NOVA LIFESTYLE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
Safe Harbor Statement
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."
Nova LifeStyle, Inc.is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and global purchase fulfillment. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStylealso sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.
Our customers principally consist of distributors and retailers with specific geographic territories that deploy middle to high end private label home furnishings which have very little competitive overlap with our specific furnishing products or product lines.
Nova LifeStyleis constantly seeking to integrate new sources of distribution and manufacturing that are properly aligned with our growth strategy. This allows us to continually focus on building both our overall distribution and manufacturing relationships through a deployment of popular, as well as trend-based, furnishing solutions worldwide. 23 Table of Contents We are a U.S.holding company with no material assets in the U.S.other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential and commercial furniture worldwide: Nova Furniture Limiteddomiciled in the British Virgin Islands(" Nova Furniture"), Nova Furniture Ltd.domiciled in Samoa("Nova Samoa"), Diamond Bar Outdoors, Inc.domiciled in California("Diamond Bar"), Nova Living (M) SDN. BHD. domiciled in Malaysia("Nova Malaysia") and Nova Living (HK) Group Limiteddomiciled in Hong Kong("Nova HK"). The Company had two former subsidiaries Bright Swallow International Group Limiteddomiciled in Hong Kong("Bright Swallow" or "BSI") which was sold in January 2020and Nova Furniture Macao Commercial Offshore Limiteddomiciled in Macao("Nova Macao") which was de-registration and liquidation in January 2021. On December 7, 2017, we incorporated i Design Blockchain Technology, Inc.("i Design") under the laws of the State of California. The purpose of i Design is to build our own blockchain technology team. i Design is in the planning stage and has had minimum operations to date. On December 12, 2019, we became the sole shareholder of Nova Living (M) SDN. BHD. ("Nova Malaysia"), a company incorporated on July 26, 2019under the laws of Malaysia. Nova Malaysiais to market and sell high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysiaand other regions in Southeast Asia.
October 14, 2020, Nova Macao's offshore license was invalidated by the Macao Trade and Investment Promotion Instituteunder the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macaowas de-registration and liquidation in January 2021and its business was taken over by Nova HK. Nova Macaocompleted the de-registration and liquidation process in January 2021. On November 5, 2020, Nova LifeStyle, Inc.acquired Nova Living (HK) Group Limited("Nova HK") which was incorporated in Hong Kongon November 6, 2019. This company has had minimal operations in 2021. In February 2022, Nova HK also entered a de-registration process and is in the process of transferring all its assets and business to Nova Malaysia. Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, Honduras, Panama, Kazakhstan, Asian and Middle Eastern markets. Due to the recent imposition of significant trade tariffs on importation from Chinato the United Statesand the adverse effect such policies have on our operations, we are actively pursuing alternative product lines with positive growth potential. One such area pertains to the health-oriented furniture segment which continues to experience popularity, particularly in Asia. Since the second quarter of 2019, we have developed a line of high-end physiotherapeutic jade mats with China-based manufacturing partners for use in therapy clinics, hospitality, and real estate projects in Asia. We launched our first flagship showroom/retail store in Kuala Lumpur, Malaysiain late 2019, which, after a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysiagovernment extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysiaimposed a new nationwide lockdown on May 12, 2021until early June 2021which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people whoare fully vaccinated and our store is reopened now. In April 2022, Malaysiahas reopened the border for foreign visitors. We expect that our flagship showroom/retail store will serve as one of our primary distribution channels in Malaysia. Marketing of jade mats will focus on their premium therapeutic qualities and target health conscious general consumers and professionals. We have limited experience with operations in Southeast Asiaand considerable management attention and resources may be required to manage these new markets and product lines. We may be subject to additional risks including credit risk, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally. Beginning in early 2020, a strain of novel coronavirus ("COVID-19") has spread globally including the U.S.and Malaysia. In March 2020, the World Health Organizationdeclared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company's two showrooms and warehouse in Malaysiawas closed from March, 2020 to May, 2020. The Los Angelesfacility closed on March 16, 2020and reopened in full operation on June 1, 2020. On May 12, 2020, the Company's Kuala Lumpuroffice and warehouse reopened for business. On August 28, 2020, the Malaysiagovernment extended the shutdown order to all business until March 5, 2021After the re-opening on March 5, 2021, Malaysiagovernment imposed a new nationwide lockdown on May 12, 2021until early June 2021which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people whoare fully vaccinated and our store is reopened now. In April 2022, Malaysiahas reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in Chinawere closed from the beginning of the Lunar New YearHoliday at the end of January 2020through the beginning of March 2020. Certain of the Company's new products are being sourced from manufacturers in Indiastarting in 2020. The factories in Indiasuspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in Indiaare open for operations. Shipping of products from Asiahas experienced significant delays since the onset of the pandemic and the costs of shipping from Asiahave increased since the onset; and we have experienced and may continue to experience shipping disruptions in the future. Finally, the Company expects that the impact of the COVID-19 outbreak on the United Statesand world economies will continue to have a material adverse impact on the demand for its products. