trust or other business entity which has either (a) entered into a nondisclosure agreement with the Company or any Company subsidiary or affiliate or (b) has within the preceding 12 months received a currently pending and not rejected written proposal in reasonable detail from the Company or any of the Company’s subsidiary or affiliate.
7.3 Inventions and Patents. The Company shall be entitled to the sole benefit and exclusive ownership of any patents, inventions or improvements in products, processes, or other things that may be made or discovered by Executive while she is in the service of the Company. During the Term, Executive shall do all acts necessary or required by the Company to give effect to this section and, following the Term, Executive shall do all acts reasonably necessary or required by the Company to give effect to this section. In all cases, the Company shall pay all costs and fees associated with such acts by Executive.
7.4 Return of Property. The Executive agrees that all property in the Executive’s possession that she obtains or is assigned in the course of her employment with the Company, including, without limitation, all documents, reports, manuals, memoranda, customer lists, credit cards, keys, access cards, and all other property relating in any way to the business of the Company, is the exclusive property of the Company, even if the Executive authored, created, or assisted in authoring or creating such property. The Executive shall return to the Company all such property immediately upon termination of employment or at such earlier time as the Company may request.
7.5 Court Ordered Revisions. If any portion of this Section 7 is found by a court of competent jurisdiction to be invalid or unenforceable, but would be valid and enforceable if modified, this Section 7 shall apply with such modifications necessary to make this Section 7 valid and enforceable. Any portion of this Section 7 not required to be so modified shall remain in full force and effect and not be affected thereby.
7.6 Specific Performance. The Executive acknowledges that the remedy at law for any breach of any of the provisions of Section 7 will be inadequate, and that the Company shall be entitled, in addition to any remedy at law or in equity, to preliminary and permanent injunctive relief and specific performance.
8. MISCELLANEOUS.
8.1 Indemnification. The Company and each of its subsidiaries shall, to the maximum extent provided under applicable law, indemnify and hold Executive harmless from and against any expenses, including reasonable attorney’s fees, judgments, fines, settlements and other legally permissible amounts (“Losses”), incurred in connection with any proceeding arising out of, or related to, Executive’s employment by the Company, other than any such Losses incurred as a result of Executive’s negligence or willful misconduct. The Company shall, or shall cause a subsidiary thereof to, advance to Executive any expenses, including attorney’s fees and costs of settlement, incurred in defending any such proceeding to the maximum extent permitted by applicable law. Such costs and expenses incurred by Executive in defense of any such proceeding shall be paid by the Company or applicable subsidiary in advance of the final disposition of such proceeding promptly upon receipt by the Company of (a) written request for payment; (b) appropriate documentation evidencing the incurrence, amount and nature of the costs and expenses for which payment is being sought; and (c) an undertaking adequate under applicable law made by or on behalf of Executive to repay the amounts so advanced if it shall ultimately be determined pursuant to any non-appealable judgment or settlement that Executive is not entitled to be indemnified by the Company or any subsidiary thereof. The Company will provide Executive with coverage under all directors and officers liability insurance policies that it has in effect during the Term, with no deductible to Executive.
8.2 Applicable Law. Except as may be otherwise provided herein, this Agreement shall be governed by and construed in accordance with the laws of the State of Nevada, applied without reference to principles of conflict of laws. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Clark County, Nevada.
8.3 Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors or legal representatives.
8.4 Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party, by U.S. nationally recognized courier service, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Thanh H. Lam
6565 East Washington Blvd.
Commerce, CA 90040
If to the Company:
Secretary of Nova LifeStyle
6565 East Washington Blvd.
Commerce, CA 90040
Or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when delivered to the addressee.
8.5 Withholding. The Company may withhold from any amounts payable under the Agreement, such federal, state and local income, unemployment, social security and similar employment related taxes and similar employment related withholdings as shall be required to be withheld pursuant to any applicable law or regulation.
8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and any such provision which is not valid or enforceable in whole shall be enforced to the maximum extent permitted by law.
8.7 Captions. The captions of this Agreement are not part of the provisions and shall have no force or effect.
8.8 Entire Agreement. This Agreement contains the entire agreement among the parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto.
8.9 Survival. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive’s employment hereunder to the extent necessary to the intended preservation of such rights and obligations.
8.10 Waiver. Either Party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent that party thereafter from enforcing each and every other provision of this Agreement.
8.11 Successors. This Agreement is personal to Executive and, without the prior express written consent of the Company, shall not be assignable by Executive. This Agreement shall inure to the benefit of and be enforceable by Executive’s estate, heirs, beneficiaries, and/or legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
8.12 Joint Efforts/Counterparts. Preparation of this Agreement shall be deemed to be the joint effort of the parties hereto and shall not be construed more severely against any party. This Agreement may be signed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.
8.13 Representation by Counsel. Each Party hereby represents that it has had the opportunity to be represented by legal counsel of its choice in connection with the negotiation and execution of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
| EXECUTIVE: | NOVA LIFESTYLE, INC. | |
| /s/ Thanh Lam | /s/ Jeffery Chuang | |
| Thanh H. Lam | Jeffery Chuang, Chief Financial Officer |
Exhibit 10.12
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this 1st day of September, 2023 by and between Nova Lifestyle Inc., a Nevada corporation (the “Company”), and Jeffery Chuang (the “Executive”).
WITNESSETH:
WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship between the Executive and the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows:
1. EMPLOYMENT.
1.1 Agreement to Employ. The Company hereby agrees to employ Executive, and Executive hereby agrees to serve, subject to the provisions of this Agreement, as an officer and employee of the Company.
1.2 Duties and Schedule. Executive shall serve as the Company’s Chief Financial Officer, and be the Principal Financial Officer and Principal Accounting Officer of the Company and responsible for all financial matters and management of the Company. The Executive shall report directly to the Company’s Chief Executive Officer and Board of Directors (the “Board”) and shall have such responsibilities as designated by the Chief Executive Officer or Board to the extent that such responsibilities are not inconsistent with all applicable laws, regulations and rules. Executive shall devote his best efforts and all of his business time to his position with the Company during the Term.
