# XMax Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [XMax Inc.](/companies/xmax.md) (CIK 1473334)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 17:10 ET
- Period: 2023-09-30
- Accession: 0001493152-23-041292
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1473334/000149315223041292/form-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1473334/000149315223041292/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $2.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $8.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $1.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $5.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $3.2m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$2.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $147.4k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $149.8k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$3.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.83 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 1,547,423 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 1,484,358 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-09-30 | $749.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $3.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $8.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $2.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $4.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $3.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,309 characters.

### Safe Harbor Declaration

*The following discussion and analysis are based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). All references to the third quarter and first nine months of 2023 and 2022 mean the three and nine-month periods ended September 30, 2023 and 2022. In addition to historical information, the following discussion and other parts of this report contain certain forward-looking information. When used in this discussion, the words, “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged to carefully review and consider our discussions regarding the various factors that affect the company’s business, which are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2022 Form 10-K.*

### Overview

Nova LifeStyle, Inc. is a distributor of contemporary styled residential and commercial furniture incorporated into a dynamic marketing and sales platform offering retail as well as online selection and global purchase fulfillment. We monitor popular trends and products to create design elements that are then integrated into our product lines that can be used as both stand-alone or whole-room and home furnishing solutions. Through our global network of retailers, e-commerce platforms, stagers and hospitality providers, Nova LifeStyle also sells (through an exclusive third-party manufacturing partner) a managed variety of high quality bedding foundation components.

Nova LifeStyle’s brand family currently includes Nova LifeStyle, Diamond Sofa (www.diamondsofa.com) and Nova Living.

Our customers principally consist of distributors and retailers with specific geographic territories that deploy middle to high end private label home furnishings which have very little competitive overlap with our specific furnishing products or product lines. Nova LifeStyle is constantly seeking to integrate new sources of distribution and manufacturing that are properly aligned with our growth strategy. This allows us to continually focus on building both our overall distribution and manufacturing relationships through a deployment of popular, as well as trend-based, furnishing solutions worldwide.

We are a U.S. holding company with no material assets in the U.S. other than the ownership interests of our wholly owned subsidiaries through which we market, design and sell residential and commercial furniture worldwide: Nova Furniture Limited domiciled in the British Virgin Islands (“Nova Furniture”), Nova Furniture Ltd. domiciled in Samoa (“Nova Samoa”), Diamond Bar Outdoors, Inc. domiciled in California (“Diamond Bar”), Nova Living (M) SDN. BHD. domiciled in Malaysia (“Nova Malaysia”) and Nova Living (HK) Group Limited domiciled in Hong Kong (“Nova HK”). The Company had three former subsidiaries Bright Swallow International Group Limited domiciled in Hong Kong (“Bright Swallow” or “BSI”) which was sold in January 2020, and Nova Furniture Macao Commercial Offshore Limited domiciled in Macao (“Nova Macao”) which was de-registration and liquidation in January 2021. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation was completed in February 2023.

On December 7, 2017, we incorporated i Design Blockchain Technology, Inc. (“i Design”) under the laws of the State of California. The purpose of i Design is to build our own blockchain technology team. i Design is in the planning stage and has had minimum operations to date. On December 12, 2019, we became the sole shareholder of Nova Living (M) SDN. BHD. (“Nova Malaysia”), a company incorporated on July 26, 2019 under the laws of Malaysia. Nova Malaysia markets and sells high-end physiotherapeutic jade mats for use in therapy clinics, hospitality, and real estate projects in Malaysia and other regions in Southeast Asia.

On January 7, 2020, we transferred our entire interest in Bright Swallow to Y-Tone (Worldwide) Limited an unrelated third party, for cash consideration of $2,500,000. We received the payment on May 11, 2020.

On October 14, 2020, Nova Macao’s offshore license was invalidated by the Macao Trade and Investment Promotion Institute under the order of Repeal of Legal Regime of the Offshore Services by Macao Special Administrative Region. Nova Macao then entered into a de-registration process and its business was taken over by Nova HK. Nova Macao completed the de-registration and liquidation process in January 2021.

On November 5, 2020, Nova LifeStyle, Inc. acquired Nova Living (HK) Group Limited (“Nova HK”) which was incorporated in Hong Kong on November 6, 2019. This company had minimal operations. In February 2022, Nova HK entered a de-registration process and transferred all its assets and business to Nova Malaysia. The process of de-registration and liquidation was completed in February 2023.

Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serve as the foundation for us to expand aggressively into the highly attractive U.S., Canada, South America, Asia and Middle Easter markets.

Due to the imposition of significant trade tariffs on importation from China to the United States and the adverse effect such policies have on our operations, we are actively pursuing alternative product lines with positive growth potential. One such area pertains to the health-oriented furniture segment which continues to experience popularity, particularly in Asia. Since the second quarter of 2019, we have developed a line of high-end physiotherapeutic jade mats with China-based manufacturing partners for use in therapy clinics, hospitality, and real estate projects in Asia. We launched our first flagship showroom/retail store in Kuala Lumpur, Malaysia in late 2019, which, after a COVID-19 related closing, was reopened in May 2020. On August 28, 2020, after few months reopening, Malaysia government extended Movement Control Order to prohibit the businesses to open to public until March 5, 2021 to contain the spread of COVID-19. After the re-opening on March 5, 2021, Malaysia imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. We have limited experience with operations in Southeast Asia and considerable management attention and resources may be required to manage these new markets and product lines. We may be subject to additional risks including credit risk, inflation, currency exchange rate fluctuations, foreign exchange controls, import and export requirements, potentially adverse tax consequences and higher costs associated with doing business internationally.