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time. 24 Table of Contents We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802under the Paycheck Protection Program ("PPP"). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar Outdoors Inc.("Diamond Bar") was granted a loan from Cathay Bankin the aggregate amount of $176,294, pursuant to the Paycheck Protection Program. In June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration(SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. In July 2021, we completed a registered direct offering of our shares of common stock and received offering gross proceeds of $3,120,622. We currently believe that our financial resources will be adequate to finance our operations through the outbreak. However, in the event that we do need to raise capital in the future, the outbreak-related instability in the securities markets could adversely affect our ability to raise additional capital.
Although there is no assurance, at this time we expect that the circumstances related to the epidemic will lead to significant write-downs of our jade mattress inventory in
Discontinued Operations Towards the end of 2019, our Board of Directors determined to discontinue its marketing efforts in
Canadaand committed to a plan to dispose of Bright Swallow. On January 7, 2020, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limitedan unrelated third party, for cash consideration of $2,500,000, pursuant to a formal agreement entered into on January 7, 2020. We received the payment in full on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented.
Main factors affecting our financial performance
At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2019 Collection in the Las
Vegas Market, with a view to attracting a higher-end ultimate customer. We believe these new strategies, will provide us with significant long term growth opportunities. The transition has and is expected to continue to adversely impact our revenue and our net profit in the short-term as we roll out new products and market those products to our existing client base and to new potential customers better suited for the higher end products, and as we assess our new products' market acceptance. Significant factors that we believe could affect our operating results are the (i) prices of our products to our international retailer and wholesaler customers and their markups to end consumers; (ii) general economic conditions in the U.S., Chinese, and other international markets; and (iii) trade tariffs imposed by the United Stateson certain products manufactured in China; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) continued significant delays in the receipt of shipments of our products from Asiaand increased costs of shipping from Asia. We believe most of our customers are willing to pay for our high quality and stylish products, timely delivery, and strong production capacity at price levels which we expect will allow us to maintain a relatively high gross profit margin for our products. We do not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by the United Stateson certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in Chinato third-party manufacturers located in other parts of Asia, such as Vietnam, Indiaand/or Malaysia, countries unaffected by the tariffs. Implementation of a relocation of manufacturing (which by necessity includes an assessment of the factory's ability to deliver the quantity of the product, in accordance with the Company's specifications, and in accordance with the Company's quality control requirements) is time-consuming, but a portion of our manufacturing has been transitioned to Malaysiaand Indiastarting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues once the COVID-19 outbreak dissipates. Some of our manufacturing will continue to be performed in Chinabecause the intellectual know-how necessary to manufacture certain products is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also allow us at least to maintain our gross profit margins. The markets in North America(excluding the United States) and particularly in Europeremain challenging because such markets are experiencing a slow-down and may be entering a recession due to the COVID-19 pandemic. 25 Table of Contents 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 in our critical accounting policies and estimates from the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended
Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America(" U.S.GAAP") for Nova LifeStyleand its subsidiaries, Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia, Nova HK and its former subsidiaries, Bright Swallow and Nova Macao. Use of Estimates In preparing consolidated financial statements in conformity with U.S.GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by us, include but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill. Actual results could differ from those estimates. Accounts Receivable Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We do not expect to collect receivables greater than one year from the time of sale. Our policy is to maintain an allowance for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We maintained an allowance for bad debt of $1,044and $5,201as of December 31, 2021and 2020, respectively. During the years ended December 31, 2021and 2020, bad debts (reversal) expense from continuing operations were ( $4,157) and $1,259, respectively. As of December 31, 2021, we had gross receivable of $104,441of which no amount was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns. Advances to Suppliers
