What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-13 · 86 added, 63 removed, 150 unchanged (50% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The disclosures in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2022 (the “2021 Form 10-K”).

The disclosures in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 30, 2022 (the “2021 Form 10-K”).

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report on Form 10-Q as well as our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K.

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A recent example of our innovative product development includes the Jetcoat Shower wall systems, which offer a stylized design option without the fuss of messy grout.

We expect to continue to invest in research and development to drive product innovation in 2022.

We expect to continue to invest in research and development to drive product innovation in 2022 and beyond.

● “BPC” (Brands, Products, Channels) strategy to drive above-market organic growth.

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We believe our BPC strategy will support enhanced margins through growth in branded products, new product categories, and new channels.

Headwinds from supply chain disruptions and inflationary pressures impacted operating margins in 2021;

Headwinds from supply chain disruptions and inflationary pressures impacted operating margins in 2021 and the first half of 2022;

however, we have recently adopted measures to offset these challenges, and expect to resume margin expansion in the back half of 2022 as these initiatives take hold.

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Results of Operations

For the Three Months Ended March 31, 2022 and 2021

The following table summarizes the results of our operations for the three months ended March 31, 2022 and 2021 and provides information regarding the dollar and percentage increase (decrease) during such periods.

The following table summarizes the results of our operations for the three and six months ended June 30, 2022 and 2021 and provides information regarding the dollar and percentage increase (decrease) during such periods.

For the Three and Six Months Ended June 30, 2022 and 2021

For the Three Months Ended

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Operating margins

Total other income (expenses), net

Provision for income taxes

Adjusted income from operations (1)

Adjusted operating margins (1)

Adjusted net income (1)

For the six months ended

Cost of revenues

Selling and distribution expenses

General and administrative expenses

Research and development expenses

Income from operations

Operating margins

Total other (expenses) income, net

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generally accepted accounting principles (“GAAP”) comparators.

Our revenues increased by $7.2 million, or 19.8%, to $43.6 million for the three months ended March 31, 2022, from $36.4 million for the three months ended March 31, 2021.

The growth in our revenues was primarily attributable to

strong growth in Sanitaryware and Other product categories, partially offset by declines in Bath Furniture.

Revenue categories by product are summarized as follows:

For the three months ended March 31,

Our revenues increased by $5.3 million, or 12.5%, to $47.8 million for the three ended June 30, 2022, from $42.5 million for the three months ended June 30, 2021.

For the six months ended June 30, 2022, our revenue increased by $12.5 million, or 15.9%, to $91.4 million from $78.9 million in the prior year period.

The growth in our revenues in both periods was primarily attributable to strong growth in Sanitaryware and Other product categories, partially offset by declines in Bath Furniture.

Revenue categories by product are summarized as follow :

For the three months ended June 30,

Bath Furniture

We derive the majority of our revenues from sales of Sanitaryware, which accounted for 64.7% and 62.7% of our total revenues for the three months ended March 31, 2022 and 2021, respectively.

Revenues generated from the sales of Sanitaryware increased by 23.6% to $28.2 million for the three months ended March 31, 2022, from $22.8 million for the three months ended March 31, 2021.

The increase in sales for this product line was primarily driven by continued volume strength in the pro channel.

Our revenues from bath furniture sales decreased by 11.9% to $10.1 million for the three months ended March 31, 2022, from $11.5 million for the three months ended March 31, 2021.

Bath Furniture sales accounted for 23.3% and 31.6% of our total revenue for the three months ended March 31, 2022 and 2021, respectively.

Volumes in Bath Furniture were up year-over-year;

however, a less favorable product mix weighed on revenues.

In addition, we experienced some order delays as certain customers had to push out orders into the second quarter of 2022 due to warehousing and supply chain issues.

This is a timing issue, and we expect to ship the orders in the coming quarters.

The revenues from sales of other products (shower systems and custom kitchen cabinetry) increased by 152.9% to $5.3 million for the three months ended March 31, 2022 from $2.1 million for the three months ended March 31, 2021.

The increase was primarily driven by volume growth resulting from continued strength in sales of the Jetcoat Shower wall systems.

For the six months ended June 30,

Bath Furniture

We derive the majority of our revenues from sales of Sanitaryware, which accounted for 67.5% and 66.1% of our total revenues for the three and six months ended June 30, 2022, respectively, compared to 48.7% and 55.2% for the comparable periods of 2021.

