NVFY 10-Q Quarterly Report June 30, 2017 | Alphaminr
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NVFY 10-Q Quarter ended June 30, 2017

Balance Sheet
Cash Flow
Income Statement
NOVA LIFESTYLE, INC.
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10-Q 1 novalifestyle10q063017.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 011-36259

NOVA LIFESTYLE, INC.
(Exact name of registrant as specified in its charter)

Nevada
90-0746568
(State or other jurisdiction of incorporation
or organization)
(IRS Employer Identification No.)

6565 E. Washington Blvd. Commerce, CA
90040
(Address of principal executive offices)
(Zip Code)

(323) 888-9999
(Registrant’s telephone number, including area code)

Indicate by checkmark 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 last 90 days.
YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,128,596 shares of common stock outstanding as of August 2, 2017.


Nova Lifestyle, Inc.

Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1.
1
1
3
4
6
Item 2.
24
Item 3.
32
Item 4.
32
PART II. OTHER INFORMATION
Item 1.
33
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
(Removed and Reserved)
Item 5.
Other Information
Item 6.
33
34
35

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016
June 30,
December 31,
2017
2016
Assets
Current Assets
Cash and cash equivalents
$
5,171,982
$
2,587,743
Accounts receivable, net
31,601,120
42,102,761
Advance to suppliers
24,592,466
13,669,752
Inventories
2,013,003
2,781,123
Assignment fee receivable (Note 3)
--
1,250,000
Receivable from an unrelated party (Note 7)
--
7,000,000
Prepaid expenses and other receivables
710,929
642,891
Taxes receivable
14,894
14,893
Total Current Assets
64,104,394
70,049,163
Noncurrent Assets
Plant, property and equipment, net
153,265
171,276
Lease deposit
43,260
43,260
Goodwill
218,606
218,606
Intangible assets, net
4,944,616
5,686,623
Deferred tax asset
1,523,720
874,759
Total Noncurrent Assets
6,883,467
6,994,524
Total Assets
$
70,987,861
$
77,043,687


The accompanying notes are an integral part of these condensed consolidated financial statements.

NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

June 30,
December 31,
2017
2016
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
$
71,834
$
2,368,775
Line of credit
4,307,073
7,977,841
Advance from customers
16,396
513,880
Accrued liabilities and other payables
967,041
780,960
Total Current Liabilities
5,362,344
11,641,456
Noncurrent Liabilities
Income tax payable
2,297,748
2,136,788
Total Noncurrent Liabilities
2,297,748
2,136,788
Total Liabilities
7,660,092
13,778,244
Contingencies and Commitments
Stockholders’ Equity
Common stock, $0.001 par value; 75,000,000 shares
authorized; 27,767,905 and 27,309,695 shares issued and
outstanding as of June 30, 2017 and December 31, 2016,
respectively
27,768
27,309
Additional paid-in capital
37,599,253
36,885,462
Statutory reserves
6,241
6,241
Retained earnings
25,694,507
26,346,431
Total Stockholders’ Equity
63,327,769
63,265,443
Total Liabilities and Stockholders’ Equity
$
70,987,861
$
77,043,687

The accompanying notes are an integral part of these condensed consolidated financial statements.

NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
Six Months Ended June 30,
Three Months Ended June 30,
2017
2016
2017
2016
(Unaudited)
(Unaudited)
Net Sales
$
37,590,789
$
42,210,054
$
19,533,767
$
19,741,047
Cost of Sales
31,417,150
36,155,603
16,061,903
17,291,739
Gross Profit
6,173,639
6,054,451
3,471,864
2,449,308
Operating Expenses
Selling expenses
1,686,436
2,308,005
711,434
723,091
General and administrative expenses
5,483,709
3,264,434
2,458,033
1,919,137
Total Operating Expenses
7,170,145
5,572,439
3,169,467
2,642,228
(Loss) Income From Operations
(996,506
)
482,012
302,397
(192,920
)
Other Income (Expenses)
Non-operating income (expense), net
797
24,371
797
11,970
Foreign exchange transaction loss
(230
)
(2,297
)
(190
)
(1,248
)
Interest expense, net
(92,161
)
(144,667
)
(37,755
)
(72,233
)
Financial expense
(51,827
)
(54,365
)
(25,767
)
(25,928
)
Total Other Expenses, Net
(143,421
)
(176,958
)
(62,915
)
(87,439
)
(Loss) Income Before Income Taxes and Discontinued operations
(1,139,927
)
305,054
239,482
(280,359
)
Income Tax (Benefit) Expense
(488,003
)
160,718
(317,984
)
141,677
(Loss) Income From Continuing Operations
(651,924
)
144,336
557,466
(422,036
)
Loss From Discontinued Operations, net of tax
--
(732,979
)
--
(263,736
)
Net (Loss) Income
(651,924
)
(588,643
)
557,466
(685,772
)
Other Comprehensive Income
Foreign currency translation
--
(322,114
)
--
(397,742
)
Comprehensive (Loss) Income
$
(651,924
)
$
(910,757
)
$
557,466
$
(1,083,514
)
Basic weighted average shares outstanding
27,429,885
24,622,887
27,513,733
24,911,803
Diluted weighted average shares outstanding
27,429,885
24,622,887
27,516,902
24,911,803
Income (loss) from continuing operations per share of common stock
Basic
$
(0.02
)
$
0.01
$
0.02
$
(0.02
)
Diluted
$
(0.02
)
$
0.01
$
0.02
$
(0.02
)
Loss from discontinued operations per share of common stock
Basic
$
--
$
(0.03
)
$
--
$
(0.01
)
Diluted
$
--
$
(0.03
)
$
--
$
(0.01
)
Net (loss) income per share of common stock
Basic
$
(0.02
)
$
(0.02
)
$
0.02
$
(0.03
)
Diluted
$
(0.02
)
$
(0.02
)
$
0.02
$
(0.03
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
Six Months Ended June 30,
2017
2016
(Unaudited)
Cash Flows From Operating Activities
Net (loss) income from continuing operations
$
(651,924
)
$
144,336
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization
762,150
310,851
Deferred tax benefit
(648,961
)
--
Stock compensation expense
913,264
938,501
Changes in bad debt allowance
504,324
(18,477
)
Changes in operating assets and liabilities:
Accounts receivable
9,997,317
1,602,326
Advance to suppliers
(10,922,714
)
(6,761,289
)
Inventories
768,120
(75,326
)
Other current assets
(267,052
)
152,260
Accounts payable
(2,296,941
)
2,162,024
Advance from customers
(497,484
)
926,231
Accrued expenses and other payables
186,081
(538,652
)
Taxes payable
160,959
153,520
Net Cash Used in Continuing Operations
(1,992,861
)
(1,003,695
)
Net Cash Used in Discontinued Operations
--
(241,174
)
Net Cash Used in Operating Activities
(1,992,861
)
(1,244,869
)
Cash Flows From Investing Activities
Assignment fee received
1,250,000
--
Purchase of property and equipment
(2,132
)
(3,544
)
Advances to unrelated parties
(8,835,000
)
--
Repayment from unrelated parties
15,835,000
--
Net Cash Provided by (Used in) Continuing Operations
8,247,868
(3,544
)
Net Cash Used in Discontinued Operations
--
(81,727
)
Net Cash Provided by (Used in) Investing Activities
8,247,868
(85,271
)
Cash Flows From Financing Activities
Proceeds from line of credit and bank loan
23,094,342
19,758,074
Repayment to line of credit and bank loan
(26,765,110
)
(19,086,365
)
Net Cash (Used in) Provided by Continuing Operations
(3,670,768
)
671,709
Net Cash Provided by Discontinued Operations
--
321,578
Net Cash (Used in) Provided by Financing Activities
(3,670,768
)
993,287
Effect of Exchange Rate Changes on Cash and Cash Equivalents
--
(1,746 )
Net increase (decrease) in cash and cash equivalents
2,584,239
(338,599 )
Cash and cash equivalents, beginning of period
2,587,743
988,029
Cash and cash equivalents, end of period
$
5,171,982
$ 649,430


NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)

Six Months Ended June 30,
2017
2016
(Unaudited)
Analysis of cash and cash equivalents
Included in cash and cash equivalents per consolidated balance sheets
$
5,171,982
$
584,339
Included in assets of discontinued operations
-
65,091
Cash and cash equivalents, end of period
$
5,171,982
$
649,430
Supplemental Disclosure of Cash Flow Information
Continuing operations:
Cash paid during the period for:
Income tax payments
$
--
$
7,200
Interest expense
$
118,753
$
144,668
Discontinued operations:
Cash paid during the period for:
Income tax payments
$
--
$
--
Interest expense
$
--
$
86,164
The accompanying notes are an integral part of these condensed consolidated financial statements.

NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
Note 1 - Organization and Description of 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 our subsidiaries through which we market, design and sell furniture worldwide: Nova Furniture Limited in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. in Samoa (“Nova Samoa”), Bright Swallow International Group Limited (“Bright Swallow” or “BSI”), Nova Furniture Macao Commercial Offshore Limited (“Nova Macao”), and Diamond Bar Outdoors, Inc. (“Diamond Bar”).

Nova Macao was organized under the laws of Macao on May 20, 2006, and is a wholly owned subsidiary of Nova Furniture.  Diamond Bar, doing business as Diamond Sofa, was incorporated in California on June 15, 2000.  Nova Macao is a trading company, importing, marketing and selling products designed and manufactured by Nova Furniture (Dongguan) Co., Ltd. (“Nova Dongguan”) and third party manufacturers for the U.S. and international markets. Diamond Bar markets and sells products manufactured by us and third party manufacturers under the Diamond Sofa brand to distributors and retailers principally in the U.S. market.  On April 24, 2013, the Company completed the acquisition of Bright Swallow, an established furniture company with a global client base.

The sale of three of the Company’s former subsidiaries, Nova Dongguan, Nova Dongguan Chinese Style Furniture Museum (“Nova Museum”), and Dongguan Ding Nuo Household Products Co., Ltd. (“Ding Nuo”), was consummated on October 25, 2016, and as a result, they are now accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. Accordingly, assets and liabilities, revenues and expenses, and cash flows related to the business of these subsidiaries have been appropriately reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented. Additional information with respect to the sale of these subsidiaries is presented at Note 3.

Before its divestment, Nova Dongguan was a wholly foreign-owned enterprise, or WFOE, and was incorporated under the laws of the PRC on June 6, 2003. Nova Dongguan organized Nova Museum on March 17, 2011 as a non-profit organization under the laws of the PRC engaged in the promotion of the culture and history of furniture in China. Nova Dongguan markets and sells products in China to stores in our former franchise network and to wholesalers and agents for domestic retailers and exporters. Nova Dongguan also provides design expertise and facilities to manufacture branded products and products for international markets under original design manufacturer and original equipment manufacturer agreements, or ODM and OEM agreements. On October 24, 2013, Nova Dongguan incorporated Ding Nuo under the laws of the PRC.