Beginning in early 2020, a strain of novel coronavirus (“COVID-19”) has spread globally including the U.S. and Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In response to the evolving dynamics related to the COVID-19 outbreak, the Company has been following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. The Company’s two showrooms and warehouse in Malaysia was closed from March, 2020 to May, 2020. The Los Angeles facility closed on March 16, 2020 and reopened in full operation on June 1, 2020. On May 12, 2020, the Company’s Kuala Lumpur office and warehouse reopened for business. On August 28, 2020, the Malaysia government extended the shutdown order to all business until March 5, 2021. After the re-opening on March 5, 2021, Malaysia government imposed a new nationwide lockdown on May 12, 2021 until early June 2021 which was subsequently extended to early October 2021. In October 2021, the Order was lifted for people who are fully vaccinated and our store has been reopened since. In April 2022, Malaysia has reopened the border for foreign visitors. The third-party contract manufacturers that the Company utilizes in China were closed from the beginning of the Lunar New Year Holiday at the end of January 2020 through the beginning of March 2020. Certain of the Company’s new products are being sourced from manufacturers in India starting in 2020. The factories in India suspended their operations as a result of the COVID-19 pandemic during March through early May 2020. Currently, the factories in India are open for operations. Shipping of products from Asia has experienced significant delays since the onset of the pandemic and the costs of shipping from Asia have increased since the onset. In June 2022, all the shipping and related costs from Asia have been back to normal. Any new COVID-19 outbreaks will have a material adverse impact on the demand for its products. Because of the significant uncertainties surrounding the COVID-19 pandemic, the extent of the future business interruption and the related financial impact cannot be reasonably estimated at this time.

We do not have access to a revolving credit facility. On May 4, 2020, the Company received loan proceeds in the amount of approximately $139,802 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. On May 5, 2020, Diamond Bar Outdoors Inc. (“Diamond Bar”) was granted a loan from Cathay Bank in the aggregate amount of $176,294, pursuant to the Paycheck Protection Program. In June 19, 2020, Diamond Bar was granted a U.S. Small Business Administration (SBA) loan in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan. In July 2021, we completed a registered direct offering of our shares of common stock and received offering gross proceeds of $3,120,622. We currently believe that our financial resources will be adequate to finance our operations in the next 12 months. However, in the event that we do need to raise capital in the future, the instability in the securities markets could adversely affect our ability to raise additional capital.

### Discontinued Operations

On February 15, 2022, we transferred entire assets and business of Nova HK to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented.

### Principal Factors Affecting Our Financial Performance

At the beginning of 2019, we commenced a transition of our business. We began moving away from low margin products. This move was intended to improve our gross profit margin, receivable collections and net profitability, and to increase our return on long-term equity. We decided to terminate sales and marketing efforts to customers that represented a high purchase volume but low profit margin, and we adjusted our product line, which included the launch of our Summer 2023 Collection in the Las Vegas and High Point Markets, with a view to attracting a higher-end ultimate customer. The core focus of the company’s direction today is entirely centered on product. Identifying a fashion-driven generational shift in the general perception and consumption of furniture and being more aware of actual consumer tastes and how best to fulfill and engage that need. Closely integrating product development alongside marketing results in appealing products that adheres to the scope of our target demographic of decision makers in the design, staging and retail fields. A process that is continually refined upon each release cycle, maintaining a singular, cohesive vision. In short, we have better identified our customers and how to cater to them – in the process gaining greater traction with every product launch considerably more so on an international level than ever previous. We believe these new strategies, will provide us with significant long term growth opportunities. The transition has and is expected to continue to adversely impact our revenue and our net profit in the short-term as we roll out new products and market those products to our existing client base and to new potential customers better suited for the higher end products, and as we assess our new products’ market acceptance. Significant factors that we believe could affect our operating results are the (i) prices of our products to our domestic and international retailer and wholesaler customers and their markups to end consumers; (ii) general economic conditions in the U.S., Chinese, and other international markets; and (iii) trade tariffs imposed by the United States on certain products manufactured in China; and (iv) the consequences of the COVID-19 outbreak throughout the world; and (v) high interest rate, inflation and slow- down in real estate market. We believe most of our customers are willing to pay for our high quality and stylish products, timely delivery, and strong production capacity at price levels which we expect will allow us to maintain a relatively high gross profit margin for our products. We do not manufacture our products, but instead we utilize third-party manufacturers. In response to the tariffs imposed by the United States on certain products manufactured in China, we are in the process of shifting a portion of our product manufacturing from third-party manufacturers located in China to third-party manufacturers located in other parts of Asia, such as Vietnam, India and/or Malaysia, countries unaffected by the tariffs. Implementation of a relocation of manufacturing (which by necessity includes an assessment of the factory’s ability to deliver the quantity of the product, in accordance with the Company’s specifications, and in accordance with the Company’s quality control requirements) is time-consuming, but a portion of our manufacturing has been transitioned to Malaysia and India starting in 2020 and we expect that more of our manufacturing will be transitioned to one or more of these venues. Some of our manufacturing will continue to be performed in China because the intellectual know-how necessary to manufacture certain products is not generally available in other Asian countries. Consumer preference trends favoring high quality and stylish products and lifestyle-based furniture suites should also allow us at least to maintain our gross profit margins. The markets in North America (excluding the United States) remains challenging because such markets are experiencing a slow-down and may be entering a recession due to high interest rate and inflation.

