What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-11 compared with 2023-05-15 · 84 added, 59 removed, 170 unchanged (46% of the section changed)

52 unchanged sentences

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

The following table summarizes the results of our operations for the three and six months ended June 30, 2023 and 2022 and provides information regarding the dollar and percentage increase (decrease) during such periods.

For the Three and Six Months Ended June 30, 2023 and 2022

For the Three Months Ended

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Research and development expenses

(Loss) income from operations

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 Six Months Ended

Cost of revenues

Selling and distribution expenses

General and administrative expenses

Research and development expenses

Income from operations

Operating margins

Total other expenses, net

Provision for income taxes

Net (loss) income

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generally accepted accounting principles (“GAAP”) comparators.

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.

Our revenues decreased by $18.6 million, or 38.9%, to $29.2 million for the three months ended June 30, 2023, from $47.8 million for the three months ended June 30, 2022.

For the six months ended June 30, 2023, our revenue decreased by $35.0 million, or 38.3%, to $56.4 million from $91.4 million in the prior year period.

The decrease in our revenues in both periods were primarily by declines in Sanitaryware, Bath Furniture and Shower System, partially offset by continued growth in Other categories over the first half of 2023.

Revenue categories by product are summarized as follow :

For the three months ended March 31,

For the Three Months Ended June 30,

Bath Furniture

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.

For the Six Months Ended June 30,

Bath Furniture

Shower System

We derive the majority of our revenues from sales of Sanitaryware, which accounted for 64.5% and 60.6% of our total revenues for the three and six months ended June 30, 2023, compared to 67.6% and 64.7% for the comparable periods of 2022.

Revenues generated from the sales of Sanitaryware decreased by 41.8% to $18.8 million and 42.2% to $34.2 million for the three and six months ended June 30, 2023, respectively, from $32.3 million and $59.1 million in same period of 2022.

The revenue decline was due to ongoing inventory de-stocking, primarily in the pro channel.

We continue to see large customers take a cautious stance regarding inventory levels given sluggish demand trends, which is prolonging the inventory correction.

However, our Sanitaryware revenue did increase 23% sequentially from the first quarter of 2023, as we are seeing some customers beginning to return to more normal order patterns, and we expect a continued rebound in order trends in the back half of the year as inventory levels normalize and demand rebounds driven by the recent improvement in housing industry fundamentals.

Our revenues from bath furniture sales accounted for 16.5% and 17.4% of our total revenue for the three and six months ended June 30, 2023, compared to 16.1% and19.5% for the comparable period of 2022.

Bath Furniture sales decreased by 37.6% to $4.8 million and 45.1% to $9.8 million for the three and six months ended June 30, 2023, compared to $7.7 million and $17.8 million in the same period of 2022.

Revenues from sales of Shower Systems decreased by 33.9% to $4.3 million and 25.1% to $9.3 million for the three and six months ended June 30, 2023, compared to $6.5 million and $12.4 million for the comparable period of 2022.

Shower systems make up approximately 14.7% and 16.5% of our total revenue for the three and six months ended June 30, 2023, compared to 13.6% and 13.6% for the comparable period of 2022.

The decline in shower systems revenue during the first and second quarters are 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 other small offerings) decreased by 1.9% to $1.3 million and increased 54.1% to $3.1 million for the three and six months ended June 30, 2023, compared to $1.3 million and $2.0 million in the same period of 2022.

Despite flat performance in the second quarter compared to same

period of 2022, the increase in first half of 2023 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

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Revenue categories by geographic location are summarized as follows:

For the three months ended March 31,

For the Three Months Ended June 30,

United States

We generated the majority of our revenues in the United States market, which amounted to $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.

For the Six Months Ended June 30,

United States

We generated the majority of our revenues in the United States market, which amounted to $19.0 million and $36.6 million for the three and six months ended June 30, 2023, compared to $29.6 million and $57.0 million for the three and six months ended June 30, 2022, representing a 35.8% and 35.8% decrease for the three and six periods.

These revenues accounted for 65.2%, 65.0% and 62.0%, 62.4% of our total revenues for the three and six months ended June 30, 2023 and 2022, respectively.

The decrease 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 $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.

Our revenues generated in the Canadian market were $7.5 million and $14.0 million for the three and six months ended June 30, 2023, compared to $13.6 million and $25.9 million for the three and six months ended June 30, 2022, representing a 44.7% and 45.8% decrease for the three and six 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 $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.

This amounted to $2.6 million and $5.7 million for the three and six months ended June 30, 2023, compared to $4.6 million and $8.5 million for the three and six months ended June 30, 2022, representing a 42.2% and 32.3% decrease for the three and six months periods.

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

Gross profit was $8.0 million and $15.2 million for the three and six months ended June 30, 2023, a decrease of 4.9% and 4.6% compared to the prior-year periods, as volume weakness was offset by pricing gains, a more favorable mix, and lower freight costs.

Gross profit margin improved to 27.4% and 27.0% for the three and six months ended June 30, 2023, up 983 basis points and 955 basis points from 17.6% and 17.5% 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 Company expects the positive factors that drove the strong margin performance in the first half to remain in place for the remainder of 2023.

Our gross profit decreased by $0.4 million, or 4.9%, to $8.0 million for the three months ended June 30, 2023, from $8.4 million for the three months ended June 30, 2022.