Advances to suppliers are reported net of allowance when we determine that amounts outstanding are not likely to be collected in cash or utilized against purchase of inventories. Based on our historical records and in normal circumstances, we generally receive goods within 5 to 9 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers have been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments has been made or recorded by us. Any provisions for allowance for advance to suppliers, if deemed necessary, will be included in general and administrative expenses in the consolidated statements of operations. Income Taxes Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. We follow ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. 26 Table of Contents Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Nova Lifestyle, Inc.and Diamond Bar are subject to U.S.federal and state income taxes. Nova Furniture BVI and Bright Swallow were incorporated in the BVI, Nova Samoa was incorporated in Samoaand Nova Macao was incorporated in Macau. There is no income tax for companies domiciled in the BVI, Samoaand Macau. Accordingly, the Company's consolidated financial statements do not present any income tax provisions related to the BVI, Samoaand Macautax jurisdictions where Nova Furniture BVI and Bright Swallow, Nova Samoa and Nova Macaoare domiciled. Nova Malaysiais incorporated in Malaysiaand is subject to Malaysiaincome taxes. Nova HK is incorporated in Hong Kongand is subject
Hong Kongincome taxes.
The Tax Cuts and Jobs Act 2017 (the “Act”) created new taxes on certain foreign source income, such as Global Low Tax Intangible Income (“GILTI”) under Section 951A of the IRC, which applies to the company for tax years. starting after
Revenue Recognition We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from the sale of products are recognized net of reserves set aside for applicable discounts and rebates that are offered under contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer. Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the years ended
December 31, 2021and 2020. 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 Conversion and Transactions
The accompanying consolidated financial statements are presented in
The Company's subsidiary with operations in
Malaysiauses its local currency, Malaysian Ringgit ("RM"), as its functional currency. An entity's functional currency is the currency of the primary economic environment in which it operates, which is normally the currency of the environment in which the entity primarily generates and expends cash. Management's judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements. 27 Table of Contents Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations. The financial statements are presented in U.S.dollars. Assets and liabilities are translated into U.S.dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders' equity accounts are translated using the historical exchange rates at the date the entry to stockholders' equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period's income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.
Conversion of RM amounts to
Balance sheet items, except for equity accounts
December 31, 2021 RM4.18to 1 December 31, 2020 RM4.02to 1 Income statement and cash flow items For the year ended December 31, 2021 RM4.14to 1 For the year ended December 31, 2020 RM4.20to 1 Segment Reporting ASC Topic 280, "Segment Reporting," requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's chief operating decision maker organizes segments within the company for making operating decisions, assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
We have determined that our business constitutes a single segment for reporting in accordance with ASC 280. We operate exclusively in one business and industry segment: the design and sale of furniture.
We concluded that we had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in
Californiafocusing on customers in the US, Bright Swallow was a furniture distributor focusing on customers primarily in Canada, Nova Macao was a furniture distributor based in Macaofocusing on international customers, Nova HK is a furniture distributor based in Hong Kongfocusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Bright Swallow, Nova Macao, Nova HK and Nova Malaysiaas a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United Statesand Malaysiafor administrative purposes. Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China. New Accounting Pronouncements
Recently Adopted Accounting Standards
December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. ASU 2019-12 was effective January 1, 2021. The adoption of ASU 2019-12 did not have any impact on our consolidated financial statement presentation or disclosures. 28 Table of Contents In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. For contracts in an entity's own equity, the type of contracts primarily affected by ASU 2020-06 are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning of such fiscal year. We adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have any impact on our consolidated financial statement presentation or disclosures.