### Critical Accounting Policies

While our significant accounting policies are described more fully in Note 2 to our accompanying unaudited condensed consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this Management’s Discussion and Analysis.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

### Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for Nova LifeStyle and its subsidiaries, Diamond Bar, i Design, Nova Furniture, Nova Samoa, Nova Malaysia and its former subsidiary, Nova HK.

### Reverse split

On May 22, 2023, the Company filed a Certificate of Change with the Secretary of State of Nevada with an effective date of May 22, 2023, at which time a 1-for-5 reverse stock split of the Company’s authorized shares of common stock, par value $0.001, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), shall be affected. All references to shares and per share data have been retroactively restated to reflect such split.

### Amendments to Articles of Incorporation

On September 5, 2023, the Company filed the Certificate of Change (the “Amendment”) with the Secretary of State for the State of Nevada to amend its Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 3,000,000 to 250,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on June 28, 2023 and by the shareholders at a special meeting of the Company’s shareholders held on August 31, 2023. The Amendment does not affect the rights of the Company’s shareholders and was effective immediately upon filing.

### Use of Estimates

In preparing condensed 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 condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include, but are not limited to, revenue recognition, the allowance for bad debt, valuation of inventories, the valuation of stock-based compensation, income taxes and unrecognized tax benefits, valuation allowance for deferred tax assets, assumptions used in assessing impairment of long-lived assets and goodwill, and loss contingencies. Actual results could differ from those estimates.

### Accounts Receivable

Our accounts receivable arises from product sales. We do not adjust receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We do not expect to collect receivables greater than one year from the time of sale. Our policy is to maintain an allowance for potential credit losses on accounts receivable. We review the composition of accounts receivable and analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We maintained an allowance for bad debt of $692 and $3,420 as of September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023 and 2022, bad debts (reversal) provision from continuing operations was ($2,222) and $2,376, respectively; ($2,026) and $1,316 for the three months ended September 30, 2023 and 2022, respectively. During the nine and three months ended September 30, 2023 and 2022, bad debt expenses from discontinued operations were $0. As of September 30, 2023, we had gross receivable of $69,203 of which $302 was over 90 days past due. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical bad debt experience, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns.

### Advances to Suppliers

Advances to suppliers represent amounts paid to suppliers in advance for goods that are yet to be delivered and from which future economic benefits are expected to flow to the Company within the normal operating cycle. Based on our historical records and in normal circumstances, we generally receive goods within 4 to 6 months from the date the advance payment is made. Due to the COVID-19 pandemic, the freight transportation of the products from our international suppliers has been delayed or suspended during the outbreak.

### 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 income tax expense for the nine months ended September 30, 2023 and 2022 are $149,771 and $0, and are primarily related to quarter-to-date income generated from foreign operation. The income tax expense for the three months ended September 30, 2023 and 2022 are $147,371 and $0, and are primarily related to quarter-to-date income generated from foreign operations.

Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.

Under the provisions of ASC Topic 740, when tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Nova Lifestyle, Inc. and Diamond Bar are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI and Nova Samoa was incorporated in Samoa. There is no income tax for companies domiciled in the BVI and Samoa. Accordingly, the Company’s condensed consolidated financial statements do not present any income tax provisions related to the BVI and Samoa tax jurisdictions where Nova Furniture BVI and Nova Samoa are domiciled. Nova Malaysia is incorporated in Malaysia and is subject to Malaysia income taxes at the statutory rate of 24%.

The Tax Cuts and Jobs Act of 2017 (the “Act”) created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”) under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the nine months ended September 30, 2023, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses (NOLs) arising in taxable years beginning after December 31, 2017.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. Since all research and development expenditures were incurred within the U.S. and the amount is immaterial, we do not anticipate it having any material impact to our provision.

As of September 30, 2023 and December 31, 2022, the accumulated undistributed earnings generated by its foreign subsidiaries were approximately $25.5 million and $25.6 million of which substantially all was previously subject to U.S. tax, the one-time transition tax on foreign unremitted earnings required by the Tax Act, or GILTI. Those earnings are considered to be permanently reinvested and accordingly, no deferred tax expense is recorded for U.S. federal and state income tax or applicable withholding taxes.

As of September 30, 2023 and 2022, unrecognized tax benefits were approximately $0. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $0 as of September 30, 2023 and 2022.