Revenues generated from the sales of Sanitaryware increased by 55.5%f to $32.2 million and 38.8% to 60.4 million for the three and six months ended June 30, 2022, respectively, from $20.7 million and 43.5 million for the three and six months ended June 30, 2021.

The increase in sales for this product line was primarily driven by continued strong demand in the both wholesale and retail channels.

Our revenues from bath furniture sales accounted for 16.1% and 19.6% of our total revenue for the three and six months ended June 30, 2022, respectively, compared to 37.6% and 34.8% for the comparable period of 2021.

Bath Furniture sales decreased by 51.7% to $7.7 million and 35.0% to 17.8 million for the three and six months ended June 30, 2022, respectively, from $16.0 million and 27.4 million for the three and six months ended June 30, 2021.

We experienced some order delays as certain customers had to push out orders into the second half of 2022 due to warehousing and supply chain issues.

This is a timing issue that we believe is temporary, and we remain encouraged by the broader trends in our bath furniture business and expect improved results in incoming quarters.

The revenues from sales of other products (shower systems and custom kitchen cabinetry) increased by 35.5% to $7.9 million and 66.5% to 13.1 million for the three and six months ended June 30, 2022, respectively, from $5.8 million and 7.9 million for the three and six months ended June 30, 2021.

The increase was primarily driven by volume growth resulting from continued strength in sales of the shower systems and customized kitchen cabinetry.

Revenue Categories by Geographic Location

We derive our revenues from the United States, Canada and Europe.

Revenue categories by geographic location are summarized as follows:

For the three months ended March 31,

For the three months ended June 30,

United States

We generated the majority of our revenues in the United States market, which amounted to $27.4 million for the three months ended March 31, 2022 and $22.1 million for the three months ended March 31, 2021, representing a 23.9% increase.

These revenues accounted for 62.8% and 60.7% of our total revenues for the three months ended March 31, 2022 and 2021, respectively.

The increase in the U.S.

For the six months ended June 30,

United States

We generated the majority of our revenues in the United States market, which amounted to $29.6 million and 57.0 million for the three and six months ended June 30, 2022, respectively, compared to $29.2 million and 51.3 million for the three and six months ended June 30, 2021, representing a 1.5% and 11.1% increase.

These revenues accounted for 62.0%, 62.4% and 68.8%, 65% of our total revenues for the three and six months ended June 30, 2022 and 2021, respectively.

The increased in the U.S.

market was primarily driven by strong demand in the pro channel on our Sanitary category along with improving demand in the R&R markets.

Our second largest market is Canada.

Our revenues generated in the Canadian market were $12.3 million and $9.6 million for the three months ended March 31, 2022 and 2021, respectively, representing a 28.6% increase.

Our revenues generated in the Canadian market were $13.6 million and $25.9 million for the three and six months ended June 30, 2022, respectively, compared to 9.0 million and 18.5 million for the three and six months ended June 30, 2021, representing a 51.8% and 39.8% increase.

The increase was primarily driven by strong demand in both retail and wholesale markets, as compared to delayed shipments during the corresponding period last year.

We also derive a small portion of our revenue from Europe, which consists primarily of sales in Germany.

This amounted to $3.9 million and $4.7 million for the three months ended March 31, 2022 and 2021, respectively, representing a 17.1% decrease.

The decrease in sales represented softer demand from the impact of the COVID-19 pandemic.

Our gross profit increased by $0.2 million, or 2.8%, to $7.5 million for the three months ended March 31, 2022, from $7.3 million for the three months ended March 31, 2021.

The increase in gross profit was primarily driven by the growth of sales, which we attribute to strong demand in the pro channel and R&R markets in the U.S.

Gross profit as a percentage of our sales decreased across all of our product lines to 17.3% for the three months ended March 31, 2022, as compared to 20.1% for the three months ended March 31, 2021.

This amounted to $4.6 million and $8.5 million for the three and six months ended June 30, 2022, respectively, compared to $ 4.3 million and 9.0 million for the three and six months ended June 30, 2021, representing a 5.8% increase and a 6.2% decrease.

The decrease in first quarter was attributed the impact of global supply chain interruptions, but started recovering in second quarter.

Our gross profit decreased by $0.8 million, or 8.4%, to $8.4 million for the three months ended June 30, 2022, from $9.2 million for the three months ended June 30, 2021.

