Nova LifeStyle(NVFY) - 2021 Q4 - Annual Report

PART I Item 1. Business Nova LifeStyle, Inc. designs and markets contemporary residential and commercial furniture globally, adapting to market trends and managing operational disruptions - Nova LifeStyle, Inc. is a U.S.-headquartered designer and marketer of contemporary residential and commercial furniture, incorporated in Nevada in 2009[24] - Products are marketed globally through wholesale, retail, and online platforms under brands like Nova LifeStyle, Diamond Sofa, and Nova Living[24][25] - A 1-for-5 reverse stock split was effected on December 20, 2019, retroactively restating all share and per share data[28] - As of December 31, 2021, the Company had 29 full-time employees worldwide, with 25 in the U.S. and 4 internationally[29] - COVID-19 caused significant disruptions, including showroom closures in Malaysia and Los Angeles, and increased shipping costs from Asia[30][31] - For 2021, largest selling product categories were sofas (46% of sales), beds (15%), and coffee tables (7%)[43] Sales by Geographic Region (Continuing Operations) | Region | 2021 Sales (%) | 2020 Sales (%) | | :------------ | :------------- | :------------- | | North America | 95.9% | 95.6% | | Other Regions | 4.1% | 4.4% | - The Company relies on three principal suppliers for approximately 60% of total purchases in 2021, diversifying for stability and pricing[55] Research and Development Expenses | Year | R&D Expense ($) | | :--- | :-------------- | | 2021 | 110,287 | | 2020 | 33,746 | Item 1A. Risk Factors The Company faces significant risks from COVID-19 disruptions, economic downturns, supply chain dependencies, key personnel loss, and potential delisting - The COVID-19 pandemic has caused and could continue to cause significant business disruptions, impacting demand, supply chains, and financial results[72][73][74] - Changes in economic conditions, including consumer spending, interest rates, and housing markets, can adversely affect product demand[75] - The strategy to transition to high-profit margin products may decrease future sales and earnings if new business is not successfully developed[77] - Loss of key personnel, including the CEO and CFO, or inability to retain qualified staff, could adversely affect business objectives[78][79] - Intense competition in the fragmented furniture industry could lead to market share loss if the Company fails to keep pace in price, quality, and style[80][81][82] - Slow-moving inventory, particularly Jade Mats in Malaysia due to COVID-19 lockdowns, led to a $39.97 million write-down in 2021, impacting cash flow and liquidity[89] - Dependence on foreign suppliers, predominantly in Asia, exposes the Company to risks from currency fluctuations, trade restrictions, and supply chain disruptions[91][92][93] - The Hong Kong-based auditor is not fully inspected by the PCAOB, potentially leading to share delisting under the HFCA Act if inspections are not possible for consecutive years[110][112][114][115][116][121][122][123][124][125][126] - Escalating U.S.-China political tensions, including trade disputes, could adversely affect business by requiring new suppliers and impacting sales[118] Item 1B. Unresolved Staff Comments This item is not applicable to the Company - Not applicable[139] Item 2. Properties The Company leases principal executive offices, showrooms, and warehouses in California, Nevada, North Carolina, and Malaysia - Principal executive offices, showrooms, distribution, and warehouse facilities are leased in Commerce, California[140] - Showrooms are maintained in leased spaces at Las Vegas Market in Nevada and High Point Market in North Carolina[140] - Nova Malaysia operates in leased office, showroom, service center, and warehouse space in Kuala Lumpur, Malaysia[140] - Nova Macao's office lease was terminated in 2021, and Nova HK shared an office with an unrelated third party[140] Item 3. Legal Proceedings The Company is involved in a settled securities class action and ongoing derivative lawsuits, which it intends to vigorously defend - A putative class action (Barney Action) was filed in December 2018, alleging federal securities law violations, including overstated alliances and inflated sales[142][143] - The Barney Action was settled on March 8, 2022, for $750,000, funded by D&O insurance, resolving all claims against the Company and defendants[145] - Two derivative lawsuits (Jie Action and Samuels Action) were filed in 2019, repeating Barney Action allegations and adding claims of self-dealing and auditor misrepresentation[146] - The derivative actions were stayed pending the final disposition of the Barney Action, with ongoing disagreement on lifting the stay[147][148] - The Company believes the derivative complaints lack basis and intends to vigorously defend them, potentially incurring significant legal costs[149] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[150] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Nova LifeStyle's common stock trades on NASDAQ, with approximately 47 record holders, and the Company does not anticipate paying