PINX:STVS Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-177353

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.)

6541 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  x    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  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
(do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  ¨   NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,486,567 shares of common stock outstanding as of August 10, 2012.
 

Nova Lifestyle, Inc.

Table of Contents
 
   
Page
PART I. FINANCIAL INFORMATION
 
     
Item 1.
1
 
1
 
3
 
4
 
6
Item 2.
20
Item 3.
29
Item 4.
30
     
PART II. OTHER INFORMATION
 
     
Item 1.
31
Item 1A.
31
Item 2.
31
Item 3.
31
Item 4.
31
Item 5.
31
Item 6.
31
     
 
32
     
 
33
 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
 
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Assets
           
             
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $ 2,136,562     $ 2,505,179  
Accounts receivable, net
    22,162,058       18,974,612  
Accounts receivable - related party
    --       28,289  
Due from factor
    --       203,351  
Advance to suppliers
    1,123,472       349,767  
Inventories
    2,325,080       1,848,081  
Prepaid expenses and other receivable
    302,468       113,853  
Deferred tax asset
    156,514       156,974  
                 
Total Current Assets
    28,206,154       24,180,106  
                 
Noncurrent Assets
               
    Heritage and cultural assets
    128,199       128,687  
Plant, property and equipment, net
    8,668,266       8,721,186  
Construction in progress
    978,224       91,466  
Construction deposit
    --       634,830  
Goodwill
    218,606       218,606  
Intangible assets, net
    1,235,900       724,465  
    Deferred tax asset, net
    118,171       118,144  
                 
Total Noncurrent Assets
    11,347,366       10,637,384  
                 
Total Assets
  $ 39,553,520     $ 34,817,490  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Liabilities and Stockholders' Equity
           
             
Current Liabilities
           
Accounts payable
  $ 3,339,981     $ 6,758,058  
Line of credit
    3,495,140       --  
Advance from customers
    90,755       91,021  
Accrued liabilities and other payables
    825,303       834,128  
Taxes payable
    426,620       198,984  
                 
Total Current Liabilities
    8,177,799       7,882,191  
                 
Noncurrent Liabilities
               
 Deferred rent payable
    48,792       58,949  
 Income tax payable
    4,215,859       4,016,266  
                 
Total Noncurrent Liabilities
    4,264,651       4,075,215  
                 
Total Liabilities
    12,442,450       11,957,406  
                 
Contingencies and Commitments
               
                 
Stockholders' Equity
               
Common stock, $0.001 par value; 75,000,000 shares authorized,
   18,486,567 and 17,898,267 shares issued and outstanding
   as of June 30, 2012 and December 31, 2011, respectively
    18,487       17,898  
Additional paid-in capital
    18,970,395       17,074,535  
Subscription receivable
    (1,950,000 )     (1,950,000 )
Statutory reserves
    6,241       6,241  
Accumulated other comprehensive income
    2,089,889       2,138,974  
Retained earnings
    7,976,058       5,572,436  
                 
Total Stockholders' Equity
    27,111,070       22,860,084  
                 
Total Liabilities and Stockholders' Equity
  $ 39,553,520     $ 34,817,490  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
 
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net Sales
  (Including sales to related party of $0 and $625,582 during the six
  months ended June 30, 2012 and 2011; and $0 and $261,180
  during the three months ended June 30, 2012 and 2011, respectively)
  $ 27,146,315     $ 14,892,220     $ 16,147,061     $ 9,259,430  
                                 
Cost of Sales
    20,320,386       10,650,433       12,331,407       6,806,804  
                                 
Gross Profit
    6,825,929       4,241,787       3,815,654       2,452,626  
                                 
Operating Expenses
                               
Selling expenses
    1,354,553       795,109       664,646       574,633  
General and administrative expenses
    2,360,913       1,416,998       1,309,698       1,090,445  
Loss on disposal of plant, property and equipment
    123,775       --       --       --  
                                 
Total Operating Expenses
    3,839,241       2,212,107       1,974,344       1,665,078  
                                 
Income From Operations
    2,986,688       2,029,680       1,841,310       787,548  
                                 
Other Income (Expenses)
                               
Non-operating income (expense)
    (23,039 )     10,474       (25,338 )     5,512  
Foreign exchange transaction gain (loss)
    23,975       (60,729 )     15,663       (37,531 )
Financial expense
    (46,898 )     (16,322 )     (36,086 )     (6,933 )
                                 
Total Other Expenses, Net
    (45,962 )     (66,577 )     (45,761 )     (38,952 )
                                 
Income Before Income Tax
    2,940,726       1,963,103       1,795,549       748,596  
                                 
Income Tax Expense
    537,104       378,035       370,589       169,070  
                                 
Net Income
    2,403,622       1,585,068       1,424,960       579,526  
                                 
Other Comprehensive Income
                               
Foreign currency translation
    (49,085 )     235,985       (61,930 )     131,511  
                                 
Comprehensive Income
  $ 2,354,537     $ 1,821,053     $ 1,363,030     $ 711,037  
                                 
Basic weighted average shares outstanding
    18,431,799       11,788,314       18,486,567       11,952,747  
Diluted weighted average shares outstanding
    18,589,410       11,788,314       18,491,138       11,952,747  
                                 
Basic net earnings per share
  $ 0.13     $ 0.13     $ 0.08     $ 0.05  
Diluted net earnings per share
  $ 0.13     $ 0.13     $ 0.08     $ 0.05  
 
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, 2012 AND 2011 (Unaudited)
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
             
Cash Flows From Operating Activities
           
 Net Income
  $ 2,403,622     $ 1,585,068  
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
               
Depreciation and amortization
    375,154       312,023  
Loss on fixed assets disposal
    123,775       --  
Bad debt allowance
    223,859       --  
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,437,107 )     (2,659,221 )
Accounts receivable - related party
    28,289       140,907  
Advance to suppliers
    (774,197 )     (542,783 )
Inventories
    (481,870 )     81,615  
Other current assets
    (189,365 )     (63,238 )
Other assets
    --       (611,518 )
Accounts payable
    (3,409,427 )     2,044,082  
Advance from customers
    (245 )     (18,655 )
Accrued expenses and other payables
    (6,366 )     (247,938 )
Deferred rent payable
    (9,962 )     6,538  
Taxes payable
    441,490       291,885  
 
               
Net Cash (Used in) Provided by Operating Activities
    (4,712,350 )     318,765  
                 
Cash Flows From Investing Activities
               
Cash received from fixed assets disposal
    8,369       --  
Acquisition of intangible asset
    (539,049 )     --  
Purchase of heritage and cultural assets
    --       (124,220 )
Purchase of property and equipment
    (462,283 )     (283,028 )
Construction in progress
    (255,390 )     (38,220 )
                 
Net Cash Used in Investing Activities
    (1,248,353 )     (445,468 )
 
               
Cash Flows From Financing Activities
               
Advance to related parties
    --       (1,553,360 )
Repayment from related parties
    --       1,353,117  
Proceeds of line of credit and bank loan
    3,498,211       --  
Cash proceeds from private placement, net
    1,753,849       --  
Due from factor
    203,351       --  
Cash received from warrants exercised
    142,600       --  
                 
Net Cash Provided by (Used in) Financing Activities
  $ 5,598,011     $ (200,243 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
   
2012
   
2011
 
             
Effect of Exchange Rate Changes on
           
 Cash and Cash Equivalents
  $ (5,925 )   $ 5,753  
                 
Net decrease in cash and cash equivalents
    (368,617 )     (321,193 )
                 
Cash and cash equivalents, beginning of period
    2,505,179       985,004  
                 
Cash and cash equivalents, ending of period
  $ 2,136,562     $ 663,811  
                 
Supplemental Disclosure of Cash Flow Information
         
                 
Cash paid during the period for:
               
Income tax payments
  $ 191,630     $ 118,774  
Interest expense
  $ 11,332     $ --  
                 
Supplemental Disclosure of Non-Cash Financing Activities
         
                 
Subscription receivable from sales of common stock
  $ --     $ 2,400,000  
Construction deposit transfer to construction in progress
  $ 634,176     $ --  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
NOVA LIFESTYLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (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.

Effective as of June 27, 2011, the company changed its name from Stevens Resources, Inc. to Nova LifeStyle, Inc. Concurrently with this action, Nova LifeStyle authorized a 5-for-1 forward split of its common stock effective June 27, 2011. Prior to the forward split, Nova LifeStyle had 2,596,000 shares of its common stock outstanding, and, after giving effect to the forward split, it had 12,980,000 shares of its common stock outstanding. The effect of the stock split has been retroactively restated in the periods presented.

On June 30, 2011, Nova LifeStyle entered into and consummated a series of agreements that resulted in the acquisition of all of the ordinary shares of Nova Furniture Limited (“Nova Furniture”), a corporation primarily engaged in investment in China and organized on April 29, 2003, under the laws of the British Virgin Islands (“BVI”). Pursuant to the terms of a Share Exchange Agreement and Plan of Reorganization dated June 30, 2011 (the “Share Exchange Agreement”), Nova LifeStyle issued 11,920,000 shares of its common stock to the four designee shareholders of Nova Furniture in exchange for their 10,000 ordinary shares of Nova Furniture, consisting of all of its issued and outstanding capital stock. Concurrently with the Share Exchange Agreement and as a condition thereof, Nova LifeStyle entered into an agreement with its former president and director, pursuant to which he returned 10,000,000 shares of Nova LifeStyle’s common stock to Nova LifeStyle for cancelation in exchange for an unsecured 90-day promissory note of $80,000 bearing interest at 0.46% per annum. The $80,000 was paid in full on August 30, 2011. Upon completion of the foregoing transactions, Nova LifeStyle had 14,900,000 shares of its common stock issued and outstanding.