2. TERM OF EMPLOYMENT. Unless Executive’s employment shall sooner terminate pursuant to Section 4, the Company shall employ Executive for a one-year term commencing on August 22, 2023 (the “Term”), which Term shall be renewable upon mutual agreement of the Company and the Executive, as approved by the Board.
3. COMPENSATION.
3.1 Salary. Executive’s salary during the Term shall be $60,000 per year (the “Salary”), payable weekly.
3.2 Bonus. At the sole discretion of the Board, or any committee duly designated by the Board and authorized to act thereto, the Executive shall be eligible for an annual cash bonus.
3.3 Vacation. Executive shall be entitled to 8 days of paid vacation per year. In the event that Executive remains employed by the Company for 3 years or more, Executive shall be entitled to 12 days of paid vacation.
3.4 Business Expenses. Executive shall be reimbursed by the Company for all ordinary and necessary expenses incurred by Executive; provided that they are incurred and approved in writing in accordance with the Company’s expense policy.
3.5 Benefits. During the Term, Executive shall be allowed to participate, on the same basis generally as other employees of the Company, in all general employee benefit plans and programs, including improvements or modifications of the same, which may exist as of August 22, 2023 or thereafter and which are made available by the Company to all or substantially all of its employees. Such benefits, plans, and programs may include, without limitation, any health, and dental insurance or 401K programs, if and when instituted. Any benefit plan existing or instituted by the Company after August 22, 2023 may be altered, change or discontinued by the Company at its sole discretion and at any time without obligation of any nature to Executive. Except as specifically provided herein, nothing in this Agreement is to be construed or interpreted to increase or alter in any way the rights, participation, coverage, or benefits under such benefit plans or programs to other than those provided to other employees pursuant to the terms and conditions of such benefit plans and programs.
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4. TERMINATION.
4.1 Death. This Agreement shall terminate immediately upon the death of Executive, and Executive’s estate or Executive’s legal representative, as the case may be, shall be entitled to Executive’s accrued and unpaid Salary as of the date of Executive’s death, plus all other compensation and benefits that were vested through the date of Executive’s death.
4.2 Disability. In the event of Executive’s Disability, this Agreement shall terminate and Executive shall be entitled to (a) accrued and unpaid Salary and vacation through the first date that a Disability is determined; and (b) all other compensation and benefits that were vested through the first date that a Disability has been determined. “Disability” means the good faith determination of the Board that Executive has become so physically or mentally incapacitated or disabled as to be unable to satisfactorily perform his duties hereunder for a period of ninety (90) consecutive calendar days or for one- hundred twenty (120) days in any three-hundred sixty (360) day period, such determination based upon a certificate as to such physical or mental disability issued by a licensed physician and/or psychiatrist (as the case may be) mutually agreed upon by Executive and the Company.
4.3 Termination by Company for Cause. The Company may terminate the Executive for Cause and such termination shall take effect upon the receipt by Executive of the Notice of Termination. Upon the effective date of the termination for Cause, Executive shall be solely entitled to accrued and unpaid Salary through such effective date. “Cause” means: (i) engaging in any act, omission or misconduct that is injurious to the Company or an affiliate; (ii) gross negligence or willful misconduct in connection with the performance of duties; (iii) conviction of a criminal offense (other than minor traffic offenses); (iv) fraud, embezzlement or misappropriation of funds or property of the Company or an affiliate; (v) material breach of any term of any employment or other services, confidentiality, intellectual property or non-competition agreements, if any, between the Executive and the Company or an affiliate; (vi) the entry of an order duly issued by any regulatory agency (including federal, state and local regulatory agencies and self-regulatory bodies) having jurisdiction over the Company or an affiliate requiring the removal of the Executive from any office held with the Company or prohibiting the Executive from participating in the business or affairs of the Company or any affiliate; or (vii) the revocation or threatened revocation of any of the Company’s or an affiliate’s government licenses, permits or approvals, which is primarily due to the Executive’s action or inaction and such revocation or threatened revocation would be alleviated or mitigated in any material respect by the termination of the Executive’s employment or services with the Company or an affiliate.
4.4 Voluntary Termination by Executive. The Executive may voluntarily terminate his employment for any reason and such termination shall take effect 30 days after the receipt by Company of the Notice of Termination. Upon the effective date of such termination, Executive shall be entitled to (a) accrued and unpaid Salary and vacation through such termination date; and (b) all other compensation and benefits that were vested through such termination date. In the event Executive is terminated without notice, it shall be deemed a termination by the Company for Cause.
4.5 Notice of Termination. Any termination of the employment by the Company or the Executive shall be communicated by a notice in accordance with Section 8.4 of this Agreement (the “Notice of Termination”). Such notice shall (a) indicate the specific termination provision in this Agreement relied upon and (b) if the termination is for Cause, the date on which the Executive’s employment is to be terminated.
4.6 Severance. The Executive shall not be entitled to severance payments upon any termination provided in Section 4 herein.
5. EMPLOYEE’S REPRESENTATION. The Executive represents and warrants to the Company that: (a) he is subject to no contractual, fiduciary or other obligation which may affect the performance of his duties under this Agreement; (b) he has terminated, in accordance with their terms, any contractual obligation which may affect his performance under this Agreement; and (c) his employment with the Company will not require him to use or disclose proprietary or confidential information of any other person or entity.
