Item 2. Management’s Discussion and Analysis
Item 2. 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 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. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q and of our 2021 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate.
Overview
FGI is a global supplier of kitchen and bath products. Over the course of 30 years, we have built an industry-wide reputation for product innovation, quality, and excellent customer service. We are currently focused on the following product categories: sanitaryware (primarily toilets, sinks, pedestals and toilet seats), bath furniture (vanities, mirrors and cabinets), shower systems, customer kitchen cabinetry and other accessory items. These products are sold primarily for R&R activity and, to a lesser extent, new home or commercial construction. We sell our products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and specialty stores.
Consistent with our long-term strategic plan, we intend to drive value creation for our shareholders through a balanced focus on product innovation, organic growth, and efficient capital deployment. The following initiatives represent key strategic priorities for us in 2022:
● Commitment to product innovation. We have a history of being an innovator in the kitchen and bath markets and developing “on-trend” products and bringing them to market ahead of the competition. We have developed deep marketing skills, leading design capabilities, and product development expertise. 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 and beyond.
● “BPC” (Brands, Products, Channels) strategy to drive above-market organic growth. We are focused on increasing the mix of Branded products as a percentage of sales, which is expected to result in larger available markets and gross margin expansion. Our owned brands grew to nearly 40% of sales as of year-end 2021, up from less than 1% at the end of 2010. We are focused on expanding our position in channels such as e-commerce, providing for additional growth opportunities with existing brick and mortar customers, as well as expanding with e-commerce customers. The e-commerce channel accounted for 21% of sales in 2021, up from only 2% at the end of 2010.
● Drive margin expansion. Margin expansion remains a key pillar of our value creation focus. 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 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.
● Efficient capital deployment. We benefit from a capital-light business model allowing us to generate strong free cash flow conversion. We expect to utilize our strong free cash flow to re-invest in the core business and drive growth through existing brand development and new product category expansion. We will also look for selective bolt-on acquisition opportunities, over time, focused within the core kitchen and bath end markets. We plan to maintain a disciplined approach to capital deployment, with most material internal investments currently subject to a company-wide 20%+ expected return on capital hurdle rate.
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● Deep manufacturing partners and customer relationships. We have developed strong manufacturing and sourcing partners over the last 30+ years, which we believe will continue to give us a competitive advantage in the markets we serve. We also have deep relationships with an established global customer base, offering end-to-end solutions to support category growth. While recent supply chain and inflation pressures have been a headwind, our durable partnerships with manufacturing and sourcing partners have helped to mitigate these challenges.
We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization (the “Reorganization”) of our parent company, Foremost Groups Ltd. (“Foremost”), and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc. (“FGI Industries”), FGI Europe Investment Limited, an entity formed in the British Virgin Islands, and FGI International, Limited, an entity formed under the laws of Hong Kong, each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost before the completion of the Reorganization and are presented as if we had been in existence and the Reorganization had been in effect for the entirely of each of the periods presented.
Results of Operations
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
June 30,
Change
2022
2021
Amount
Percentage
USD
USD
USD
%
Revenues
$
47,809,014
$
42,490,358
$
5,318,656
12.5
Cost of revenues
39,388,061
33,301,421
6,086,640
18.3
Gross profit
8,420,953
9,188,937
(767,984)
(8.4)
Selling and distribution expenses
4,362,707
4,088,739
273,968
6.7
General and administrative expenses
2,093,162
1,623,917
469,245
28.9
Research and development expenses
235,735
155,356
80,379
51.7
Income from operations
1,729,349
3,320,925
(1,591,576)
(47.9)
Operating margins
3.6
%
7.8
%
(420)
bps
Total other income (expenses), net
(173,412)
(184,700)
11,288
6.1
Provision for income taxes
385,407
628,324
(242,917)
(38.7)
Net income
$
1,170,530
$
2,507,901
$
(1,337,371)
(53.3)
Adjusted income from operations (1)
$
1,752,908
$
3,320,925
$
(1,568,017)
(47.2)
Adjusted operating margins (1)
3.7
%
7.8
%
(410)
bps
—
Adjusted net income (1)
$
1,189,848
$
2,507,901
$
(1,318,053)
(52.6)
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For the six months ended
June 30,
Change
2022
2021
Amount
Percentage
USD
USD
USD
%
Revenues
$
91,384,254
$
78,866,047
$
12,518,207
15.9
Cost of revenues
75,438,715
62,360,079
13,078,636
21.0
Gross profit
15,945,539
16,505,968
(560,429)
(3.4)
Selling and distribution expenses
9,040,059
8,029,209
1,010,850
12.6
General and administrative expenses
3,935,969
2,982,939
953,030
31.9
Research and development expenses
549,416
289,124
260,292
90.0
Income from operations
2,420,095
5,204,696
(2,784,601)
(53.5)
Operating margins
2.6
%
6.6
%
(400)
bps
Total other (expenses) income, net
(206,288)
1,348,430
(1,554,718)
(115.3)
Provision for income taxes
513,084
1,083,811
(570,727)
(52.7)
Net income
$
1,700,723
$
5,469,315
$
(3,768,592)
(68.9)
Adjusted income from operations (1)
$
2,675,966
$
5,320,596
$
(2,644,630)
(49.7)
Adjusted operating margins (1)
2.9
%
6.7
%
(380)
bps
—
Adjusted net income (1)
$
1,910,357
$
4,186,015
$
(2,275,658)
(54.4)
(1) See “Non-GAAP Measures” below for more information on our use of these adjusted figures and a reconciliation of these financial measures to their closest U.S. generally accepted accounting principles (“GAAP”) comparators.