For accounting purposes, the transaction described above was treated as a recapitalization of Nova Furniture because Nova Furniture’s shareholders own the majority of Nova LifeStyle’s outstanding common stock following the transaction and exercise significant influence over the operating and financial policies of the consolidated entity, and Nova LifeStyle was a non-operating shell prior to the acquisition. Pursuant to Securities and Exchange Commission (“SEC”) rules, the merger or acquisition of a private operating company into a non-operating public shell with nominal net assets is considered a capital transaction in substance, rather than a business combination. As a result, the accompanying consolidated financial statements have been retroactively restated to reflect the recapitalization.

The “Company” and “Nova” collectively refer to Nova LifeStyle, the U.S. parent, and its subsidiaries, Nova Furniture, Nova Furniture (Dongguan) Co., Ltd. (“Nova Dongguan”), Nova Furniture Macao Commercial Offshore Ltd. (“Nova Macao”), and Diamond Bar Outdoors, Inc. (“Diamond Bar”). Nova is engaged in development, manufacture and sale of furniture in China and worldwide. Nova Dongguan Chinese Style Furniture Museum (“Nova Museum”) is a non-profit organization engaged principally in the promotion and dissemination of the culture and history of furniture in China.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The condensed 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, 2012 and for the six and three month periods ended June 30, 2012 and 2011 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, 2011, previously filed with the SEC.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of June 30, 2012, its interim condensed consolidated results of operations and cash flows for the six and three month periods ended June 30, 2012 and 2011, 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 at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the allowance for bad debt, valuation of inventories and recoverability of long-lived assets and goodwill. Actual results could differ from those estimates.

Business Combination

For a business combination with an acquisition date on or after January 1, 2009, the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree were 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, were 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 was recognized as a gain attributable to the acquirer.

Deferred tax liability and asset were 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 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. As of June 30, 2012 and December 31, 2011, the Company concluded there was no impairment of goodwill.

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. Based on historical collection activity, the Company recorded $223,859 and $0 as allowance for bad debts as of June 30, 2012 and December 31, 2011, respectively.
 
Inventories

Inventories are stated at the lower of cost or market value with cost determined on a weighted-average basis, which approximates the first-in first-out method. 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 provision for write-downs of inventory at June 30, 2012 and December 31, 2011.
 

Plant, Property and Equipment and Construction in Progress
 
Plant, property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; 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:
 
Building and workshops
20 years
Computer and office equipment
5 years
Museum decoration and renovation
10 years
Machinery
10 years
Autos
5 years

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

Construction in progress represents capital expenditure in respect of direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. Construction in progress is not depreciated.
  
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, 2012 and December 31, 2011, there were no significant impairments of its long-lived assets except that the Company disposed of an obsolete and unused workshop for the loss of $123,775 during the six months ended June 30, 2012.

Research and Development

Research and development costs are related primarily to the Company designing and testing its new products in development stage. Research and development costs are recognized in general and administrative expenses and expensed as incurred. Research and development expense was $250,160 and $64,675 for the six months ended June 30, 2012 and 2011, respectively; $136,187 and $34,938 for the three months ended June 30, 2012 and 2011, 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 for the period ended June 30, 2012 differs from the U.S. federal statutory tax rate primarily as a result of a tax benefit from the tax-exempt status of Nova Macao and unrecognized tax benefits from uncertain tax positions.

Nova Lifestyle, Inc. and Diamond Bar Outdoors, Inc. are subject to U.S. federal and state income taxes. Nova Furniture BVI was incorporated in the BVI. There is no income tax for a company domiciled in the BVI. Accordingly, the Company’s consolidated financial statements do not present any income tax provision related to the BVI tax jurisdiction where Nova Furniture BVI is domiciled.

Nova Dongguan and Nova Museum are governed by the Enterprise Income Tax Law of the People’s Republic of China (the “PRC”) which is subject to a 25% corporate income tax. Nova Museum is subject to a 25% corporate income tax in the first year and allowed to apply for tax-exempt status in the second year following its incorporation.  Nova Macao is an income tax-exempt entity incorporated and domiciled in Macao.
 

During the six months ended June 30, 2012 and 2011, the Company recorded income tax expense of approximately $537,000 and $378,000, respectively. During the three months ended June 30, 2012 and 2011, the Company recorded income tax expense of approximately $371,000 and $169,000, respectively.

As of June 30, 2012, unrecognized tax benefits were approximately $3.8 million.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $3.8 million as of June 30, 2012.
 
A reconciliation of the January 1, 2012, through June 30, 2012, amount of unrecognized tax benefits excluding interest and penalties ("Gross UTB") is as follows:
 
   
Gross UTB
 
Beginning Balance - January 1, 2012
   
3,709,129
 
Increase in unrecorded tax benefits taken in 2012
   
83,480
 
Exchange rate adjustment – 2012
   
(14,305)
 
Ending Balance – June 30, 2012
 
$
3,778,304
 

At June 30, 2012, and December 31, 2011, the Company had cumulatively accrued approximately $438,000 and $310,000, respectively, 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 $129,000 and $22,000 for the six months ended June 30, 2012, and 2011, respectively, and $62,000 and $42,000 for the three months ended June 30, 2012 and 2011, respectively. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next twelve months.

Nova Dongguan is subject to taxation in the PRC. Nova Dongguan’s PRC income tax returns are generally not subject to examination by the tax authorities for tax years before 2007. With a few exceptions, the tax years 2007-2011 remain open to examination by tax authorities in the PRC; the tax year 2011 for US entities remain open to examination by tax authorities in the US.

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.

Franchise Arrangements

In 2010, the Company began entering into area product franchise agreements with franchisees who operate specialty furniture stores carrying only Nova-branded products. The product franchise agreement provides for the franchisee to retail Nova-brand furniture products for a period of one year from the date of the agreement. The franchisee is 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 is required to guarantee a minimum purchase amount from the Company during the contract period. The Company has the right to terminate the agreement should the franchisee fail to meet the minimum purchase amounts. The Company provides the franchisee with store images and designs, signage, floor plan product information and training. In addition, the Company will rebate a per square meter subsidy to the franchisee for the store build-out within six months from the agreement date. The franchisee earns 30% of the rebate on its initial purchase from the Company and then at a rate of 5% of each subsequent purchase until fully refunded of its deposit or six months from the agreement date, whichever is earlier. At June 30, 2012 and December 31, 2011, the Company had franchising subsidy payable of $154,065 and $187,758, respectively. 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 franchisee.
 

Cost of Sales

Cost of sales consists primarily of 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, 2012 and 2011, shipping and handling costs were $299,592 and $217,942, respectively; during the three months ended June 30, 2012 and 2011, shipping and handling costs were $154,796 and $ 148,691, respectively.

Advertising

Advertising expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising. The Company expenses all advertising costs as incurred. Advertising expense was $111,239 and $225,792 for the six months ended June 30, 2012 and 2011, respectively; and $54,331 and $193,151 for the three months ended June 30, 2012 and 2011, respectively.
 
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, warrants and stock options 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 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 earnings per share for the six and three months ended June 30, 2012 and 2011:
 
   
Six Months Ended
   
Three Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
Net income
 
$
2,403,622
   
$
1,585,068
   
$
1,424,960
   
$
579,526
 
                                 
Weighted average shares outstanding – basic
   
18,431,799
     
11,788,314
     
18,486,567
     
11,952,747
 
Effect of dilutive securities:
                               
Unexercised warrants
   
157,611
     
-
     
4,571
     
-
 
                                 
Weighted average shares outstanding – diluted
   
18,589,410
     
11,788,314
     
18,491,138
     
11,952,747
 
                                 
Earnings (loss) per share – basic
 
$
0.13
   
$
0.13
   
$
0.08
   
$
0.05
 
Earnings (loss) per share – diluted
 
$
0.13
   
$
0.13
   
$
0.08
   
$
0.05
 
 
At June 30, 2012 and December 31, 2011, the Company had no options to purchase shares of common stock outstanding and warrants to purchase 983,280 and 899,480 shares of common stock were outstanding and exercisable, respectively.

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.
 

Two major customers accounted for 37% (22% and 15% for each) and 43% (32% and 11% for each) of the Company’s sales for the six months ended June 30, 2012 and 2011, respectively.  Two and one major customers accounted for 37% (22% and 15% for each) and 34% of the Company’s sales for the three months ended June 30, 2012 and 2011, respectively. Accounts receivable from these customers amounted to $7,572,570 and $2,071,711 as of June 30, 2012 and December 31, 2011, respectively.

The Company purchased its products from one major vendor during the six months ended June 30, 2012 and 2011, accounting for 12% and 15% of the purchases, respectively. One major vendor accounted for 16% and 15% of the purchases during the three months ended June 30, 2012 and 2011, respectively. There were no accounts payable to this vendor as of June 30, 2012, and December 31, 2011.

The operations of the Company are located principally in China and the US. Accordingly, the Company’s Chinese subsidiaries' business, financial condition and results of operations may be influenced by the political, economic and legal environments in China, as well as by the general state of the PRC economy.