A reconciliation of unrecognized tax benefits excluding interest and penalties (“Gross UTB”) for the nine months ended September 30, 2023 and 2022, is as follows:

|  | Gross UTB 2023 | 2022 |
| --- | ---: | ---: |
| **Balance – January 1 and September 30** | $- | $- |

As of September 30, 2023 and December 31, 2022, the Company had cumulatively accrued approximately $0 for estimated interest and penalties related to unrecognized tax benefits. The Company recorded interest and penalties related to unrecognized tax benefits as a component of income tax benefit, which totaled $0 for the nine and three months ended September 30, 2023 and 2022, respectively, related to the Company’s continuing operations. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.

Nova Lifestyle and Diamond Bar are subject to U.S. federal and state income taxes and tax years 2019-2022 remain open to examination by tax authorities in the U.S.

### Revenue Recognition

We recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.

Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.

Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer.

Our sales policy allows for the return of product within the warranty period if the product is defective and the defects are our fault. As alternatives for the product return option, the customers have the option of asking us for a discount for products with quality issues, or of receiving replacement parts from us at no cost. The amount of reserves for return of products, the discount provided to the customers, and cost for the replacement parts were immaterial for the nine months and three months ended September 30, 2023 and 2022.

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses on our condensed consolidated statements of operations.

### Foreign Currency Translation and Transactions

The accompanying unaudited condensed consolidated financial statements are presented in United States Dollar (“$” or “USD”), which is also the functional currency of Nova LifeStyle, Nova Furniture, Nova Samoa, Diamond Bar, Nova HK and i Design.

The Company’s subsidiary with operations in Malaysia uses its local currency, Malaysian Ringgit (“RM”), as its functional currency. An entity’s functional currency is the currency of the primary economic environment in which it operates, which is normally the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements.

Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the statements of operations.

The financial statements are presented in U.S. dollars. Assets and liabilities are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Stockholders’ equity accounts are translated using the historical exchange rates at the date the entry to stockholders’ equity was recorded, except for the change in retained earnings during the period, which is translated using the historical exchange rates used to translate each period’s income statement. Differences resulting from translating functional currencies to the reporting currency are recorded in accumulated other comprehensive income in the balance sheets.

Translation of amounts from RM into U.S. dollars has been made at the following exchange rates:

|  |  |
| --- | --- |
| Balance sheet items, except for equity accounts |  |
| September 30, 2023 | RM4.69 to 1 |
| December 31, 2022 | RM4.40 to 1 |
| Income statement and cash flow items |  |
| For the nine months ended September 30, 2023 | RM4.51 to 1 |
| For the nine months ended September 30, 2022 | RM4.34 to 1 |

### Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the company for making operating decisions, assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

We determined that our operations constitute a single reportable segment in accordance with ASC 280. We operate exclusively in one business and industry segment: the design and sale of furniture.

We concluded that we had one reportable segment under ASC 280 because Diamond Bar is a furniture distributor based in California focusing on customers in the US, Nova HK was a furniture distributor based in Hong Kong focusing on international customers and Nova Malaysia is a furniture retailer and distributor focusing on customers primarily in Malaysia. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of Diamond Bar, Nova HK and Nova Malaysia as a whole for making business decisions. Our long-lived assets are mainly property, plant and equipment located in the United States and Malaysia for administrative purposes.

Net sales to customers by geographic area are determined by reference to the physical product shipment delivery locations requested by our customers. For example, if the products are delivered to a customer in the U.S., the sales are recorded as generated in the U.S.; if the customer directs us to ship its products to China, the sales are recorded as sold in China.

### New Accounting Pronouncements

#### Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 replaces the probable, incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost basis. Am entity should apply ASU 2016-13 on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the balance sheets as of the date of adoption. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for trouble debt restructurings by creditors and enhances the disclosure requirements for modifications of loans to borrowers experiencing financial difficulty. Additionally, ASU 2022-02 requires disclosure of gross writeoffs by year of origination for receivables within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, which should be applied prospectively. Both ASU 2016-13 and ASU 2022-02 are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 and ASU 2022-02 beginning January 1, 2023. The adoption of ASU 2016-13 and ASU 2022-02 did not have any impact on our condensed consolidated financial statement presentation or disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). This Update is effective for smaller reporting companies for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022, which is required to be applied prospectively from the date of adoption. The Company adopted ASU 2017-04 for its interim and annual goodwill impairment tests beginning January 1, 2023. The adoption of ASU 2017-04 did not have any impact on our condensed consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company applied the new standard beginning January 1, 2022. The adoption of the new standard did not have any impact on our condensed consolidated financial statement presentation or disclosures.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This Update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This Update is effective for annual periods beginning after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company adopted ASU 2021-10 beginning January 1, 2022. The adoption of ASU 2021-10 did not have any impact on our condensed consolidated financial statements.

#### Recently Issued But Not Yet Adopted Accounting Pronouncements

In March 2023, the FASB issued ASU 2023-01, Lease (Topic 842): Common Control Arrangements, which clarifies the accounting for leasehold improvements associated with leases between entities under common control (hereinafter referred to as common control lease). ASU 2023-01 requires entities to amortize leasehold improvements associated with common control lease over the useful life to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease, and to account for any remaining leasehold improvements as a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the underlying asset. This ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. An entity may apply ASU 2023-01 either prospectively or retrospectively. The Company is currently evaluating the impact that the adoption of ASU 2023-01 will have on our consolidated financial statement presentations and disclosures.

We do not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on our financial statement presentation or disclosures.