future cash dividends - Common stock is quoted on The NASDAQ Stock Market under symbol "NVFY" since January 17, 2014[153] - As of April 6, 2022, the common stock closing price was $1.60 per share[153] - As of April 6, 2022, there were approximately 47 holders of record[154] - The Company does not anticipate paying cash dividends, intending to retain earnings for business development and expansion[155] Item 6. Selected Financial Data This item is not required for the Company - Not required[156] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Nova LifeStyle's financial condition and operational results, highlighting COVID-19 impacts, inventory write-downs, increased net sales, and liquidity management - Nova LifeStyle distributes contemporary residential and commercial furniture through retail, online, and global fulfillment platforms[158] - The Company is transitioning to higher-margin products to improve profitability, which may temporarily impact revenue and net profit[173] - The COVID-19 pandemic caused significant disruptions, including showroom closures and increased shipping costs, materially impacting demand and operations[168][169] - The Company sold its subsidiary Bright Swallow in January 2020 for $2.5 million, with operations reported as discontinued[172] Key Financial Results (Continuing Operations) | Metric | 2021 ($) | 2020 ($) | Change (%) | | :------------------------- | :----------- | :----------- | :--------- | | Net Sales | 12,813,223 | 11,350,230 | 13% | | Cost of Sales | 23,130,588 | 31,242,671 | (26)% | | Gross Loss | (10,317,365) | (19,892,441) | (48)% | | Operating Expenses | 9,478,259 | 6,412,335 | 48% | | Loss from Operations | (19,795,624) | (26,304,776) | (25)% | | Income Tax (Expenses) Benefit | (163,893) | 649,165 | (125)% | | Loss from Continuing Operations | (19,962,493) | (25,751,794) | (22)% | | Net Loss | (19,962,493) | (26,078,325) | (24)% | - Net sales from continuing operations increased by 13% to $12.81 million in 2021, driven by a 29.43% increase in average selling price despite a 12.78% decrease in sales volume[208] - Cost of sales decreased by 26% to $23.13 million in 2021, primarily due to a lower inventory write-down of $15.96 million and a shift to higher-margin products[210] - Operating expenses increased by 48% to $9.48 million in 2021, driven by a 115% increase in marketing and advertising and a 23% increase in general and administrative expenses[214] - Net working capital was $23.75 million at December 31, 2021, a decrease of $17.52 million from $41.27 million in 2020[222] Cash Flow Summary | Activity | 2021 ($) | 2020 ($) | | :----------------- | :------------ | :----------- | | 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 increased by $2.71 million from 2020 to 2021, primarily due to changes in advances to suppliers and inventories[223] - In July 2021, a registered direct offering raised gross proceeds of $3.12 million and net proceeds of approximately $2.76 million from equity financing[230] Overview This section provides an overview of the Company's business model and strategic focus on higher-margin products Discontinued Operations This section details the financial impact and reporting of the Company's discontinued operations Principal Factors Affecting Our Financial Performance This section discusses key internal and external factors influencing the Company's financial performance Critical Accounting Policies This section outlines the Company's critical accounting policies that require significant management judgment Basis of Presentation This section describes the basis on which the Company's financial statements are prepared Use of Estimates This section explains the use of estimates and assumptions in preparing the Company's financial statements Accounts Receivable This section details the Company's policies and balances related to accounts receivable Advances to Suppliers This section provides information on the Company's advances made to its suppliers Income Taxes This section outlines the Company's accounting policies and disclosures related to income taxes Revenue Recognition This section describes the Company's policies and methods for recognizing revenue from its operations Foreign Currency Translation and Transactions This section explains the Company's accounting for foreign currency translation and transactions Segment Reporting This section provides information on the Company's operating segments and their financial performance New Accounting Pronouncements This section discusses the impact of recently issued accounting pronouncements on the Company Results of Operations This section analyzes the Company's financial performance, including revenues, expenses, and profitability Liquidity and Capital Resources This section discusses the Company's ability to meet its short-term and long-term financial obligations Item 7A. Quantitative and Qualitative Disclosures about Market Risk This item is not required for the Company - Not required[235] Item 8. Financial Statements and Supplementary Data This item refers to the Company's financial statements and