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments in China and foreign currency exchange. The Company’s results may be adversely affected by changes in PRC government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchase and expense transactions in China and Macao are denominated in Chinese Yuan Renminbi (“RMB”) and Macau Pataca (“MOP”) (prior to 2011), respectively, and all of the assets and liabilities of the Company’s subsidiaries in China and Macao are also denominated in RMB and MOP (prior to 2011), respectively. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

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.

Fair Value of Financial Instruments

Some of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debt, have carrying amounts that approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC Topic 815, “Derivatives and Hedging.”
 

Foreign Currency Translation and Transactions

The accompanying condensed consolidated financial statements are presented in USD. The functional currency of Nova LifeStyle, Nova Furniture, Nova Macao and Diamond Bar is the United States Dollar (“$” or “USD”). The functional currency of Nova Dongguan and Nova Museum 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 and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded as a separate component of stockholders’ equity, 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.
 
Comprehensive Income (Loss)

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, 2012 and 2011, 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 management organizes segments within the company for making operating decisions and assessing performance. 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, manufacture and sale of furniture. All of the Company’s long-lived assets for production are located at its facilities in Dongguan, Guangdong Province, China, and operate within the same environmental, safety and quality regulations governing furniture manufacturers. The Company established Nova Macao, and acquired Diamond Bar for the purpose of marketing and selling the Company’s products. As a result, management views the business and operations of Nova Dongguan, Nova Macao and Diamond Bar as a blended gross margin when determining future growth, return on investment and cash flows. Nova Museum, a non-profit organization engaged principally in the promotion and dissemination of the culture and history of furniture in China, has no operations or substantial assets other than its decorations and renovation, and its heritage and cultural assets are for the purpose of exhibition only.

Accordingly, management concluded that the Company had one reportable segment under ASC 280 because: (i) the Company’s products sold through Nova Dongguan, Nova Macao and Diamond Bar are created with similar production processes, in the same facilities, under the same regulatory environment and sold to similar customers using similar distribution systems; (ii) Diamond Bar is a U.S. furniture distributor based in California but operates under the same senior management of Nova Dongguan and Nova Macao, and management views the operations of Nova Dongguan, Nova Macao and Diamond Bar as a whole for making business decisions; and (iii) although Nova Museum is principally engaged in the dissemination of the culture and history of furniture in China, it also serves 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 is operated under the same management with the same resources and in the same location as Nova Dongguan, and it is an additive and supplemental unit to the Company’s main operations, the manufacture and sale of furniture.

New Accounting Pronouncements

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP.  The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

As of June 30, 2012, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s interim consolidated financial statements.
 

Note 3 - Inventories

As of June 30, 2012 and December 31, 2011, inventories consisted of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Raw material
 
$
37,217
   
28,667
 
Work in progress
   
686,883
     
436,980
 
Finished goods
   
1,600,980
     
1,382,434
 
                 
   
$
2,325,080
   
$
1,848,081
 

Note 4 - Heritage and Cultural Assets

As of June 30, 2012 and December 31, 2011, Nova Museum had heritage and cultural assets of $128,199 and $128,687, consisting principally of collectibles and antiques for exhibition. Depreciation is not required to be provided on heritage assets that have indefinite lives and no reduction in their value with the passage of time; however, the carrying amount of the heritage and cultural assets will be reviewed when there is evidence of impairment in accordance with ASC 360-10.

Note 5 - Plant, Property and Equipment, Net

As of June 30, 2012 and December 31, 2011, plant, property and equipment consisted of the following:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Building and workshops
 
$
7,379,886
   
$
7,604,331
 
Office equipment
   
526,658
     
465,596
 
Autos
   
307,269
     
345,492
 
Machinery
   
2,940,719
     
2,643,008
 
Museum decoration and renovation
   
549,125
     
422,280
 
Less: accumulated depreciation
   
(3,035,391
)
   
(2,759,521
)
                 
   
$
8,668,266
   
$
8,721,186
 

Depreciation expense was $350,845 and $306,511 for the six months ended June 30, 2012 and 2011, respectively; $170,798 and $154,217 for the three months ended June 30, 2012 and 2011, respectively.

During the six months ended June 30, 2012, the Company had disposal loss of $123,775 on retirement of unused and obsolete workshop.

Note 6 - Construction in Progress

At June 30, 2012, the construction in progress of $978,224 consisted of construction cost of a new manufacturing plant at Nova Dongguan (Phase II factory construction project). The total construction cost is approximately $6.16 million and the Company is required to pay additional $5.18 million to complete the construction.  The Company expects to complete construction by the end of 2012.

At December 31, 2011, the construction in progress of $91,466 consisted of construction material purchased for the construction of a new manufacturing plant at Nova Dongguan (Phase II factory construction project).
 
 
Note 7 - Intangible Assets

Intangible assets consisted of land use right, trademark and customer relationship. All land in the PRC is government-owned and the ownership cannot be sold to any individual or company. However, the government grants the user a right to use the land (“land use right”). The Company acquired the right to use land in Dongguan, Guangdong Province, China, in 2004 for 50 years and is amortizing such rights on a straight-line basis for 50 years.

At February 28, 2012, the Company acquired another land use right for $537,558 (RMB3.4 million) with useful life of 50 years and is amortizing such right on a straight-line basis for 50 years. As of June 30, 2012, the Company paid in full for this land use right.  In addition, the Company is required to pay an annual fee at $240 per MU (total 17.97 MU for the land) from the second year after commencing of the land filling for 60 years for total of approximately $333,000 (RMB 2.1 million). The payment will be made annually with a 5% increase every 5 years. The Company will record such fees on a straight-line basis in future periods.

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 registered U.S. trademarks (Diamond Sofa and Diamond Furniture) for $200,000 paid in full at the closing. Amortization of customer relationship and trademark is provided using the straight-line method and estimated lives were 5 and 10 years, respectively.

Intangible assets consisted of the following at June 30, 2012 and December 31, 2011:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Land use right
 
$
1,107,589
   
$
572,202
 
Customer relationship
   
50,000
     
50,000
 
Trademark
   
200,000
     
200,000
 
Less: accumulated amortization
   
(121,689
)
   
(97,737
)
                 
   
$
1,235,900
   
$
724,465
 

Amortization of intangible assets was $24,309 and $5,512 for the six months ended June 30, 2012 and 2011, respectively, and $13,053 and $2,774 for the three months ended June 30, 2012 and 2011, respectively. Annual amortization expense is expected to be approximately $50,400 for each year from 2013 to 2016, and expected to be approximately $33,750 in 2017.

Note 8 - Prepaid Expenses and Other Receivables

Other current assets consisted of the following at June 30, 2012 and December 31, 2011:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Prepaid expenses
 
$
290,989
   
$
81,841
 
Other receivables
   
11,479
     
32,012
 
Total
 
$
302,468
   
$
113,853
 

Other receivables represented cash advances to employees and advertising and exhibition deposits. Prepaid expenses included prepayments for insurance and advertising.

Note 9 - Construction Deposit

At December 31, 2011, the Company had a refundable deposit of $634,830 to an independent contractor for the Phase II factory construction project at Nova Dongguan. Total cost of this project is estimated to be $6.16 million. The Company commenced construction in January 2012 and transferred the deposit to construction in progress. The company expects to complete construction by the end of 2012.
 

Note 10 - Accrued Liabilities and Other Payables

Accrued liabilities and other payables consisted of the following at June 30, 2012 and December 31, 2011:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Other payables
 
$
99,800
   
$
30,011
 
Salary payable
   
453,619
     
497,257
 
Franchising subsidy
   
156,200
     
187,758
 
Accrued expenses
   
115,684
     
119,102
 
                 
Total
 
$
825,303
   
$
834,128
 

Accrued expenses represented accrued utility and freight expenses. Other payables represented payables to contractors and vendors other than for purchase of materials. Franchising subsidy represented the accrued amount the Company will pay to its franchisees as a rebate to support their franchise store decoration expense.

Note 11 - Line of Credit

On May 25, 2012, Diamond Bar entered into a an agreement with a bank in California for a line of credit up to $5,000,000 with annual interest of 4.5% and maturity on June 15, 2013. The line of credit was guaranteed by Nova Lifestyle. As of June 30, 2012, Diamond Bar had borrowed $2,388,403 from this credit line. During the six months ended June 30, 2012, the Company paid interest of $7,478.

The loan has the following covenants: (i) maintain a minimum tangible net worth of not less than $3 million; (ii) maintain a current ratio in excess of 1.25 to 1.00; and (iii) maintain a ratio of debt to tangible net worth not in excess of 3.500 to 1.000; (iv) the pre-tax income must be not less than 0.5% of total revenue quarterly. As of June 30, 2012, Diamond Bar was in compliance with all the covenants.

On April 25, 2012, Nova Dongguan entered into an agreement with a commercial bank in Dongguan for a line of credit up to $3,162,105 (RMB 20 million) with maturity on April 24, 2015.  As of June 30, 2012, Nova Dongguan borrowed $1,106,737 (RMB 7 million) with maturity on May 20, 2013 from this credit line. The loan bears annual interest of 6.94% and requires monthly payment on the interest; the interest rate will be adjusted annually. The loan was guaranteed by Nova Dongguan and the Company’s CEO. During the six months ended June 30, 2012, the Company paid interest of $24,305.