Our gross profit decreased by $0.6 million, or 3.4%, to $15.9 million for the six months ended June 30, 2022, from $16.5 million for the six months ended June 30, 2021.

The decrease in gross profit was due to supply chain disruptions and elevated freight costs that was partially offset by solid revenue growth.

Gross profit as a percentage of our sales decreased across all of our product lines to 17.6% and 17.5% for the three and six months ended June 30, 2022, as compared to 21.6% and 20.9% for the three and six months ended June 30, 2021.

The reduction in our gross margin percentage is primarily attributable to the impact of higher raw materials and higher freight charges associated with recent global supply chain issues.

While gross profit margin was down year-over-year, the Company is beginning to see the benefits of measures put in place to offset recent margin headwinds, as first quarter 2022 gross profit margin was up 277 basis points from the fourth quarter of 2021.

While gross profit margin was down year-over-year, it was up from the first quarter of 2022, as we continue to make progress offsetting the elevated costs through price increases and other cost reduction efforts.

Operating Expenses

Selling and distribution expenses primarily consisted of personnel costs, marketing and promotion costs, commission, and freight and leasing charges.

Our selling and distribution expenses increased by $0.7 million, or 18.7%, to $4.7 million for the three months ended March 31, 2022, from $3.9 million for the three months ended March 31, 2021.

Our selling and distribution expenses increased by $0.3 million, or 6.7%, to $4.4 million for the three months ended June 30, 2022, from $4.1 million for the three months ended June 30, 2021, respectively, an increased by $1.0 million, or 12.6%, to $9.0 million for the six months ended June 30, 2022, from $8.0 million for the six months ended June 30, 2021, respectively.

The increase in selling and distribution expenses was a result of the growth in our sales, which led to an increase in commission, product display, logistics and warehouse costs.

In addition, business sales activities are gradually returning to pre-COVID-19 levels, which led to increases in marketing, trade shows and travel.

In addition, business sales activities are gradually returning to pre-COVID-19 levels, which led to increases in marketing, trade shows and travel costs.

General and administrative expenses primarily consisted of personnel costs, professional service fees, depreciation, travel, and office supply expenses.

Our general and administrative expenses increased by $0.5 million, or 35.6%, to $1.8 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Our general and administrative expenses increased by $0.5 million, or 28.9%, to $2.1 million for the three months ended June 30, 2022,from 1.6 million for the three months ended June 30, 2021, an increased by 1.0 million, or 31.9%, to 4.0 million for the six months ended June 30,2022, from 3.0 million for the six months ended June 30,2021,respectively.

The increase was primarily attributable to incremental public company costs and a one-time IPO bonus.

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Other Income (Expenses)

Other income (expenses) decreased by $1.6 million, or (102.1)%, to less than $(0.1) million for the three months ended March 31, 2022, from $1.5 million for the three months ended March 31, 2021.

This decrease was the result of one-time income recognized in the first quarter of 2021 upon the forgiveness of the PPP loan .

Other expenses decreased by approximately $11,000 or 6.1%, to $173,000 for the three months ended June 30, 2022, from $184,000 for the three months ended June 30, 2021.

This increase was the result of lower interest income, higher interest expenses, partially offset by favorable exchange rate differences .

Other income (expenses) decreased by $1.6 million, or (115.3)%, to $(0.2) million for the six months ended June 30, 2022, from $1.4 million of income for the six months ended June 30, 2021.

This decrease was the result of one-time income recognized in the first half of 2021 upon the forgiveness of the PPP loan .

Provision for Income Taxes

We recorded income tax expense of $0.1 million for the three months ended March 31, 2022, and $0.5 million for the three months ended March 31, 2021.

We recorded income tax expense of $0.4 million for the three months ended June 30, 2022, and $0.6 million for the three months ended June 30, 2021.

The decrease resulted from the decrease in our reported income before taxes of $1.6 million, or 50.4%.

Our net income decreased by $2.4 million, or 82.1%, to $0.5 million for the three months ended March 31, 2022, from $3.0 million for the three months ended March 31, 2021.

This increase was a result of the combination of the changes discussed above.

We recorded income tax expense of $0.5 million for the six months ended June 30, 2022, and $1.1 million for the six months ended June 30, 2021.

The decrease resulted from the decrease in our reported income before taxes of $4.3 million, or 66.2%.