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6. CONFIDENTIAL INFORMATION Except as permitted or directed by the Board of Directors of the Company in writing, during the time the Executive is employed by the Company or at any time thereafter, the Executive shall not use for his personal purposes nor divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret information or knowledge of the Company, whether developed by himself or by others. Such confidential and/or secret information encompassed by this Section 6 includes, but is not limited to, the Company’s customer and supplier lists, business plans, software, systems, and financial, marketing, and personnel information. The Executive agrees to refrain from any acts or omissions that would reduce the value of any confidential or secret knowledge or information to the Company, both during his employment hereunder and at any time after the termination of his employment. The Executive’s obligations of confidentiality under this Section 6 shall not apply to any knowledge or information that is now published publicly or that subsequently becomes generally publicly known, other than as a direct or indirect result of a breach of this Agreement by the Executive.
7. NON-COMPETITION: NON-SOLICITATION; INVENTIONS.
7.1 Non-Competition. During the employment of the Executive under this Agreement and for a period of six (6) months after termination of such employment, the Executive shall not at any time compete on his own behalf, or on behalf of any other person or entity, with the Company or any of its affiliates within all territories in which the Company does business with respect to the business of the Company or any of its affiliates as such business shall be conducted on the date hereof or during the employment of the Executive under this Agreement. The ownership by the Executive of not more than 5% of a corporation, partnership or other enterprise shall not constitute a violation hereof.
7.2 Non-Solicitation. During the employment of the Executive under this Agreement and thereafter Executive shall not at any time (i) solicit or induce, on his own behalf or on behalf of any other person or entity, any employee of the Company or any of its affiliates to leave the employ of the Company or any of its affiliates; or (ii) solicit or induce, on his own behalf or on behalf of any other person or entity, any customer or Prospective Customer of the Company or any of their respective affiliates to reduce its business with the Company or any of its affiliates. For the purposes of this Agreement, “Prospective Customer” shall mean any individual, corporation, trust or other business entity which has either (a) entered into a nondisclosure agreement with the Company or any Company subsidiary or affiliate or (b) has within the preceding 12 months received a currently pending and not rejected written proposal in reasonable detail from the Company or any of the Company’s subsidiary or affiliate.
7.3 Inventions and Patents. The Company shall be entitled to the sole benefit and exclusive ownership of any inventions or improvements in products, processes, or other things that may be made or discovered by Executive while he is in the service of the Company, and all patents for the same. During the Term, Executive shall do all acts necessary or required by the Company to give effect to this section and, following the Term, Executive shall do all acts reasonably necessary or required by the Company to give effect to this section. In all cases, the Company shall pay all costs and fees associated with such acts by Executive.
7.4 Return of Property. The Executive agrees that all property in the Executive’s possession that he obtains or is assigned in the course of his employment with the Company, including, without limitation, all documents, reports, manuals, memoranda, customer lists, credit cards, keys, access cards, and all other property relating in any way to the business of the Company, is the exclusive property of the Company, even if the Executive authored, created, or assisted in authoring or creating such property. The Executive shall return to the Company all such property immediately upon termination of employment or at such earlier time as the Company may request.
7.5 Court Ordered Revisions. If any portion of this Section 7 is found by a court of competent jurisdiction to be invalid or unenforceable, but would be valid and enforceable if modified, this Section 7 shall apply with such modifications necessary to make this Section 7 valid and enforceable. Any portion of this Section 7 not required to be so modified shall remain in full force and effect and not be affected thereby.
7.6 Specific Performance. The Executive acknowledges that the remedy at law for any breach of any of the provisions of Section 7 will be inadequate, and that the Company shall be entitled, in addition to any remedy at law or in equity, to preliminary and permanent injunctive relief and specific performance.
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8. MISCELLANEOUS.
8.1 Indemnification. The Company and each of its subsidiaries shall, to the maximum extent provided under applicable law, indemnify and hold Executive harmless from and against any expenses, including reasonable attorney’s fees, judgments, fines, settlements and other legally permissible amounts (“Losses”), incurred in connection with any proceeding arising out of, or related to, Executive’s employment by the Company, other than any such Losses incurred as a result of Executive’s negligence or willful misconduct. The Company shall, or shall cause a subsidiary thereof to, advance to Executive any expenses, including attorney’s fees and costs of settlement, incurred in defending any such proceeding to the maximum extent permitted by applicable law. Such costs and expenses incurred by Executive in defense of any such proceeding shall be paid by the Company or applicable subsidiary in advance of the final disposition of such proceeding promptly upon receipt by the Company of (a) written request for payment; (b) appropriate documentation evidencing the incurrence, amount and nature of the costs and expenses for which payment is being sought; and (c) an undertaking adequate under applicable law made by or on behalf of Executive to repay the amounts so advanced if it shall ultimately be determined pursuant to any non-appealable judgment or settlement that Executive is not entitled to be indemnified by the Company or any subsidiary thereof. The Company will provide Executive with coverage under all directors and officers liability insurance policies that it has in effect during the Term, with no deductible to Executive.
8.2 Applicable Law. Except as may be otherwise provided herein, this Agreement shall be governed by and construed in accordance with the laws of the State of Nevada, applied without reference to principles of conflict of laws. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Clark County, Nevada.
8.3 Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors or legal representatives.
8.4 Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party, by an international mail courier, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
| If to the Executive: | |
| Jeffery Chuang | |
| If to the Company: | |
| 6565 East Washington Blvd. | |
| Commerce, CA 90040 | |
| Attn: Board of Directors |
Or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when delivered to the addressee.
8.5 Withholding. The Company may withhold from any amounts payable under the Agreement, such federal, state and local income, unemployment, social security and similar employment related taxes and similar employment related withholdings as shall be required to be withheld pursuant to any applicable law or regulation.
8.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and any such provision which is not valid or enforceable in whole shall be enforced to the maximum extent permitted by law.
8.7 Captions. The captions of this Agreement are not part of the provisions and shall have no force or effect.
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8.8 Entire Agreement. This Agreement contains the entire agreement among the parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto.
8.9 Survival. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive’s employment hereunder to the extent necessary to the intended preservation of such rights and obligations.
8.10 Waiver. Either Party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent that party thereafter from enforcing each and every other provision of this Agreement.
