Nova LifeStyle, Inc.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Greetings, and welcome to the Nova LifeStyle 2015 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’ll now like to turn the conference over to your host, Adam Prior of The Equity Group. Thank you Mr. Prior, you may begin.

[Adam Prior:]

Thank you, and good morning everyone. We’re pleased that you’re joining us. On the call today will be Warren Wong, Executive Vice President, speaking on behalf of Jeffrey Wong, Chief Executive Officer; Tawny Lam, President; and Sammy Ho, Chief Financial Officer. By now, everyone should have access to the press release that went out this morning. If you have not received the press release, it is available on the Investor Relations section of Nova’s website at www.novalifestyle.com. Before we begin, I’d like to remind you that the information in today’s press release and the remarks made by our executives on this call, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual financial results, performance, prospects and opportunities to differ materially from those expressed or implied by these statements. These risks and uncertainties include but are not limited to the factors identified in our news release and our filings with the Securities and Exchange Commission. You may access any of these files at www.sec.gov. Please also note that the information provided on this call should be considered current only as of today. Except as expressly required by the federal securities laws, we undertake no duty to update that information. With that, I would like to turn the call over to Mr. Warren Wong speaking on behalf of the Company’s Chief Executive Officer, Jeffrey Wong. Please go ahead, Warren.

[Warren Wong:]

Thank you and good morning everyone. On behalf of Nova LifeStyle, thank you for joining our second quarter 2015 earnings call. We are proud of the results that we have achieved this quarter, highlighted by the [indiscernible] and despite a noisy quarter on the bottom line due to regulation changes on our world, we report very strong operating income growth. So, what’s driving this growth? Our North American business, which is predominantly sells through well-established wholesale channels and over 100 furniture stores throughout U.S. It’s expanding in an accelerated pace. We feel this is due to the consumers now beginning to readily recognize our Diamond Sofa brand as an innovator in modern contemporary furniture. The sales and marketing efforts that we have implemented over the past three years have continued to drive awareness in the industry and we are exploring new potential wholesale market. Second, we are gaining traction on improving our brand in China. We report favorable growth in the region and are on pace with our franchise store expansion. We opened additional furniture stores during the period as we enter the second half of the year by embracing new methods of technology to improve our consumers’ overall experience. We are expanding all of the optionality as brick and mortar provider along with a full e-commerce platform. Our goal remains to be at a forefront of home quality and innovation in our design and service, which we still have to define our competitive advantage over other multinational peers in the home furnishing industry. As we ended the second half of the year, we intend to enrich our product lines to include a bedroom series, inclusive of beds, bed side tables, mattresses and bedding sets. We also commit to improve our customers’ overall experience by embracing new methods of technology. We feel that many of our initiatives, we have put into place over last years have started to increase awareness of our product on a global scale and we look forward to enduring out this new product and service offering in the coming months. Now, I will like to turn the call over to our President, Tawny Lam, who will expand further on our operating highlights for the quarter. Tawny?

[Tawny Lam:]