Our net income decreased by $1.3 million, or 53.3%, to $1.2 million for the three months ended June 30, 2022, from $2.5 million for the three months ended June 30, 2021, and decreased by $3.8 million, or 68.9%, to $1.7 million for the six months ended June 30, 2022, from $5.5 million for the six months ended June 30, 2021, respectively.

This decrease was a result of the combination of the changes discussed above.

Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from operating activities and cash borrowed under credit facilities, which we believe provides sufficient liquidity to support our financing needs.

As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $8.8 million and $3.9 million, respectively.

We had working capital of $13.8 million as of March 31, 2022 compared to $1.4 million as of December 31, 2021.

As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $3.1 million and $3.9 million, respectively.

We had working capital of $15.7 million as of June 30, 2022 compared to $1.4 million as of December 31, 2021.

On January 27, 2022, we closed an underwritten public offering of 2.5 million units consisting of ordinary shares and warrants and received net proceeds, after commissions and expenses, of approximately $12.4 million.

We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations well into the foreseeable future.

However, we may need additional cash resources in the future if we experience changes in business conditions or other developments and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions.

However, we may need additional cash resources in the future if we experience changes in business conditions or other developments, such as rising interest rates, inflation and increased costs, and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions.

For example, from time to time we may provide loans or other operational support to Foremost to assist Foremost in capital expenditures or other efforts related to the manufacturing services that Foremost provides to us, which could limit the assets available for other corporate purposes or require additional resources.

If it is determined that the cash requirements exceed our amount of cash on hand, we may seek to issue debt or equity securities.

As of March 31, 2022, our total debt is represented by a credit facility with East West Bank.

If it is determined that the cash requirements exceed our amount of cash on hand, we may seek to issue debt or equity securities, and there can be no assurances that additional financing will be available on acceptable term, if at all.

As of June 30, 2022, our total debt is represented by a credit facility with East West Bank.

East West Bank Credit Facility

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however, East West Bank provided a waiver for such non-compliance.

As of March 31, 2022, East West Bank waived testing of this financial covenant.

As of June 30, 2022, FGI Industries was in compliance with this financial covenant.

The loan bears interest at a rate per annum equal to 0.25 percentage points above the Prime Rate as quoted by the Wall Street Journal.

Under no circumstances will the interest rate on this loan be less than 3.250% per annum or more than the maximum rate allowed by applicable law.

The interest rate as of March 31, 2022 and December 31, 2021 was 3.75% and 3.50%, respectively.

The interest rate as of June 30, 2022 and December 31, 2021 was 4.75% and 3.50%, respectively.

Each sum of borrowings under the Credit Agreement is deemed due on demand and is classified as a short-term loan.

The outstanding balance of such loan was $16,321,410 and $14,657,280 as of March 31, 2022 and December 31, 2021, respectively.

The outstanding balance of such loan was $14,690,048 and $14,657,280 as of June 30, 2022 and December 31, 2021, respectively.

On April 9, 2020, Foremost Group, Inc.

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Upon such approval, the entire balance, including principal and interest, was forgiven and recorded as other income on our unaudited condensed consolidated statements of income and comprehensive income.

The following table summarizes the key components of our cash flows for the three months ended March 31, 2022 and 2021.

For the Three Months Ended March 31,

Net cash used in operating activities

The following table summarizes the key components of our cash flows for the six months ended June 30, 2022 and 2021.

For the Six Months Ended June 30,

Net cash provided by (used in) operating activities

Net cash used in investing activities

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Operating Activities

Net cash used in operating activities was approximately $9.1 million for the three months ended March 31, 2022 and was primarily attributable to a decrease in accounts payable of approximately $8.1 million, an increase in prepayments and other receivables - related parties of approximately $4.2 million, an increase in prepayments and other current assets of approximately $1.1 million, an increase in other noncurrent assets of approximately $0.6 million, a decrease in accrued expenses and other current liabilities of approximately $0.6 million, and an increase in inventories of approximately $0.3 million, plus various non-cash items of approximately $0.1 million, which were partially offset by a decrease in accounts receivable of approximately $5.9 million and net income for the quarter of approximately $0.5 million.