### Results of Operations

### Comparison of Three Months Ended September 30, 2023 and 2022

The following table sets forth the results of our operations for the three months ended September 30, 2023 and 2022. Certain columns may not add due to rounding.

|  | Three Months Ended September 30, 2023 $% of Sales |  | 2022 $% of Sales |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $2,476,134 |  | $3,016,104 |  |
| Cost of sales | (1,411,573) | (57)% | (1,878,361) | (62)% |
| Gross profit | 1,064,561 | 43% | 1,137,743 | 38% |
| Operating expenses | (2,115,498) | (85)% | (2,091,741) | (69)% |
| Loss from operations | (1,050,937) | (42)% | (953,998) | (32)% |
| Other expenses, net | (90,321) | (4)% | (758,994) | (25)% |
| Income tax expenses | (147,371) | -% | - | -% |
| Loss from continuing operations | (1,288,629) | (46)% | (1,712,992) | (57)% |
| Loss from discontinued operations | - | -% | - | -% |
| Net loss | (1,288,629) | (46)% | (1,712,992) | (57)% |

### Net Sales

Net sales from continuing operations for the three months ended September 30, 2023 were $2.48 million, a decrease of 18% from $3.02 million for the same period of 2022. This decrease in net sales resulted primarily from a 12% decrease in average selling price, along with a 7% decrease in sales volume. Our three largest selling product categories for the three months ended September 30, 2023 were sofas, beds and chairs, which accounted for approximately 44%, 17% and 10% of sales from continuing operations, respectively. For the three months ended September 30, 2022, the three largest selling categories were sofas, beds and chairs, which accounted for approximately 38%, 15% and 12% of sales from continuing operations, respectively.

The $0.54 million decrease in net sales from continuing operations for the three months ended September 30, 2023, compared to the same period of 2022, was mainly due to decreased sales to North America and other countries. Sales to North America decreased by 12% to $2.43 million for the three months ended September 30, 2023, compared to $2.77 million for the same period of 2022, such decrease mainly due to inflation, U.S. tightening monetary policy, reducing the purchasing power of the customers and thus making them less willing to spend in nonfood categories. Sales to other countries decreased by $215,774 to $34,878 for the three months ended September 30, 2023, from $250,652 for the same period of 2022, primarily due to less direct container sales in other countries.

### Cost of Sales

Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations decreased by 25% to $1.41 million for the three months ended September 30, 2023, compared to $1.88 million for the same period of 2022. Cost of sales as a percentage of sales decreased to 57% for the three months ended September 30, 2023, compared to 62% for the same period of 2022. The decrease in cost of sales in dollar term and cost of sales as a percentage of sales were mainly due to the decrease in our net sales along with the decrease in our direct container sales which came with low profit margin for the three months ended September 30, 2023, compared to the same period of 2022.

Moreover, if total cost of sales from continuing operations excluded our inventory write down of $23,544 and $50,293 for the three months ended September 30, 2023 and 2022, respectively, total cost of sales from continuing operations would decrease by 24% to $1.39 million for the three months ended September 30, 2023, compared to $1.83 million for the same period of 2022, and cost of sales as a percentage of sales would decrease to 56% for the three months ended September 30, 2023, compared to 61% for the same period of 2022. The decrease in cost of sales in dollar term and cost of sales as a percentage were due to the decrease in our net sales along with the decrease in our direct container sales which came with low profit margin for the three months ended September 30, 2023, compared to the same period of 2022.

### Gross Profit

Gross profit from continuing operations was $1.06 million for the three months ended September 30, 2023, compared to $1.14 million for the same period of 2022, representing a decrease in gross profit of $0.07 million. Our gross profit margin was 43% for the three months ended September 30, 2023, compared to 38% for the same period of 2022. The decrease in gross profit was mainly due to the decrease in our net sales for the three months ended September 30, 2020, compared to the same period of 2022. The increase in gross profit margin was mainly a result of our decreased direct container sales which came with low profit margin for the three months ended September 30, 2023, compared to the same period of 2022.

Moreover, if total cost of sales from continuing operations excluded our inventory write down of $23,544 and $50,293 for the three months ended September 30, 2023 and 2022, respectively, gross profit would be $1.09 million for the three months ended September 30, 2023, compared to $1.19 million for the same period of 2022, and our gross profit margin would be 44% for the three months ended September 30, 2023, compared to 39% for the same period of 2022. The decrease in gross profit was mainly due to the decrease in our net sales for the three months ended September 30, 2020, compared to the same period of 2022. The increase in gross profit margin was mainly a result of our decreased direct container sales which came with low profit margin for the three months ended September 30, 2023, compared to the same period of 2022.

### Operating Expenses

Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses from continuing operations were $2.12 million for the three months ended September 30, 2023, compared to $2.09 million for the same period of 2022. Selling expenses from continuing operations decreased by 8%, or $0.05 million, to $0.59 million for the three months ended September 30, 2023, from $0.64 million for the same period of 2022, primarily due to decreased marketing and advertising expenses. On the other hand, general and administrative expenses from continuing operations increased by 5%, or $0.07 million, to $1.52 million for the three months ended September 30, 2023, from $1.45 million for the same period of 2022, primarily due to an increase in bad debt expense and stock compensation expense of $0.19 million and $0.16 million, respectively, while the increase was partially offset by a decrease in travel expenses of $0.31 million.

### Other Expenses, Net

Other expenses, net, from continuing operations were $90,321 for the three months ended September 30, 2023, compared to $758,994 for the same period of 2022, representing a decrease in other expenses of $668,673. The decrease in other expenses was due primarily to a decrease in foreign exchange loss of $664,431 to $43,738 for the three months ended September 30, 2023, from $708,169 for the same period of 2022. The decrease in foreign exchange loss was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the liquidation sales of jade mats in Malaysia as partial sales were collected in U.S. dollars.

### Income Tax Expenses

Income tax expenses from continuing operations were $147,371 and $0 for the three months ended September 30, 2023 and 2022, due to net loss incurred from continuing operations. The income tax expenses were primarily due to the net taxable income from Nova Malaysia. The net taxable income was resulted from the income from debt forgiveness to Nova Malaysia from Nova HK, while offset with inventory impairment loss incurred in Malaysia, current operating loss and prior year net operating loss in Nova Malaysia.

### Loss from Continuing Operations

As a result of the foregoing, our loss from continuing operations was $1.29 million for the three months ended September 30, 2023, compared to $1.71 million for the same period of 2022.

### Loss from Discontinued Operations

On February 15, 2022, we transferred our entire assets and business in Nova HK to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had no loss from discontinued operations for the three months ended September 30, 2023 and 2022, respectively.

### Net Loss

As a result of the foregoing, our net loss was $1.29 million for the three months ended September 30, 2023, compared to $1.71 million for the same period of 2022.

### Comparison of Nine Months Ended September 30, 2023 and 2022

The following table sets forth the results of our operations for the nine months ended September 30, 2023 and 2022. Certain columns may not add due to rounding.

|  | Nine Months Ended September 30, 2023 $% of Sales |  | 2022 $% of Sales |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $8,813,128 |  | $10,495,097 |  |
| Cost of sales | (5,639,925) | (64)% | (11,377,203) | (108)% |
| Gross profit (loss) | 3,173,203 | 36% | (882,106) | (8)% |
| Operating expenses | (5,785,987) | (66)% | (6,568,966) | (63)% |
| Loss from operations | (2,612,784) | (30)% | (7,451,072) | (71)% |
| Other expenses, net | (286,970) | (3)% | (825,720) | (8)% |
| Income tax expenses | (149,771) | 0% | - | -% |
| Loss from continuing operations | (3,049,525) | (33)% | (8,276,792) | (79)% |
| Loss from discontinued operations | - | -% | (25,754) | 0% |
| Net loss | (3,049,525) | (33)% | (8,302,546) | (79)% |

### Net Sales

Net sales from continuing operations for the nine months ended September 30, 2023 were $8.81 million, a decrease of 16% from $10.50 million for the same period of 2022. This decrease in net sales resulted primarily from a 39% decrease in average selling price, partially offset by a 37% increase in sales volume. Our three largest selling product categories for the nine months ended September 30, 2023 were sofas, jade mats and beds, which accounted for approximately 34%, 22% and 13% of sales from continuing operations, respectively. For the nine months ended September 30, 2022, the three largest selling categories were sofas, beds and chairs, which accounted for approximately 40%, 14% and 11% of sales from continuing operations, respectively.

The $1.68 million decrease in net sales from continuing operations for the nine months ended September 30, 2023, compared to the same period of 2022, was mainly due to decreased sales to North America and other countries. Sales to North America decreased by 33% to $6.62 million for the nine months ended September 30, 2023, compared to $9.86 million for the same period of 2022, such decrease mainly due to inflation, U.S. tightening monetary policy, reducing the purchasing power of the customers and thus making them less willing to spend in nonfood categories. Sales to other countries decreased by $384,588 to $186,095 for the nine months ended September 30, 2023, from $570,683 for the same period of 2022, such decrease mainly due to less direct container sales in other countries. However, the decrease in net sales from continuing operations was partially offset by the increase in sales to Asia. Sales to Asia increased by $1.94 million to $2.00 million for the nine months ended September 30, 2023, from $0.06 million for the same period of 2022, primarily due to our liquidation sales of the entire inventory of jade mats in Malaysia for $1.99 million during the nine months ended September 30, 2023.

### Cost of Sales

Cost of sales from continuing operations consists primarily of costs of finished goods purchased from third-party manufacturers. Total cost of sales from continuing operations decreased by 50% to $5.64 million for the nine months ended September 30, 2023, compared to $11.38 million for the same period of 2022. Cost of sales as a percentage of sales decreased to 64% for the nine months ended September 30, 2023, compared to 108% for the same period of 2022. The decrease in cost of sales in dollar term and cost of sales as a percentage were a result of two factors: (a) our decreased inventory write down of $0.13 million, primarily for the products in U.S., for the nine months ended September 30, 2023, compared to $5.17 million of inventory write down, primarily for the jade mats in Malaysia, for the same period of 2022; (b) the decrease in our net sales for the nine months ended September 30, 2023, compared to the same period of 2022.