Revenues
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,
Change
2022
Percentage
2021
Percentage
Percentage
USD
%
USD
%
%
Sanitaryware
$
32,237,144
67.5
20,730,408
48.7
55.5
Bath Furniture
7,711,420
16.1
15,957,226
37.6
(51.7)
Other
7,860,450
16.4
5,802,723
13.7
35.5
Total
$
47,809,014
100.0
$
42,490,357
100.0
12.5
For the six months ended June 30,
Change
2022
Percentage
2021
Percentage
Percentage
USD
%
USD
%
%
Sanitaryware
$
60,416,339
66.1
43,535,821
55.2
38.8
Bath Furniture
17,827,232
19.6
27,439,887
34.8
(35.0)
Other
13,140,683
14.3
7,890,339
10.0
66.5
Total
$
91,384,254
100.0
$
78,866,047
100.0
15.9
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.
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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 June 30,
Change
2022
Percentage
2021
Percentage
Percentage
USD
%
USD
%
%
United States
$
29,645,440
62.0
29,216,039
68.8
1.5
Canada
13,597,568
28.4
8,960,495
21.0
51.8
Europe
4,566,006
9.6
4,313,823
10.2
5.8
Total
$
47,809,014
100.0
$
42,490,357
100.0
12.5
For the six months ended June 30,
Change
2022
Percentage
2021
Percentage
Percentage
USD
%
USD
%
%
United States
$
56,998,636
62.4
51,297,861
65.0
11.1
Canada
25,893,570
28.3
18,518,691
23.5
39.8
Europe
8,492,048
9.3
9,049,495
11.5
(6.2)
Total
$
91,384,254
100.0
$
78,866,047
100.0
15.9
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 $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 $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.
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Gross Profit
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, 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 $0.3 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 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 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.
Research and development expenses mainly consisted of personnel costs and product development costs. Our research and development activities remained stable and are relatively immaterial to our unaudited condensed consolidated statements of income and comprehensive income.
Other Income (Expenses)
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 $0.4 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%.
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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%.
Net Income
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 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, 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, 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
Our wholly owned subsidiary, FGI Industries (formerly named Foremost Groups, Inc.), has a line of credit agreement (the “Credit Agreement”) with East West Bank, which is collateralized by all of the assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately 49.75% of the voting control of Foremost. For the year ended December 31, 2018 and through September 30, 2019, the Credit Agreement allowed for borrowings up to $25,000,000, which previously included a discretionary loan in the amount of $3,000,000 that could only be drawn upon under certain circumstances as described in the Credit Agreement. The discretionary line expired on September 30, 2019. The non-discretionary line of credit was renewed through September 23, 2020, and maximum borrowings were decreased to $22,000,000. On August 13, 2020, the line of credit was renewed with an extended maturity date of September 23, 2022, and maximum borrowings were further decreased to $18,000,000.