supplementary data presented in a separate section - Financial statements and supplementary data appear in a separate section of this Annual Report beginning on page F-1[236] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[237] Item 9A. Controls and Procedures The Company's CEO and CFO concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - As of December 31, 2021, the CEO and CFO concluded that disclosure controls and procedures were effective[238] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2021, based on the COSO 2013 Internal Control-Integrated Framework[241] - No material changes in internal control over financial reporting occurred during the period covered by this annual report[242] Item 9B. Other Information This item is not applicable to the Company - Not applicable[243] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable, but refers to risks regarding PCAOB inspection limitations on the Company's Hong Kong-based auditor - Not applicable, with further information referenced in Item 1A regarding the PCAOB's inability to inspect the Company's auditor and potential delisting risks[243] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[245] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the Company's definitive Proxy Statement - Information is incorporated by reference from the Proxy Statement[246] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of beneficial owners and management is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement[247] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement[248] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the Proxy Statement[249] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements and various exhibits filed as part of the Annual Report on Form 10-K - Includes financial statements listed in the Index to Financial Statements, starting on page F-1[251] - Lists various exhibits such as merger agreements, articles of incorporation, bylaws, stock certificates, warrants, and employment agreements[251][252] - Includes certifications of Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act[253] Financial Statements Report of Independent Registered Public Accounting Firm Centurion ZD CPA & Co. issued an unqualified opinion on the financial statements, identifying inventory write-down as a critical audit matter - Centurion ZD CPA & Co. issued an unqualified opinion on the consolidated financial statements for December 31, 2021 and 2020, affirming fair presentation in conformity with U.S. GAAP[260] - The auditor did not perform an audit of internal control over financial reporting and expresses no opinion on its effectiveness[262] - Inventory write-down was identified as a critical audit matter due to subjective management assumptions about future demands and market conditions affecting net realizable value[265][266] - Audit procedures for inventory write-down included observing physical inventory, evaluating management's estimation process, testing report reliability, assessing reasonableness of assumptions, and analyzing subsequent sales[267][268] Consolidated Balance Sheets Total assets decreased from $46.48 million in 2020 to $29.53 million in 2021, driven by reduced inventories and cash, while liabilities slightly increased Consolidated Balance Sheet Summary | Metric | Dec 31, 2021 ($) | Dec 31, 2020 ($) | | :------------------------- | :--------------- | :--------------- | | Assets | | | | Cash and cash equivalents | 6,276,106 | 8,744,784 | | Accounts receivable, net | 103,397 | 514,939 | | Inventories | 17,656,175 | 32,814,520 | | Total Current Assets | 25,568,953 | 43,294,903 | | Total Noncurrent Assets | 3,960,671 | 3,183,619 | | Total Assets | 29,529,624 | 46,478,522 | | Liabilities | | | | Accounts payable | 358,362 | 743,785 | | Total Current Liabilities | 1,814,397 | 2,025,283 | | Total Noncurrent Liabilities | 4,271,039 | 3,524,764 | | Total Liabilities | 6,085,436 | 5,550,047 | | Stockholders' Equity | | | | Total Stockholders' Equity | 23,444,188 | 40,928,475 | - Cash and cash equivalents decreased by $2.47 million (28.2%) from $8.74 million in 2020 to $6.28 million in 2021[271] - Inventories decreased significantly by $15.16 million (46.2%) from $32.81 million in 2020 to $17.66 million in 2021[271] - Accumulated deficits increased from $351,370 in retained earnings in 2020 to a deficit of $19.60 million in 2021[273] Consolidated Statements of Comprehensive (Loss) Income The Company reported a net loss of $19.96 million in 2021, an improvement from $26.08 million in 2020, driven by reduced gross loss despite increased operating expenses Consolidated Statements of Comprehensive (Loss) Income Summary | Metric | 2021 ($) | 2020 ($) | Change (%) | | :------------------------- | :----------- | :----------- | :--------- | | Net Sales | 12,813,223 | 11,350,230 | 13% | | Cost of Sales | 23,130,588 | 31,242,671 | (26)% | | Gross Loss | (10,317,365) | (19,892,441) | (48)% | | Total Operating Expenses | 9,478,259 | 6,412,335 | 48% | | Loss From Operations | (19,795,624) | (26,304,776) | (25)% | | Income Tax (Expense) Benefit | (163,893) | 