8.11 Successors. This Agreement is personal to Executive and, without the prior express written consent of the Company, shall not be assignable by Executive. This Agreement shall inure to the benefit of and be enforceable by Executive’s estate, heirs, beneficiaries, and/or legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
8.12 Joint Efforts/Counterparts. Preparation of this Agreement shall be deemed to be the joint effort of the parties hereto and shall not be construed more severely against any party. This Agreement may be signed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.
8.13 Representation by Counsel. Each Party hereby represents that it has had the opportunity to be represented by legal counsel of its choice in connection with the negotiation and execution of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
| EXECUTIVE: | NOVA LIFESTYLE, INC. | |
| /s/Jeffery Chuang | /s/Thanh H. Lam | |
| Jeffery Chuang | Thanh H. Lam | |
| Chief Executive Officer |
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Exhibit 10.14
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this “Amendment”) is made as of this 22nd day of December, 2023 (the “Effective Date”), by and between Nova Lifestyle, Inc., a Nevada corporation (the “Company”), and Jeffery Chuang (“Employee”). The Company and Employee are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.
WHEREAS, the Company and Employee are party to that certain Employment Agreement, dated September 1, 2023 (the “Agreement”);
WHEREAS, the Board of Directors of the Company has approved to increase the salary of the Executive from $60,000 to $70,000 per year, effective from January 1, 2024; and
WHEREAS, capitalized terms in this Amendment that are not otherwise defined have the meanings given those terms in the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows:
1. Section 3.1 of the Agreement is hereby amended and restated in its entirety to read as follows:
3.1 Salary. Employee’s salary shall be $70,000 per year (the “Salary”) payable weekly, effective from January 1, 2024.
2. Except as expressly amended hereby, the Agreement continues in full force and effect.
3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
4. This Amendment shall take effect on Effective Date.
5. This Amendment shall be governed by and construed in accordance with the laws of the State of Nevada, without giving effect to the conflict of law principles thereof. Each Party irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Clark County, Nevada.
[signature page follows]
IN WITNESS WHEREOF, the Parties to this Amendment to Employment Agreement have duly executed it as of the day and year first above written.
| COMPANY: | EMPLOYEE: | |||
| NOVA LIFESTYLE, INC. | Jeffery Chuang | |||
| By: | /s/Tawny Lam | By: | /s/Jeffery Chuang | |
| Print Name: | Tawny Lam | |||
| Title: | Chief Executive Officer | |||
Exhibit 19.1
NOVA LIFESTYLE, INC.
INSIDER TRADING POLICY
THIS POLICY HAS BEEN APPROVED
BY THE BOARD OF DIRECTORS
OF NOVA LIFESTYLE, INC.
AND IS APPLICABLE TO ALL EMPLOYEES, OFFICERS AND DIRECTORS
OF NOVA LIFESTYLE, INC.
The Need for a Policy Statement
For many years, the Securities and Exchange Commission (the “SEC”) and the Justice Department have pursued individuals for violations of the laws with respect to insider trading (i.e., trading in a company’s securities while in possession of material nonpublic information about that company). To further deter insider trading violations, Congress in 1988 expanded the authority of the SEC and the Justice Department by adopting the Insider Trading and Securities Fraud Enforcement Act (the “Act”). In addition to increasing the penalties for insider trading, the Act imposes liability on companies and possibly other “controlling persons” for violations by company personnel. Although the Act was aimed primarily at firms in the securities industry, and individuals who trade or tip information to others who trade, the Act also applies to all companies, with the result that if companies like ours do not take active steps to adopt preventive policies and procedures covering securities trades by our personnel, the consequences to Nova LifeStyle, Inc. (“NOVA”) could be severe.
Persons to Whom the Policy Applies
NOVA has adopted the following policy regarding purchases and sales of NOVA’s securities by all “Insiders” who have access to material nonpublic information (as defined below) about NOVA and about other firms with which NOVA does business. “Insiders” include all NOVA directors, officers and 10% or greater shareholders who are required to file reports with the SEC under Section 16 of the Securities Exchange Act of 1934 and certain other key employees, designated by the Chief Executive Officer, President or Chief Financial Officer, who have access to the same types of information. Each Insider is responsible for ensuring that he or she does not violate federal or state securities laws or NOVA’s policy concerning securities trading. This policy is designed to promote compliance with the federal securities laws and to protect NOVA, as well as its Insiders, from the very serious liabilities and penalties that can result from violations of these laws.
While only certain individuals are designated “Insiders” for purposes of limitations on periods when they may trade, the approval process for such trades, and the filing requirements, ALL employees are subject to the prohibitions on trading and the other contraints contained in this policy while in possession of undisclosed material information. Consequently, NOVA requires each employee to read and certify that he/she has read and understands the policy. Anyone who is uncertain should contact NOVA’s Chief Financial Officer.
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The Consequences of Insider Trading Violations
The consequences of insider trading violations can be staggering. For an individual who trades on inside information (or “tips” information to others), the consequences can include severe civil and criminal monetary penalties and extended jail terms. NOVA and potentially any control supervisory person may also be subject to severe civil and criminal monetary penalties if they fail to take appropriate steps to prevent illegal trading.
Moreover, if one of NOVA’s Insiders violates this insider trading policy, NOVA may impose sanctions, including dismissal for cause. Needless to say, any of the above consequences or even an SEC investigation that does not result in prosecution, can tarnish one’s reputation and irreparably damage a career.
General Policy
NOVA Insiders and their family members may not trade in the stock or other securities of NOVA or of any other firm with which NOVA does business when they know material nonpublic information about NOVA or the other firm. The definition of “material nonpublic information” is discussed in detail below. An SEC rule makes it clear that a person will be deemed to have traded on the basis of material nonpublic information if the person effects the transaction while “aware” of the information. Thus, a person will not be able to claim that the material nonpublic information did not affect his or her decision to trade.