The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Samoa, Nova Macao, Diamond Bar, and BSI.  The “Company” may also from time to time in these Notes include the Company’s former subsidiaries, Nova Furniture BVI, Nova Dongguan, Nova Museum and Ding Nuo.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The 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.

The interim condensed consolidated financial information as of June 30, 2017 and for the six and three month periods ended June 30, 2017 and 2016 have been prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with U.S. GAAP have not been included. The interim condensed consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, previously filed with the SEC on April 14, 2017.


In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of June 30, 2017, its interim condensed consolidated results of operations and cash flows for the six and three month periods ended June 30, 2017 and 2016, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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, the allowance for bad debt, valuation of inventories, 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.

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, 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 asset 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 Diamond Bar reporting unit.  Accordingly, as of June 30, 2017 and 2016, the Company concluded there was no impairment of goodwill of Diamond Bar.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.


Accounts Receivable

The Company’s policy is to maintain an allowance for potential 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 doubtful accounts is as follows:

Balance at January 1, 2017
$
3,019,931
Provision for the period
504,324
Write off
(3,106,474)
Balance at June 30, 2017
$
417,781

During the six months ended June 30, 2016, bad debt (reversal) expense from continuing operations and discontinued operations were $(18,476) and $13,284, respectively. During the three months ended June 30, 2016, bad debt expense from continuing operations and discontinued operations were $8,225 and $12,909, respectively.

Inventories

Inventories are stated at the lower of cost and net realizable value with cost determined on a weighted-average basis. Management compares the cost of inventories with the net realizable value and an allowance is made for writing down their inventories to market value, if lower. The Company did not record any write-downs of inventory at June 30, 2017 and 2016.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory,” which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 effective January 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements.

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 10% salvage value and estimated lives as follows:

Computer and office equipment
5 years
Decoration and renovation
10 years

Depreciation of plant, property and equipment attributable to manufacturing activities is capitalized as part of inventories, and expensed to cost of goods sold when inventories are sold.

Impairment of Long-Lived Assets

Long-lived assets, which include property, plant and equipment and intangible 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.

Based on its review, the Company believes that, as of June 30, 2017 and December 31, 2016, there was no significant impairment of its long-lived assets.


Research and Development

Research and development costs are related primarily to the Company designing and testing its new products during the development stage. Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and development expense from continuing operations was $364,105 and $59,665 for the six months ended June 30, 2017 and 2016, respectively; $309,105 and $32,419 for the three months ended June 30, 2017 and 2016, respectively.  Research and development expense from the Company’s discontinued operations was $409,147 and $228,069 for the six and three months ended June 30, 2016, respectively.

Income Taxes

In its interim financial statements, the Company follows the guidance in ASC 270 “Interim Reporting” and ASC 740 “Income Taxes” whereby the Company utilizes the expected annual effective rate in determining its income tax provision. The actual effective tax rate of continuing operations of 42.81% for the six months ended June 30, 2017 differs from the U.S. federal statutory tax rate, primarily as a result of tax liability reserves from uncertain tax positions.

During the six months ended June 30, 2017 and 2016, the Company recorded income tax (benefit) and expense from its continuing operations of approximately ($488,000) and $161,000, respectively.  During the three months ended June 30, 2017 and 2016, the Company recorded income tax (benefit) and expense of approximately ($318,000) and $142,000 from its continuing operations.

During the six and three months ended June 30, 2016, the Company recorded income tax from its discontinued operations of approximately $63,000 and $(45,000), respectively.

Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture Limited and Bright Swallow were incorporated in the BVI. Nova Macao was incorporated in Macao. Nova Furniture Ltd was incorporated in Samoa, Virgin Islands. There is no income tax for companies domiciled in the BVI or Macao. Accordingly, the Company’s consolidated financial statements do not present any income tax provision related to the BVI and Macao tax jurisdiction where Nova Furniture BVI, BSI and Nova Macao are domiciled. Nova Macao is an income tax-exempt entity incorporated and domiciled in Macao.

As of June 30, 2017, unrecognized tax benefits were approximately $1.7 million.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $1.7 million as of June 30, 2017. As of June 30, 2016, unrecognized tax benefits were approximately $4.8 million.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $4.8 million as of June 30, 2016.

A reconciliation of the January 1, 2017, through June 30, 2017, amount of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) is as follows:

Gross UTB
Beginning Balance – January 1, 2017
$
1,642,381
Increase in unrecorded tax benefits related to the Company’s continuing operations
67,833
Exchange rate adjustment
26,980
Ending Balance – June 30, 2017
$
1,737,194

As of June 30, 2017, the Company had cumulatively accrued approximately $561,000 for estimated interest and penalties related to unrecognized tax benefits. At December 31, 2016, the Company had cumulatively accrued approximately $494,000 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 expense, which totaled approximately $67,000 and $232,000 for the six months ended June 30, 2017 and 2016, respectively, of which $67,000 and $67,000 were related to the Company’s continuing operations; and totaled approximately $33,000 and $118,000 for the three months ended June 30, 2017 and 2016, respectively, of which $34,000 and $34,000 were 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.


Revenue Recognition

The Company’s revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition.” Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and no other significant obligations of the Company exist and collectability is reasonably assured. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, or the possible return of the goods. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

Sales revenue represents the invoiced value of goods, net of value-added taxes (“VAT”). All of the Company’s products sold in China are subject to the PRC VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials purchased in China and included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the consolidated financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.

The Company’s sales policy allows for the return of product within the warranty period if the product is defective and the defects are the Company’s fault.  As alternatives for the product return option, the customers have options of asking a discount from the Company for the products with quality issues or receiving replacement parts from the Company at no cost. The amount for return of products, the discount provided to the Company’s customers and the cost for replacement parts were immaterial for six and three months ended June 30, 2017 and 2016.

Franchise Arrangements

In 2010, the Company’s former subsidiaries in China began entering into area product franchise agreements with franchisees who operated specialty furniture stores carrying only Nova-branded products. The product franchise agreement provided for the franchisee to retail Nova-brand furniture products for a period of one year from the date of the agreement. The franchisee was required to pay a deposit of RMB 30,000 at the signing of the agreement, which is used as payment for future purchases and is deferred on the Company’s balance sheet as a customer deposit. The franchisee was required to guarantee a minimum purchase amount from the Company during the contract period. The Company had the right to terminate the agreement should the franchisee fail to meet the minimum purchase amount. The Company previously provided the franchisee with store images and designs, signage, floor plan product information and training. In addition, the Company would rebate a per square meter subsidy to the franchisee for the store build-out within 12 months from the agreement date.  Under the program, the Company established standard renovation amounts (the “Renovation Subsidy”) for various cities in China.  The franchisee was able to obtain, in the form of credits against purchase orders, percentages of the Renovation Subsidy applicable in the city in which the franchisee is located, as follows: 0% to 30% of the Renovation Subsidy applied to the first purchase order and 5% of each purchase order thereafter until the aggregate of all credits equals 100% of the Renovation Subsidy, or 12 months from the date of the franchise agreement, whichever occurs first. In accordance with ASC 605-50, as the Company does not receive an identifiable benefit from these rebates, the rebates are recorded as a reduction of revenue on sales to the franchisees.  All of the franchise agreements relating to the Company’s operations were divested in connection with its discontinued operations (see Note 3 – Discontinued Operations).

Cost of Sales

Cost of sales consists primarily of finished goods purchased from other manufacturers, material costs, labor costs and related overhead that are directly attributable to the production of the products. Write-down of inventory to the lower of cost or net realizable value is also recorded in the cost of sales.

Shipping and Handling Costs

Shipping and handling costs related to delivery of finished goods are included in selling expenses. During the six months ended June 30, 2017 and 2016, shipping and handling costs from continuing operations were $953 and $1,720, respectively; and $648 and $1,178 for the three months ended June 30, 2017 and 2016, respectively.  During the six and three months ended June 30, 2016, shipping and handling costs from discontinued operations were $235,815 and $119,187, respectively.

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 from continuing operations was $660,796 and $1,315,106 for the six months ended June 30, 2017 and 2016, respectively; and $123,217 and $179,192 for the three months ended June 30, 2017 and 2016, respectively. Advertising expense from discontinued operations was $1,093 and $690 for the six and three months ended June 30, 2016, respectively.

Share-based compensation

The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.

The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the fair value of the equity instrument issued or committed to be issued, as this is more reliable than the fair value of the services received. The fair value is measured at the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.

Earnings per Share (EPS)

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).

The following table presents a reconciliation of basic and diluted (loss) earnings per share for the six and three months ended June 30, 2017 and 2016:

Six Months Ended June 30,
Three Months Ended June 30,
2017
2016
2017
2016
(Loss) Income from continuing operations
$
(651,924
)
$
144,336
$
557,466
$
(422,036
)
Loss from discontinued operations
-
(732,979
)
-
(263,736
)
Net (loss) income
(651,924
)
(588,643
)
557,466
(685,772
)
Weighted average shares outstanding – basic
27,429,885
24,622,887
27,513,733
24,911,803
Dilutive unvested restricted stock
-
-
3,169
-
Weighted average shares outstanding – diluted
27,429,885
24,622,887
27,516,902
24,911,803
(Loss) income from continuing operations per share
– basic
$
(0.02
)
$
0.01
$
0.02
$
(0.02
)
– diluted
$
(0.02
)
$
0.01
$
0.02
$
(0.02
)
Loss from discontinued operations per share
– basic
$
-
$
(0.03
)
$
-
$
(0.01
)
– diluted
$
-
$
(0.03
)
$
-
$
(0.01
)
Net (loss) income per share
– basic
$
(0.02
)
$
(0.02
)
$
0.02
$
(0.03
)
– diluted
$
(0.02
)
$
(0.02
)
$
0.02
$
(0.03
)

* Including 698,271 and 404,367 shares that were granted and vested but not yet issued for the six months ended June 30, 2017 and 2016, respectively.

For the six and three months ended June 30, 2017 and 2016, 858,334 and 2,050,001 shares purchasable under warrants were excluded from EPS, respectively, as their effects were anti-dilutive. For the six month periods ended June 30, 2017 and 2016, and the three month period ended June 30, 2016, the unvested restricted stock were anti-dilutive.


Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts 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.

A customer accounted for 18% and 13% of the Company’s sales for the six months ended June 30, 2017 and 2016, respectively. A customer accounted for 22% and 12% of the Company’s sales for the three months ended June 30, 2017 and 2016, respectively. Accounts receivable from this customer were $7,347,112 and $5,216,213 as of June 30, 2017 and December 31, 2016, respectively.

The Company purchased its products from four major vendors both during the six and three months ended June 30, 2017, accounting for a total of 92% (36%, 25%, 18% and 13% for each) and 90% (37%, 23%, 17%, and 13% for each) of the Company’s purchases, respectively. Advances made and accounts payable to these vendors were $23,024,991 and $0 as of June 30, 2017, respectively. Advances made and accounts payable to these vendors were $13,463,715 and $446,428 as of December 31, 2016, respectively.