Pursuant to the Credit Agreement, FGI Industries is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter; (b) an effective tangible net worth (defined as total book net worth plus minority interest, less amounts due from officers, shareholders and affiliates, minus intangible assets and accumulated amortization, plus debt subordinated to East West Bank) of not less than $10,000,000 for the quarter ended March 31, 2021 and thereafter; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth, which is defined as total book net worth plus minority interest, less loans to officers, shareholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter. As of December 31, 2021, FGI Industries was not in compliance with this financial covenant;
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however, East West Bank provided a waiver for such non-compliance. . 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 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 $14,690,048 and $14,657,280 as of June 30, 2022 and December 31, 2021, respectively.
PPP Loan
On April 9, 2020, Foremost Group, Inc. entered into a loan agreement in connection with the Paycheck Protection Program (“PPP”) and received proceeds of approximately $1.68 million (the “PPP loan”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Interest on the loan accrued at a fixed interest rate of 1.0%. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the year ended December 31, 2020, Foremost Groups, Inc. used all of the PPP loan proceeds to pay for qualified expenses. 100% of the PPP loan proceeds were used for payroll related expenses. Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit by the U.S. Small Business Administration (“SBA”) to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the PPP rules. Foremost Groups, Inc. submitted its application and supporting documentation for forgiveness on December 22, 2020. As of December 31, 2020, the balance of the PPP loan was included in the short-term loan on the consolidated balance sheet. On February 8, 2021, Foremost Groups, Inc. received approval of forgiveness of the PPP loan from the SBA. 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 six months ended June 30, 2022 and 2021.
For the Six Months Ended June 30,
2022
2021
USD
USD
Net cash provided by (used in) operating activities
$
(12,990,336)
$
629,772
Net cash used in investing activities
(42,752)
(1,751)
Net cash provided by (used in) financing activities
12,403,568
(1,072,328)
Effect of exchange rate fluctuation on cash
(128,071)
226,359
Net changes in cash
(757,591)
(217,948)
Cash, beginning of period
3,883,896
4,018,558
Cash, end of period
$
3,126,305
$
3,800,610
Operating Activities
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
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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 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 $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
Capital Expenditures
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 six months ended June 30, 2022 and 2021. We do not expect to incur significant capital expenditures in the immediate future.
Critical Accounting Policies and Significant Accounting Estimates
A discussion of our critical accounting policies and significant accounting estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. The preparation of the unaudited condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ materially from these estimates. 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 six months ended June 30, 2022.
Recently Issued Accounting Pronouncements
See Note 2, “Summary of significant accounting policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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
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business and assist us in making strategic decisions. Our non-GAAP measures are: Adjusted Income from Operations, Adjusted Operating Margins and Adjusted Net Income. These non-GAAP financial measures are not prepared in accordance with GAAP. They are supplemental financial measures of our performance only, and should not be considered substitutes for net income, income from operations or any other measure derived in accordance with GAAP and may not be comparable to similarly titled measures reported by other entities.
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.
We use these non-GAAP measures, along with GAAP measures, to evaluate our business, measure our financial performance and profitability and our ability to manage expenses, after adjusting for certain one-time expenses, identify trends affecting our business and assist us in making strategic decisions. We believe these non-GAAP measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance over time on a consistent basis.
The following table reconciles Income from Operations to Adjusted Income from Operations and Adjusted Operating Margins, as well as Net income to Adjusted Net Income for the periods presented.
For the three months ended
For the six months ended
June 30,
June 30,
2022
2021
2022
2021
Income from operations
1,729,349
3,320,925
2,420,095
5,204,696
Adjustments:
Non-recurring IPO-related compensation
23,559
255,871
—
COVID one-time expenses
—
115,900
Adjusted income from operations
1,752,908
3,320,925
2,675,966
5,320,596
Revenue
47,809,014
42,490,357
91,384,254
78,866,047
Adjusted operating margins
3.7
%
7.8
%
2.9
%
6.7
%
For the three months ended
For the six months ended
June 30,
June 30,
2022
2021
2022
2021
Net Income
1,170,530
2,507,901
1,700,723
5,469,315
Adjustments:
Non-recurring IPO-related compensation
23,559
255,871
—
Other income (PPP Loan)
—
—
—
(1,680,900)
COVID one-time expenses
—
—
—
115,900
Total
1,194,089
2,507,901
1,956,594
3,904,315
Tax impact of adjustment at 18% effective rate
(4,241)
—
(46,057)
281,700
Adjusted net income
1,189,848
2,507,901
1,910,537
4,186,015
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
39
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.