Net cash used in operating activities was approximately $0.8 million for the three months ended March 31, 2021 and was primarily attributable to a decrease in accounts payable of approximately $4.0 million, an increase in accounts receivable of approximately $1.3 million, an increase in other noncurrent assets of approximately $0.8 million, and a decrease in operating lease liabilities of approximately $0.1 million, which were partially offset by net income for the quarter of approximately $3.0 million, various non-cash items of approximately $0.9 million, an increase in accounts payable —related parties of approximately $0.5 million, and a decrease in inventories of approximately $0.1 million.

Net cash provided by (used in) operating activities was approximately $13.0 million for the six months ended June 30, 2022 and was primarily attributable to a decrease in accounts payable of approximately $10.8 million, an increase in prepayments and other receivables - related parties of approximately $5.3 million, an increase in prepayments and other current assets of approximately $1.5 million, a decrease in accrued expenses and other current liabilities of approximately $1.0 million, a decrease in operating lease liabilities of approximately $0.6 million, a decrease in income taxes payable of approximately $0.3 million, and an increase in other noncurrent assets of approximately $0.1 million, which were partially offset by a decrease in inventories of approximately $2.6 million, a decrease in accounts receivable

of approximately $1.8 million, and net income for the quarter of approximately $1.7 million, a decrease in right-of-used assets of approximately $ 0.6 million, and plus various non-cash items of approximately $0.1 million.

Net cash provided by operating activities was approximately $0.6 million for the six-month period ended June 30, 2021 and was primarily attributable to net income generated for the period of approximately $5.5 million, plus various non-cash items of approximately $2.1 million, an increase in accounts payable of approximately $0.4 million, an increase in accounts payable – related parties of approximately $0.8 million, an increase in accrued expenses and other current liabilities of approximately $1.6 million, which was partially offset by an increase in accounts receivable of approximately $1.9 million, an increase in inventory of approximately $4.4 million and an increase in other noncurrent assets of approximately $3.8 million.

Investing Activities

Net cash used in investing activities was less than $0.1 million for each of the three months ended March 31, 2022 and 2021, which was attributable to the purchase of property and equipment.

Net cash provided by (used in) investing activities was less than $0.1 million for each of the six months ended June 30, 2022 and 2021, which was attributable to the purchase of property and equipment.

Financing Activities

Net cash provided by financing activities was approximately $14.0 million for the three months ended March 31, 2022, which represents net proceeds from bank loans of $1.7 million and net proceeds from issuance of units in the IPO of $12.4 million.

Net cash used in financing activities was approximately $1.4 million for the three months ended March 31, 2021, which represents net proceeds from bank loans of less than $0.1 million and a net decrease in parent company investment of $1.3 million.

Net cash provided by financing activities was approximately $12.4 million for the six months ended June 30, 2022, which primarily represents net proceeds from bank loans of less than $0.1 million and net proceeds from issuance of units in the IPO of $12.4 million.

Net cash provided by (used in) financing activities was approximately $1.1 million for the six months ended June 30, 2021, which represents net proceeds from bank loans of approximately $6.3 million and a net decrease in parent company investment of $7.4 million.

Commitments and Contingencies

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Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment.

Our capital expenditures amounted to less than $0.1 million for each of the three months ended March 31, 2022 and 2021.

Our capital expenditures amounted to less than $0.1 million for each of the six months ended June 30, 2022 and 2021.

We do not expect to incur significant capital expenditures in the immediate future.

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Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur.

Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the three months ended March 31, 2022.

Recently Issued Accounting Pronouncements

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Non-GAAP Measures

In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following non-GAAP measures to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions.

business and assist us in making strategic decisions.

Our non-GAAP measures are:

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We define Adjusted Income from Operations as GAAP income from operations excluding the impact of certain non-recurring expenses, including IPO-related compensation and stock-based compensation expense and expenses related to COVID-19 protocols.

We define Adjusted Net Income as GAAP net income excluding the tax-effected impact of certain non-recurring expenses and income, such as IPO-related compensation and stock-based compensation expense, expenses

related to COVID-19 protocols and the impact of our PPP loan.

We define Adjusted Operating Margins as adjusted income from operations divided by revenue.

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For the three months ended

For the six months ended

Income from operations

Non-recurring IPO-related compensation and stock-based compensation expense

Non-recurring IPO-related compensation

COVID one-time expenses

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For the three months ended

Non-recurring IPO-related compensation and stock-based compensation expense

For the six months ended

Non-recurring IPO-related compensation

Other income (PPP Loan)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis