What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 109 added, 133 removed, 120 unchanged (67% 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 April 17, 2023 (the “2022 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 2022 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 and beyond.

We expect to continue to invest in research and development to drive product innovation in 2023.

● “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 and the first half of 2022;

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

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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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.

Recent Trends

Due to changing market conditions, we are experiencing, and may continue to experience, lower market demand for certain of our products, particularly in our bath furniture category, as weak demand as customer destock and inventory corrections have had a negative impact on our net sales.

As previously noted, we also began experiencing supply chain disruptions and inflationary pressures, which affected operating margins beginning in late 2021.

However, we adopted several productivity and pricing measures to offset these headwinds and began to see resumed margin expansion in the second half of 2022.

While demand for our bath furniture products remains lower than historical levels thus far in 2023, based on discussions with our existing customers and other market factors, we expect demand to pick up in the second half of 2023.

Results of Operations

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

As a result of the increased significance of shower systems in our product portfolio in 2022, the Company has created a standalone “Shower Systems” product category, as detailed below.

The “Other” category continues to comprise our kitchen cabinetry and other smaller offerings.

The updates were applied retroactively to impacted product categories.

Such changes had no impact on the Company's historical consolidated financial position, results of operations or cash flows.

The following table summarizes the results of our operations for the three months ended March 31, 2023 and 2022 and provides information regarding the dollar and percentage increase (decrease) during such periods.

For the Three Months Ended March 31, 2023 and 2022

For the three months ended

September 30,

Cost of revenues

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Research and development expenses

Income from operations

(Loss) income from operations

Operating margins

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Provision for income taxes

Adjusted income from operations (1)

Adjusted operating margins (1)

Adjusted net income (1)

For the nine months ended

September 30,

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

Provision for income taxes

Net (loss) income

Adjusted income from operations (1)

Adjusted operating margins (1)

Adjusted net income (1)

Adjusted net (loss) income (1)

(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.

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).

Our revenues decreased by $16.4 million, or 37.3%, to $27.2 million for the three months ended March 31, 2023, from $43.6 million for the three months ended March 31, 2022.

The decrease in our revenues was primarily by declines in Sanitaryware, Bath Furniture and Shower System, partially offset by continued growth in Other categories.

Revenue categories by product are summarized as follow :

For the three months ended September 30,

Bath Furniture

For the nine months ended September 30,

For the three months ended March 31,

Bath Furniture

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 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.

Shower System

We derive the majority of our revenues from sales of Sanitaryware, which accounted for 56.5% of our total revenues for the three months ended March 31, 2023, compared to 61.5% for the comparable periods of 2022.

Revenues generated from the sales of Sanitaryware decreased by 42.7% to $15.4 million in the three months ended March 31, 2023, from $26.8 million in same period of 2022.

The revenue decline was due to ongoing inventory de-stocking, primarily in the pro channel, as customers are becoming increasingly cautious regarding inventory levels, with some large customers reducing their inventory levels to below historical averages.

Our revenues from bath furniture sales accounted for 18.3% of our total revenue for the three months ended March 31, 2023, compared to 23.2% for the comparable period of 2022.

Bath Furniture sales decreased by 50.9% to $5.0 million for the three months ended March 31, 2023, compared to $10.1 million in the same period of 2022.

As previously noted, our Bath Furniture business has been experiencing significant de-stocking, and customers continued to decrease inventory levels amidst modest softening in overall demand from the prior year period.

Revenues from sales of Shower Systems decreased by 15.6% to $5.0 million for the three months ended March 31, 2023, compared to 6.0 million for the comparable period of 2022.

Shower systems make up approximately 18.5% and 13.7% of our total revenue for the three months ended March 31, 2023 and 2022, respectively.

The decline in shower systems revenue during the first quarter is expected to be temporary, as momentum in the business remains strong and we expect to roll-out several new shower system products with national retailer partners in the second half of 2023.

The revenues from sales of other products (custom kitchen cabinetry and others) increased by 157.2% to $1.8 million for the three months ended March 31, 2023, compared to $0.7 million in the same period of 2022.

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

Revenue Categories by Geographic Location

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

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 September 30,

United States

Rest of World

For the nine months ended September 30,

For the three months ended March 31,

United States

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.

We generated the majority of our revenues in the United States market, which amounted to $17.5 million for the three ended March 31, 2023, compared to $27.4 million for the three months ended March 31, 2022, representing a 35.9% decrease for the three periods.