Moreover, if total cost of sales from continuing operations excluded our inventory write down of $0.13 million and $5.17 million for the nine months ended September 30, 2023 and 2022, respectively, total cost of sales from continuing operations would decrease by 11% to $5.51 million for the nine months ended September 30, 2023, compared to $6.21 million for the same period of 2022, and cost of sales as a percentage of sales would increase to 62% for the nine months ended September 30, 2023, compared to 59% for the same period of 2022. The decrease in cost of sales in dollar term was mainly due to the decrease in our net sales for the nine months ended September 30, 2023, compared to the same period of 2022. The increase in cost of sales as a percentage was mainly a result of the liquidation sales of the jade mats in Malaysia which came with low profit margin during the nine months ended September 30, 2023.

### Gross Profit (Loss)

Gross profit from continuing operations was $3.17 million for the nine months ended September 30, 2023, compared to gross loss of $0.88 million for the same period of 2022, representing an increase in gross profit of $4.06 million. Our gross profit margin was 36% for the nine months ended September 30, 2023, compared to a gross loss margin of 8% for the same period of 2022. The increase in gross profit and gross profit margin was mainly a result of our decreased inventory write down of $0.13 million for the nine months ended September 30, 2023, compared to $5.17 million of inventory write down for the same period of 2022.

Moreover, if total cost of sales from continuing operations excluded our inventory write down of $0.13 million and $5.17 million for the nine months ended September 30, 2023 and 2022, gross profit would be $3.31 million for the nine months ended September 30, 2023, compared to gross profit of $4.29 million for the same period of 2022, and our gross profit margin would be 38% for the nine months ended September 30, 2023, compared to a gross profit margin of 41% for the same period of 2022. The decrease in gross profit and gross profit margin was mainly due to the decrease in our net sales along with the increase in our liquidation sales of the jade mats in Malaysia which came with low profit margin for the nine months ended September 30, 2023.

### Operating Expenses

Operating expenses from continuing operations consisted of selling, general and administrative expenses. Operating expenses from continuing operations were $5.79 million for the nine months ended September 30, 2023, compared to $6.58 million for the same period of 2022. Selling expenses from continuing operations decreased by 14%, or $0.31 million, to $1.87 million for the nine months ended September 30, 2023, from $2.18 million for the same period of 2022, primarily due to decreased marketing and advertising expenses. In addition, general and administrative expenses from continuing operations decreased by 11%, or $0.47 million, to $3.91 million for the nine months ended September 30, 2023, from $4.40 million for the same period of 2022, primarily due to a decrease in technology services fees, consulting fees and travel expenses of $0.32 million, $0.25 million and $0.23 million, respectively.

### Other Expenses, Net

Other expenses, net, from continuing operations were $286,970 for the nine months ended September 30, 2023, compared to $825,720 for the same period of 2022, representing a decrease in other expenses of $538,750. The decrease in other expenses was due primarily to a decrease in foreign exchange loss of $467,126 to $177,399 for the nine months ended September 30, 2023, from $644,525 for the same period of 2022. The decrease in foreign exchange loss was mainly a result of the depreciation of Malaysian Ringgit against U.S. dollars on the liquidation sales of jade mats in Malaysia as partial sales were collected in U.S. dollars. In addition, the decrease in other expenses resulted from an increase in non-operating income of $28,509 and a decrease in financial expenses of $24,991 for the nine months ended September 30, 2023, compared to the same period of 2022. The increase in non-operating income mainly resulted from the sales orders cancelled by the customers who agreed not to have credit back from us, while the decrease in financial expenses was mainly a result of the decreased credit card transaction charges due to decreased sales for the nine months ended September 30, 2023.

### Income Tax Expenses

Income tax expenses from continuing operations were $149,771 for the nine months ended September 30, 2023, compared to $0 for the same period of 2022. The income tax expenses were primarily related to minimum California state tax incurred from U.S. entities and the net taxable income from Nova Malaysia. The net taxable income from Nova Malaysia was due to the income from debt forgiveness to Nova Malaysia from Nova HK, while offset with inventory impairment loss incurred in Malaysia, current operating loss and prior year net operating loss in Nova Malaysia.

### Loss from Continuing Operations

As a result of the foregoing, our loss from continuing operations was $3.05 million for the nine months ended September 30, 2023, compared to $8.28 million for the same period of 2022.

### Loss from Discontinued Operations

On February 15, 2022, we transferred our entire assets and business in Nova HK to Nova Malaysia, one of our subsidiaries. Operations of Nova HK were reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We had loss from discontinued operations of $0 and $0.03 million for the nine months ended September 30, 2023 and 2022, respectively.

### Net Loss

As a result of the foregoing, our net loss was $3.05 million for the nine months ended September 30, 2023, compared to $8.30 million for the same period of 2022.

### Liquidity and Capital Resources

Our principal demands for liquidity are related to our efforts to increase sales and purchase inventory, and for expenditures related to sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to purchase of inventories and the expansion of our business, primarily through cash flow provided by operations, collections of accounts receivable, and credit facilities from banks.

We rely primarily on internally generated cash flow and available working capital to support growth. We may seek additional financing in the form of bank loans or other credit facilities or funds raised through offerings of our equity or debt, if and when we determine such offerings are required. As of September 30, 2023, we do not have any credit facilities. We believe that our current cash and cash equivalents and anticipated cash receipts from sales of products will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months.