The Company purchased its products from four major vendors both during the six and three months ended June 30, 2016, accounting for a total of 60% (22%, 16%, 12% and 10% for each) and 85% (25%, 20%, 20%, and 20% for each) of the Company’s purchases, respectively.

Prior to its divestment of its PRC subsidiaries, the operations of the Company were located principally in China and the U.S. Accordingly, the Company’s Chinese subsidiaries’ business, financial condition and results of operations were, from time to time, influenced by the political, economic and legal environments in China, as well as by the general state of the PRC economy.

Statement of Cash Flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations is calculated based upon local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Foreign Currency Translation and Transactions

The consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Nova Macao, Bright Swallow and Diamond Bar.

The functional currency of Nova Dongguan, Nova Museum and Ding Nuo is RMB. The functional currencies of the Company’s foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date, except for the equity account using the historical exchange rate, and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded in the consolidated statements of income and comprehensive income, captioned “Accumulated other comprehensive income.” Gains and losses resulting from transactions denominated in foreign currencies are included in “Other income (expenses)” in the consolidated statements of income and comprehensive income. There have been no significant fluctuations in the exchange rate for the conversion of RMB to USD after the balance sheet date.

The RMB to USD exchange rates in effect as of December 31, 2016, was RMB6.4612 = USD$1.00. The weighted-average RMB to USD exchange rates in effect for the six months ended June 30, 2016 was RMB6.5303= USD$1.00. The exchange rates used in translation from RMB to USD were published by the People’s Bank of the People’s Republic of China.

Comprehensive Income

The Company follows FASB ASC 220 “Reporting Comprehensive Income.” Comprehensive income is comprised of net income and all changes to the consolidated statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the six and three months ended June 30, 2016 included net income and foreign currency translation adjustments.


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 US, Bright Swallow is a furniture distributor based in Hong Kong focusing on customers in Canada, and Nova Macao is a furniture distributor based in Macao focusing on international customers. They are all operated under the same senior management of the Company, and management views the operations of Diamond Bar, Bright Swallow and Nova Macao as a whole for making business decisions

Prior to the disposal of Nova Dongguan, the Company’s furniture products sold through Nova Dongguan, Nova Macao, and Ding Nuo were created with similar production processes, in the same facilities, under the same regulatory environment and sold to customers using similar distribution systems. Although Nova Museum was principally engaged in the dissemination of the culture and history of furniture in China, it also served a function of promoting and marketing the Company’s image and products by providing a platform and channel for consumers to be exposed to the Company and its products, it was operated under the same management with the same resources and in the same location as Nova Dongguan, and it was an additive and supplemental unit to the Company’s main operations, the design and sale of furniture.

Until the disposal of Nova Dongguan and its subsidiaries, all of the Company’s long-lived assets for production were located at its facilities in Dongguan, Guangdong Province, China, and operated within the same environmental, safety and quality regulations governing furniture manufacturers. After the disposal of Nova Dongguan and its subsidiaries, all of the Company’s long-lived assets are mainly property, plant and equipment located in the United States for administrative purposes.

Net sales to customers by geographic area are determined by reference to the physical locations of the Company’s customers. For example, if the products are delivered to a customer in the US, the sales are recorded as generated in the US; if the customer directs the Company to ship its products to China, the sales are recorded as sold in China.

New Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.

In May 2014, the FASB issued No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients. These ASUs clarify the implementation guidance on a few narrow areas and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect that these ASUs will have on its consolidated financial statements and related disclosures.


On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes amendments to accounting for income taxes at settlement, forfeitures, and net settlements to cover withholding taxes. The amendments in ASU 2016-09 are effective for public companies for fiscal years beginning after December 31, 2016, and interim periods within those annual periods. The Company adopted this new guidance on January 1, 2017 and this standard does not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), 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. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied using a retrospective transition method to each period presented. The Company does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or disposals of assets or businesses.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

Note 3 - Discontinued Operations

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 Dongguan, a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”), which such value was primarily derived from Nova Dongguan and Nova Donguan’s wholly owned subsidiary, Nova Museum, and 90.97% owned subsidiary, Ding Nuo. Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan. The purchase price of $8,500,000 was fully paid on October 6, 2016.


On November 10, 2016, Nova Furniture entered into a Trademark Assignment Agreement with Kuka Design BVI.  Pursuant to the terms of the Trademark Assignment Agreement, Nova Furniture agreed to assign to Kuka Design BVI its full right to, and title in, the NOVA trademark in China for $6,000,000 (the “Assignment Fee”).  Kuka Design BVI was to pay the Assignment Fee in two installments: $1,000,000 on or before November 30, 2016, and $5,000,000 on or before December 31, 2016.  As the result of the assignment of NOVA trademark in China, Nova Furniture and its affiliated companies, including Nova Macao, have ceased to use the NOVA trademark and brand in their business in China. A portion of the Assignment Fee in the amount of $4,750,000 was received in 2016, and the remaining balance of $1,250,000 was fully paid in January 2017.

As a result, the operations of Nova Dongguan, Nova Museum and Ding Nuo are now accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. The following table presents the components of discontinued operations reported in the consolidated statements of operations:

Six Months ended June 30,
Three Months Ended June 30
2017
2016
2017
2016
Sales from external customers
$
-
$
8,842,212
$
-
$
4,227,132
Intrasegment sales
-
397,399
-
279,434
Cost of goods sold
-
(7,656,817
)
-
(3,579,408
)
Operating expenses
-
(1,772,160
)
-
(946,073
)
Loss before income taxes
-
(669,942
)
-
(308,891
)
Income tax (expense) benefit
-
(63,037
)
-
45,155
Loss from discontinued operations
$
-
$
(732,979
)
$
-
$
(263,736
)

Note 4 - Inventories

The inventories as of June 30, 2017 and December 31, 2016 totaled $2,013,003 and $2,781,123, respectively, and were all finished goods.
Note 5 - Plant, Property and Equipment, Net

As of June 30, 2017 and December 31, 2016, plant, property and equipment consisted of the following:

June 30, 2017
December 31, 2016
Computer and office equipment
$
276,867
$
274,735
Decoration and renovation
110,015
110,015
Less: accumulated depreciation
(233,617
)
(213,474
)
$
153,265
$
171,276

Depreciation expense from continuing operations was $20,143 and $22,089 for the six months ended June 30, 2017 and 2016, respectively; and $10,027 and $10,405 for the three months ended June 30, 2017 and 2016, respectively.  Depreciation expense from discontinued operations was $679,803 and $338,845 for the six and three months ended June 30, 2016, respectively.

Note 6 - Intangible Assets

The Company acquired a customer relationship with a fair value of $50,000 on August 31, 2011, as part of its acquisition of Diamond Bar. Concurrently with its acquisition of Diamond Bar, the Company entered into a trademark purchase and assignment agreement for all rights, title and interest in two trademarks (Diamond Sofa and Diamond Furniture) for $200,000 paid in full at the closing. Amortization of said customer relationship and the trademarks is provided using the straight-line method and estimated lives were 5 years for each.

The Company acquired a customer relationship with a fair value of $6,100,559 on April 24, 2013, as part of its acquisition of Bright Swallow. Amortization of said customer relationship is provided using the straight-line method and estimated life was 15 years.


The Company’s eCommerce platform is a website through which customers are able to browse and place orders online for the Company’s products. For the downloadable mobile application, customers are able to download the application onto their own mobile devices to browse the Company’s product offerings. The Nova sales kit application is used on mobile devices to enable the Company’s sales representatives to display the Company’s products and inventory to customers. The total cost associated with the development, programming, design and roll-out of the Company’s eCommerce platform, downloadable mobile application, and Nova sales kit application is approximately $1.20 million. The Company’s eCommerce platform, downloadable mobile application, and Nova sales-kit application were completed and put into operation in 2015. These intangible assets are amortized using the straight-line method with an original estimated life of 10 years for each and are revised to 1 year in the quarter ended March 31, 2017.  The effect of the change in estimate for on a prospective basis.

Intangible assets consisted of the following as of June 30, 2017 and December 31, 2016:

June 30, 2017
December 31, 2016
eCommerce platform
$
1,208,200
$
1,208,200
Customer relationship
6,150,559
6,150,559
Trademarks
200,000
200,000
Less: accumulated amortization
(2,614,143
)
(1,872,136
)
$
4,944,616
$
5,686,623

Amortization of intangible assets from continuing operations was $742,007 and $288,762 for the six months ended June 30, 2017 and 2016, respectively; and $371,004 and $144,381 for the three months ended June 30, 2017 and 2016, respectively. Amortization of intangible assets from discontinued operations was $18,860 and $9,505 for the six and three months ended June 30, 2016, respectively.

Estimated amortization expense relating to the existing intangible assets with finite lives for each of the next five years is as follows:

12 months ending June 30,
2018
$
945,360
2019
406,704
2020
406,704
2021
406,704
2022
406,704

Note 7 - Receivables from an Unrelated Party, Prepaid Expenses and Other Receivables

(a)
On September 22, 2016, in order to promote the Company’s image and extend its customer reach, the Company entered into a memorandum of understating with an unrelated party (“MOU”) whereby the Company agreed to pay a total fee of $16,000,000 for a period of twelve months, commencing on December 31, 2016, to finance the establishment and promotion of the unrelated party’s Academic E-commerce platform and integrated training center in Hong Kong (the “Platform”). As of June 30, 2017 and December 31, 2016, the Company prepaid $0 and $7,000,000 to the unrelated party, respectively.
However, having considered the recent market situation and the status of the establishment and promotion of the Platform, the Company does not wish to continue to finance the promotion of the Platform. On March 20, 2017, the Company and the unrelated party terminated the MOU and released both parties from all the obligations and liabilities under the MOU. The Company agreed to bear the costs of $800,000 incurred by the unrelated party on the Platform, which were charged as expenses in the first quarter of fiscal 2017. The Company collected a total of approximately $13 million, which was prepaid previously, as of June 30, 2017, and no more balance was owed by the unrelated party.

(b) Prepaid Expenses and Other Receivables consisted of the following at June 30, 2017 and December 31, 2016:

June 30, 2017
December 31, 2016
Prepaid expenses
$
670,859
$
573,005
Other receivables
40,070
69,886
Total
$
710,929
$
642,891


On March 23, 2017, the Company made a short-term advance of $2,000,000 to an unrelated party. The advance is unsecured and bears interest of 5% per annum. The unrelated party agreed to pay the whole amount of $2,000,000 back to the Company by May 31, 2017. During the three months ended June 30, 2017, the Company collected full payment and interest of $26,575 from the unrelated party.

Note 8 - Accrued Liabilities and Other Payables

Accrued liabilities and other payables consisted of the following as of June 30, 2017 and December 31, 2016:

June 30, 2017
December 31, 2016
Other payables
$
54,410
$
47,790
Salary payable
42,342
30,207
Financed insurance premiums
200,294
66,314
Accrued rents
100,383
102,269
Accrued commission
493,048
494,108
Accrued expenses, others
76,564
40,272
Total
$
967,041
$
780,960

As of June 30, 2017 and December 31, 2016, other accrued expenses mainly included legal and professional fees, transportation expenses and utilities.  Other payables represented other tax payable and meal expenses.