Note 12 - Related Party Transactions

The Company’s president, Ms. Lam, was the co-founder of KTY International Inc. (“KTY”) (DBA: Diamond Sofa), a former customer of the Company until September 2010, at which time KTY ceased doing business with the Company. In October 2010 Ms. Lam subsequently became the Chief Executive Officer of Diamond Bar, which had acquired the business of Diamond Sofa. The Company appointed Ms. Lam its president and director on June 30, 2011, and, as of such appointment date, Ms. Lam had no ownership interest in Diamond Sofa or Diamond Bar. The Company acquired all the outstanding capital stock of Diamond Bar on August 31, 2011. During the six and three months ended June 30, 2012, Diamond Sofa accounted for $0 of the Company’s sales. During the six and three months ended June 30, 2011, Diamond Bar accounted for $625,582 and $261,180, respectively, of the Company’s sales. The accounts receivable from Diamond Sofa and Diamond Bar was $0 and $28,289 at June 30, 2012 and December 31, 2011, respectively.

On August 6, 2011, Diamond Bar leased a warehouse and office in Commerce, California, U.S., under a three-year renewable lease agreement. The warehouse is owned by the spouse of the Company’s president. The monthly rent under this lease was $38,100. Total rental expense for the six and three months ended June 30, 2012 was $245,000 and $105,000, respectively.

On September 30, 2011, Diamond Bar leased a showroom in High Point, North Carolina from the Company’s president. The lease was for $15,192 and only for use during a furniture exhibition held in October 2011. This lease was renewed for another year for the same rate on April 1, 2012.
 

Note 13 - Deferred Rent Payable

Deferred rent payable represented supplemental payments the Company must pay to the residents who originally lived on the land in Dongguan, Guangdong Province, China, to which the Company acquired land use rights for commercial use. The Company was required to pay an annual amount at RMB 800 per mu (or 666.67 square meters) for a total of 60 mu (or 40,000 square meters) starting from 2003 for 60 years. The payment increases 10% every 5 years. The Company recorded such expense on a straight-line basis. During the six months ended June 30, 2012 and 2011, the Company recorded expense of $6,781 and $6,538, respectively. During the three months ended June 30, 2012 and 2011, the company recorded expense of $3,391 and $3,290, respectively. As of June 30, 2012 and December 31, 2011, the Company has $48,792 and $58,949 of deferred rent payable, respectively. 

Note 14 - Due From Factor

On April 10, 2010, Diamond Bar entered into a factoring and security agreement with a credit management company for full factoring services without recourse. The factoring fee for accounts receivable insurance and collection service was 2.25% of each invoice or credit note transferred, but not less than a minimum annual amount of $12,000 payable monthly at $1,000. If Diamond Bar requested financing service in addition to accounts receivable insurance and collection service from the credit management company, the monthly interest charge was one month LIBOR plus 5.37%. The factoring agreement was terminated on December 15, 2011. As December 31, 2011, the Company had a net due from factor of $203,351 from the credit management company, which was cleared in January 2012.

In January 2012, the Company entered into a factoring and security agreement with another credit management company for accounts receivable insurance and collection service. The factoring fee is 1.5% of each invoice or credit note transferred. As of June 30, 2012, the Company did not have any amounts due from factor.

Note 15 - Stockholders’ Equity

Private Placement in January 2012

On January 13, 2012, the Company completed a private placement pursuant to which it sold 517,000 units, each such unit consisting of 1 share of the Company’s common stock and a warrant to purchase 15% of 1 share of the Company’s common stock, at $4.00 per unit for gross proceeds of $2.07 million. The warrants are immediately exercisable, expire on the third anniversary of their issuance and entitle the holders to purchase 77,550 shares of the Company’s common stock at $4.50 per share. The Company may call the warrants at $5.00 per share at any time after: (i) a registration statement registering the common stock underlying the warrants becomes effective; (ii) the common stock is listed on a national securities exchange; and (iii) the closing price of the common stock equals or exceeds $5.00. The Company also issued the placement agent in the private placement warrants to purchase 77,550 shares of the Company’s common stock under the same terms and conditions as the warrants issued to investors in the private placement. In connection with the financing, the Company paid $0.21 million in placement agent fees and $0.11 million of legal and other related cost.

The warrants issued in this private placement are exercisable for a fixed number of shares, solely redeemable by the Company and not redeemable by the warrant holders. Accordingly, these warrants are classified as equity instruments. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated life of 3 years, volatility of 67%, risk-free interest rate of 0.34% 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 $131,310, and the fair value of the warrants issued to the placement agent at grant date was $131,310.

Warrants

Following is a summary of the warrant activity for the six months ended June 30, 2012:

   
Number of
Warrants
   
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term in Years
 
Outstanding at January 1, 2012
   
899,480
   
$
2.00
     
2.63
 
Granted
   
155,100
   
$
4.50
     
3.00
 
Exercised
   
71,300
     
2.00
     
-
 
Forfeited
   
-
     
-
     
-
 
Expired
   
-
     
-
     
-
 
Outstanding at June 30, 2012
   
983,280
   
$
2.39
     
2.19
 
Exercisable at June 30, 2012
   
983,280
   
$
2.39
     
2.19
 
 

Note 16 - 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 subsidiaries, Nova Dongguan and 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 the Company’s PRC subsidiaries. Pursuant to the corporate laws of the PRC and Macao, including the PRC Regulations on Enterprises with Foreign Investment, Nova Dongguan and Nova Macao are only required to maintain one 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 following 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, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend.

Surplus Reserve Fund

Nova Dongguan and Nova Macao are 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, 2012 and December 31, 2011, Nova Macao had surplus reserve of $6,241, representing 50% of its registered capital. Nova Dongguan did not make any transfer to surplus reserve due to its accumulated deficit.
  
Common Welfare Fund

The common welfare fund is a voluntary fund to which Nova Dongguan and 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 Dongguan and Nova Macao do not participate in this voluntary fund.

Note 17 - Geographical Sales

Geographical distribution of sales consisted of the following for the six and three months ended June 30, 2012 and 2011 (unaudited):
 
   
For six months ended June 30,
   
For three months ended June 30,
 
Geographical Areas
 
2012
   
2011
   
2012
   
2011
 
                                 
China
 
$
7,604,846
   
$
4,953,905
   
$
4,850,192
   
$
2,878,443
 
North America
   
10,460,271
     
3,777,490
     
5,744,109
     
2,505,053
 
Asia
   
392,915
     
307,890
     
310,949
     
171,396
 
Europe
   
6,878,974
     
4,909,358
     
4,242,432
     
3,161,714
 
Australia
   
284,368
     
307,256
     
155,651
     
158,356
 
Hong Kong
   
519,946
     
228,125
     
180,936
     
99,876
 
Other countries
   
1,004,995
     
408,196
     
662,792
     
284,592
 
                                 
   
$
27,146,315
   
$
14,892,220
   
$
16,147,061
   
$
9,259,430
 
 

Note 18 - Business Acquisition and Unaudited Pro Forma Information

On August 31, 2011, Nova LifeStyle acquired all the outstanding capital stock of Diamond Bar for $0.45 million paid in full at the closing pursuant to a stock purchase agreement entered into with the sole shareholder of Diamond Bar. Diamond Bar, doing business as Diamond Sofa, is engaged in the import, marketing and sale of furniture in the U.S. market. The acquisition was accounted as a business combination in accordance with ASC Topic 805 “Business Combination.”

According to ASC Topic 805, the allocation of Diamond Bar’s purchase price among assets acquired and liabilities assumed is based on estimates of the fair values. Under purchase method of accounting, the total purchase price is allocated to tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values with the excess changed to goodwill.

In accordance with SEC regulation S-X Rule 3-05, Diamond Bar was not a significant subsidiary as of the acquisition date. Therefore, no separate audited financial statements are presented.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

Cash
 
$
141,231
 
Accounts receivable
   
986,145
 
Inventory
   
786,776
 
Property and equipment
   
164,913
 
Customer relationship
   
50,000
 
Goodwill
   
218,606
 
Accounts payable
   
(1,742,540
)
Other payable and accrued expenses
   
(138,131
)
Deferred tax liability
   
(17,000
)
Purchase price
 
$
450,000
 
 
The following unaudited pro forma consolidated results of operations of Nova LifeStyle and Diamond Bar for the six and three months ended June 30, 2011, presents the operations of Nova LifeStyle and Diamond Bar as if the acquisition of Diamond Bar occurred on January 1, 2011. The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisition been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.

   
For the six
months ended
June 30,
   
For the three
months ended
June 30,
 
   
2011
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
Net sales
  $ 18,193,943     $ 11,137,204  
                 
Net income
  $ 1,503,898     $ 506,307  
                 
Basic weighted average shares outstanding
    11,788,314       11,952,747  
Diluted weighted average shares outstanding
    11,788,314       11,952,747  
                 
Basic net earnings per share
  $ 0.07     $ 0.02  
Diluted net earnings per share
  $ 0.07     $ 0.02  
 
Net sales and net income of Diamond Bar included in the consolidated income statement for the six months ended June 30, 2012, were $6,581,697and $338,192, respectively; net sales and net income for the three months ended June 30, 2012 were $4,789,615 and $659,009, respectively.
 
