FGI Industries Ltd. 10-Q

Item 1. Legal Proceedings. We may be subject to legal proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes. Ayers Bath Litigation FGI Industries, Inc. (formerly known as Foremost Groups, Inc.) (“FGI Industries”), our wholly-owned subsidiary, is currently involved in litigation arising from its efforts to protect an exclusivity agreement with sanitaryware manufacturer Tangshan Huida Ceramic Group Co., Ltd. (“Huida”). In 2011, FGI Industries filed a complaint against Ayers Bath (USA) Corporation (“Ayers Bath”) in the United States District Court for the Central District of California (the “District Court”) and succeeded in obtaining an injunction barring Ayers Bath from selling, distributing or offering for sale Huida parts and products in the United States and Canada. As a result, Ayers Bath ceased all business activity. Ayers Bath filed a voluntary chapter 7 petition in the United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) on March 22, 2013. FGI Industries filed a proof of claim in the Ayers Bath bankruptcy case for an amount not less than $5,265,000, which was deemed allowed, but due to Ayers Bath’s lack of assets, FGI Industries only received a distribution of $7,757.24. On January 9, 2014, FGI Industries filed a complaint in the District Court against Tangshan Ayers, as Ayers Bath’s alter ego, to recover the balance of its damages. The District Court ultimately referred the litigation to the Bankruptcy Court, whereby FGI Industries filed a motion in Bankruptcy Court to add Tangshan Ayers as judgment debtor, thereby allowing FGI Industries to recover its proof of claim. A hearing for the motion to add Tangshan Ayers as judgment debtor was held on June 7, 2021. On September 22, 2021, the Bankruptcy Court issued a report and recommendation to the District Court recommending that it deny FGI Industries’ motion to amend the judgment. FGI Industries filed an objection to the report in October 2021 and is awaiting the Bankruptcy Court’s decision. Huida Arbitration As previously disclosed, FGI Industries Ltd. (the “Company”), has been involved in arbitration with Tangshan Huida Ceramic Group Co., Ltd (“Huida”), one of the Company’s largest suppliers. The arbitration, held in the Shenzhen Court of International Arbitration, related to that certain Agreement for Co-operations (the “Co-Operation Agreement”), dated October 20, 2000, by and between Huida and FGI Industries, Inc., our wholly owned subsidiary. Huida was seeking a determination that the terms of the Co-Operation Agreement were not unlimited in duration and should be amended or else terminable. On September 28, 2022, the Company received notice that the arbitrator ruled that the Co-Operation Agreement was not unlimited in duration and is being terminated. There are no termination fees or penalties payable by the Company as a result of this termination, although the Company did pay certain arbitration fees of Huida. Under the Co-Operation Agreement, so long as the Company met certain annual product placement volume requirements, (i) the Company had an exclusive right to distribute and resell in the United States and Canadian markets any products designed and created by Huida and for which Huida retained all intellectual property rights, and (ii) Huida was not permitted to manufacture or sell any products the Company designed or created, for which we retained all intellectual property rights, without the Company’s prior consent. 41 Table of Contents Huida remains a supplier of the Company’s sanitaryware products. The Company intends to work towards a new agreement with Huida that complies with the arbitrator’s findings, primarily a more limited duration to the length of the contract. However, there is no guarantee that an agreement can be reached on mutually agreeable terms.