Note 9 - Lines of Credit

Diamond Bar entered into an agreement with a bank in California for a line of credit of up to $5,000,000 with annual interest of 4.25% and maturity on June 1, 2015. On June 8, 2015, the bank extended and modified the terms of the loan agreement to extend the line of credit up to a maximum of $6,000,000 until July 31, 2015 and $5,000,000 thereafter with an annual interest rate of 4.25% and maturity on September 1, 2015 (the term of which the bank allowed to extend until the renewal described in the following sentence while the bank conducted its own audit associated therewith). On September 28, 2015, Diamond Bar extended the line of credit up to a maximum of $6,000,000 with annual interest of 3.75% (4% from December 17, 2015) and maturity on June 1, 2017. On January 20, 2016, Diamond Bar increased the line of credit up to a maximum of $8,000,000 with annual interest of 4%.  On June 22, 2017, Diamond Bar extended the line of credit to maturity on September 1, 2017. The annual interest was 4.25% as of June 30, 2017. The line of credit is secured by all of the assets of Diamond Bar and is guaranteed by Nova LifeStyle . As of June 30, 2017 and December 31, 2016, Diamond Bar had $4,307,073 and $6,129,841 outstanding on the line of credit, respectively.  During the six months ended June 30, 2017 and 2016, the Company recorded interest expense of $104,925 and $106,254, respectively; and $64,347 and $53,548 for the three months ended June 30, 2017 and 2016, respectively.  As of June 30, 2017, Diamond Bar had $3,692,927 available for borrowing without violating any covenants.

The Diamond Bar loan has the following covenants: (i) maintain a minimum tangible net worth of not less than $10 million; (ii) maintain a ratio of debt to tangible net worth not in excess of 2.500 to 1.000; (iii) the pre-tax income must be not less than 1.000% of total revenue quarterly; and (iv) maintain a current ratio in excess of 1.250 to 1.000. As of June 30, 2017, Diamond Bar was in compliance with the stated covenants.
On January 22, 2015, Nova Macao renewed a line of credit, with an annual interest rate of 4.25% and principal of up to $6,500,000, with a commercial bank in Hong Kong to extend the maturity date to January 29, 2016. On February 16, 2016, Nova Macao extended the maturity date of line of credit to January 31, 2017, with an annual interest rate of 4% and principal of up to $6,500,000. The loan requires monthly payment of interest and that the interest rate will be adjusted annually. The loan was secured by assignment of Sinosure (China Export and Credit Insurance Company) credit insurance and is guaranteed by Nova LifeStyle and Diamond Bar. The Company did not extend the line of credit and paid it off in February 2017. As of June 30, 2017 and December 31, 2016, Nova Macao had $0 and $1,848,000 outstanding on the line of credit, respectively. During the six months ended June 30, 2017 and 2016, Nova Macao paid interest of $13,828 and $38,414, respectively; and $0 and $18,686 for the three months ended June 30, 2017 and 2016, respectively.


Note 10 - 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 our Chief Executive Officer and Chairman of the Board. The lease is to be renewed and has been renewed each year since 2011. On March 16, 2017, the Company renewed the lease for an additional one year term. The lease was $32,916 for one year and only for use during two furniture exhibitions to be held between April 1, 2017 and March 31, 2018. During the six and three months ended June 30, 2017, the Company paid rental amounts of $16,458 and $0 that are included in selling expenses from continuing operations.

During the six and three months ended June 30, 2016, the Company paid rental amounts of $16,458 that are included in selling expenses from continuing operations.
Note 11 - Stockholders’ Equity

Warrants

Following is a summary of the warrant activity for the six months ended June 30, 2017:

Number of
Warrants
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term in Years
Outstanding at January 1, 2017
858,334
2.71
3.92
Exercisable at January 1, 2017
858,334
2.71
3.92
Granted
-
-
-
Exercised / surrendered
-
-
-
Expired
-
-
-
Outstanding at June 30, 2017
858,334
2.71
3.42
Exercisable at June 30, 2017
858,334
2.71
3.42

Shares and Warrants issued to Consultants

On December 1, 2014, the Company entered into a consulting agreement with a consulting firm for management consulting services effective on December 1, 2014. The Company agreed to issue 60,000 shares of the Company’s common stock to the firm for three years of consulting services. The shares will be issued according to the following vesting schedule set forth as follows: The initial 10,000 shares were required to be issued within 30 days upon signing of the agreement; for the remaining 50,000 shares, the Company issued to the consultant 10,000 shares of common stock on or before each of June 1, 2015, December 1, 2015, June 1, 2016, December 1, 2016 and June 1, 2017. The Company or the consultant may terminate the agreement at any time by 90 days’ written notice to the other party. The fair value of the 60,000 shares was $224,400, which was calculated based on the stock price of $3.74 per share on December 1, 2014 and will be amortized over the service term. During each of the six-month and three-month periods ended June 30, 2017 and 2016, the Company amortized $37,400 and $18,700 as consulting expenses, respectively.

On March 1, 2015, the Company entered into a marketing agreement with a consultant for marketing and product promotion services effective on March 1, 2015. The Company agreed to grant the consultant $100,000 worth of shares of the Company’s common stock for 12 months of consulting services starting on March 1, 2015. The shares vested immediately on March 1, 2015. The share price was calculated as the average closing price per share for ten trading days immediately prior to the execution of the agreement and was amortized over the service term. On March 9, 2015, the Company issued 38,745 shares at an average price of $2.581 per share to the consultant. During the six months ended June 30, 2017 and 2016, the Company amortized $0 and $16,667 as consulting expenses, respectively; and $0 for each of the three month periods ended June 30, 2017 and 2016.

On September 14, 2015, the Company entered into a business marketing advisory agreement with a consultant for marketing and general consulting services effective on August 15, 2015. The Company agreed to pay the consultant a monthly fee of $5,000 and also granted 18,348 shares of the Company’s common stock to the consultant for 12 months of services starting on August 15, 2015. Twenty-five percent (25%) of those shares vested on November 15, 2015, 25% on February 15, 2016, 25% on May 15, 2016 and the remaining 25% vested on August 15, 2016. The fair value of the 18,348 shares was $45,870, which was calculated based on the stock price of $2.50 per share on August 15, 2015 and will be amortized over the service term. During the six months ended June 30, 2017 and 2016, the Company amortized $0 and $22,935 as consulting expenses, respectively; and $0 and $11,468 for the three months ended June 30, 2017 and 2016, respectively.


On February 1, 2016, the Company entered into a marketing agreement with a consultant for marketing development strategies and consulting services for 15 months. The Company agreed to grant the consultant 10,000 unregistered restricted shares of the Company’s common stock per month, for a total commitment of 150,000 shares of common stock. The fair value of the 150,000 shares was $204,000, which was calculated based on the stock price of $1.36 per share on February 1, 2016, the date the agreement was executed, and will be amortized over the service term. During the six months ended June 30, 2017 and 2016, the Company amortized $54,400 and $68,000 as consulting expenses, respectively; and $13,600 and $40,800 for the three months ended June 30, 2017 and 2016 as consulting expenses, respectively.

On February 1, 2016, the Company entered into an agreement with a consultant for E-Commerce consulting service with a term of 24 months. The Company agreed to grant the consultant 10,000 shares of the Company’s common stock per month, for a total commitment of 240,000 shares. Twelve and half percent (12.5%) of those shares vested or will vest on April 30, 2016, 12.5% on July 30, 2016, 12.5% on October 31, 2016, 12.5% on January 31, 2017, 12.5% on April 30, 2017, 12.5% on July 30, 2017, 12.5% on October 31, 2017, and the remaining 12.5% on January 31, 2018. The fair value of the 240,000 shares was $326,400, which was calculated based on the stock price of $1.36 per share on February 1, 2016, the date the agreement was executed, and will be amortized over the service term. During the six months ended June 30, 2017 and 2016, the Company amortized $81,600 and $68,000 as consulting expenses, respectively; and $40,800 for the three months ended June 30, 2017 and 2016.

On February 1, 2016, the Company entered into a consulting agreement with a consultant for planning, coordinating and strategy implementation services for a term of 6 months. The Company agreed to grant the consultant $10,000 worth of shares of the Company’s common stock per month. During each of the six month periods ended June 30, 2017 and 2016, 83,386 shares vested, based on the stock prices as of the end of each month commencing February 2016 and concluding September 2016. During the six months ended June 30, 2017 and 2016, the Company amortized $0 and $50,000 as consulting expense, respectively; and $0 and $30,000 for the three month ended June 30, 2017 and 2016, respectively.
On November 15, 2016, the Company entered into a consulting and strategy service agreement with a consultant for marketing and general consulting services effective on November 14, 2016. The Company agreed to grant 100,000 shares of the Company’s common stock to the consultant for 12 months of services starting on November 14, 2016. The shares would be issued pursuant to Nova LifeStyle, Inc. 2014 Omnibus Long-Term Incentive Plan (the “Plan”) approved by the Board of Directors (“Board”) of the Company on May 13, 2014 and ratified at the annual shareholder meeting on June 30, 2014. The Plan was registered under Form S-8 on July 30, 2014. Twenty-five percent (25%) of those shares vested on December 15, 2016, 25% on February 15, 2017, 25% on May 15, 2017, and the remaining 25% will vest on August 15, 2017. The fair value of the 100,000 shares was $294,000, which was calculated based on the stock price of $2.94 per share on November 15, 2016 and will be amortized over the service term. During the six and three months ended June 30, 2017, the Company amortized $145,792 and $73,299 as consulting expenses, respectively.

On November 15, 2016, the Company entered into a consulting agreement with a consultant for business development and financial advisory service for a term of 12 months. The Company agreed to grant the consultant 100,000 shares of the Company’s common stock. The shares would be issued pursuant to Nova LifeStyle, Inc. 2014 Omnibus Long-Term Incentive Plan (the “Plan”) approved by the Board of Directors (“Board”) of the Company on May 13, 2014 and ratified at the annual shareholder meeting on June 30, 2014. The Plan was registered under Form S-8 on July 30, 2014. The fair value of the 100,000 shares was $294,000, which was calculated based on the stock price of $2.94 per share on November 15, 2016 and will amortized over the service term. During the six and three months ended June 30, 2017, the Company amortized $147,000 and $73,500 as consulting expense, respectively.

On November 15, 2016, the Company entered into a consulting agreement with a consultant for business advisory service for a term of 12 months. The Company agreed to compensate the consultant a one-time amount of $20,000 worth of shares of the Company’s common stock based on the price per share on November 15, 2016. The Company also granted the consultant $15,000 worth of shares of the Company’s common stock per month starting from December 1, 2016 for 12 months. The shares would be issued pursuant to Nova LifeStyle, Inc. 2014 Omnibus Long-Term Incentive Plan (the “Plan”) approved by the Board of Directors (“Board”) of the Company on May 13, 2014 and ratified at the annual shareholder meeting on June 30, 2014. The Plan was registered under Form S-8 on July 30, 2014. During the six and three months ended June 30, 2017, the Company amortized $100,000 and $50,000 as consulting expense, respectively.