 
Note 19 - Commitments and Contingencies

Lease Commitment

The Company has entered into several lease agreements for office, warehouse and showroom space. Total rental expense for the six months ended June 30, 2012 and 2011, was $354,300 and $6,932; respectively, $150,800 and $3,468 for the three months ended June 30, 2012 and 2011, respectively. The estimated annual rental expense for lease commitment is as follows:
Year
 
Amount
 
2012 (July 1 to December 31)
 
$
313,000
 
2013
   
427,000
 
Total
 
$
740,000
 
 
Capital Contribution

Nova Dongguan’s total registered capital is $20 million. As of June 30, 2012 and December 31, 2011, Nova Dongguan has received $12.60 million and $11.89 million in capital contributions, respectively. The remaining $7.40 million of additional capital contribution was due by June 30, 2012. Nova Dongguan received an additional $1.00 million in August 2012, and the Dongguan Municipal Foreign Trade and Economic Cooperation Bureau allowed Nova Dongguan to fulfill the remaining amount of capital contributions from its shareholders by June 30, 2013. The Company may apply for an extension of the payment period or reduction of the capital contribution requirement, if needed, as allowed by PRC regulations for foreign-invested enterprises. If the Company does not receive an extension or reduction of registered capital, and is unable to make the required capital contribution to registered capital, Nova Dongguan may be subject to a negotiated penalty related to the unsatisfied portion of registered capital.

Employment Agreements

On June 30, 2011, the Company entered into one-year employment agreements with Ya Ming Wong and Yuen Ching Ho to serve as the Company’s Chief Executive Officer and Chief Financial Officer, respectively. The agreements provide for annual salaries of $100,000 and $80,000, respectively, and annual bonuses at the sole discretion of the Board of Directors. The agreement was automatically extended for another year at June 30, 2012.
 
On June 30, 2011, the Company entered into a one-year employment agreement with Thanh H. Lam to serve as the Company’s president. The agreement, as amended effective as of September 1, 2011, provides for an annual salary of $80,000 and an annual bonus at the sole discretion of the Board. The agreement was automatically extended for another year at June 30, 2012.
 
Note 20 - Subsequent Events

The company has evaluated subsequent events through the issuance of the consolidated financial statements and no subsequent event is identified.

 
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. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. 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 other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. 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
 
Overview

We are a furniture design, manufacture, marketing, distribution and logistics company of modern home furniture for today’s middle class, urban consumer in diverse markets worldwide. We develop, produce and market high quality residential furniture for the living room, dining room, bedroom and home office in distinctive styles targeted at the medium and upper-medium price ranges. Our products feature urban contemporary styles offering comfort and functionality in matching furniture collections and upscale luxury pieces appealing to lifestyle-conscious middle and upper middle-income consumers. Our products are sold in the U.S., China, Europe, Australia and other markets worldwide. In China, we sell products under our brands through franchise stores to China’s growing middle class. In the U.S. and international markets, our customers principally consist of private label retailers and furniture distributors for whom we supply products that are in turn offered to retailers under their own brand names. We also sell products under the Diamond Sofa brand in the U.S. market. Our logistics, manufacturing and delivery capabilities provide our customers with the flexibility to select from our extensive furniture collections in their respective requirements. Our experience developing and marketing products for international markets has enabled us to develop the scale, logistics, marketing, manufacturing efficiencies and design expertise that serves as the foundation for us to expand aggressively into the highly attractive U.S. and China markets.

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, manufacture and sell residential furniture worldwide: Nova Dongguan, Nova Macao, Nova Museum and Diamond Bar. Nova Dongguan is a wholly foreign owned enterprise (“WFOE”) and was incorporated under the laws of the PRC on June 6, 2003. Nova Macao was organized under the laws of Macao on May 20, 2006. 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 and Nova Macao are wholly owned subsidiaries of Nova Furniture, a wholly owned subsidiary of the Company, organized under the laws of the BVI on April 29, 2003. We acquired Nova Furniture pursuant to the Share Exchange Agreement on June 30, 2011. Diamond Bar is a California corporation organized on June 15, 2000, which we acquired pursuant to a stock purchase agreement on August 31, 2011.

Nova Dongguan markets and sells our products in China to stores in our franchise network and to wholesalers and agents for domestic retailers and exporters. Nova Dongguan also provides the design expertise and facilities to manufacture our branded products and products for international markets under Original Design Manufacturer (“ODM”) and Original Equipment Manufacturer (“OEM”) agreements. Nova Macao is a trading company, importing, marketing and selling products designed and manufactured by Nova Dongguan and third party manufacturers for the U.S. and international markets. We are expecting the operations of Nova Macao to move oversight of manufacturing operations from Nova Dongguan, and we anticipate completion of this transition process by the end of 2012. 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. We commenced operations at our new factory in 2011 and anticipate completing construction of a new plant at our Nova Dongguan facilities in the second half of 2012. The manufacturing capacity provided by these new plants will help Nova Dongguan maintain current and anticipated levels of production on pace with our anticipated expansion and increase in sales to China. We intend to meet our liquidity requirements, including capital expenditures related to the expansion of our manufacturing facilities at Nova Dongguan, purchase of raw materials and the expansion of our business, through cash flow provided by operations, the proceeds from our recent private placements and funds raised through future offerings of our securities, if and when we determine such offerings are required.
 

Principal Factors Affecting Our Financial Performance

Significant factors that we believe could affect our operating results are the (i) cost of raw materials; (ii) prices of our products to our international retailer and wholesaler customers and their markup to end consumers; (iii) consumer acceptance of our new brands and product collections; and (iv) general economic conditions in the U.S., China, Europe and other international markets. We have experienced and anticipate continued fluctuation in raw material costs as a result of world economic conditions, such as the price of stainless and carbon steel. We normally can pass the raw material cost increase to our customers, but there may be a time lag as we renegotiate pricing with our customers on existing products and introduce new product collections. We attempt to mitigate short-term risks of raw material price swings in between customer price negotiations by purchasing some raw materials in advance based on forecasted production needs. In addition, we are less susceptible to these short-term raw material pricing risks in the China retail market because we reserve the right under our product franchise agreements to adjust our wholesale and retail product pricing based on raw material price fluctuations, providing franchisees with at least one month’s notice prior to price adjustment. We believe most of our customers are willing to pay us 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 introducing brands and product collections exclusively for China, acquiring the Diamond Sofa brand in the U.S. market and developing higher-margin products for the U.S. and international markets. 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 the U.S. and Europe remain challenging because they are experiencing a slower than anticipated recovery from the recent international financial crisis and the Euro-area crisis in particular. 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 recovery of housing markets. Furthermore, we believe that our expansion of direct sales in China and 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

While our significant accounting policies are described more fully in Note 2 to our accompanying condensed consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP for Nova LifeStyle and its subsidiaries, Diamond Bar, Nova Furniture, Nova Dongguan, Nova Macao and Nova Museum.

Use of Estimates

In preparing 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 at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the allowance for bad debts, valuation of inventories and recoverability of long-lived assets and goodwill. Actual results could differ from those estimates.

Accounts Receivable

Our 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.  The Company maintained an allowance for bad debt of $223,859 as of June 30, 2012.

Revenue Recognition

Our 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, no other significant obligations of ours 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, or VAT. All of our products sold in China are subject to VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials purchased in China and included in the cost of producing the finished product. We recorded VAT payable and VAT receivable net of payments in the 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 when we act as an agent for the PRC government.

Foreign Currency Translation and Transactions

The accompanying consolidated financial statements are presented in USD. The functional currency of Nova Lifestyle, Nova Furniture, Nova Macao and Diamond Bar is the US Dollar. The functional currency of our PRC subsidiaries, Nova Dongguan and Nova Museum, is RMB. The functional currencies of our foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded as a separate component of stockholders’ equity, 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.
  
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 management organizes segments within the company for making operating decisions and assessing performance. 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 our operations constitute a single reportable segment in accordance with ASC 280. We operate exclusively in one business: the design, manufacture and sale of furniture. All of our long-lived assets for production are located at our facilities in Dongguan, Guangdong Province, China, and operate within the same environmental, safety and quality regulations governing furniture manufacturers. We established Nova Macao and acquired Diamond Bar for the purpose of marketing and selling our products. As a result, management views the business and operations of Nova Dongguan, Nova Macao and Diamond Bar as a blended gross margin when determining future growth, return on investment and cash flows. Nova Museum, a non-profit organization engaged principally in the promotion and dissemination of the culture and history of furniture in China, has no operations or substantial assets other than its decorations and renovation, and its heritage and cultural assets are for the purpose of exhibition only.

Accordingly, management has concluded that we had one reportable segment under ASC 280 because: (i) all of our products sold through Nova Dongguan, Nova Macao and Diamond Bar are created with similar production processes, in the same facilities, under the same regulatory environment and sold to similar customers using similar distribution systems; (ii) Diamond Bar is a U.S. furniture distributor based in California but operates under the same senior management of Nova Dongguan and Nova Macao, and management views the operations of Nova Dongguan, Nova Macao and Diamond Bar as a whole for making business decisions; and (iii) although Nova Museum is mainly for disseminating the culture and history of furniture in China, it also serves a function of promoting and marketing our image and products by providing the platform and channel for consumers to be exposed to our furniture, it is operated under the same management with the same resources and is an additive and supplemental unit to our main operation, the manufacture and sale of furniture.

New Accounting Pronouncements

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP.  The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

As of June 30, 2012, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.
 

Results of Operations
 
Comparison of Three Months Ended June 30, 2012 and 2011

The following table sets forth the results of our operations for the three months ended June 30, 2012 and 2011. Certain columns may not add due to rounding.
 