Accounting pronouncements recently issued but not yet adopted
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is to be adopted on a modified retrospective basis. As a smaller reporting company, ASU 2016-13 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our consolidated financial statement presentations and disclosures. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwilland Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Adoption of the ASUs is on a modified retrospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022. We are currently evaluating the impact that the adoption of ASU 2017-04 will have on our consolidated financial statement presentation or disclosures. 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. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have any impact on our consolidated financial statement presentation or disclosures.
We do not believe that any other recently issued but not yet effective authoritative guidance, if currently adopted, would have a material effect on the presentation or disclosure in our financial statements.
29 Table of Contents Results of Operations
Comparison of completed exercises
The following table shows the results of our operations for the years ended
Years Ended December 31, 2021 2020 $ % of Sales $ % of Sales Net sales
$ 12,813,223 $ 11,350,230Cost of sales (23,130,588 ) 181 % (31,242,671 ) 275 % Gross loss (10,317,365 ) (81 )% (19,892,441 ) (175 )%
Operating expenses (9,478,259 ) (74 )% (6,412,335 ) (56 )% Loss from operations (19,795,624 ) (155 )% (26,304,776 ) (232 )% Other expenses, net (2,976 ) - % (96,183 ) (1 )% Income tax (expenses) benefit (163,893 ) (1 )% 649,165 6 %
Loss from continuing operations (19,962,493 ) (156 )% (25,751,794 ) (227 )% Loss from discontinued operations
- - % (326,531 ) (3 )% Net loss (19,962,493 ) (156 )% (26,078,325 ) (230 )% Net Sales Net sales from continuing operations for the year ended
December 31, 2021were $12.81 million, an increase of 13% from $11.35 millionin 2020. This increase in net sales resulted primarily from a 29.43% increase in average selling price, partially offset by a 12.78% decrease in sales volume. Our three largest selling product categories in the year ended December 31, 2021were sofas, beds and coffee tables, which accounted for approximately 46%, 15% and 7% of sales from our continuing operations, respectively. In the year ended December 31, 2020, the three largest selling categories were sofas, beds and coffee table, which accounted for approximately 52%, 14%and 8% of sales from our continuing operations, respectively. The $1.46 millionincrease in net sales from continuing operations in the year ended December 31, 2021, compared to the year of 2020, was mainly due to increased sales to North Americaand other countries. Sales to North America, increased by 13.3% to $12.29 millionin the year ended December 31, 2021, as compared to $10.85 millionin 2020. It was primarily due to the change of our sales strategy to seek sales of products of higher margins. Sales to other countries increased by $232,614to $266,858in the year ended December 31, 2021from $34,244in 2020, primarily due to receiving more sales orders from our customers in other countries. Sales to Asiadecreased to $257,004in the year ended December 31, 2021, compared to $468,248in 2020, primarily due to government lockdown order in Malaysiabecause of COVID-19 pandemic. 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 26% to $23.13 millionin the year ended December 31, 2021, compared to $31.24 millionin 2020. Cost of sales as a percentage of sales decreased to 181% in the year ended December 31, 2021, compared to 275% in 2020. The decrease of cost of sales in dollar term, is a result of two related factors: (a) our write down of $15.96 millionof our slow-moving inventory, primarily the jade mats in Malaysia, to the lower of cost and net realizable value in the year of 2021, compared to an inventory write-down of $24.01 millionin 2020; (b) a change in the mix of our products sold as a result of our suspension of operations in Malaysiadue to COVID-19. Due to Malaysiagovernment's shut down orders caused by prolonged COVID-19 pandemic, our Malaysian operations have been curtailed. The decrease in cost of sales as a percentage of sales was a result that we focused on selling products at high margin. Moreover, total cost of sales from continuing operations excluding our write down of $15.96 millionof our slow-moving inventory, decreased by 1% to $7.17 millionin the year ended December 31, 2021, compared to $7.24 millionof cost of sales which excluded $24.01 millionof inventory write down in 2020. Cost of sales as a percentage of sales, excluding our write down of $15.96 millionof our slow-moving inventory, decreased to 56%, in the year ended December 31, 2021, compared to 64%, in 2020. Our gross loss margin was 81% in the year ended December 31, 2021, compared to a gross loss margin of 175% in 2020. The decrease in gross loss margin was a result that we focused on selling products at high margin. excluding $24.01 millionof inventory write down, in 2020. The decrease of cost of sales in dollar term, and cost of sales as a percentage of sales, was primarily the result of the sale of higher quality products with higher profit margins. 30 Table of Contents Gross Loss