Our gross profit decreased by $0.7 million, or 4.6%, to $15.2 million for the six months ended June 30, 2023, from $15.9 million for the six months ended June 30, 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.

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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 $0.1 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.

Our selling and distribution expenses increased by $0.4 million, or 10.0%, to $4.8 million for the three months ended June 30, 2023, from $4.4 million for the three months ended June 30, 2022, and increased by $0.5 million, or 5.2%, to $9.5 million for the six months ended June 30, 2023, from $9.0 million for the six months ended June 30, 2022, respectively.

The increase in first and second quarters was a result of participating more sales trade show events and promotions as pandemic restrictions were eased, which caused the increase on marketing, sample and travel related expenses, partially offset by lower commission, sales coop and shipping freight expenses impacted by sales volume loss in first and second quarters 2023.

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 $0.3 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.

Our general and administrative expenses increased by $0.2 million, or 7.6%, to $2.3 million for the three months ended June 30, 2023, from $2.1 million for the three months ended June 30, 2022, an increased by $0.5 million, or 11.7%, to $4.4 million for the six months ended June 30, 2023, from $3.9 million for the six months ended June 30, 2022, respectively.

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

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Other Income (Expenses)

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.

Other expenses increased by approximately $0.1 million or 73.2%, to $0.3 million for the three months ended June 30, 2023, from $0.2 million for the three months ended June 30, 2022.

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

Other expenses increased by approximately $0.4 million or 175.4%, to $0.6 million for the six months ended June 30, 2023, from $0.2 million for the six months ended June 30, 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 $0.1 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.

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.

We recorded income tax expense of $0.2 million for the three months ended June 30, 2023, and $0.4 million for the three months ended June 30, 2022.

The decrease resulted from the decrease in taxable income.

We recorded income tax expense of $0.2 million for the six months ended June 30, 2023, and $0.5 million for the six months ended June 30, 2022.

The decrease resulted from the decrease in taxable income.

Our net income decreased by $1.1 million, or 92.4%, to $0.1 million for the three months ended June 30, 2023, from $1.2 million for the three months ended June 30, 2022, and decreased by $1.9 million, or 112.6%, to $(0.2) million for the six months ended June 30, 2023, from $1.7 million for the six months ended June 30, 2022, 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 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.

As of June 30, 2023, we had cash and working capital of $6.9 million and $16.5 million, respectively.

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.

As of March 31, 2023, FGI’s total outstanding debt is represented by a credit facility with East West Bank.

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

As of June 30, 2023, FGI’s total outstanding debt is represented by a credit facility with East West Bank.

East West Bank Credit Facility

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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.

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

As of the date of report, FGI Industries has obtained a waiver for such Corporate Borrower’s Audited 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.

The interest rate as of June 30, 2023 and December 31, 2022 was 8.00% 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 $8,426,548 and $9,795,052 as of March 31, 2023 and December 31, 2022, respectively.

The outstanding balance of such loan was $7,863,680 and $9,795,052 as of June 30, 2023 and December 31, 2022, respectively.

HSBC Canada Bank Loan

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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).

The revolving line of credit with HSBC Canada allows for borrowing up to CAD $7,500,000 (US $5,538,734 as of the June 30, 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.

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

As of March 31, 2023, FGI Canada Ltd.

As of June 30, 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.

Borrowings under this line of credit amounts to $0 as of June 30, 2023, and December 31, 2022.

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

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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,

The following table summarizes the key components of our cash flows for the six months ended June 30, 2023 and 2022.

For the Six Months Ended June 30,

Net cash used in operating activities

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Operating Activities

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.

Net cash used in operating activities was approximately $1.0 million for the six months ended June 30, 2023 and was primarily attributable to an increase in prepayments and other receivables - related parties of approximately $3.0 million, a decrease in accounts payable of approximately $1.9 million, an increase in prepayments and other current assets of approximately $1.6 million, a decrease in operating lease liabilities of approximately $0.6 million, and net income for the six months of approximately $0.2 million, plus non-cash items of approximately $0.1 million.

These drivers were partially offset by a decrease in inventories of approximately $3.5 million, an increase in accounts payable-related parties of approximately $1.2 million, and a decrease in right-of-used assets of approximately $0.9 million, a decrease in accounts receivable of approximately $0.3 million, a decrease in other noncurrent assets of approximately $0.3 million, an increase in accrued expenses and other current liabilities of approximately $0.2 million, and an increase in income taxes payable of approximately $0.1 million.

Net cash 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.

Investing Activities

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.

Net cash used in investing activities was $0.2 million and approximately $0.1 million for the six months ended June 30, 2023, and 2022, respectively, which was attributable to the purchase of property and equipment.

Financing Activities

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.

Net cash used in financing activities was approximately $1.9 million for the six months ended June 30, 2023, which represents repayment of bank loans.

Net cash provided by financing activities was approximately $12.4 million for the six months ended June 30, 2022, which represents net proceeds from bank loans of $0.1 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 $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

Our capital expenditures amounted to $0.2 million and $0.1 million for the six months ended June 30, 2023 and 2022, 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 three months ended March 31, 2023.

Recently Issued Accounting Pronouncements

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For the Three Months Ended

(Loss) income from operations

For the Six Months Ended

Income from operations

Non-recurring IPO-related compensation

4 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Net (Loss) Income

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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