What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 83 added, 66 removed, 170 unchanged (47% 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 June 30, 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 March 31, 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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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

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

For the Three and Nine Months Ended September 30, 2022 and 2021

For the Three Months Ended

September 30,

Cost of revenues

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Operating margins

Total other income (expenses), net

Total other expenses, net

Provision for income taxes

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Adjusted net income (1)

For the six months ended

For the nine months ended

September 30,

Cost of revenues

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generally accepted accounting principles (“GAAP”) comparators.

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.

Our revenues decreased by $12.3 million, or 24.3%, to $38.5 million for the three ended September 30, 2022, from $50.8 million for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, our revenue increased by $0.1 million, or 0.1%, to $129.9 million from $129.8 million in the prior year period.

The decrease in our revenues was primarily by declines in Sanitaryware and Bath Furniture, partially offset by continued growth in Other categories (including shower systems and custom kitchen cabinetry).

Revenue categories by product are summarized as follow :

For the three months ended June 30,

For the three months ended September 30,

Bath Furniture

For the six months ended June 30,

For the nine months ended September 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.

We derive the majority of our revenues from sales of Sanitaryware, which accounted for 66.2% and 65.1% of our total revenues for the three and nine months ended September 30, 2022, respectively, compared to 61.2% and 57.5% for the comparable periods of 2021.

Revenues generated from the sales of Sanitaryware decreased by 18.1% to $25.5 million in the three months ended September 30, 2022, from $31.1 million in same period of 2021.

The decrease in sales for this product line in the third quarter was primarily driven by volume weakness in the pro channel in the U.S.

The revenue decrease was also due in large part to inventory de-stocking, with end customer demand remaining relatively stable.

For the nine months ended September 30, 2022, Sanitaryware revenues increased by 13.2% to $84.6 million from $74.7 million in the same period in 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.

Our revenues from bath furniture sales accounted for 14.5% and 18.0% of our total revenue for the three and nine months ended September 30, 2022, respectively, compared to 29.7% and 32.8% for the comparable period of 2021.

Bath Furniture sales decreased by 62.9% to $5.6 million for the three months ended September 30, 2022, compared to $15.1 million in the same period of 2021.

For the nine months ended September 30, 2022, Bath Furniture sales decreased 45.0% to $23.4 million from $42.6 million in the same period of 2021.

While order patterns were expected to begin to normalize in the back half of 2022, customers continue to de-stock in order to reduce channel inventory levels.

While there are some signs of moderating consumer demand, the Company continues to expect a normalization in order patten in the coming quarters as inventory levels adjust.

The revenues from sales of other products (shower systems and custom kitchen cabinetry) increased by 60.8% to $7.4 million for the three months ended September 30, 2022, compared to $4.6 million in the same period of 2021.

For the nine months ended September 30, 2022, sales of other products increased 75.4% to $22.0 million from $12.5 million in the same period of 2021.

The increase was primarily driven by volume growth resulting from continued strength in sales of the shower systems and Covered Bridge custom-kitchen cabinetry businesses.

Revenue Categories by Geographic Location

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

We derive our revenues from the United States, Canada and Rest of World.

Revenue categories by geographic location are summarized as follows:

For the three months ended June 30,

For the three months ended September 30,

United States

For the six months ended June 30,

Rest of World

For the nine months ended September 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.

Rest of World

We generated the majority of our revenues in the United States market, which amounted to $23.9 million and $80.9 million for the three and nine months ended September 30, 2022, respectively, compared to $29.6 million and $80.9 million for the three and nine months ended September 30, 2021, representing a 19.3% decrease and 0 % increase for the three and nine months periods, respectively.

These revenues accounted for 61.9% and 58.1% of our total revenues for the three months ended September 30, 2022 and 2021 and 62.3% and 62.3% of our total revenues for the nine months ended September 30, 2022 and 2021.

The decreased in the U.S.

market was primarily driven by volume weakness in the pro channel in our Sanitary category.

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.

Our revenues generated in the Canadian market were $9.5 million and $35.4 million for the three and nine months ended September 30, 2022, respectively, compared to $16.7 million and $35.2 million for the three and nine months ended September 30, 2021, representing a 43.0% decrease and 0.6 % increase for the three and nine months periods, respectively.

The decrease was primarily driven by volume weakness in both retail and wholesale markets.

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.

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.

This amounted to $4.8 million and $13.3 million for the three and nine months ended September 30, 2022, respectively, compared to $ 4.7 million and $13.7 million for the three and nine months ended September 30, 2021, representing a 4.2% increase and a 2.6% decrease for the three and nine months periods, respectively.

The decrease in first nine months was attributable to the impact of global supply chain interruptions in the first quarter, and sales have begun recovering in subsequent quarters of 2022.

Gross profit was $8.0 million during the third quarter of 2022, a decrease of 1.1% compared to the prior-year period, as volume weakness was offset by pricing gains, a more favorable mix, and lower freight costs.

Gross profit margin improved to 20.9% during the third quarter of 2022, up 490 basis points from 16.0% in the prior-year period, as measures put in place to mitigate the recent margin headwinds benefitted results.

The improvement in the Company’s gross margin percentage is primarily attributable to solid growth in higher margin products, such as shower systems and kitchen cabinetry, continued pricing gains, and a reduction in freight costs versus the elevated levels experienced last year.