This restriction on insider trading is not limited to trading in NOVA’s securities. It includes trading in the securities of other firms, such as customers, suppliers or vendors of NOVA and those with which NOVA may be negotiating transactions, such as an acquisition, investment or sale. Information that is not material to NOVA may nevertheless be material to one of those other firms.
Assuming no awareness of material nonpublic information, Insiders may trade in NOVA’s securities only during certain “Trading Windows” discussed below, and then only if the Insider does not have knowledge of any material nonpublic information relating to NOVA and has pre-cleared the trade with NOVA’s Chief Financial Officer. Please see “Procedure for Trading in NOVA Stock” below.
Trading. “Trading” includes purchases and sales of stock, partnership units, bonds, debentures, options, puts, calls and other similar securities. This policy includes trades made in each of the following circumstances:
| ● | trades in the open market; | |
| ● | immediate sale of some or all of the shares received in connection with an option exercise; | |
| ● | trades pursuant to any trading plan or program; and |
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| ● | certain elections made under NOVA’s employee stock purchase plan, including: |
| ○ | an election to increase or decrease the percentage of periodic contributions that will be allocated to the NOVA plan; | |
| ○ | an election to make an intra-plan transfer of an existing account balance into or out of the NOVA plan; | |
| ○ | an election to borrow money against a plan account if the loan will result in a liquidation of some or all of an individual’s NOVA plan balance; and | |
| ○ | an election to pre-pay a plan loan if the pre-payment will result in allocation of loan proceeds to the NOVA plan. |
NOVA’s insider trading policy does not apply to purchases of NOVA common stock in the plan resulting from periodic contribution of money to the plan pursuant to employee payroll deduction elections.
Waivers. In certain special situations, a waiver or an exception to the Insider Trading Policy may be granted. Only the Company’s Board of Directors or a Committee of the Board of Directors delegated the authority by the Board of Directors may issue a waiver of this Policy.
Tipping Information to Others. Insiders must not pass material nonpublic information on to others or recommend to anyone the purchase or sale of any securities on the basis of such information. This practice, known as “tipping,” also violates the securities laws and can result in the same civil and criminal penalties that apply to insider trading, whether or not the Insider derives any benefit from another’s actions.
Internet Postings. Posting material nonpublic information, or responding to or making statements or recommendations based on this information, on any Internet website, electronic bulletin board, Internet message board, Internet chat room or other similar form of electronic communication can also constitute tipping under the securities laws. Because of the high potential for leaks of material nonpublic information posed by these activities and the resulting liability under the securities laws for the Insider and NOVA, Insiders may not post any information either directly or in response to a posting about NOVA, its business plans, employees, directors, customers, suppliers or vendors, nor engage in any discussions about NOVA, its business plans, employees, directors, customers, suppliers or vendors, on any of these forums. Furthermore, Insiders are expected to notify NOVA’s Chief Financial Officer, if they are aware of such activities by any employee.
Transactions By Family Members. The same restrictions as to trading and tipping apply to family members and other persons living in an Insider’s household. Insiders are expected to be responsible for the compliance of the members of their immediate family and personal household. In fact, the SEC adopted a rule to make clear that the receipt of information from a spouse, parent, child or sibling will in most cases provide a sufficient basis for insider trading liability, both for the person trading on the material nonpublic information and for the person tipping such information.
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No Exceptions to Policy. Transactions that may be necessary or justifiable for independent reasons, such as the need to raise money for an emergency expenditure or to satisfy margin calls, are no exception to the policy.
Prohibition on Certain Transactions. Because of the unique potential for abuse of material nonpublic information, it is also NOVA’s policy that Insiders may not engage in “short sales” of NOVA’s securities. “Short sales” are those sales in which the seller attempts to profit from an anticipated drop in market price by selling securities he/she does not own and covering the sales with securities bought after the price declines. Insiders generally may not purchase and sell or sell and purchase NOVA securities in the open market within a six-month period. Short sales and buying or selling puts or calls or other derivative securities are prohibited. Insiders also are prohibited from holding NOVA securities in a margin account or pledging NOVA securities as collateral for a loan.
Definition of Material Nonpublic Information
Material Information. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, hold or sell a security. Therefore, any information that could reasonably be expected to affect the price of the security is material. Common examples of material information are:
| ● | Projections of future earnings or losses or changes in such projections; | |
| ● | Actual changes in earnings inconsistent with expectations; | |
| ● | A pending or prospective material joint venture, merger, acquisition, change in assets, tender offer, financing or change in control; | |
| ● | A significant sale of assets or disposition of a subsidiary or operation; | |
| ● | A gain or loss of a material contract, customer, tenant or supplier, or material changes in the profitability status of a current contract; | |
| ● | Changes in management, major personnel changes or labor negotiations; | |
| ● | Financial liquidity problems, bankruptcies or receiverships; | |
| ● | Change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report or that the auditor’s opinion will be qualified; | |
| ● | Events regarding securities (e.g., defaults on senior securities, calls of securities for redemption, breach of covenant relating to debt obligations, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities); and | |
| ● | The existence of material litigation, claim or investigation. |
Both positive and negative information can be material. Because any trading that receives scrutiny will be evaluated after the fact (with the benefit of hindsight), questions concerning the materiality of particular information should be resolved in favor of materiality, and trading should be avoided.
Nonpublic Information. Nonpublic information is information that is not generally known or available to the public. Information is considered to be available to the public only when it has been released to the public through appropriate channels, e.g., by means of a press release, a filing with the SEC or a statement from one of the senior officers to the public, and enough time has elapsed to permit the investment market to absorb and evaluate the information. Insiders should assume that all information obtained in the course of their employment by or relationship with NOVA is nonpublic.
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If you ever have a question regarding whether the information you possess about NOVA is either “material” or “nonpublic,” please contact NOVA’s Chief Financial Officer for guidance before you trade in NOVA’s stock.