   
Three Months Ended June 30,
 
   
2012
(Unaudited)
 
2011
(Unaudited)
 
   
$
   
% of Sales
   
$
   
% of Sales
 
Net sales
   
16,147,061
           
9,259,430
       
Cost of sales
   
12,331,407
     
76
%
   
6,806,804
     
74
%
Gross profit
   
3,815,654
     
24
%
   
2,452,626
     
26
%
Operating expenses
   
1,974,344
     
12
%
   
1,665,078
     
18
%
Income from operations
   
1,841,310
     
11
%
   
787,548
     
9
%
Other income (expenses), net
   
(45,761
   
-
%
   
(38,952
)
   
(1)
%
Income tax expense
   
370,589
     
2
%
   
169,070
     
2
%
Net income
  $
1,424,960
     
9
%
  $
579,526
     
6
%

Net Sales

Net sales for the three months ended June 30, 2012 were $16.15 million, an increase of 74% from $9.26 million in the same period of 2011. The increase in net sales resulted primarily from a 15% increase in sales volume in the three months ended June 30, 2012. The newly acquired subsidiary Diamond Bar brought $4.79 million to sales for the three months ended June 30, 2012. Our overall average selling price increased approximately 53% in the three months ended June 30, 2012 compared to the same period of 2011, resulting primarily from increased both China domestic market and worldwide sales volume of higher-margin products and finished goods purchased from third party manufacturers but with relatively lower profit margin. Our largest selling product categories in the three months ended June 30, 2012 were dining tables, sofas and cabinets, which accounted for approximately 26%, 16% and 15% of sales, respectively, whereas our largest selling product categories in the same period of 2011 were sofas, dining tables and cabinets, which accounted for 13%, 10% and 8% of sales, respectively.

Sales to international markets increased $4.92 million in the three months ended June 30, 2012 compared to the same period of 2011 principally as a result of increased sales in North America. North American sales increased 129% to $5.74 million in the three months ended June 30, 2012 compared to $2.51 million in the same period of 2011 as we aggressively expanded sales to the U.S. market and began integrating the operations of our newly acquired subsidiary, Diamond Bar. Sales to Australia decreased slightly by $2,705 in the three months ended June 30, 2012 to $155,651 compared sales of $158,356 for  the same period of 2011. As part of our gradual change in sales and marketing strategy in 2012, we increased marketing efforts in the U.S. and China markets while maintaining our marketing efforts and existing customer base in Europe. Sales to Europe were $4.24 million in the three months ended June 30, 2012, increased 34% from $3.16 million in the same period of 2011. We anticipate increasing sales and marketing to the European market as the region’s economic outlook improves. A continued effort in Hong Kong and other countries, resulted in sales of $0.84 million to these regions in the three months ended June 30, 2012, comparing with $0.38 million in the same period of 2011.

Sales to China, which includes sales to franchisees in addition to wholesalers and agents to domestic retail stores and distributors for the export market, accounted for 30% of sales in the three months ended June 30, 2012 compared to 31% of sales in the same period of 2011. Sales to franchisees selling our branded products in China contributed approximately $0.81 million or 17% of our total China sales in the three months ended June 30, 2012 compared to $1.94 million or 67% in the same period of 2011. We first entered into product franchise agreements with stores in China during the first quarter of 2010, with sales commencing during the second quarter of 2010. Overall sales to China increased 69% to $4.85 million in the three months ended June 30, 2012 compared to $2.88 million in the same period of 2011. We anticipate increasing sales volume in China as our franchise store network continues to expand and we commence internet sales of our branded products.
 
 
Cost of Sales

Cost of sales consists primarily of material costs, labor costs and related overhead directly attributable to the production of our products. Total cost of sales increased 81% to $12.33 million in the three months ended June 30, 2012 compared to $6.81 million in the same period of 2011 due primarily to an increase in sales and production. Cost of sales for products that we manufactured was $4.06 million in the three months ended June 30, 2012, a 194% increase from $1.38 million in the same period of 2011. Material costs, labor costs and related overhead accounted for 78%, 16% and 6% of cost of sales for such products in the three months ended June 30, 2012 compared to 69%, 24% and 7% in the same period of 2011, respectively. The cost of products purchased from third party manufacturers increased 53% to $8.27 million in the three months ended June 30, 2012 from $5.42 million in the same period of 2011. Cost of sales as a percentage of net sales was 76% in the three months ended June 30, 2012 compared to 74% in the same period of 2011. The increase in cost of sales as a percentage of net sales from the three months ended June 30, 2012 to the comparable period of 2011resulted primarily from increased cost of products purchased from third party manufacturers as well as increased cost of raw material as a result of continuous inflation in China.

Gross Profit

Gross profit increased 56% to $3.82 million in the three months ended June 30, 2012 compared to $2.45 million in the same period of 2011. Our gross profit margin decreased to 24% in the three months ended June 30, 2012 compared to 26% in the same period of 2011. The decrease in gross profit margin resulted primarily from increased cost of sales as a percentage of net sales, which was due primarily to changes in our sales and marketing strategy that included increased products purchased from other manufacturers and overall price increases on raw material and labor as a result of continuous inflation in China; in addition, we attracted more sales orders from certain big trading company customers by lowering the selling price to them. Management believes that our gross profit margin will stabilize at approximately 30% as our mix of product offerings broadens and more of the increased raw materials costs are passed through to customers as we renegotiate pricing with our customers on existing products and introduce new product collections, and adjust our product pricing under our product franchise agreements in China.

Operating Expenses

Operating expenses consisted of selling, general and administrative expenses. Operating expenses increased 19% to $1.97 million in the three months ended June 30, 2012 from $1.67 million in the same period of 2011. Selling expense increased 16% to $0.66 million due primarily to increased sales, an increase of salary, rent and an increase of marketing expense, including tradeshow expense related to our expansion in the China retail market. General and administration expense increased 20% to $1.31 million mainly due to bad debt allowance of $223,800 recorded in the period.

Other Income (Expense), net

Other expense was $45,761 in the three months ended June 30, 2012 compared with other expense of $38,952 in the same period of 2011, an increase of $6,809. The increase in other expense resulted primarily from the increased financial expense which includes interest expense and non-operating expense, despite foreign exchange transaction gain of $15,663 in the three months ended June 30, 2012 comparing with foreign exchange transaction loss of $37,531 in the same period of 2011 for our sales in international markets.

Net Income

Net income increased 146% to $1.42 million in the three months ended 2012 from $0.58 million in the same period of 2011. Our net profit margin was 9% in the three months ended 2012, which was higher than the rate in the same period of 2011 of 6%, due to the reasons described above.

Earnings Per Share

In the second quarter of 2012, basic and diluted earnings per share were $0.08, compared with $0.05 in the same period last year.  It must be noted that EPS in the 2012 second quarter was calculated on the basis of 18,486,567 basic and 18,491,138 diluted weighted average shares outstanding, respectively, compared with 11,952,747 basic and diluted weighted average shares outstanding in the second quarter of 2011.
 

Comparison of Six Months Ended June 30, 2012 and 2011

The following table sets forth the results of our operations for the six months ended June 30, 2012 and 2011. Certain columns may not add due to rounding.

   
2012
   
2011
 
   
$
   
% of Sales
   
$
   
% of Sales
 
Net sales
   
27,146,315
           
14,892,220
       
Cost of sales
   
20,320,386
     
75
%
   
10,650,433
     
72
%
Gross profit
   
6,825,929
     
25
%
   
4,241,787
     
28
%
Operating expenses
   
3,839,241
     
14
%
   
2,212,107
     
15
%
Income from operations
   
2,986,688
     
11
%
   
2,029,680
     
14
%
Other income (expenses), net
   
(45,962
   
 -
%
   
(66,577
)
   
-
%
Income tax expense
   
537,104
     
2
%
   
378,035
     
3
%
Net income
   
2,403,622
     
9
%
   
1,585,068
     
11
%

Net Sales

Net sales for the six months ended June 30, 2012 were $27.15 million, an increase of 82% from $14.89 million in the same period of 2011. The increase in net sales resulted primarily from a 62% increase in average selling price and 12% increase in sales volume in the six months ended June 30, 2012. The newly acquired subsidiary Diamond Bar brought $6.58 million to sales for the six months ended June 30, 2012. Our overall average selling price increased approximately 62% in the six months ended June 30, 2012 compared to the same period of 2011, resulting primarily from increased both China domestic market and worldwide sales volume of higher-margin products and finished goods purchased from third party manufacturers but with relatively lower profit margin. Our largest selling product categories in the six months ended June 30, 2012 were dining tables, sofas and cabinets, which accounted for approximately 22%, 18% and 15% of sales, respectively, whereas our largest selling product categories in the same period of 2011 were sofas, dining tables and cabinets, which accounted for 12%, 9% and 8% of sales, respectively.

Sales to international markets increased $9.60 million in the six months ended June 30, 2012 compared to the same period of 2011 principally as a result of increased sales in North America. North American sales increased 177% to $10.46 million in the six months ended June 30, 2012 compared to $3.78 million in the same period of 2011 as we aggressively expanded sales to the U.S. market and began integrating the operations of our newly acquired subsidiary, Diamond Bar. Sales to Australia decreased in the six months ended June 30, 2012 compared to the same period of 2011, primarily because of the ongoing economic crisis and our changing sales and marketing strategy to diversify international sales. As part of our gradual change in sales and marketing strategy in 2012, we increased marketing efforts in the U.S. and China markets while maintaining our marketing efforts and existing customer base in Europe. Sales to Europe were $6.87 million in the six months ended June 30, 2012, increased 40% from $4.91 million in the same period of 2011. We anticipate increasing sales and marketing to the European market as the region’s economic outlook improves. A continued effort in Hong Kong and other countries, resulted in sales of $1.52 million to these regions in the six months ended June 30, 2012, comparing with $0.64 million in the same period of 2011.