Gross loss from continuing operations was
$10.32 millionin the year ended December 31, 2021, compared to gross loss of $19.89 millionin 2020, representing a decrease in gross loss of $9.57 million. The decrease in gross loss was primarily due to our write down of $15.96 millionof our slow-moving inventory in the year ended December 31, 2021, compared with $24.01 millionof inventory write down in 2020. Our gross loss margin was 81% in the year ended December 31, 2021, compared to a gross loss margin of 175% in 2020. The decrease in gross loss margin was a result that we focused on selling products at high margin. Moreover, excluding our write down of $15.96 millionof our slow-moving inventory, gross profit from continuing operations was $5.64 millionin the year ended December 31, 2021, compared to gross profit of $4.11 million, excluding $24.01 millionof inventory write down, in 2020. Our gross profit margin, excluding our write down of $15.96 millionof our slow-moving inventory, increased to 44%, in the year ended December 31, 2021, compared to a gross profit margin of 36%, excluding $24.01 millionof inventory write down, in 2020. The increase in gross profit and gross profit margin, was primarily the result of the sale of higher quality products with higher profit margins. Operating Expenses
Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses were
$9.48 millionin the year ended December 31, 2021, compared to $6.41 millionin 2020. Selling expenses increased by 115%, or $2.01 million, to $3.76 millionin the year ended December 31, 2021, from $1.75 millionin 2020, primarily due to increased marketing and advertising expenses. In addition, general and administrative expenses increased by 23%, or $1.06 million, to $5.72 millionin the year ended December, 2021, from $4.66 millionin 2020, primarily due to an increase in insurance of $0.11 million, technology services fee of $0.44 million, rent expenses of $0.23 millionand legal and professional fees of $0.14 million, respectively Other Expenses, Net Other expenses, net, from continuing operations was $2,976in the year ended December 31, 2021, compared with other expenses, net, of $96,183in 2020, representing a decrease in other expenses of $93,207. The decrease in other expenses was due primarily to the increase of foreign exchange gain to $96,352for the year ended December 31, 2021from foreign exchange loss of $297,965in 2020. The gain in 2021 was mainly a result of the appreciation of Malaysian Ringgit against U.S.dollars on the Company's assets in Malaysia. The decrease in other expenses was partially offset by the increase in interest expense and financial expense with the decrease in non-operating income. Income Tax (Expenses) Benefit Income tax expense from continuing operations was $163,893in the year ended December 31, 2021, compared with $649,165of income tax benefit in 2020. The income tax expense was primarily related to payable true up for the one-time transition tax commencing in April 2018as the result of the tax examination of Internal Revenue Service.
Loss from continuing operations
As a result of the foregoing, our loss from continuing operations was
$19.96 millionin the year ended December 31, 2021, compared with $25.75 millionof loss for the year of 2020.
Loss of discontinued operations
January 7, 2020, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limited, an unrelated third party, for cash consideration of $2.50 million, pursuant to a formal agreement entered into on January 7, 2020. We received the payment on May 11, 2020. Operations of Bright Swallow were reported as discontinued operations in the accompanying consolidated financial statements for all periods presented. We had no income from discontinued operations in the year ended December 31, 2021, while we had loss from discontinued operations of $0.33 millionin 2020. Net Loss
As a result of the above, our net loss was
31 Table of Contents
Cash and capital resources
Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks. In
May 2020, we received loans under the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act. In June 2020, we obtained a loan pursuant to the Economic Injury Disaster Loan Program. We rely primarily on internally generated cash flow and available working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through offerings of our equity or debt, if and when we determine such offerings are required. As of December 31, 2021, we do not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from sales of products will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months. We had net working capital of $23,754,556at December 31, 2021, a decrease of $17,515,064from net working capital of $41,269,620at December 31, 2020. The ratio of current assets to current liabilities was 13.09-to-1 at December 31, 2021.