The Company expects the positive factors that drove the strong margin performance in the third quarter to remain in place, which combined with an expected rebound in the Bath Furniture segment, should enable the Company to drive additional gross margin gains over time.

Our gross profit decreased by $0.6 million, or 2.6%, to $24.0 million for the nine months ended September 30, 2022, from $24.6 million for the nine months ended September 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.

Our selling and distribution expenses decreased by $0.3 million, or 7.3%, to $4.3 million for the three months ended September 30, 2022, from $4.6 million for the three months ended September 30, 2021, respectively.

The decrease was a result of the lower sales in third quarter 2022 compared to prior-year period, which caused the decrease in commission, sales coop and shipping freight.

Our selling and distribution expenses increased by $0.7 million, or 5.3%, to $13.3 million for the nine months ended September 30, 2022, from $12.6 million for the nine months ended September 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.

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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.

Our general and administrative expenses increased by $0.4 million, or 22.9%, to $1.9 million for the three months ended September 30, 2022, from $1.5 million for the three months ended September 30, 2021, and increased by $1.3 million, or 28.9%, to $5.8 million for the nine months ended September 30, 2022, from $4.5 million for the nine months ended September 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 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 .

Other income (expenses) decreased by approximately $93,000 or (51.7)%, to $(87,000) for the three months ended September 30, 2022, from $(180,000) for the three months ended September 30, 2021.

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

Other income (expenses) decreased by $1.5 million, or (125.1)%, to $(0.3) million for the nine months ended September 30, 2022, from $1.2 million of income for the nine months ended September 30, 2021.

This decrease was the result of one-time income recognized in 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%.

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.

We recorded income tax expense of $0.3 million for the three months ended September 30, 2022, and $0.2 million for the three months ended September 30, 2021.

The increase resulted from mix provision from each tax territories.

We recorded income tax expense of $0.8 million for the nine months ended September 30, 2022, and $1.3 million for the nine months ended September 30, 2021.

The decrease resulted from the decrease in our reported income before taxes.

Our net income decreased by $0.1 million, or 8.9%, to $1.3 million for the three months ended September 30, 2022, from $1.4 million for the three months ended September 30, 2021, and decreased by $3.9 million, or 56.7%, to $3.0 million for the nine months ended September 30, 2022, from $6.9 million for the nine months ended September 30, 2021, respectively.

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

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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.

As of September 30, 2022, and December 31, 2021, we had cash of $6.0 million and $3.9 million, respectively.

We had working capital of $15.7 million as of September 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.

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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.

The current credit facility is expired in December 2022, but expect to be renewed by end of November, please refer to financial footnote 8 – Short-term loans.

As of September 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.

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.

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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.

On September 8, 2022, the line was extended again, with a new maturity date of December 21, 2022.

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;

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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.

As of September 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.

The interest rate as of September 30, 2022 and December 31, 2021 was 6.50% 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.

The outstanding balance of such loan was $13,007,649 and $14,657,280 as of September 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 six months ended June 30, 2022 and 2021.

For the Six Months Ended June 30,

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

For the Nine Months Ended September 30,

Net cash provided by (used in) operating activities

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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

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.

Net cash provided by (used in) operating activities was approximately $6.3 million for the nine months ended September 30, 2022 and was primarily attributable to a decrease in accounts payable of approximately $18.3 million, an increase in prepayments and other receivables - related parties of approximately $3.9 million, various non-cash items of approximately $3.4 million, a decrease in accrued expenses and other current liabilities of approximately $1.4 million, and plus a decrease in income taxes payable of approximately $1.0 million, which were partially offset by a decrease in accounts receivable of approximately $9.5 million, a decrease in inventories of approximately $5.3 million, and net income for the quarter of approximately $3.0 million, an increase in operating lease liabilities of approximately $1.5 million, a decrease in right-of-used assets of approximately $1.0 million, a decrease in other noncurrent assets of approximately $0.7 million, an increase in accounts payables – related parties of approximately $0.6 million, a decrease in prepayments and other current assets of approximately $0.2 million.

Net cash provided by operating activities was approximately $0.9 million for the nine months period ended September 30, 2021 and was primarily attributable to net income generated for the period of approximately $6.9 million, plus various non-cash items of approximately $1.2 million, an increase in accounts payable of approximately $14.1 million, an increase in accounts payable — related parties of approximately $0.1 million, and an increase in accrued expenses and other current liabilities of approximately $2.9 million, which was partially offset by an increase in accounts receivable of approximately $10.4 million, an increase in inventory of approximately $10.7 million and an increase in other noncurrent assets of approximately $3.3 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.

Net cash used in investing activities was $1.3 million and approximately $10,000 for the nine months ended September 30, 2022, and 2021, respectively.

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.

Net cash provided by financing activities was approximately $10.7 million for the nine months ended September 30, 2022, which primarily represents repayment of bank loans of $1.6 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 nine months period ended September 30, 2021, which represents the net proceeds from bank loans of approximately $4.2 million and net decrease in parent company investment of $5.6 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 six months ended June 30, 2022 and 2021.

Our capital expenditures amounted to 1.4 million and ten thousands for the nine months ended September 30, 2022 and 2021, respectively.

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 six months ended June 30, 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.

Our non-GAAP measures are:

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For the three months ended

For the six months ended

For the nine months ended

September 30,

Income from operations

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For the three months ended

For the six months ended

For the nine months ended

September 30,

Non-recurring IPO-related compensation

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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