Procedure for Trading in NOVA Stock
To provide assistance in preventing inadvertent insider trading violations and avoiding even the appearance of an improper transaction, NOVA has established the following procedures for trading in NOVA’s stock:
| 1. | General Prohibition: An Insider of NOVA may never trade NOVA’s stock while in possession of material nonpublic information relating to NOVA, even if the trading “window” described in Section 2 below is “open.” Please see “Definition of Material Nonpublic Information” above. |
| 2. | Pre-clearance of Trades: In order to avoid inadvertent violations of the securities laws or even the appearance of an improper transaction as well as assist Insiders in complying with their reporting obligations, Insiders are required to pre-clear any transactions involving NOVA stock. |
Specifically, all proposed transactions in NOVA stock, including any trading program or plan, must be reported to and pre-cleared by NOVA’s Chief Financial Officer. If you contemplate a transaction, you should contact the Chief Financial Officer in advance. Any pre-clearance approval provided by the Chief Financial Officer will only be effective through the close of business on the trading day following such approval. After that time, if the trade does not occur, you must again contact the Chief Financial Officer for pre-approval of the trade. The pre-approval requirement does not apply to stock option exercises but would cover market sales of option stock in connection with the exercise.
| 3. | Trading Windows: Insiders may, with pre-clearance, trade during the period beginning at the close of business on the third business day after the public release of NOVA’s annual or quarterly results, counting the day of the release as the first business day. For example, if the public release of earnings results occurred on a Tuesday, the first day an Insider could trade would be on the following Friday. The trading window period ends on the first day of the last month of each quarter of NOVA’s fiscal year, unless a blackout period is announced sooner. Please note that Insiders are required to receive a pre-clearance by NOVA’s Chief Financial Officer for transactions occurring during a window period. |
In addition, NOVA may close a trading window at any time it deems necessary, in which event NOVA will provide all Insiders with notification that the trading window has closed until further notice is provided.
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Insiders may only trade in NOVA stock during a trading window. If an Insider has a need to conduct a transaction in NOVA stock outside of a trading window, a special request must be made to NOVA’s Chief Financial Officer for approval of the transaction. This is true whether or not the Insider possesses specific material nonpublic information. Depending upon circumstances at the time a request is made, and upon the position within NOVA of the Insider making the request, approval may or may not be given for the trade.
| 4. | Public Announcements During Trading Window: In addition, if at any time during a trading window, NOVA makes a public announcement of material information, an Insider must not engage in any transactions until the second business day after the information has been released in order to give NOVA’s shareholders and the investing public the time to receive and digest the information and act upon it. Thus, if an announcement were made on a Monday, Wednesday generally would be the first day on which you should trade. If an announcement is made on a Friday, the following Tuesday generally would be the first day on which you may trade. |
| 5. | Trading During Pension Fund Blackout Periods: Additionally, Directors and Executive Officers of NOVA may not trade NOVA securities acquired in connection with their services as directors or officers during any pension fund blackout period. Pension fund blackout periods are certain periods during which trading in NOVA securities may be subject to restrictions, and such restrictions are imposed on tax qualified defined contribution plans. Generally, these blackout periods are imposed on plan participants only when there is a change in plan administrators. NOVA will notify Insiders of these periods when they occur. |
| 6. | SEC Filings: As discussed above, in advance of any transaction in NOVA stock (acquisitions, dispositions, transfers, etc.), all Insiders are required to report such transactions to and obtain pre-clearance from NOVA’s Chief Financial Officer. If you are required to file a Form 4, Form 144 or other documents with the SEC, at your request, NOVA will assist you in completing any necessary SEC reporting forms. Remember, however, the ultimate responsibility for the filing of such forms rests with the Insider. |
Unauthorized Disclosure
It is the policy of NOVA to respond “no comment” to inquiries of any kind concerning the stock value or activities of NOVA, including possible acquisitions or business combinations which might affect the stock value. It is also the policy of NOVA to respond “no comment” in response to any inquiries involving speculation or rumors that might appear or be raised. Maintaining the confidentiality of NOVA information is essential for competitive, security and other business reasons, as well as to comply with securities laws. Information an Insider learns about NOVA or its business plans is potentially “inside” information until publicly disclosed or made available by NOVA. The Insider should treat all such information as confidential and proprietary to NOVA. The Insider may not disclose information to others, such as family members, other relatives, or business or social acquaintances, who do not need to know it for legitimate business reasons. This prohibition includes disclosure of all such information on any Internet website, electronic bulletin board or message board, chat room, or other similar form of electronic communication.
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Also, the timing and nature of NOVA’s disclosure of material information to outsiders is subject to legal rules, the breach of which could result in substantial liability to the Insider, NOVA and its management. Accordingly, it is important that only specifically designated representatives of NOVA discuss the business of NOVA and its affiliates with the news media, securities analysts and investors. If you receive any inquiry of this type, you should refer the inquiry to NOVA’s Chief Financial Officer, who will make certain the inquiry is directed to the appropriate individual within NOVA.
Personal Responsibility; Company Assistance
Each Insider should remember that the ultimate responsibility for adhering to this policy and avoiding improper trading rests with the Insider. In this regard, it is important that each Insider use his or her best judgment. If an Insider violates this policy, NOVA may take disciplinary action, including termination for cause.
Compliance with this policy by all Insiders is of the utmost importance both for the Insider and for NOVA. Any person who has any questions about the application of this policy to any particular case may obtain additional guidance from NOVA’s Chief Financial Officer.
| Dated: May 22, 2013 |
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Exhibit 21.1
Nova LifeStyle, Inc. and subsidiaries as of December 31, 2023
| Subsidiary Name | Jurisdiction of Incorporation | Percentage Owned | ||||
| Diamond Bar Outdoors, Inc. | California, U.S. | 100 | % | |||
| Nova Furniture Limited | British Virgin Islands | 100 | % | |||
| Nova Furniture Limited (Samoa) | Samoa | 100 | % | |||
| i Design Blockchain Technology, Inc.* | California, U.S. | 100 | % | |||
| Nova Living (M) SDN. BHD.* | Malaysia | 100 | % | |||
* Indicates subsidiary of a subsidiary.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Nova Lifestyle Inc.