649,165 | (125)% | | Loss From Continuing Operations | (19,962,493) | (25,751,794) | (22)% | | Loss From Discontinued Operations | - | (326,531) | (100)% | | Net Loss | (19,962,493) | (26,078,325) | (24)% | | Foreign currency translation | (416,440) | 798,290 | (152)% | | Net Loss and Comprehensive Loss | (20,378,933) | (25,280,035) | (19)% | - Net sales increased by 13% from $11.35 million in 2020 to $12.81 million in 2021[275] - Gross loss decreased by 48% from $19.89 million in 2020 to $10.32 million in 2021[275] - Total operating expenses increased by 48% from $6.41 million in 2020 to $9.48 million in 2021[275] - Net loss per share of common stock (Basic and Diluted) improved from $(4.54) in 2020 to $(3.27) in 2021[275] Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased from $40.93 million in 2020 to $23.44 million in 2021, primarily due to net loss and foreign currency translation loss Consolidated Statements of Stockholders' Equity Summary | Metric | Dec 31, 2021 ($) | Dec 31, 2020 ($) | | :------------------------- | :--------------- | :--------------- | | Common stock | 6,837 | 5,596 | | Additional paid-in capital | 42,660,383 | 39,766,978 | | Statutory reserves | - | 6,241 | | Accumulated other comprehensive income | 381,850 | 798,290 | | (Accumulated deficits) Retained earnings | (19,604,882) | 351,370 | | Total Stockholders' Equity | 23,444,188 | 40,928,475 | - Net loss of $19.96 million contributed to the decrease in retained earnings in 2021[277] - Issuance of common stock generated $2.76 million in 2021[277] - Foreign currency translation resulted in a loss of $416,440 in 2021, compared to a gain of $798,290 in 2020[277] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $2.47 million in 2021, primarily due to increased cash used in operating and investing activities, partially offset by equity financing Consolidated Statements of Cash Flows Summary | Activity | 2021 ($) | 2020 ($) | | :----------------- | :------------ | :----------- | | Operating Activities | (4,782,354) | (2,075,272) | | Investing Activities | (154,820) | 672,757 | | Financing Activities | 2,760,974 | 466,096 | | Effect of Exchange Rate Changes | (292,478) | 795,805 | | Net decrease in cash and cash equivalents | (2,468,678) | (140,614) | | Cash and cash equivalents, end of year | 6,276,106 | 8,744,784 | - Net cash used in operating activities increased by $2.71 million from 2020 to 2021, primarily due to changes in advances to suppliers and inventories[279] - Net cash used in investing activities was $0.15 million in 2021, a shift from $0.67 million provided in 2020, mainly due to the absence of cash received from subsidiary sales[279] - Net cash provided by financing activities increased to $2.76 million in 2021, primarily from equity financing, compared to $0.47 million from other loans in 2020[279] Notes to Consolidated Financial Statements The notes detail the Company's organization, accounting policies, COVID-19 impacts, inventory write-downs, tax positions, related party transactions, and legal proceedings Note 1 - Organization and Description of Business This note describes the Company's corporate structure, business activities, and operational scope Note 2 - Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements Note 3 - Discontinued Operations This note provides details on the financial results and assets/liabilities of discontinued operations Note 4 - Inventories This note details the composition, valuation, and write-downs related to the Company's inventories Note 5 - Plant, Property and Equipment, Net This note provides information on the Company's property, plant, and equipment, including depreciation Note 6 - Advances to Suppliers This note details the amounts and nature of advances made by the Company to its suppliers Note 7 - Prepaid Expenses and Other Receivables This note outlines the components of prepaid expenses and other non-trade receivables Note 8 - Accrued Liabilities and Other Payables This note details the Company's accrued liabilities and other non-trade payables Note 9 - Loan to Unrelated Party This note provides information on a loan extended by the Company to an unrelated third party Note 10 - Other Loans This note details other loans and borrowing arrangements of the Company Note 11 - Income Taxes This note provides a reconciliation of income tax expense and deferred tax assets/liabilities Note 12 - Related Party Transactions This note discloses transactions and balances with related parties of the Company Note 13 - Stockholders' Equity This note details changes in common stock, additional paid-in capital, and retained earnings Note 14 - Geographical Analysis This note provides a breakdown of the Company's revenues and assets by geographic region Note 15 - Lease This note outlines the Company's lease agreements, including right-of-use assets and lease liabilities Note 16 - Commitments and Contingencies This note discloses the Company's contractual commitments and potential contingent liabilities Note 17 - Subsequent Events This note describes significant events that occurred after the balance sheet date