We had net working capital of $1,291,250 at September 30, 2023, a decrease of $5,266,379 from net working capital of $6,557,629 at December 31, 2022. The ratio of current assets to current liabilities was 1.55-to-1 at September 30, 2023.

The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2023 and 2022:

| Cash provided by (used in): | 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $1,520,147 | $(3,453,559) |
| Investing activities | (2,437,727) | (5,771) |
| Financing activities | - | - |

Net cash provided by operating activities was $1.52 million for the nine months ended September 30, 2023, an increase in cash inflow of $4.97 million from $3.45 million of cash used in operating activities for the same period of 2022.

The increase in cash inflow was attributable primarily to (i) an increase in cash inflow of $0.52 million for accounts receivable to $0.22 million cash inflow for the nine months ended September 30, 2023, from 0.30 million cash outflow for the same period of 2022, such increase in cash inflow mainly due to we collect our accounts receivable from our customers in timely matter; and (ii) an increase in cash inflow of $4.56 million for inventories to $2.86 million cash inflow for the nine months ended September 30, 2023, from $1.71 million cash outflow for the same period of 2022, such increase in cash inflow being mainly due to less purchases made from our suppliers and the liquidation sales of the entire inventory of jade mats in Nova Malaysia for the nine months ended September 30, 2023; and (iii) an increase in cash inflow of $0.63 million for other current assets to $0.68 million cash inflow for the nine months ended September 30, 2023, from $0.05 million cash outflow for the same period of 2022, such increase in cash inflow being mainly a result of less prepayments to IT consulting firm due to the completion of our tour and web augmented reality development project during the nine months ended September 30, 2023. The increase in operating cash inflow was partially offset by (i) an increase in cash outflow of $0.72 million for advance to supplier to $0.05 million cash outflow for the nine months ended September 30, 2023, from $0.66 million cash inflow for the same period of 2022, such increase in cash outflow being mainly due to more deposits paid to our suppliers with less goods received from them for the nine months ended September 30, 2023; and (ii) an increase in cash outflow of $0.40 million for accounts payable to $0.17 million cash inflow for the nine months ended September 30, 2023, from $0.57 million cash inflow for the same period of 2022, such increase in cash outflow being mainly due to we purchased less inventory on credit.

Net cash used in investing activities was $2.44 million for the nine months ended September 30, 2023, an increase in cash outflow of $2.43 million from $5,771 of cash used in investing activities for the same period of 2022. We incurred cash outflow of $2.43 million from the virtual tour and web augmented reality experience software project during the nine months ended September 30, 2023. During the same period of 2022, we incurred cash outflow of $5,771 from purchase of office equipment.

Net cash provided by financing activities was $0 for the nine months ended September 30, 2023 and 2022.

As of September 30, 2023, we had gross accounts receivable of $69,203, of which $25,522 was not yet past due, $43,379 was less than 90 days past due and $302 was more than 90 days past due. We had an allowance for bad debt of $692. As of November 7, 2023, 95% of accounts receivable outstanding as of September 30, 2023 had been collected.

100% of our accounts receivable outstanding at December 31, 2022 had been collected during 2023.

As of September 30, 2023 and December 31, 2022, we had advances to suppliers of $75,183 and $21,173, respectively. These supplier prepayments are made for goods before we actually receive them.

For a new product, the normal lead time from new product R&D, prototype, and mass production to delivery of goods from our suppliers to us is approximately six to nine months after we make advance payments to our suppliers. For other products, the typical time is 4-6 months after our advance payment. During the COVID-19 pandemic, freight transportation of products from our international suppliers has been delayed or suspended during the outbreak. We will consider the need for a reserve when and if a supplier fails to fulfill our orders within the time frame as stipulated in the purchase contracts.

As of November 7, 2023, $9,150 or 12% of our advances to suppliers outstanding at September 30, 2023 had been delivered to us in the form of purchases of furniture.

### Shelf Registration

On October 8, 2020, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $60,000,000. The shelf registration statement was declared effective on October 15, 2020 (the “2020 Form S-3”). On July 23, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 222,902 shares of common stock. The shares were offered and sold by the Company pursuant to the effective shelf registration statement on Form S-3. The offering gross proceeds were $3,120,622 before deducting placement agent’s commissions and other offering costs, and the net proceeds of the offering were approximately $2,760,000. The offering closed on July 27, 2021. The 2020 Form S-3 expired on October 15, 2023.

On October 13, 2023, the Company filed a new shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $55,000,000. The new shelf registration statement was declared effective on October 23, 2023.

### Other Long-Term Liabilities

As of September 30, 2023, we recorded long-term taxes payable of $0.64 million, consisting of an income tax payable of $0.64 million, primarily arising from a one-time transition tax recognized in the fourth quarter of 2017 on our post-1986 foreign unremitted earnings, as ASC 740 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.

We elected to pay the one-time transition tax over the eight years commencing April 2018.

### Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

## Controls and procedures

As filed, 1,823 characters.

### Evaluation of Disclosure Controls and Procedures

We have evaluated, under the supervision of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2023. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during or subsequent to the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-041292. Last ingested by Listed: Nov 4, 2026, 17:44 ET. No prices; not investment advice.