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-193746, 333-205768, 333-249384, 333-261343 and 333-274970) and the Registration Statements on Form S-8 (File Nos. 333-257139, 333-197735 and 333-276082) of Nova LifeStyle, Inc. (the “Company”) of our report dated April 12, 2024, relating to the Company’s consolidated financial statements which appears in this Annual Report on Form 10-K of the Company for the year ended December 31, 2023.
/s/ WWC, P.C.
WWC, P.C.
Certified Public Accountants
San Mateo, California
PCAOB ID: 1171
April 12, 2024
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Thanh H. Lam, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2023, of Nova LifeStyle, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 12, 2024 | By: | /s/ Thanh H. Lam |
| Thanh H. Lam | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffery Chuang, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2023, of Nova LifeStyle, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 12, 2024 | By: | /s/ Jeffery Chuang |
| Jeffery Chuang | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Thanh H. Lam, Chief Executive Officer of Nova Lifestyle, Inc., certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Nova LifeStyle, Inc. for the fiscal year ended December 31, 2023, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Nova LifeStyle, Inc.
| Date: April 12, 2024 | By: | /s/ Thanh H. Lam |
| Thanh H. Lam | ||
| Chief Executive Officer |
The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not to be incorporated by reference into any filing of Nova LifeStyle, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
A signed original of this written statement required by Section 906 has been provided to Nova LifeStyle, Inc. and will be retained by Nova LifeStyle, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffery Chuang, Chief Financial Officer of Nova Lifestyle, Inc., certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Nova LifeStyle, Inc. for the fiscal year ended December 31, 2023, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Nova LifeStyle, Inc.
| Date: April 12, 2024 | By: | /s/ Jeffery Chuang |
| Jeffery Chuang | ||
| Chief Financial Officer |
The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not to be incorporated by reference into any filing of Nova LifeStyle, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
A signed original of this written statement required by Section 906 has been provided to Nova LifeStyle, Inc. and will be retained by Nova LifeStyle, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 97.1
NOVA LIFESTYLE, INC.
CLAWBACK POLICY
1. Introduction
Nova LifeStyle, Inc. (the “Company”), through the Company’s Board of Directors (the “Board”), believes that it is in the best interests of the Company and its shareholders to create and maintain a culture that emphasizes integrity and accountability and that reinforces the Company’s pay-for-performance compensation philosophy. The Board has therefore adopted this policy, which provides for the recoupment of certain compensation in the event of an accounting restatement resulting from material noncompliance with financial reporting requirements under the federal securities laws (the “Policy”). This Policy is designed to comply with, and shall be interpreted to be consistent with, Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 10D-1 promulgated under the Exchange Act (“Rule 10D-1”) and Nasdaq Listing Rule 5608 (the “Listing Standards”). The Company shall recover all erroneously awarded Incentive-Based Compensation that received by Covered Executives on or after the effective date of the Listing Standards which is October 2, 2023.
2. Administration
Except as specifically set forth herein, this Policy shall be administered by the Board or, if so designated by the Board, a committee thereof (the Board or such committee charged with administration of this Policy, the “Administrator”). The Administrator is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate or advisable for the administration of this Policy. Any determinations made by the Administrator shall be final and binding on all affected individuals and need not be uniform with respect to each individual covered by the Policy. In relevant part, it is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act and any applicable rules or standards adopted by the Securities and Exchange Commission or any national securities exchange on which the Company’s securities are listed.
In the administration of this Policy, the Administrator is authorized and directed to consult with the full Board or such other committees of the Board, such as the Audit Committee or the Compensation Committee of the Board, as may be necessary or appropriate as to matters within the scope of such other committee’s responsibility and authority. Subject to any limitation at applicable law, the Administrator may authorize and empower any officer or employee of the Company to take any and all actions necessary or appropriate to carry out the purpose and intent of this Policy (other than with respect to any recovery under this Policy involving such officer or employee).
3. Definitions
As used in this Policy, the following definitions shall apply:
(a) “Accounting Restatement” means an accounting restatement of the Company’s financial statements due to the Company’s material noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
(b) “Administrator” has the meaning set forth in Section 1 above.
(c) “Applicable Period” means the three completed fiscal years immediately preceding the date on which the Company is required to prepare an Accounting Restatement, as well as any transition period (that results from a change in the Company’s fiscal year) within or immediately following those three completed fiscal years (except that a transition period that comprises a period of at least nine months shall count as a completed fiscal year). The “date on which the Company is required to prepare an Accounting Restatement” is the earlier to occur of: (i) the date the Board concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement or (ii) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement, in each case regardless of if or when the restated financial statements are filed.
(d) “Covered Executives” means the Company’s current and former Covered Executives, as determined by the Administrator in accordance with the definition of Covered Executive set forth in Rule 10D-1 and the Listing Standards.
(e) “Erroneously Awarded Compensation” has the meaning set forth in Section 6 of this Policy.
(f) “Financial Reporting Measure” is any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measure that is derived wholly or in part from such measure. Financial Reporting Measures include but are not limited to the following (and any measures derived from the following): Company stock price; total shareholder return (“TSR”); revenues; net income; operating income; profitability of one or more reportable segments; financial ratios (e.g., accounts receivable turnover and inventory turnover rates); earnings before interest, taxes, depreciation and amortization (“EBITDA”); funds from operations and adjusted funds from operations; liquidity measures (e.g., working capital, operating cash flow); return measures (e.g., return on invested capital, return on assets); earnings measures (e.g., earnings per share); sales per square foot or same store sales, where sales is subject to an Accounting Restatement; revenue per user, or average revenue per user, where revenue is subject to an Accounting Restatement; cost per employee, where cost is subject to an Accounting Restatement; any of such financial reporting measures relative to a peer group, where the Company’s financial reporting measure is subject to an Accounting Restatement; and tax basis income. A Financial Reporting Measure need not be presented within the Company’s financial statements or included in a filing with the Securities Exchange Commission.