Sales to China, which includes sales to franchisees in addition to wholesalers and agents to domestic retail stores and distributors for the export market, accounted for 28% of sales in the six months ended June 30, 2012 compared to 33% of sales in the same period of 2011. Sales to franchisees selling our branded products in China contributed approximately $1.53 million or 20% of our total China sales in the six months ended June 30, 2012 compared to $2.75 million or 56% in the same period of 2011. We first entered into product franchise agreements with stores in China during the first quarter of 2010, with sales commencing during the second quarter of 2010. Overall sales to China increased 54% to $7.60 million in the six months ended June 30, 2012 compared to $4.95 million in the same period of 2011. We anticipate increasing sales volume in China as our franchise store network continues to expand and we commence internet sales of our branded products.
 
 
Cost of Sales

Cost of sales consists primarily of material costs, labor costs and related overhead directly attributable to the production of our products. Total cost of sales increased 91% to $20.32 million in the six months ended June 30, 2012 compared to $10.65 million in the same period of 2011 due primarily to an increase in sales and production. Cost of sales for products that we manufactured was $5.26 million in the six months ended June 30, 2012, a 49% increase from $3.53 million in the same period of 2011. Material costs, labor costs and related overhead accounted for 76%, 17% and 7% of cost of sales for such products in the six months ended June 30, 2012 compared to 74%, 20% and 6% in the same period of 2011, respectively. The cost of products purchased from third party manufacturers increased 111% to $15.06 million in the six months ended June 30, 2012 from $7.12 million in the same period of 2011. Cost of sales as a percentage of net sales was 75% in the six months ended June 30, 2012 compared to 72% in the same period of 2011. The increase in cost of sales as a percentage of net sales from the six months ended June 30, 2012 to the comparable period of 2011 resulted primarily from increased cost of products purchased from third party manufacturers as well as increased cost of raw material as a result of continuous inflation in China.

Gross Profit

Gross profit increased 61% to $6.83 million in the six months ended June 30, 2012 compared to $4.24 million in the same period of 2011. Our gross profit margin decreased to 25% in the six months ended June 30, 2012 compared to 28% in the same period of 2011. The decrease in gross profit margin resulted primarily from increased cost of sales as a percentage of net sales, which was due primarily to changes in our sales and marketing strategy that included increased products purchased from other manufacturers and decreased percentage of self-produced products, and overall price increases on raw material as a result of continuous inflation in China; in addition, we attracted more sales orders from certain big trading company customers by lowering the selling price to them. Management believes that our gross profit margin will stabilize at approximately 30% as our mix of product offerings broadens and more of the increased raw materials costs are passed through to customers as we renegotiate pricing with our customers on existing products and introduce new product collections, and adjust our product pricing under our product franchise agreements in China.

Operating Expenses

Operating expenses consisted of selling, general and administrative expenses. Operating expenses increased 74% to $3.84 million in the six months ended June 30, 2012 from $2.21 million in the same period of 2011. Selling expense increased 70% to $1.35 million due primarily to increased sales, an increase of salary and commission to sales persons, warehouse rents, shipping cost and an increase of marketing expense, including advertisement, promotional expense and tradeshow expense related to our expansion in the China retail market. General and administration expense increased 67% to $2.36 million due primarily to an increase of employee compensation, insurance, travel, and increased compliance costs including audit, legal and consulting expenses as a result of being a U.S. public company since mid of 2011. In addition, we recorded an allowance for bad debt for $223,800 and had a loss on disposal of fixed assets of $0.12 million during the six months ended June 30, 2012.

Other Income (Expense)

Other expense was $45,962 in the six months ended June 30, 2012, compared with other expense of $66,577 in the 2011 period, a decrease of $20,615. The decrease in other expense was due primarily to increased foreign exchange transaction gain of $23,975 compared to foreign exchange transaction loss of $60,729 for our sales in international markets.

Net Income

Net income was $2.40 million in the six months ended June 30, 2012, an increase of 52% from $1.59 million in the 2011 period. Our net profit margin was 9% for the six months ended June 30, 2012, a decrease of 2% from 11% for the 2011 period, due to the reasons explained above.

Earnings Per Share

In the six months ended June 30, 2012, basic and diluted earnings per share were $0.13, compared with $0.13 in the same period last year.  It must be noted that EPS in the six months ended June 30, 2012 was calculated on the basis of 18,431,799 basic and18,589,410 diluted weighted average shares outstanding, respectively, compared with 11,788,314 basic and diluted weighted average shares outstanding in the comparable period of 2011.
 

Liquidity and Capital Resources

Our principal demands for liquidity are to increase sales in the U.S. and China, purchase inventory and for sales distribution and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to the expansion of our manufacturing facilities and production capacity, purchase of raw materials and the expansion of our business, primarily through cash flow provided by operations and collections of accounts receivable.

As we continue to execute our growth strategy focused on aggressively expanding sales, particularly in the U.S. and China, we remain focused on improving net margins and bottom line growth.  As noted above, a particular focus in this regard is on reducing reliance on lower margin third party manufacturing and expansion of our own higher margin production facilities. We also believe 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 further believe that increased direct sales in China, including the planned start-up of Internet sales in the second quarter, will positively impact profitability.

As explained in this report, the year over year increase in diluted shares outstanding, is a consequence of two private placement financings we completed in August, 2011 and January, 2012. In August 2011, we completed a private placement of our common stock whereby we raised $4.50 million (net proceeds of $3.86 million). In January 2012, we completed an additional private placement of our common stock whereby we raised $2.07 million (net proceeds of $1.75 million). As described in this report, the Company relies primarily on internally generated cash flow to support growth, but nevertheless may seek additional financing in the form of bank loans or funds raised through future offerings of our equity or debt, if and when we determine such offerings are required. Should we determine to seek any such financing over the next twelve months, given our strong balance sheet as of June 30, 2012, and the current low interest rate environment, we believes it would most likely be in the form of non-diluting debt.
 
On May 25, 2012, Diamond Bar entered into an agreement with a bank in California for a line of credit up to $5,000,000 with annual interest of 4.5% and maturity on June 15, 2013. The line of credit was guaranteed by Nova Lifestyle. As of June 30, 2012, Diamond Bar borrowed $2,388,403 from this credit line. The loan has the following covenants: (i) maintain a minimum tangible net worth of not less than $3 million; (ii) maintain a current ratio in excess of 1.25 to 1.00; and (iii) maintain a ratio of debt to tangible net worth not in excess of 3.500 to 1.000; (iv) the pre-tax income must be not less than 0.5% of total revenue quarterly. As of June 30, 2012, Diamond Bar was in compliance with all the covenants. During the six months ended June 30, 2012, the Company paid interest of $7,478.

On April 25, 2012, Nova Dongguan entered into an agreement with a commercial bank in Dongguan for a line of credit up to $3,162,105 (RMB 20 million) with maturity on April 24, 2015.  As of June 30, 2012, Nova Dongguan borrowed $1,106,737 (RMB 7 million) with maturity on May 20, 2013 from this credit line. The loan bears annual interest of 6.94% and requires monthly payment of the interest; the interest rate will be adjusted annually. The loan was guaranteed by Nova Dongguan and the Company’s CEO. During the six months ended June 30, 2012, the Company paid interest of $24,305.

We had net working capital of $20,028,355 at June 30, 2012, an increase of $3,730,440 from net working capital of $16,297,915 at December 31, 2011. The ratio of current assets to current liabilities was 3.45-to-1 at June 30, 2012.
 
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, 2012 and 2011:

   
2012
   
2011
 
Cash provided by (used in):
           
Operating activities
 
$
(4,712,350
)
 
$
318,765
 
Investing activities
   
(1,248,353
)
   
(445,468
)
Financing activities
   
5,598,011
     
(200,243
)

Net cash used in operating activities was $4.71 million in the six months ended June 30, 2012, a decrease of cash inflow of $5.03 million or 1,578% from $0.32 million of cash provided by operating activities in the same period of 2011. The increase in cash outflow was attributable primarily to significant amount of payment made for outstanding accounts payable as a result of increased purchases, and increased accounts receivable outstanding, advance to suppliers and inventory on hand as a result of our significant increase in sales, despite we had increased net income.

Net cash used in investing activities was $1.25 million in the six months ended June 30, 2012, an increase of $0.80 million or 180% from $0.45 million in the same period of 2011. In the six months ended June 30, 2012, we paid $0.46 million for the acquisition of property and equipment, $0.54 million payment for the acquisition of a land use right, and $0.26 million for construction in progress. In the same period of 2011, we paid $0.28 million for the acquisition of property and equipment, $0.12 million for acquisition of heritage and cultural assets and $0.04 million for construction in progress.
 

Net cash provided by financing activities was $5.60 million in the six months ended June 30, 2012 compared to the cash outflow of $0.20 million in the same period of 2011. In the six months ended June 30, 2012, we received $3.50 million from bank loans, $1.75 million from a private placement and $0.14 million from warrants exercised. In the comparable period of 2011, we had $1.35 million repayment from a related party and $1.55 million advance to related parties.