The following is a summary of the cash provided or used in each of the types of activities indicated during the years ended
2021 2020 Cash provided by (used in): Operating activities
$ (4,782,354 ) $ (2,075,272 )Investing activities (154,820 ) 672,757 Financing activities 2,760,974 466,096
Net cash used in operating activities was
The increase of cash outflow was attributable primarily to an increased cash outflow of
$27.69 millionin advance to suppliers to $0.33 millioncash inflow in the year ended December 31, 2021, compared to $27.36 millioncash inflow in the year of 2020, such increase in cash outflow being mainly a result of purchase but not receiving products from our suppliers in the year ended December 31, 2020, compared to the result of purchase and receiving more jade mats products in the same period of 2021. Also, the increase in cash outflow for accounts payable of $0.72 millionto $0.39 millioncash outflow in the year ended December 31, 2021, compared to $0.33 millioncash inflow in the year of 2020, such increase in cash outflow being mainly due to we settled the debts owed to our suppliers more rapidly than we purchased new goods on credit. The increase in operating cash outflow was partially offset by the increase in cash inflow for inventory of $26.30 millionto $0.80 millioncash outflow in the year ended December 31, 2021, compared to $27.10 millioncash outflow in the same period of 2020, such increase in cash inflow being mainly due to less purchase made for lagging sales in Malaysia. Net cash used in investing activities was $0.15 millionin the year ended December 31, 2021, an increase of cash outflow of $0.82 millionfrom $0.67 millionof cash provided by investing activities in 2020. We incurred cash outflow of $154,820from purchase of office equipment and leasehold improvement in the year ended December 31, 2021. Net cash of $0.67 millionprovided by investing activities in the year ended December 31, 2020, primarily related to cash of Bright Swallow disposed of $1.46 millionin January 2020while we received $2.50 millioncash consideration for this sale transaction. Net cash provided by financing activities was $2.76 millionin the year ended December 31, 2021, an increase of $2.29 millionfrom cash inflow of $0.47 millionin 2020. In the year ended December 31, 2021, we received $2.76 millionfrom equity financing. In the year ended December 31, 2020, we received $0.47 millionfrom other loans. As of December 31, 2021, we had gross accounts receivable of $104,441, of which $73,747was not yet past due and $30,694was less than 90 days past due. We had an allowance for bad debt of $1,044. As of April 1, 2022, all accounts receivable outstanding as of December 31, 2021had been collected.
All outstanding accounts receivable
December 31, 2021and 2020, we had advances to suppliers of $707,264and $381,894, respectively. These supplier prepayments are made for goods before we actually receive them. 32 Table of Contents For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is five months after our advance payment. Due to the COVID-19 pandemic, freight transportation of products from our international suppliers has been delayed or suspended during the outbreak. As such, no reserve on supplier prepayments had been made or recorded by us. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts. As of December 31, 2021and 2020, no reserve on supplier prepayments had been made or recorded by us.
Shelf Registration On
October 8, 2020, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The shelf registration statement was declared effective on October 15, 2020. On July 23, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 1,114,508 shares of common stock. The shares were offered and sold by the Company pursuant to the effective shelf registration statement on Form S-3. The offering gross proceeds were $3,120,622before deducting placement agent's commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021. Other Long-Term Liabilities As of December 31, 2021, we recorded long-term taxes payable of $1.54 million, consisting of an income tax payable of $1.54 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, and a $0.01 millionunrecognized tax benefit, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.
We have chosen to pay the single transition tax over the eight years beginning
Off-balance sheet arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to shareholders. We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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