On June 30, 2017, the Company entered into a consulting agreement with a consultant for business advisory service for a term of 12 months. The Company agreed to compensate the consultant a one-time amount of $10,000 worth of shares of the Company’s common stock based on the price per share on June 30, 2017. The Company also granted the consultant $10,000 worth of shares of the Company’s common stock per month starting from July 1, 2017 for a period of 12 months. The shares would be issued pursuant to Nova LifeStyle, Inc. 2014 Omnibus Long-Term Incentive Plan (the “Plan”) approved by the Board of Directors (“Board”) of the Company on May 13, 2014 and ratified at the annual shareholder meeting on June 30, 2014. The Plan was registered under Form S-8 on July 30, 2014.


Shares and Warrants issued through Private Placement

Private Placement on May 28, 2015

On May 28, 2015, the Company entered into a Securities Purchase Agreement with certain purchasers (the “Purchasers”) pursuant to which the Company offered to the Purchasers, in a registered direct offering, an aggregate of 2,970,509 shares of common stock, par value $0.001 per share. Of these, 2,000,001 shares were sold to the Purchasers at a negotiated purchase price of $2.00 per share, for aggregate gross proceeds to the Company of $4,000,002, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. In accordance with the terms of the Purchase Agreement entered on April 14, 2014, the outstanding 2014 Series A Warrants were exchanged for 660,030 shares of common stock, and the outstanding 2014 Series C Warrants were exchanged for 310,478 shares of common stock.
In a concurrent private placement, the Company also sold to the Purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering, pursuant to that certain common stock Purchase Warrant, by and between the Company and each Purchaser (the “2015 Warrants”). The 2015 Warrants became exercisable beginning on the six month anniversary of the date of issuance (the “Initial Exercise Date”) at an exercise price of $2.71 per share and will expire on the five year anniversary of the Initial Exercise Date. The purchase price of one share of the Company’s common stock under the 2015 Warrants is equal to the exercise price.

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 2015 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 years, volatility of 107%, risk-free interest rate of 1.55% 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 at grant date was $3,147,530.

Shares Issued to Independent Directors

In March 2015, the Company entered into restricted stock award agreements under the 2014 Omnibus Long-Term Incentive Plan with three independent directors of the Board. The Company agreed to grant 12,195 shares of the Company’s common stock to each of these independent directors with a grant date of March 24, 2015. The restricted period lapses as to 25% of the restricted stock on September 30, 2015, December 31, 2015, March 31, 2016 and September 30, 2016, subject to the director remaining in the continuous service of the Company or its affiliates on each applicable vesting date. The fair value of these shares was $119,999, which was calculated based on the stock price of $3.28 per share on March 24, 2015. During the six and three months ended June 30, 2016, the Company amortized $0 and $26,959 as directors’ stock compensation expenses, respectively.

In May 2015, the Company entered into a restricted stock award agreement under the 2014 Omnibus Long-Term Incentive Plan with a new independent director. The Company agreed to grant 12,195 shares of the Company’s common stock to the new independent director with a grant date of May 19, 2015. The restricted period lapsed as to 25% of the restricted stock on September 30, 2015, December 31, 2015, March 31, 2016 and September 30, 2016, subject to the director remaining in the continuous service of the Company or its affiliates on each applicable vesting date. The fair value of these shares was $38,292, which was calculated based on the stock price of $3.14 per share on May 19, 2015. During the six and three months ended June 30, 2016, the Company amortized $0 and $4,826 as directors’ stock compensation expenses, respectively.

On August 9, 2016, the Board approved a restricted stock award agreement under the 2014 Omnibus Long-Term Incentive Plan with four independent directors. The Company agreed to grant $40,000 worth of stocks to each of its four independent directors. The restricted period lapses as to 25% of the restricted stock granted vested on September 30, 2016 based on the closing price of common stock on Nasdaq as of August 9, 2016, 25% of the restricted stock granted vested on December 31, 2016 based on the closing price of common stock on Nasdaq as of September 30, 2016, 25% of the restricted stock granted vested on March 31, 2017 based on the closing price of common stock on Nasdaq as of December 31, 2016, and 25% of the restricted stock granted vested on June 30, 2017 based on the closing price of common stock on Nasdaq as of March 31, 2017. During the six and three months ended June 30, 2017, the Company amortized $79,342 and $39,890 as directors’ stock compensation expenses, respectively.

On April 10, 2017, the Company entered into restricted stock award agreements under 2014 Omnibus Long-Term Incentive Plan with a new independent director of the Board. The Company agreed to grant $20,000 worth of stock to the independent director with a grant date on April 10, 2017. The restricted period lapses as of 50% of the restricted stock granted vested on April 10, 2017 based on the closing price of common stock on Nasdaq as of April 10, 2017, and 50% of the restricted stock granted vested on June 30, 2017 based on the closing price of common stock on Nasdaq as of June 30, 2017. During the six and three months ended June 30, 2017, the Company amortized $8,658 as directors’ stock compensation expenses.

Shares Issued to Employees and Service Providers

On May 18, 2016, the Company entered into agreements with three designers for product design services for a term of 24 months. The Company agreed to grant each designer 240,000 shares of the Company’s common stock. Twenty five percent (25%) of those shares vested or will vest on May 31, 2016, 25% on December 18, 2016, 25% on June 18, 2017 and the remaining 25% on December 18, 2017. The fair value of these shares was $388,800, which was calculated based on the stock price of $0.54 per share on May 18, 2016, the date the agreement was executed, and will be amortized over the service term. During the six months ended June 30, 2017 and 2016, the Company amortized $96,401 and $23,495 as stock compensation expenses, respectively; and $48,467 and $23,435 for the three months ended June 30, 2017 and 2016, respectively.
On November 14, 2016, the Company entered into an employment agreement with an executive for one year. The Company agreed to grant an award of 30,000 restricted Stock Units to the executive pursuant to the Company’s 2014 Omnibus Long-Term Incentive Plan. The fair value of these shares was $92,100, which was calculated based on the stock price of $3.07 per share on November 11, 2016, the date the awards were determined by the Compensation Committee of the Board. Twenty-five percent (25%) of those shares vested on December 30, 2016, 25% on March 31, 2017, 25% on June 30, 2017 and the remaining 25% vest on September 30, 2017. During the six and three months ended June 30, 2017, the Company amortized $45,672 and $22,962 as stock compensation, respectively.

On November 15, 2016, the Company entered into an agreement with a designer for furniture design services effective on November 15, 2016 for 1 year. The Company agreed to grant the designer 100,000 shares of the Company’s common stock. The fair value of the 100,000 shares was $294,000, which was calculated based on the stock price of $2.94 per share on November 15, 2016 and will be amortized over the service term. Twenty-five percent (25%) of those shares vested on February 15, 2017, 25% on May 15, 2017, 25% will vest on August 15, 2017 and the remaining 25% will vest on November 15, 2017. During the six and three months ended June 30, 2017, the Company amortized $147,000 and $73,500 as stock compensation, respectively.

Note 12 - Statutory Reserves

As a U.S. holding company, the Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiary, Nova Macao, only out of the subsidiary’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Nova Macao. Pursuant to the corporate laws of the PRC and Macao, including the PRC Regulations on Enterprises with Foreign Investment, Nova Macao is required to maintain a statutory reserve by appropriating from after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings. As a result of the PRC laws and regulations described below that require such annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as a general statutory reserve fund, Nova Macao is restricted in its ability to transfer a portion of its net assets to the Company as a dividend.

Surplus Reserve Fund

Prior to the Company’s divestment of Nova Dongguan and Ding Nuo, such subsidiaries were required to transfer 10% of net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the subsidiary’s registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholdings or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issuance is not less than 25% of the registered capital.

At June 30, 2017 and December 31, 2016, Nova Macao had surplus reserves of $6,241, representing 50% of its registered capital.

Common Welfare Fund

The common welfare fund is a voluntary fund to which Nova Macao can elect to transfer 5% to 10% of its net income. This fund can only be utilized on capital items for the collective benefit of the subsidiary’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. Nova Macao does not participate in this voluntary fund.


Note 13 - Geographical Sales

Geographical distribution of sales consisted of the following for the six and three months ended June 30, 2017 and 2016:

Six Months Ended June 30,
Three Months Ended June 30,
Geographical Areas
2017
2016
2017
2016
North America
$
25,257,436
$
30,010,042
$
12,727,804
$
12,786,666
Europe
3,456,045
7,806,839
1,193,180
3,907,954
Australia
6,697,694
2,089,435
4,248,240
1,315,280
Asia*
1,691,625
1,848,100
876,554
1,395,321
Hong Kong
461,943
296,695
461,943
277,012
Other countries
26,046
158,943
26,046
58,814
$
37,590,789
$
42,210,054
$
19,533,767
$
19,741,047

* excluding Hong Kong
Note 14 - Commitments and Contingencies

Lease Commitments

On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provides an option to extend the term for an additional six years. The monthly rental payment is $42,000 with an annual 3% increase.  The rent is recorded on a straight-line basis over the term of the lease.

On January 7, 2014, the Company entered into a sublease agreement with Diamond Bar for warehouse space with a five-year term commencing on November 1, 2013 and expiring on October 31, 2018. The Company subleased a portion of its warehouse space to one of its customers with a one-year term commencing on December 1, 2013 and expiring on November 30, 2014. The Company has successively renewed the lease agreement for one-year terms, with the current renewal expiring on October 31, 2017.  The sublease income was recorded against the rental expense. During the six months ended June 30, 2017 and 2016, the Company recorded $33,900 and $40,154 sublease income, respectively; and $17,450 and $20,077 for the three months ended June 30, 2017 and 2016, respectively.

On September 19, 2013, Bright Swallow entered into a lease agreement for office space in Hong Kong with a two year term, commencing on October 1, 2013 and expiring on September 30, 2015.  On September 15, 2015, Bright Swallow renewed the lease for another two year term, commencing on October 1, 2015 and expiring on September 30, 2017. The monthly rental payment is 20,000 Hong Kong Dollars ($2,578).

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 on monthly or annual terms.

Total rental expense from continuing operations for the six months ended June 30, 2017 and 2016 was $372,754 and $365,852, respectively; and $194,585 and $207,754 for the three months ended June 30, 2017 and 2016. The rental expense is recorded on a straight-line basis over the term of the lease.