These revenues accounted for 64.6% and 62.8% of our total revenues for the three months ended March 31, 2023 and 2022.

The decreased in the U.S.

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Our second largest market is Canada.

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.

Our revenues generated in the Canadian market were $6.5 million for the three months ended March 31, 2023, compared to $12.3 million for the three months ended March 31, 2022, representing a 47.0% decrease for the three months periods.

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 $4.8 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.

This amounted to $3.1 million for the three months ended March 31, 2023, compared to $3.9 million for the three months ended March 31, 2022, representing a 20.8% decrease for the three months periods.

The decrease in first three months was attributable to customers reducing inventory levels to below historical average.

Gross profit was $7.2 million during the first quarter of 2023, a decrease of 4.3% 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 26.5% during the first quarter of 2023, up 920 basis points from 17.3% 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 greater expansion of higher margin products in our portfolio, 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 first quarter to remain in place.

Our gross profit decreased by $0.3 million, or 4.3%, to $7.2 million for the three months ended March 31, 2023, from $7.5 million for the three months ended March 31, 2022.

The decrease in gross profit was due to revenue decline in major product categories that was partially offset by continued pricing gains and reduction in freight costs.

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 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.

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

Our selling and distribution expenses increased by $0.1 million, or 0.7%, to $4.7 million for the three months ended March 31, 2023, from $4.6 million for the three months ended March 31, 2022, respectively.

The increase was a result of participating more sales trade show events and promotions as pandemic is eased, which caused the increase on marketing, sample and travel related expenses, partially offset by lower sales in first quarter 2023 compared to prior-year period, that caused the decrease in commission, sales coop and shipping freight expenses.

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 $0.4 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.

Our general and administrative expenses increased by $0.3 million, or 16.2%, to $2.1 million for the three months ended March 31, 2023, from $1.8 million for the three months ended March 31, 2022,respectively.

The increase was primarily attributable to incremental public company costs and legal expenses.

Research and development expenses mainly consisted of personnel costs and product development costs.

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Other Income (Expenses)

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.

Other expenses increased by approximately $0.2 million or 714.6%, to $0.3 million for the three months ended March 31, 2023, from $0.1 million for the three months ended March 31, 2022.

This increase was the result of higher interest expenses due to increases in applicable interest rates.

Provision for Income Taxes

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.

We recorded income tax expense of $0.1 million for the three months ended March 31, 2023, and $0.1 million for the three months ended March 31, 2022.

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.

Our net income decreased by $0.8 million, or 157.2%, to $(0.3) million for the three months ended March 31, 2023, from $0.5 million for the three months ended March 31, 2022.

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 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.

As of March 31, 2023, and December 31, 2022, we had cash of $7.4 million and $10.1 million, respectively.

We had working capital of $16.1 million as of March 31, 2023, compared to $16.1 million as of December 31, 2022.

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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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.

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.

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 March 31, 2023, FGI’s total outstanding 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.

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

Our wholly owned subsidiary, FGI Industries (formerly named Foremost Groups, Inc.), has a line of credit with East West Bank pursuant to a Business Loan 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.

On November 25, 2022, the Credit Agreement was amended and restated with a maximum borrowing amount of $18,000,000 and a maturity date of December 21, 2024.

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;

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

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 September 30, 2022 and December 31, 2021 was 6.50% and 3.50%, respectively.

As of March 31, 2023, FGI Industries was in compliance with this financial covenant.

As described in Item 1.

Note 8, FGI Industries is also required to provide the lender with certain periodic financial information, including annual financial statements of FGI Industries on a non-consolidated basis.

As of the date of report, FGI Industries has obtained an extension to June 30, 2023 for such Corporate Borrower Annual Statements, a U.S.

standalone reporting obligation under the Credit Agreement, which were due by April 30, 2023.

The loan bears interest rate equal to, at the Company ’ s option, either (i) 0.25 percentage points less than the Prime Rate quoted by the Wall Street Journal or (ii) the SOFR Rate (as administered by CME Group Benchmark Administration Limited and displayed by Bloomberg LP) plus 2.20% per annum (in either case, subject to a minimum rate of 4.500% per annum) .

The interest rate as of March 31, 2023 and December 31, 2022 was 7.75% and 7.25%, 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 $13,007,649 and $14,657,280 as of September 30, 2022, and December 31, 2021, respectively.

