Note 12 - Commitments and Contingencies

Lease Commitments

On June 17, 2013, the Company entered into a lease agreement for office, warehouse, storage, and distribution space with a five year term, commencing on November 1, 2013 and expiring on October 31, 2018. The lease agreement also provides an option to extend the term for an additional six years. On April 23, 2018, the Company extended the lease for another 36 months with an expiration date of October 31, 2021. The monthly rental payment is $42,000 with an annual 3% increase.

On January 7, 2014, the Company entered into a sublease agreement with Diamond Bar for warehouse space with a five-year term commencing on November 1, 2013 and expiring on October 31, 2018. The Company subleased a portion of its warehouse space to one of its customers with a one-year term commencing on December 1, 2013 and expiring on November 30, 2014, which has been renewed every year with the current term expiring on October 31, 2018. The sublease was not renewed. The sublease income of $6,000 per month was recorded against the rental expense. During the three months ended March 31, 2019 and 2018, the Company recorded $0 and $18,000 sublease income, respectively.

On September 13, 2017, Bright Swallow renewed the lease for another two year term, commencing on October 1, 2017 and expiring on September 30, 2019. The monthly rental payment is 20,000 Hong Kong Dollars ($2,548). The Company terminated the lease on December 31, 2018.

The Company has entered into several lease agreements for office and warehouse space in Commerce, California and showroom space in Las Vegas, Nevada and High Point, North Carolina on monthly or annual terms. Total rental payments for the three months ended March 31, 2019 and 2018 was $291,439 and $199,069, respectively.

The components of lease costs, lease term and discount rate with respect of leases with an initial term of more than 12 months are as follows:

	Three Months Ended
	March 31, 2019

Operating lease cost	$	146,069
Weighted Average Remaining Lease Term - Operating leases	5.58 years
Weighted Average Discount Rate - Operating leases		5	%

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2019:

	Operating Leases
The remainder of 2019	$	441,127
Fiscal year 2020		604,811
Fiscal year 2021		622,956
Fiscal year 2022		641,644
Fiscal year 2023		660,894
Thereafter		508,000
Total undiscounted cash flows		3,479,432
Less: imputed interest		(454,153	)
Present value of lease liabilities	$	3,025,279

Legal Proceedings

On December 28, 2018, a Federal class action complaint was filed by George Barney against the Company and its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) in the United States District Court for the Central District of California, claiming the Company violated federal securities laws and pursuing remedies under Sections 10(b) and 20(a) of the Security Exchange Act of 1934 and Rule 10b-5 (the “Complaint”). The Complaint seeks to recover compensatory damages caused by the Company’s alleged violations of federal security laws during the period from December 3, 2015 through December 20, 2018. In reliance solely on a blog appearing in Seeking Alpha on December 21, 2018, the Complaint states that the Company made false and/or misleading statements and/or failed to disclose that: (1) the Company overstated its purported strategic alliance with a customer in China to operate as lead designer and manufacturer for all furnishings in such customer’s planned $460 million senior care center in China; (2) the Company inflated its reported sales in 2016 and 2017 with the Company’s two major customers; and (3) as a result, the Company’s public statements were materially false and misleading at all relevant times. The Audit Committee engaged the Company’s auditor to perform special procedures to confirm the reported sales. Those procedures included but were not limited to the examination and testing of relevant documentation relating to the sales made by the Company to the customers identified in the purported research report for the periods 2015-2018, and 100% sampling of all transactions between the Company and the subject customers. The Audit Committee finished its special procedures in March 2019 and the Company’s independent auditor has reported to the Audit Committee that, regarding the four subject customers mentioned in the purported research report, the special procedures resulted in no evidence of fictitious sales or of fictitious customers. Please see the details in the Form 8-K filed by the Company with SEC on March 29, 2019. Pursuant to a Stipulation approved by the Court, any amendment to the complaint must be filed by May 29, 2019 and no response is required until the earlier of 45 days after an amended complaint is filed or May 29, 2019 (should no amendment be filed).

The Company plans to vigorously defend against this lawsuit.

On March 8, 2019, in the United States District Court for the Central District of California, shareholder Jie Yuan filed a derivative lawsuit purportedly on behalf of the Company against its former and current CEOs and CFOs (Thanh H. Lam, Ya Ming Wong, Jeffery Chuang and Yuen Ching Ho) and directors (Charlie Huy La, Bin Liu, Steven Qiang Liu, Umesh Patel, and Min Su) (collectively, the “Defendants”) seeking to recover any losses the Company sustains as a result of alleged securities violations outlined in the Andri Report and Barney securities class action complaint. Specifically, the derivative lawsuit alleges that the Defendants caused the Company to make the alleged false and/or misleading statements giving rise to the putative securities class action. The Plaintiff also alleges that President and CEO Lam engaged in self-dealing by leasing her property to Diamond Bar, a Company subsidiary, and asserts, in conclusory fashion, that Lam, former CEO and director Ya Ming Wong, former CFO and director Yuen Ching Ho, and director Umesh Patel sold securities during the period of time when the alleged false and/or misleading statements were made “with knowledge of material non-public information . . . .” While the lawsuit is purportedly asserted on behalf of the Company, it is possible that the Company may incur attorneys’ fees in this matter. To the Company’s knowledge, the Complaint has not been served on any of the defendants.

Other than the above, the Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.