As of June 30, 2012, we had gross accounts receivable of $22,385,917, of which $13,577,558 was with aging within 90 days, $8,808,359 was with aging over 90 days; we had an allowance for bad debt of $223,859 for accounts receivables. The increase in accounts receivable resulted primarily from increased sales in the six months ended June 30, 2012.

On November 16, 2009, the Foreign Trade and Economic Cooperation Bureau of Dongguan approved an increase in the registered capital of Nova Dongguan from $8 million to $20 million, with the $12 million in additional contribution of capital to be paid within two years, for which we received an extension. As of June 30, 2012, Nova Dongguan has received additional capital contributions of $12.60 million. The remaining $7.40 million of additional contribution to capital was due by June 30, 2012.but was extended to June 30,2013. We may apply for another extension of the payment period and a reduction of the registered capital requirement, as allowed by PRC regulations for foreign-invested enterprises. If we do not receive an extension or reduction of registered capital, and we are unable to make the required contribution to registered capital, Nova Dongguan may be required to pay a negotiated penalty, typically 3% to 5% of the unsatisfied contribution of registered capital remaining outstanding, or up to $370,000 based on the amount remaining outstanding as of June 30, 2012. After a six-month period following payment of any such penalty, Nova Dongguan may request a reduction of its registered capital to the amount already contributed with the outstanding balance waived without risk of business license revocation. Although repatriation of profits or dividends by Nova Dongguan will require approval by the SAFE until the contribution of capital is satisfied or the registered capital requirement is reduced to the amount contributed, based upon our prior working experience with the relevant PRC government agencies, we believe that such approval would be granted.  Nova Dongguan received additional $1 million registered capital in August 2012, and, as noted above, was allowed to fulfill the remaining amount of capital contribution by June 30, 2013
 
Private Placement

On August 18, 2011, we completed a closing of a private placement pursuant to which we sold 2,998,267 units, each such unit consisting of 1 share of our common stock and a warrant to purchase 15% of 1 share of our common stock, at $1.50 per unit for gross proceeds of $4,497,401 (net proceeds of $3,859,933 after commission and offering-related costs). The warrants are immediately exercisable, expire on the third anniversary of their issuance and entitle the holders to purchase 449,740 shares of our common stock at $2.00 per share. We may call the warrants at $4.00 per share at any time after: (i) a registration statement registering the common stock underlying the warrants becomes effective; (ii) the common stock is listed on a national securities exchange; and (iii) the closing price of the common stock equals or exceeds $4.00. We paid the placement agent in the private placement commissions consisting of $449,740 and warrants, having the same terms and conditions as the warrants issued in the private placement, to purchase 449,740 shares of our common stock. Certain purchasers of the units and the placement agent received registration rights pursuant to a registration rights agreement that requires us to register the shares of common stock and the shares of common stock issuable upon exercise of the warrants issued to such shareholders in the private placement. The registration statement with respect to such securities was declared effective on October 28, 2011. During the six months ended June 30, 2012, 71,300 shares of warrants were exercised at $2 per share.
  
On January 13, 2012, we completed a closing of a private placement pursuant to which we sold 517,000 units, each such unit consisting of 1 share of our common stock and a warrant to purchase 15% of 1 share of our common stock, at $4.00 per unit for gross proceeds of $2,068,000 (net proceeds of $1,753,849 after commission and offering-related costs). The warrants are immediately exercisable, expire on the third anniversary of their issuance and entitle the holders to purchase 77,550 shares of our common stock at $4.50 per share. We may call the warrants at $5.00 per share at any time after: (i) a registration statement registering the common stock underlying the warrants becomes effective; (ii) the common stock is listed on a national securities exchange; and (iii) the closing price of the common stock equals or exceeds $5.00. We paid the placement agent in the private placement commissions consisting of $206,800 and warrants, having the same terms and conditions as the warrants issued in the private placement, to purchase 77,550 shares of our common stock. The purchasers of the units and placement agent received registration rights pursuant to a registration rights agreement that requires us to file a registration statement within 60 days of the closing of the private placement covering the shares of common stock and the shares of common stock issuable upon exercise of the warrants issued in the private placement. The registration statement with respect to such securities was filed with SEC on March 30, 2012 but has not been declared effective yet.
 

Line of Credit
 
On May 25, 2012, Diamond Bar entered into an agreement with a bank in California for a line of credit up to $5,000,000 with annual interest of 4.5% and maturity on June 15, 2013. The line of credit was guaranteed by Nova Lifestyle. As of June 30, 2012, Diamond Bar borrowed $2,388,403 from this credit line. The loan has the following covenants: (i) maintain a minimum tangible net worth of not less than $3 million; (ii) maintain a current ratio in excess of 1.25 to 1.00; and (iii) maintain a ratio of debt to tangible net worth not in excess of 3.500 to 1.000; (iv) the pre-tax income must be not less than 0.5% of total revenue quarterly. As of June 30, 2012, Diamond Bar was in compliance with all the covenants. During the six months ended June 30, 2012, the Company paid interest of $7,478.

On April 25, 2012, Nova Dongguan entered into an agreement with a commercial bank in Dongguan for a line of credit up to $3,162,105 (RMB 20 million) with maturity on April 24, 2015.  As of June 30, 2012, Nova Dongguan borrowed $1,106,737 (RMB 7 million) with maturity on May 20, 2013 from this credit line. The loan bears annual interest of 6.94% and requires monthly payment on the interest; the interest rate will be adjusted annually. The loan was guaranteed by Nova Dongguan and the Company’s CEO. During the six months ended June 30, 2012, the Company paid interest of $24,305.

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.

Our standard payment term for accounts receivable is 30 - 120 days. We give an extended payment term to certain of our major customers of up to 180 days, but have since reduced this payment term to 120 days beginning in 2011. During the six months ended June 30, 2012, we had accounts receivable turnover of 2.63 on an annualized basis, with sales outstanding of 140 days and inventory turnover of 19.5 on an annualized basis.  During the six months ended June 30, 2011, we had accounts receivable turnover of 3.82 on an annualized basis, with sales outstanding of 95 days and inventory turnover of 21.55 on an annualized basis.

To attract franchisees to our new franchise network in 2010, we granted new store operators a payment term of 90 days. We have a short history of collections with franchisees, but based on subsequent collections, we fully expect payment. Our management assesses the financial position, credit quality, credit history and other factors such as current market conditions before entering into product franchise agreements with new store operators to help ensure the franchisee’s ability to make payment in a timely manner. We retain the right to review and assess the performance of franchisees annually under the product franchise agreement, enabling our termination of franchises that fail to meet certain performance targets or make payments on product orders. We have since started phasing out the preferential payment terms in 2011, and our current product franchise agreement requires payment in full before delivery. Management expects accounts receivable outstanding from sales in China to decrease correspondingly going forward.

Sales to international markets typically are made through letters of credit, but for some long-term, high volume customers, such as Actona Company, we accept telegraphic transfer, or T/T, with a payment term of 15 days after delivery. Historically, we have not experienced bad debts from our sales to international markets. Our accounts receivable related to sales to international markets typically are less than three months, depending on customer shipment schedules. We expect the balance of accounts receivable to decrease as our new sales strategy and shortened payment term to our major customers in the international markets takes effect along with our new payment terms for franchisees. We had an allowance for bad debt of $223,859 as of June 30, 2012.

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, 2012, 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 Inetrnal 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

As of March 31, 2012 and June, 30, 2012, we have identified certain matters that constituted a material weakness in our internal control over financial reporting. Specifically, our Board of Directors currently lacks independent directors and an audit committee, and we 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 this material weakness related to our lack of U.S. GAAP experience. We hired an outside consultant as of March 2012 to assist in testing and improving our internal controls and for the design of effective documented financial accounting policies and procedures for our U.S. parent company and all subsidiaries. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge of U.S. GAAP in our operations and the requirements of Section 404 of the Sarbanes-Oxley Act to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and the relevant securities laws. In addition, we plan to provide additional training to our accounting staffs on U.S. GAAP, the Sarbanes-Oxley Act and the requirements of the PCAOB regarding the preparation of financial statements. We intend to add independent directors and establish an audit committee as a separately designated committee of the Board of Directors with a written charter. We also intend to appoint an “audit committee financial expert” as defined under Item 407(d)(5) of Regulation S-K as a requirement to the listing of our common stock on a national securities exchange. Until such time as we hire qualified accounting personnel and train our current accounting personnel with the requisite U.S. GAAP experience, we intend to mitigate this material weakness by engaging an outside CPA 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.

We believe the measures described above will facilitate remediation of the material weaknesses identified above and will continue to strengthen and have a material impact on our internal control over financial reporting. However, because this remediation process is still in its initial stages, we can give no assurance as to when it will be completed. 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 deficiencies.

Other than as described above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2012, 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 1A. Risk Factors

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

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.
 
 

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 14, 2012
By:
/s/ Ya Ming Wong                                
   
Ya Ming Wong
Chief Executive Officer
(Principal Executive Officer)
     
Date: August 14, 2012
 
/s/ Yuen Ching Ho                                           
   
Yuen Ching Ho
Chief Financial Officer
(Principal Accounting Officer)
 

 
 

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
 

PINX:STVS Quarterly Report 10-Q Filling

PINX:STVS Stock - Get Quarterly Report SEC Filing of PINX:STVS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

PINX:STVS Quarterly Report 10-Q Filing - 6/30/2012
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