The total minimum future lease payments are as follows:
12 Months Ending June 30,
Amount
2018
$
569,491
2019
189,085
2020
-
2021
-
2022
-
Thereafter
-
Total
$
758,576



Employment Agreements

On May 3, 2013, the Company entered into an amended and restated employment agreement with Thanh H. Lam to serve as the Company’s president for a five-year term. The agreement provides for an annual salary of $80,000, a grant of 200,000 shares of the Company’s common stock and an annual bonus at the sole discretion of the Board. The 200,000 shares to be issued to Ms. Lam are subject to the terms of a stock award agreement. The first 50,000 shares of common stock were vested immediately, and the remaining shares vest at 50,000 shares per year for three years on each anniversary of the effective date of the stock award agreement. The fair value of the shares was based on the stock price of $3.82 per share on May 3, 2013. During the six months ended June 30, 2017 and 2016, the Company recorded $0 and $64,626, as stock-based compensation to Ms. Lam, respectively. During the three months ended June 30, 2017 and 2016, the Company recorded $0 and $16,876, as stock compensation to Ms. Lam, respectively. On July 24, 2017, the Company and Ms. Lam executed an amendment to her employment to increase her annual salary to $100,000.
On March 21, 2016, the Company granted Restricted Stock Units to Ya Ming (Jeffrey) Wong (the Company’s former CEO), Yuen Ching (Sammy) Ho, the Company’s CFO, and Thanh H. Lam, the Company’s President. Each of them will receive a grant of 100,000 Restricted Stock Units (“RSU”). The fair value of the 300,000 shares of RSU was $360,000, which was calculated based on the stock price of $1.20 per share on March 21, 2016. The RSU grants have fully vested. During the six months ended June 30, 2017 and 2016, the Company recorded $0 and $180,000, as stock-based compensation to the officers, respectively. During the three months ended June 30, 2017 and 2016, the Company recorded $0 and $90,000, as stock-based compensation to the officers, respectively.
On March 25, 2016, the Company entered into one-year employment agreements, effective as of November 11, 2015, with Mr. Ya Ming (Jeffrey) Wong and Mr. Yuen Ching (Sammy) Ho to serve as the Company’s CEO and CFO, respectively. These agreements are in substantially the same form as the previous one-year employment agreements entered into on March 25, 2015 (which expired by their terms), and provide for annual salaries of $100,000 for Mr. Wong and $80,000 for Mr. Ho, and annual bonuses at the sole discretion of the Board of Directors. The employment agreements also reflect the RSU grants described in the immediately preceding paragraph. On October 3, 2016, Mr. Wong resigned his position as CEO, terminated his employment agreement, and forfeited 25,000 RSUs granted to him under such agreement.

Note 15 - Subsequent Events

The Company has evaluated all events that have occurred subsequent to June 30, 2017 through the issuance of the consolidated financial statements and the following subsequent event has been identified as requiring disclosure in this section.

On July 24, 2017, the Company and Thanh H. Lam entered into an amendment (the “Amendment”) to her amended and restated employment agreement, pursuant to which she serves as the Company’s Chief Executive Officer and President.  The Amendment increased the annual salary of Ms. Lam from $80,000 to $100,000.



CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” the negatives of such terms and other terms of similar meaning typically identify forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our 2016 Form 10-K. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 2016 Form 10-K. Unless the context otherwise requires, references in this report to “we,” “us,” “Nova,” “Nova Lifestyle” or the “Company” refer to Nova Lifestyle, Inc. and its subsidiaries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Declaration
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Form 10-K”). All references to the first quarter and first six months of 2017 and 2016 mean the three and six month periods ended June 30, 2017 and 2016.  In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the company’s business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2016 Form 10-K.
Overview
Nova LifeStyle, Inc. is a broad based distributor and retailer of contemporary styled residential furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and purchase fulfillment globally.  We monitor popular trending and work 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, 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 Diamond Sofa ( www.diamondsofa.com ), Colorful World, Giorgio Mobili, and Bright Swallow.

Our customers principally consist of distributors and retailers having specific geographic coverages that deploy middle to high end private label home furnishings having very little competitive overlap within our specific furnishings 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, thus allowing us to continually focus on building both same store sales growth as well as drive the expansion of 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 other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential furniture worldwide: Nova Macao, Bright Swallow, and Diamond Bar. Nova Macao was organized under the laws of Macao on May 20, 2006. Nova Macao is a wholly owned subsidiary of Nova Lifestyle.  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; the purchase price was $6.5 million in cash and was fully paid at the closing of the acquisition.


On October 24, 2013, Nova Dongguan incorporated Ding Nuo under the laws of the PRC and contributed capital of RMB 1 million ($162,994). Nova Dongguan made an additional capital contribution of RMB 0.1 million ($16,305) on November 27, 2013 through one of Nova Dongguan’s officers, Mr. Gu Xing Chang, who acted as the nominee shareholder of Ding Nuo.  As discussed below, the sale of three of the Company’s former subsidiaries, Nova Dongguan, Nova Dongguan Chinese Style Furniture Museum, and Ding Nuo, was consummated on October 25, 2016.

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., Canadian, European, Australian, Asian and Middle Eastern markets.

Discontinued Operations

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 Dongguan, a wholly owned subsidiary of the Seller, to the Buyer for a total of $8,500,000 (the “Transaction”), which such value was primarily derived from Nova Dongguan and Nova Donguan’s wholly owned subsidiary, Nova Museum, and 90.97% owned subsidiary, Ding Nuo. Upon consummation of the Transaction on October 25, 2016, the Buyer became the sole owner of Nova Dongguan.  The purchase price of $8,500,000 was fully paid on October 6, 2016.

On November 10, 2016, Nova Furniture (“Assignor”) entered into a Trademark Assignment Agreement with Kuka Design BVI (“Assignee”).  Pursuant to the terms of the Trademark Assignment Agreement, Assignor agreed to assign to the Assignee its full right to, and title in, the NOVA trademark in China for $6,000,000 (the “Assignment Fee”).  Assignee was to pay the Assignment Fee in two installments: $1,000,000 on or before November 30, 2016, and $5,000,000 on or before December 31, 2016. As of December 31, 2016, $4,750,000 had been received, and the remaining balance of $1,250,000 was fully paid in January 2017.

As a result, the operations of Nova Dongguan, Nova Museum and Ding Nuo are now accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented.

In previous reports filed with SEC, the Company erroneously reported that Nova Samoa, another wholly-owned subsidiary entered into the Agreement and the Trademark Assignment Agreement with Kuka Design BVI and sold all of the issued and outstanding shares of Nova Furniture to Kuka Design BVI and assigned the right to, and title in, the NOVA trademark in China to Kuka Design BVI.

Principal Factors Affecting Our Financial Performance

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) consumer acceptance of our new brands and product collections; and (iii) general economic conditions in the U.S., Canadian, European and other international markets. We believe most of our customers are willing to pay higher prices for our high quality and stylish products, timely delivery and strong production capacity, which we expect will allow us to maintain high gross profit margins for our products. We have diversified our products by acquiring the Diamond Sofa brand in the U.S. market and developing higher-margin products for the U.S. and international markets, and acquiring Bright Swallow for the Canadian market. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites also should allow us to maintain our high gross profit margins. The markets in North America, and particularly in Europe, remain challenging because such markets are experiencing a slower than anticipated recovery since the international financial crisis that began in 2008. However, we believe that discretionary purchases of furniture by middle to upper middle-income consumers, our target global consumer market, will increase along with expected growth in the worldwide furniture trade and the recovery of housing markets. Furthermore, we believe that our expansion of direct sales in the U.S. will have a positive impact on our net sales and net income, while helping to diversify our customer base and end consumer markets.
Critical Accounting Policies

Our condensed consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


Changes in Accounting Standards

Please refer to note 2 to our condensed consolidated financial statements, “Summary of Significant Accounting Policies – New Accounting Pronouncements,” for a discussion of relevant pronouncements.

Results of Operations

Comparison of three months Ended June 30, 2017 and 2016

The following table sets forth the results of our operations for the three months ended June 30, 2017 and 2016. Certain columns may not add due to rounding.

Three Months Ended June 30,
2017
2016
$
% of Sales
$
% of Sales
Net sales
19,533,767
19,741,047
Cost of sales
(16,061,903
)
(82
%)
(17,291,739
)
(88
%)
Gross profit
3,471,864
18
%
2,449,308
12
%
Operating expenses
(3,169,467
)
(16
%)
(2,642,228
)
(13
%)
Income (loss) from operations
302,397
2
%
(192,920
)
(1
%)
Other expenses, net
(62,915
)
-
%
(87,439
)
(-
%)
Income tax (benefit) expense
(317,984
)
(1
%)
141,677
1
%
(Loss) Income from continuing operations
557,466
3
%
(422,036
)
(2
%)
Loss from discontinued operations
-
-
(263,736
)
(1
%)
Net income (loss)
557,466
3
%
(685,772
)
(3
%)

Net Sales

Net sales for the three months ended June 30, 2017, were $19.53 million, a decrease of 1% from $19.74 million in the same period of 2016. This decrease in net sales resulted primarily from a 33% decrease in sales volume, which was partially offset by a 49% increase in average selling price. Our largest selling product categories in the three months ended June 30, 2017 were sofas, beds and coffee tables, which accounted for approximately 74%, 15% and 4% of sales, respectively. Our largest selling product categories in the three months ended June 30, 2016 were sofas, dining tables and beds which accounted for approximately 62%, 9% and 8% of sales, respectively.

The $0.21 million decrease in net sales in the three months ended June 30, 2017, compared to the same period of 2016, was mainly due to decreased sales to Europe and Asia.  Europe sales decreased by 69% to $1.19 million in the three months ended June 30, 2017, compared to $3.91 million in the same period of 2016, primarily as a result of the sluggish European economy. We anticipate increasing sales and marketing to the European market as the region’s economic outlook improves and following aggressive changes to our product mix and our sales and marketing strategies with the aim of diversifying sales. We sold high quality products while offering discounts during our promotion period, which lasted throughout the second and third quarter of 2016. We have continued to increase marketing efforts in the U.S. markets while maintaining our marketing efforts and existing customer base in Europe. Sales to Asia, excluding Hong Kong, were $0.88 million in the three months ended June 30, 2017, a decrease of 37% from $1.40 million in the same period of 2016, primarily due to the decreases of sales orders from customers in the region. Sales to Australia increased 223% to $4.25 million in the three months ended June 30, 2017, compared to $1.32 million in the same period of 2016, primarily due to the increases of sales orders from the satisfied customers who purchased more variety of our products.

Cost of Sales
Cost of sales consists primarily of finished goods purchased from other manufacturers. Total cost of sales decreased by 7% to $16.06 million in the three months ended June 30, 2017, compared to $17.29 million in the same period of 2016, due primarily to a decrease in net sales. Cost of sales as a percentage of sales decreased to 82% in the three months ended June 30, 2017, compared to 88% in the same period of 2016. The decrease in cost of sales as a percentage of sales resulted primarily from the decreased cost of products purchased from third-party manufacturers.

Gross Profit

Gross profit increased by 42% to $3.47 million in the three months ended June 30, 2017, compared to $2.45 million in the same period of 2016. Our gross profit margin increased to 18% in the three months ended June 30, 2017, compared to 12% in the same period of 2016. The increase in gross profit margin resulted primarily from decreased cost of sales as a percentage of net sales, which was mainly due to a decreased cost of products purchased from third parties.