(g) “Incentive-Based Compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of a Financial Reporting Measure. Incentive-Based Compensation is “received” for purposes of this Policy in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of such Incentive-Based Compensation occurs after the end of that period.
4. Covered Executives; Incentive-Based Compensation
This Policy applies to Incentive-Based Compensation received by a Covered Executive (i) after beginning services as a Covered Executive; (ii) if that person served as a Covered Executive at any time during the performance period for such Incentive-Based Compensation and (iii) while the Company had a listed class of securities on a national securities exchange.
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5. Required Recoupment of Erroneously Awarded Incentive-Based Compensation in the Event of an Accounting Restatement
In the event the Company is required to prepare an Accounting Restatement, the Company shall reasonably promptly recoup the amount of any Erroneously Awarded Compensation received by any Covered Executive, as calculated pursuant to Section 6 of this Policy, during the Applicable Period.
6. Erroneously Awarded Incentive-Based Compensation: Amount Subject to Recovery
The amount of “Erroneously Awarded Compensation” subject to recovery under the Policy, as determined by the Administrator, is the amount of Incentive-Based Compensation received by the Covered Executive that exceeds the amount of Incentive-Based Compensation that would have been received by the Covered Executive had it been determined based on the restated amounts. Erroneously Awarded Compensation shall be computed by the Administrator without regard to any taxes paid by the Covered Executive in respect of the Erroneously Awarded Compensation.
By way of example, with respect to any compensation plans or programs that take into account Incentive-Based Compensation, the amount of Erroneously Awarded Compensation subject to recovery hereunder includes, but is not limited to, the amount contributed to any notional account based on Erroneously Awarded Compensation and any earnings accrued to date on that notional amount.
For Incentive-Based Compensation based on stock price or TSR: (i) the Administrator shall determine the amount of Erroneously Awarded Compensation based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or TSR upon which the Incentive-Based Compensation was received; and (ii) the Company shall maintain documentation of the determination of that reasonable estimate and provide such documentation to the Nasdaq Stock Market (“Nasdaq”).
7. Method of Recoupment
The Administrator shall determine, in its sole discretion, the timing and method for promptly recouping Erroneously Awarded Compensation hereunder, which may include without limitation (i) seeking reimbursement of all or part of any cash or equity-based award; (ii) cancelling prior cash or equity-based awards, whether vested or unvested or paid or unpaid; (iii) cancelling or offsetting against any planned future cash or equity-based awards; (iv) forfeiture of deferred compensation, subject to compliance with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder and (v) any other method authorized by applicable law or contract. Subject to compliance with any applicable law, the Administrator may affect recovery under this Policy from any amount otherwise payable to the Covered Executive, including amounts payable to such individual under any otherwise applicable Company plan or program, including base salary, bonuses or commissions and compensation previously deferred by the Covered Executive.
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The Company is authorized and directed pursuant to this Policy to recoup Erroneously Awarded Compensation in compliance with this Policy unless the Compensation Committee of the Board has determined that recovery would be impracticable solely for the following limited reasons, and subject to the following procedural and disclosure requirements: (i) the direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered; provided, however, before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on expense of enforcement, the Administrator must make a reasonable attempt to recover such erroneously awarded compensation, document such reasonable attempt(s) to recover and provide that documentation to Nasdaq; (ii) recovery would violate home country law of the issuer where that law was adopted prior to November 28, 2022; provided, however, before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on violation of home country law of the issuer, the Administrator must satisfy the applicable opinion and disclosure requirements of Rule 10D-1 and the Listing Standards or (iii) recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
8. No Indemnification of Covered Executives
Notwithstanding the terms of any indemnification or insurance policy or any contractual arrangement with any Covered Executive that may be interpreted to the contrary, the Company shall not indemnify any Covered Executives against the loss of any Erroneously Awarded Compensation, including any payment or reimbursement for the cost of third-party insurance purchased by any Covered Executives to fund potential clawback obligations under this Policy.
9. Administrator Indemnification
Any members of the Administrator, and any other members of the Board who assist in the administration of this Policy, shall not be personally liable for any action, determination or interpretation made with respect to this Policy and shall be fully indemnified by the Company to the fullest extent under applicable law and Company policy with respect to any such action, determination or interpretation. The foregoing sentence shall not limit any other rights to indemnification of the members of the Board under applicable law or Company policy.
10. Interpretation
The Administrator is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate or advisable for the administration of this Policy. In relevant part, it is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act and any applicable rules or standards adopted by the Securities and Exchange Commission or any national securities exchange on which the Company’s securities are listed.
11. Effective Date
This Policy shall be effective as of the date approved by the Board (the “Effective Date”) and shall apply to Incentive Based Compensation that is approved, awarded or granted to Covered Executives.
12. Amendment; Termination
The Board may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary, including any amendments to reflect regulations adopted by the Securities and Exchange Commission under Section 10D of the Exchange Act and to comply with any rules or standards adopted by a national securities exchange on which the Company’s securities are listed. The Board may terminate this Policy at any time.
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13. Other Recoupment Rights
The Board intends that this Policy will be applied to the fullest extent of the law. The Board may require that any employment agreement, equity award agreement, or similar agreement shall, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this Policy. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, equity award agreement or similar agreement and any other legal remedies available to the Company.
Nothing in this Policy will limit in any respect (i) the Company’s right to take or not to take any action with respect to any Covered Executive’s or any other person’s employment or (ii) the obligation of the Chief Executive Officer or the Chief Financial Officer to reimburse the Company in accordance with Section 304 of the Sarbanes-Oxley Act of 2002, as amended.
14. Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives.
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