Thank you, Warren. I want to provide additional color on our options thus far in 2015 and how we're gaining tractions in both floor space and a deeper understanding of our brand from the partners and ultimately our customers. I’d like to take a moment to outline our products and a larger shift that we’ve seen in recent years. Our largest selling categories remain upholstery products, case goods such as specifically designed shelving and cabinetry and dining tables. In total, this represented a little over 60% of our sales for the second quarter. However, internally, we are not defining success by selling more sofas. Our goal is to provide a seamless modern experience for individuals throughout the home. When we sell our products to established customers in the United States such as the Nebraska Furniture Mart, Wayfair, [indiscernible] we are not selling a piece, we are selling a solution. This is where we are seeing our greatest sales catalyst. It’s the continued branding of our specific blend of modern home furniture for today’s middle class, open consumers and diverse markets worldwide. And it is working with each new line and design concept we introduced. I was pleased to attend the recent Las Vegas market where our Diamond Sofa brand premiered over 40 brand new designs while simultaneously launching a new product catalog at the show. Our highlight during the show was the introduction of a stainless steel collection. While the concept of stainless steel furniture is not new, Nova LifeStyle has had incredible success with much of our finished furnishings in the past. This is a natural evolution and we are positioning it in a manner where it comes to the customer as a complete solution. That integrates the beauty and the sturdiness of stainless steel seamlessly into a newer modern lifestyle design. So, as an investor, what does this mean to you? Our company is able to source the steel at a price that allows our end price to the consumer to be reasonable. We are able to create a timeless design that we can sell to consumer at a fair price. This will allow us to continue to build our brand recognition and drive sales into the future. The response was overwhelmingly positive from the brick and mortar stores to e-commerce to top 100 retailers. What we are selling is working well and we feel that as long as we continue to offer unique alternatives to a growing sales base, we will continue to see favorable growth. Nova’s rapidly expanding product lines provide our worldwide customer base with superior qualities and customized option that specifically address markets with a wide variety of price and style. As Warren also mentioned, the focus of our company continues to be innovations in the realm of technology. As we’ve announced this quarter, we have developed an app in China that addresses so many of the pain points that customer encounter. Our EasyHome app will customize the entire process for customers from design, payment, delivery and installation. We have aimed to create a service where we can essentially place our custom showroom on the desktop and mobile devices of every customer. As an example, many of you may have used Uber for transportation, but we have created a similar type of app that connects trusted contractors in China that can install our furniture directly in the home. Users can see local contractors and we made the process as seamless as possible. Nova will project at the launch the EasyHome app simultaneously with home87 in the later part of 2015. This is a major catalyst for the company and we are very excited to provide each of you with additional information as we progress. Before I turn it to Sammy for a review of financial results, I would like to take a few minutes to talk about our sales results from our larger geographic markets. First of all, sales in our largest market in North America increased 38% to $20.3 million in the three months ended June 30, 2015, this was driven by increased marketing efforts in the U.S. markets and introduction of our new lines into the marketplace. North America remains Nova LifeStyle’s largest and fastest growing market as a percentage of total revenue. North American share was 69.1%. In Europe, we are continuing to keep an eye on the economic recovery of the overall region. As a result of the slow recovery of the European economy, we reported a slight decrease in our sales of 5% to $3.1 million for the period. In China, we were very pleased with our sales progressions as we continue to benefit from increased brand recognitions as we expand our franchise store locations throughout the country. Our overall sales increased by 3% to $4.8 million in the three months ended June 30, 2015. We have made great efforts in creating a truly global brand and our growth in both North America and China this quarter were positive trends. With that, now let me turn the call over to our CFO, Sammy Ho to discuss the financial results.

[Sammy Ho:]

Thank you Tawny, and hello everyone. I would like to review our financial results in more detail. Net sales for the second quarter were $29.2 million compared to $25.9 million last year. This represented 13% increase in revenue from last year. The increase in net sales resulted primarily from a 13% increase in average selling price with a 2% increase in sales volume. Gross profits increased 4% to $5.2 million in the three months ended June 30, 2015 compared to $5 million in the same period of 2014. The increase in gross profit resulted primarily from increase of net sales. Our gross profit margin decreased to 18% compared to 19% in the three months ended June 30, 2015 compared with the same period of 2014. Operating income for the second quarter was $1.8 million in the three month ended June 30, 2015 compared to $1.5 million in the same period of 2014. As we discussed in our press release and noted earlier in the call, our bottom line performance was affected by a change in fair value of warrant liability. This change led to a net loss during the period of $0.1 million compared to net income of $3.4 million for the same period of 2014. Adjusted net income which excludes the change in fair value of warrant liability increased to $1.6 million or adjusted diluted EPS of $0.07 per share compared to $1.1 million or adjusted diluted EPS of $0.06 per share in the prior year period. Some of you may noticed that this is a new metric we are providing to investors and felt that this was a more actuate assessment of the operating profitability of our business by detaching the bottom line performance of the business from the alterations in share price, fair value change. We have reconciled this measure in our financial results issued this morning. Now, I would like to discuss the balance sheet and liquidity. We had net working capital of $42.6 million as of June 30, 2015, an increase of $8 million from net working capital of $34.5 million at December 31, 2014. The ratio of current assets to current liabilities was 3.12-to-1 at June 30, 2015. Additionally, our cash and cash equivalents as of June 30, 2015 was $1.35 million, which is a 9% increase over $1.24 million that was reported as of December 31, 2014. Let us now discuss our accounts receivables. As of June 30, 2015, we had gross accounts receivable of $47.5 million of which $31.5 million was with aging within 90 days, and $8.4 million was with aging over 90 days. We also had an allowance for bad debt of $437,000 for accounts receivables. The annualized inventory turnover rate was 15.33 at June 30, 2015, compared with 17.62 at June 30, 2014. The decrease of inventory turnover rate was due to stocking of more fast-selling products in order to avoid shipment delays. We had mentioned to many of you that our goal is to continue to improve this quarter-by-quarter, and we are doing so. Our change required payment [indiscernible] delivery in China coupled with improved activity among our larger major accounts had led to steady improvement throughout the year. We feel that the company has reached an inflection point where we would begin to see much improvements. That concludes my comments. Let me now turn the call back to Tawny to discuss our outlook. Tawny?