Operating Expenses
Operating expenses consist of selling and general and administrative expenses and research and development expenses. Operating expenses were $3.17 million in the three months ended June 30, 2017, compared to $2.64 million in the same period of 2016. Selling expenses decreased by 2% to $0.71 million in the three months ended June 30, 2017, from $0.72 million in the same period of 2016, due primarily to decreased sales and marketing expense. General and administrative expense increased by 28% to $2.46 million in the three months ended June 30, 2017, from $1.92 million in the same period of 2016, primarily due to increases in bad debt expense of approximately $171,000, research and development of approximately $277,000 and amortization expense of approximately $226,000 on our intangible assets (see note 6 to our condensed consolidated financial statements), notwithstanding a decrease in stock-based compensation of approximately $180,000 to our officers, directors and consultants.

Other Expenses, Net

Other expenses, net was $62,915 in the three months ended June 30, 2017, compared with $87,439 in the same period of 2016, representing a decrease in other expense of $0.02 million. The decrease in other expense was due primarily to the decreased interest expense on our lines of credit to $64,347 in the three months ended June 30, 2017 from $72,234 in the same period of 2016, offset by an interest income of $26,575 on a short-term advance to an unrelated party.

Income Tax Benefit (Expense)

Income tax benefit was $317,984 in the three months ended June 30, 2017, compared with $141,677 of income tax expense in the same period of 2016.  The income tax benefit was mainly due to the deferred tax on our NOL carryforwards in the U.S., partially offset by accruing interest on prior year ASC 740-10 (FIN 48) reserves.

Loss from Discontinued Operations

The subsidiaries that were sold on October 25, 2016, Nova Dongguan, Nova Museum, and Ding Nuo, are reported as discontinued operations in our condensed consolidated financial statements. Loss from discontinued operations, net of tax, was approximately $0.26 million for the three months ended June 30, 2016.

Net (Loss) Income

As a result of the foregoing, our net income was $0.56 million in the three months ended June 30, 2017, compared with $0.69 million of net loss in the same period of 2016. Our net profit margin from continuing operations was 2.85% in the three months ended June 30, 2017, as compared with 2.14% of net loss margin in the same period of 2016.

Comparison of Six Months Ended June 30, 2017 and 2016

The following table sets forth the results of our operations for the six months ended June 30, 2017 and 2016. Certain columns may not add due to rounding.

Six Months Ended June 30,
2017
2016
$
% of Sales
$
% of Sales
Net sales
37,590,789
42,210,054
Cost of sales
(31,417,150
)
(84
%)
(36,155,603
)
(86
%)
Gross profit
6,173,639
16
%
6,054,451
14
%
Operating expenses
(7,170,145
)
(19
%)
(5,572,439
)
(13
%)
(Loss) Income from operations
(996,506
)
(3
%)
482,012
1
%
Other expenses, net
(143,421
)
-
%
(176,958
)
(1
%)
Income tax (benefit) expense
(488,003
)
(1
%)
160,718
1
%
(Loss) Income from continuing operations
(651,924
)
(2
%)
144,336
1
%
Loss from discontinued operations
-
-
(732,979
)
(2
%)
Net (loss) income
(651,924
)
(2
%)
(588,643
)
(1
%)


Net Sales

Net sales for the six months ended June 30, 2017, were $37.59 million, a decrease of 11% from $42.21 million in the same period of 2016; this decrease in net sales resulted primarily from a 40% decrease in sales volume, which was partially offset by a 50% increase in average selling price.   Our largest selling product categories in the six months ended June 30, 2017 were sofas, beds and coffee tables, which accounted for approximately 77%, 13% and 4% of sales, respectively, for the six months ended June 30, 2017. In the six months ended June 30, 2016, the largest three selling categories were sofas, dining tables and cabinets, which accounted for 61%, 9% and 6% of sales, respectively, for the six months ended June 30, 2016.

The $4.62 million decrease in net sales in the six months ended June 30, 2017, compared to the same period of 2016, includes a $4.75 million decrease in sales in North America and $4.35 million decrease in sales in Europe, partially offset by a $4.61 million increase in sales in Australia. North American sales decreased by 16% to $25.26 million in the six months ended June 30, 2017, compared to $30.01 million in the same period of 2016, as we aggressively changed our product mix and our sales and marketing strategies aimed at diversifying sales. We sold high quality products while offering discounts during our promotion period, which lasted throughout the second quarter of 2016. We have continued to increase marketing efforts in the U.S. markets while maintaining our marketing efforts and existing customer base in Europe. Sales to Europe were $3.46 million in the six months ended June 30, 2017, a decrease of 56% from $7.81 million in the same period of 2016, primarily as a result of the sluggish European economy. We anticipate increasing sales and marketing to the European market as the region’s economic outlook improves. Sales to Australia increased to $6.70 million in the six months ended June 30, 2017, compared to $2.09 million in the same period of 2016, primarily due to an increase in sales order from customers in that region. Sales to Asia, excluding Hong Kong, decreased by 8% to $1.69 million in the six months ended June 30, 2016, compared to $1.85 million in the same period of 2016, primarily due to the decreases of sales orders of our products. Sales to Hong Kong, increased by 56% to 0.46 million in the six months ended June 30, 2017, compared to $0.30 million in the same period of 2016, primarily due to the increase of sales orders.

Cost of Sales

Cost of sales consists primarily of finished goods purchased from other manufacturers. Total cost of sales decreased by 13% to $31.42 million in the six months ended June 30, 2017, compared to $36.16 million in the same period of 2016. The decrease of products purchased from third party manufacturers is primarily due to the decrease of our sales orders in the six months ended June 30, 2017. Cost of sales as a percentage of sales decreased to 84% in the six months ended June 30, 2017, compared to 86% in the same period of 2016. The decrease in cost of sales as a percentage of sales from the six months ended June 30, 2017 compared to the same period during 2016 resulted primarily from decreased cost of products purchased from third party manufacturers.

Gross Profit

Gross profit increased by 2% to $6.17 million in the six months ended June 30, 2017, compared to $6.05 million in the same period of 2016. Our gross profit margin increased to 16% in the six months ended June 30, 2017, compared to 14% in the same period of 2016. The increase in gross profit margin resulted primarily from decreased cost of sales as a percentage of net sales, which was due primarily to a decreased cost of products purchased from third parties.

Operating Expenses
Operating expenses consist of selling, general and administrative expenses and research and development expenses. Operating expenses were $7.17 million in the six months ended June 30, 2017, compared to $5.57 million in the same period of 2016. Selling expenses decreased by 27% to $1.69 million in the six months ended June 30, 2017, from $2.31 million in the same period of 2016, due primarily to decreased sales and marketing expense. General and administrative expense increased by 68% to $5.48 million in the six months ended June 30, 2017, from $3.26 million in the same period of 2016, primarily due to increased bad debt expense of approximately $523,000, research and development of approximately $304,000, amortization expense of approximately $453,000 on our intangible assets (see note 6 to our condensed consolidated financial statements), and termination cost on Academic E-commerce platform of approximately $800,000 (see note 7 to our condensed consolidated financial statements).

Other Expenses, Net

Other expenses, net, was $143,421 in the six months ended June 30, 2017, compared with other expense, net, of $176,958 in the same period of 2016, representing a decrease in other expense of $0.03 million. The decrease in other expense was due primarily to the decreased interest expense on our lines of credit to $118,753 in the six months ended June 30, 2017 from $144,668 of interest expense in the same period of 2016, offset by an interest income of $26,575 on a short-term advance to an unrelated party.


Income Tax Benefit (Expense)

Income tax benefit was $488,003 in the six months ended June 30, 2017, compared with $160,718 of income tax expense in the same period of 2016.  The income tax benefit was mainly due to the deferred tax on our NOL carryforwards in the U.S., partially offset by accruing interest on prior year ASC 740-10 (FIN 48) reserves.

Loss from Discontinued Operations

The subsidiaries that were sold on October 25, 2016, Nova Dongguan, Nova Museum, and Ding Nuo, are reported as discontinued operations in our condensed consolidated financial statements. Loss from discontinued operations, net of tax, was approximately $0.73 million for the six months ended June 30, 2016.

Net (Loss) Income

Net loss was $0.65 million in the six months ended June 30, 2017, as compared with $0.59 million of net loss for the same period of 2016. This increase in net loss was mainly due the increased operating expense for the six months ended June 30, 2017, compared to the same period of 2016, primarily as a result of increased general and administrative expense of $2.22 million. Our net loss margin from continuing operations was 2% in the six months ended June 30, 2017, as compared with 0.3% of net profit margin for the same period of 2016.

Liquidity and Capital Resources

Our principal demands for liquidity are from our efforts to increase sales, to 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 and collections of accounts receivable, and credit facilities from banks.

As we continue to execute our growth strategy focused on aggressively expanding sales, particularly in the U.S., we remain focused on improving net margins and bottom line growth.  As noted above, we have in recent periods found it necessary to increase reliance on third party providers in order to meet demand for particular products required by certain of our customers. We also believe that there is elasticity in pricing our higher end products and an ongoing opportunity to improve our product mix which should help us to stay in step with cost increases.

We rely primarily on internally generated cash flow and proceeds under our existing credit facilities to support growth.  We may seek additional financing in the form of bank loans or other credit facilities or funds raised through future offerings of our equity or debt, if and when we determine such offerings are required. During 2016, we raised approximately $3.09 million from exercise of warrants.
We had net working capital of $58,742,050 at June 30, 2017, an increase of $0.33 million from net working capital of $58,407,707 at December 31, 2016. The ratio of current assets to current liabilities was 11.95-to-1 at June 30, 2017.

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2017 and 2016:

2017
2016
Cash (used in) provided by:
Operating activities
$
(1,992,861
)
$
(1,244,869
)
Investing activities
8,247,868
(85,271
)
Financing activities
(3,670,768
)
993,287
Net cash used in operating activities was $1.99 million in the six months ended June 30, 2017, an increase of cash outflow of $0.75 million from $1.24 million of cash used in operating activities in the same period of 2016. The increase in cash outflow was attributable primarily to an increased cash outflow of $2.30 million from increased accounts payable payments, compared with $2.16 million inflow in the same period of 2016, and an increased cash outflow for a reduced amount of advances from customers of $0.50 million during the six months ended June 30, 2017, compared to $0.93 million inflow in the same period of 2016. Despite our cash inflow from inventories of $0.77 million during the six months ended June 30, 2017, compared to $0.08 million outflow in the same period of 2016, and increased cash inflow from accounts receivable of $10.00 million for the six months ended June 30, 2017, compared with cash inflow of $1.60 million in the same period of 2016, mainly due to the improved collection on account receivable; We had increased cash outflow of $10.92 million from advances to suppliers during the six months ended June 30, 2017, compared to $6.76 million outflow in the same period of 2016 due to prepayments for inventory purchases to receive vendor discounts; in addition, the China government is enforcing its labor and environmental law because of the G20, many factories have been under the high scrutiny from the government and could not produce at full capacity; we make more advance to suppliers to prioritize our products production. With this advance, we can launch our new collections earlier and meet our customers' ongoing demand. Net operating cash outflow from our discontinued operations was $0.24 million in the six months ended June 30, 2016.