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 nine months ended September 30, 2022 and 2021.

For the Nine Months Ended September 30,

Net cash provided by (used in) operating activities

The outstanding balance of such loan was $8,426,548 and $9,795,052 as of March 31, 2023 and December 31, 2022, respectively.

HSBC Canada Bank Loan

FGI Canada Ltd.

has a line of credit agreement with HSBC Canada (the “Canadian Revolver”).

The revolving line of credit with HSBC Canada allows for borrowing up to CAD $7,500,000 (US $5,538,734 as of the March 31, 2023 exchange rate).

This is an assets-based line of credit, the borrowing limit is calculated based on certain percentage of accounts receivable and inventory balances.

Pursuant to the Canadian Revolver, FGI Canada Ltd.

is required to maintain (a) a debt to tangible net worth ratio of no more than 3.00 to 1.00;

and (b) a ratio of current assets to current liabilities of at least 1.25 to 1.00.

The loan bears interest at a rate of Prime rate plus 0.50%.

As of March 31, 2023, FGI Canada Ltd.

was in compliance with this financial covenant.

Borrowings under this line of credit amounts to $0 as of March 31, 2023, and December 31, 2022.

The facility matures at the discretion of HSBC Canada upon 60 days’ notice.

FGI Canada Ltd.

also has a revolving foreign exchange facility up to a permitted maximum of US $3,000,000.

The advances are available to purchase foreign exchange forward contacts from time to time up to six months, subject to an overall maximum aggregate USD Equivalent outstanding face value not exceeding the Foreign Exchange Facility Limit.

The following table summarizes the key components of our cash flows for the three months ended March 31, 2023 and 2022.

For the Three Months Ended March 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate fluctuation on cash

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Operating Activities

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.

Net cash used in operating activities was approximately $1.2 million for the three months ended March 31, 2023 and was primarily attributable to a decrease in accounts payable of approximately $6.6 million, a decrease in accrued expenses and other current liabilities of approximately $0.6 million and net income for the quarter of approximately $0.3 million, an increase in prepayments and other current assets of approximately $0.3 million, a decrease in operating lease liabilities of approximately $0.3 million.

These drivers were partially offset by a decrease in inventories of approximately $3.4 million, a decrease in accounts receivable of approximately $1.7 million, plus non-cash items of approximately $0.5 million, and an increase in accounts payable-related parties of approximately $0.5 million, a decrease in right-of-used assets of approximately $0.4 million, a decrease in prepayments and other receivables - related parties of approximately $0.3 million, and an increase in income taxes payable of approximately $0.1 million.

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 income taxes payable of approximately $0.6 million, a decrease in accrued expenses and other current liabilities of approximately $0.5 million, and an increase in inventories of approximately $0.3 million, plus various non-cash items of approximately $0.2 million, which were partially offset by a decrease in accounts receivable of approximately $5.9 million, net income for the quarter of approximately $0.5 million and a decrease in right-of-used assets of approximately $0.3 million.

Investing Activities

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.

Net cash used in investing activities was $0.1 million and approximately $0.1 million for the three months ended March 31, 2023, and 2022, respectively.

which was attributable to the purchase of property and equipment.

Financing Activities

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

Net cash used in financing activities was approximately $1.4 million for the three months ended March 31, 2023, which represents repayment of bank loans.

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.

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 1.4 million and ten thousands for the nine months ended September 30, 2022 and 2021, respectively.

Our capital expenditures amounted to $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

Critical Accounting Policies and Significant Accounting Estimates

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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 nine months ended September 30, 2022.

Recently Issued Accounting Pronouncements

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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 Income from Operations as GAAP income from operations excluding the impact of certain non-recurring expenses, including IPO-related compensation, legal fees and business expansion expenses.

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, legal fees and business expansion expenses.

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

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For the three months ended

For the nine months ended

September 30,

Income from operations

(Loss) income from operations

Non-recurring IPO-related compensation

COVID one-time expenses

IPO legal fee

Business expansion expense

Adjusted income from operations

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For the three months ended

For the nine months ended

September 30,

Net (Loss) Income

Non-recurring IPO-related compensation

Other income (PPP Loan)

COVID one-time expenses

IPO legal fee

Business expansion expense

Tax impact of adjustment at 18% effective rate

Adjusted net income

Adjusted net (loss) income

Quantitative and Qualitative Disclosures About Market Risk.

1 unchanged sentence

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