[Tawny Lam:]

Thank you, Sammy. In the coming months, our goal is to continue the expansion of our brand while we are serving our customers through implementing new modern lifestyle furniture and supplementing it with innovation that drives a better customer experience. On the capital market front, we have continued to review all options in regard to Nova LifeStyle’s business. We have formed a special committee on our Board to evaluate any opportunities that are presented to us through a variety of forms. We also retained Everbright Securities International as a strategic advisor in reviewing options available to us. So we want to be as transparent as possible to our investors and will keep our view of price upon progress. To conclude, we are very proud that we bidding here at Nova LifeStyle in a relatively short period of time as a public company where we are a well-recognized global brand that deferred from our peers and the ability to properly target the largest and fastest growing markets in North America and Asia. This has helped to diversify our revenue stream and we are working diligently to ensure our operating margins are sustainable during this period of rapid growth. With that, operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Michael Jacobs at Axon Capital [ph].

[Unidentified Analyst:]

Hey, Tawny. Congratulations on another very nice quarter.

[Tawny Lam:]

Thank you, Jacob Michael.

[Unidentified Analyst:]

How are you?

[Tawny Lam:]

Very fine. Thank you.

[Unidentified Analyst:]

So you guys continue to be successful basically quarter-after-quarter, growing top line. Gross profit looks like it's starting to catch up, but the stock hasn't performed the same way that the company's operating results have? What is your thought on the topic and what is the independent board doing and what is Everbright doing to try and help you on the capital markets front?

[Tawny Lam:]

Well, Michael, thank you for the questions. I wanted to just begin that we received the - because of the certain inbound increase in the funds, regarding the investment in our company, we felt that it is best of our interest of the company and shareholders to be proactive and form a special committee among these opportunities. And then, we were very well respected as the strategic advisor from the China Everbright. It is important that with maybe further action in the company and that we wanted to ensure that we have all the countermeasure in place. And as well as for investors, I think to answer your initial questions about why the stock performance, I think I can have Sammy elaborate a little bit more with the answers to the question of numbers. Sammy, can you help me answer Michael's questions about the stock performance price?

[Sammy Ho:]

Okay. The stock performance price is affected by many factors. So it is out of control.

[Unidentified Analyst:]

Well, when the company does need financing again, remember I'm here for accretive rather than dilutive type financings in terms of making sure that there is an immediate pressure on the company's stock from short-term financings.

[Tawny Lam:]

Thank you, Michael. We'll always put you in the loop.

[Operator:]

[Operator Instructions] Ms. Lam, at this time, there are no further questions. Would you like to make any closing remarks?

[Tawny Lam:]

Yes. I would like to thank everyone for listening to our earnings call today and for your continued support. We look forward to discussing the third quarter of 2015 later this year. Again, thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.