Net cash provided by investing activities was $8.25 million in the six months ended June 30, 2017, an increase of cash inflow of $8.35 million from $85,271 outflow in the same period of 2016. In the six months ended June 30, 2017, we incurred a cash inflow of $15.84 million from repayment from unrelated parties, an inflow of $1.25 million on collection of assignment fee, despite cash outflow from advances to unrelated parties of $8.84 million, and a cash outflow of $2,131 from purchase of property and equipment. Net investing cash outflow from our discontinued operations was $81,727 in the six months ended June 30, 2016.

Net cash used in financing activities was $3.67 million in the six months ended June 30, 2017, an increase of cash outflow of $4.67 million from cash inflow of $0.99 million in the same period of 2016. In the six months ended June 30, 2017, we repaid $26.77 million for bank loans, and borrowed $23.09 million from bank loans.  In the six months ended June 30, 2016, we repaid $19.09 million for bank loans, and borrowed $19.76 million from bank loans.  Net financing cash inflow from discontinued operations was $0.32 million in the six months ended June 30, 2016.

As of June 30, 2017, we had gross accounts receivable of $32,018,901, of which $19,543,006 was not yet past due, $6,914,760 was less than 90 days past due, $2,569,455 was over 90 days but within 180 days past due and $2,991,680 over 180 days past due. We had an allowance for bad debt of $417,781 for accounts receivable. As of July 27, 2017, $7,132,836 accounts receivable outstanding at June 30, 2017 had been collected.

As of July 27, 2017, $37,680,057, or 90%, of accounts receivable outstanding at December 31, 2016 had been collected.

Private Placements

On April 14, 2014, we entered into a Securities Purchase Agreement (the “2014 Purchase Agreement”) with certain purchasers (the “Buyers”) pursuant to which we sold to the Buyers, in a registered direct offering, an aggregate of 1,320,059 shares of common stock, par value $0.001 per share, at a negotiated purchase price of $6.78 per share, for aggregate gross proceeds to us of $8.95 million, before deducting fees to the placement agent of $716,000 and other estimated offering expenses of $20,000 payable by us.

As part of the transaction, the Buyers also received (i) Series A warrants to purchase up to 660,030 shares of common stock in the aggregate at an exercise price of $8.48 per share (the “Series A Warrants”); (ii) Series B warrants to purchase up to 633,628 shares of common stock in the aggregate at an exercise price of $6.82 per share (the “Series B Warrants”); and (iii) Series C warrants to purchase up to 310,478 shares of common stock in the aggregate at an exercise price of $8.53 per share (the “Series C Warrants” and together with the Series A Warrants and the Series B Warrants, the “Warrants”). The Series A Warrants had a term of four years and were exercisable by the holders at any time after the date of issuance. The Series B Warrants had a term of six months and were exercisable by the holders at any time after the date of issuance. The Series C Warrants had a term of four years and were exercisable by the holders at any time after the date of issuance. After the six month anniversary of the issuance date of the Series C Warrants, to the extent that a holder of Series C Warrant had exercised less than 70% of such holder’s Series B Warrants and the closing sale price of the common stock was equal to or greater than $9.81 for a period of ten consecutive trading days, then we were entitled to purchase the entire then-remaining portion of such holder’s Series C Warrants for $1,000.  The shares and warrants were registered on a takedown of our shelf registration statement described below. The Series B Warrants expired on October 14, 2014, and none of the Series B Warrants were exercised prior to such expiration.

On May 28, 2015, we entered into a Securities Purchase Agreement (the “2015 Purchase Agreement”) with certain purchasers (the “Purchasers”) pursuant to which we offered to the Purchasers, in a registered direct offering, an aggregate of 2,970,509 shares of common stock, par value $0.001 per share. Of these shares, 2,000,001 shares were sold to the Purchasers at a negotiated purchase price of $2.00 per share, for aggregate gross proceeds to us of $4,000,002, before deducting fees to the placement agent and other estimated offering expenses payable by us. In accordance with the terms of the 2015 Purchase Agreement, the outstanding Series A Warrants described above and issued in connection with the transactions contemplated by the 2014 Purchase Agreement were exchanged for 660,030 shares of our common stock, and the outstanding Series C Warrants described above and issued in connection with the transactions contemplated by the 2014 Purchase Agreement were exchanged for 310,478 Shares of our common stock.

As contemplated under the 2015 Purchase Agreement and pursuant to a concurrent private placement, we also sold to the Purchasers a warrant to purchase one share of our common stock for each share purchased for cash in the offering, pursuant to that certain common stock Purchase Warrant, by and between us and each Purchaser (the “2015 Warrants”). The 2015 Warrants are exercisable beginning on the six month anniversary of the date of issuance (the “Initial Exercise Date”) at an exercise price of $2.71 per share and will expire on the five year anniversary of the Initial Exercise Date. The purchase price of one share of our common stock under the 2015 Warrants is equal to the exercise price.


Lines of Credit

Diamond Bar entered into an agreement with a bank in California for a line of credit of up to $5,000,000 with annual interest of 4.25% and maturity on June 1, 2015. On June 8, 2015, the bank extended and modified the terms of the loan agreement to extend the line of credit up to a maximum of $6,000,000 until July 31, 2015 and $5,000,000 thereafter with an annual interest rate of 4.25% and maturity on September 1, 2015 (the term of which the bank allowed to extend until the renewal described in the following sentence while the bank conducted its own audit associated therewith). On September 28, 2015, Diamond Bar extended the line of credit up to a maximum of $6,000,000 with annual interest of 3.75% (4% from December 17, 2015) and maturity on June 1, 2017. On January 20, 2016, Diamond Bar increased the line of credit up to a maximum of $8,000,000 with annual interest of 4%. On June 22, 2017, Diamond Bar extended the line of credit to maturity on September 1, 2017. The annual interest was 4.25% as of June 30, 2017. The line of credit is secured by all of the assets of Diamond Bar and is guaranteed by Nova LifeStyle. As of June 30, 2017 and 2016, Diamond Bar had $4,307,073 and $6,129,841 outstanding on the line of credit, respectively.  During the six months ended June 30, 2017 and 2016, the Company recorded interest expense of $104,925 and $106,254, respectively; and $64,347 and $53,548 for the three months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, Diamond Bar had $3,692,927 available for borrowing without violating any covenants.

The Diamond Bar loan has the following covenants: (i) maintain a minimum tangible net worth of not less than $10 million; (ii) maintain a ratio of debt to tangible net worth not in excess of 2.500 to 1.000; (iii) the pre-tax income must be not less than 1.000% of total revenue quarterly; and (iv) maintain a current ratio in excess of 1.250 to 1.000. As of June 30, 2017, Diamond Bar was in compliance with the stated covenants.

On January 22, 2015, Nova Macao renewed a line of credit, with an annual interest rate of 4.25% and principal of up to $6,500,000, with a commercial bank in Hong Kong to extend the maturity date to January 29, 2016. On February 16, 2016, Nova Macao extended the maturity date of its line of credit to January 31, 2017, with an annual interest rate of 4% and principal of up to $6,500,000. The loan requires monthly payment of interest and that the interest rate will be adjusted annually. The loan was secured by assignment of Sinosure (China Export and Credit Insurance Company) credit insurance and is guaranteed by Nova LifeStyle and Diamond Bar.  The Company did not extend the line of credit and paid it off in February 2017. As of June 30, 2017 and 2016, Nova Macao had $0 and $1,848,000 outstanding on the line of credit, respectively. During the six months ended June 30, 2017 and 2016, the Company paid interest of $13,828 and $38,414, respectively; and $0 and $18,686 for the three months ended June 30, 2017 and 2016, respectively.

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 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal financial officer, respectively, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2017, our disclosure controls and procedures were not effective as of such date as identified in our internal control over financial reporting below.

Notwithstanding this material weakness, our management has concluded that, based upon the interim remediation of internal control described below under “Changes in Internal Control over Financial Reporting”, our consolidated financial statements for the periods covered by and included in this report are prepared in accordance with U.S. GAAP and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the periods presented herein.

Changes in Internal Control over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of June 30, 2017, based upon the updated framework in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 1992 and updated in May 2013. Based on this assessment, our management concluded that, as of June 30, 2017, there is a material weakness in our internal control over financial reporting. Specifically, we currently lack sufficient accounting personnel with the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements.

We have taken, and are taking, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge and experience of U.S. GAAP and related regulatory requirements to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and other relevant securities laws. For example, we are still in the process of searching for an acceptable candidate. Until such time as we hire qualified accounting personnel with the requisite U.S. GAAP knowledge and experience and train our current accounting personnel, we have engaged an outside CPA with U.S. GAAP knowledge and experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP. In addition to the above stated remediation plan we previously engaged an outside Sarbanes-Oxley Act consultant in March 2012 to assist us with improving the design and operations of our internal controls over financial reporting for our U.S. parent company and all subsidiaries.

We believe the measures described above will remediate the material weakness identified above. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine that additional measures are necessary to address control any future deficiencies.

Other than as described above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We may occasionally become involved in various lawsuits and legal proceedings arising in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters that may arise from time to time could have an adverse effect on our business, financial condition or operating results. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Item 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.




SIGNATURES

Pursuant to the requirements 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: August 7, 2017
By:
/s/ Thanh H. Lam
Thanh H. Lam
Chairperson and Chief Executive Officer
(Principal Executive Officer)
Date: August 7, 2017
/s/ Yuen Ching Ho
Yuen Ching Ho
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.
Document Description
31.1 †
31.2 †
32.1 ‡
32.2 ‡
101.INS†
XBRL Instance Document
101.SCH†
XBRL Schema Document
101.CAL†
XBRL Calculation Linkbase Document
101.DEF†
XBRL Definition Linkbase Document
101.LAB†
XBRL Label Linkbase Document
101.PRE†
XBRL Presentation Linkbase Document

† Filed herewith
‡ Furnished herewith
35
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 - Organization and Description Of BusinessNote 2 - Summary Of Significant Accounting PoliciesNote 3 - Discontinued OperationsNote 4 - InventoriesNote 5 - Plant, Property and Equipment, NetNote 6 - Intangible AssetsNote 7 - Receivables From An Unrelated Party, Prepaid Expenses and Other ReceivablesNote 8 - Accrued Liabilities and Other PayablesNote 9 - Lines Of CreditNote 10 - Related Party TransactionsNote 11 - Stockholders EquityNote 12 - Statutory ReservesNote 13 - Geographical SalesNote 14 - Commitments and ContingenciesNote 15 - Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 6. Exhibits

Exhibits

31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by the Chief Executive Officer 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by the Chief Financial Officer