FGI Industries Ltd. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The disclosures in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on 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. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q and of our 2022 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Overview FGI is a global supplier of kitchen and bath products. Over the course of 30 years, we have built an industry-wide reputation for product innovation, quality, and excellent customer service. We are currently focused on the following product categories: sanitaryware (primarily toilets, sinks, pedestals and toilet seats), bath furniture (vanities, mirrors and cabinets), shower systems, customer kitchen cabinetry and other accessory items. These products are sold primarily for R&R activity and, to a lesser extent, new home or commercial construction. We sell our products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and specialty stores. Consistent with our long-term strategic plan, we intend to drive value creation for our shareholders through a balanced focus on product innovation, organic growth, and efficient capital deployment. The following initiatives represent key strategic priorities for us in 2023: ● Commitment to product innovation. We have a history of being an innovator in the kitchen and bath markets and developing “on-trend” products and bringing them to market ahead of the competition. We have developed deep marketing skills, leading design capabilities, and product development expertise. A recent example of our innovative product development includes the Jetcoat Shower wall systems, which offer a stylized design option without the fuss of messy grout. We expect to continue to invest in research and development to drive product innovation in 2023. ● “BPC” (Brands, Products, Channels) strategy to drive above-market organic growth. We are focused on increasing the mix of Branded products as a percentage of sales, which is expected to result in larger available markets and gross margin expansion. Our owned brands grew to nearly 34% of sales as of year-end 2022, up from less than 1% at the end of 2010. We are focused on expanding our position in channels such as e-commerce, providing for additional growth opportunities with existing brick and mortar customers, as well as expanding with e-commerce customers. The e-commerce channel accounted for 13% of sales in 2022, up from only 2% at the end of 2010. ● Drive margin expansion. Margin expansion remains a key pillar of our value creation focus. We believe our BPC strategy will support enhanced margins through growth in branded products, new product categories, and new channels. Headwinds from supply chain disruptions and inflationary pressures impacted operating margins in 2021; however, we have recently adopted measures to offset these challenges, and expect to resume margin expansion in the back half of 2022 as these initiatives take hold. ● Efficient capital deployment. We benefit from a capital-light business model allowing us to generate strong free cash flow conversion. We expect to utilize our strong free cash flow to re-invest in the core business and drive growth through existing brand development and new product category expansion. We will also look for selective bolt-on acquisition opportunities, over time, focused within the core kitchen and bath end markets. We plan to maintain a disciplined approach to capital deployment, with most material internal investments currently subject to a company-wide 20%+ expected return on capital hurdle rate. 35 Table of Contents ● Deep manufacturing partners and customer relationships. We have developed strong manufacturing and sourcing partners over the last 30+ years, which we believe will continue to give us a competitive advantage in the markets we serve. We also have deep relationships with an established global customer base, offering end-to-end solutions to support category growth. While recent supply chain and inflation pressures have been a headwind, our durable partnerships with manufacturing and sourcing partners have helped to mitigate these challenges. We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization (the “Reorganization”) of our parent company, Foremost Groups Ltd. (“Foremost”), and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc. (“FGI Industries”), FGI Europe Investment Limited, an entity formed in the British Virgin Islands, and FGI International, Limited, an entity formed under the laws of Hong Kong, each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost before the completion of the Reorganization and are presented as if we had been in existence and the Reorganization had been in effect for the entirely of each of the periods presented. 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, we have seen increases in demand quarter over quarter. Based on discussions with our existing customers and other market factors, we expect demand to continue to pick up during the remainder of 2023 and into early 2024. Results of Operations 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 and nine months ended September 30, 2023 and 2022 and provides information regarding the dollar and percentage increase (decrease) during such periods. ​ 36 Table of Contents For the Three and Nine Months Ended September 30, 2023 and 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ Change ​ ​ 2023 ​ 2022 ​ Amount ​ Percentage ​ USD USD USD % Revenues ​ $ 29,932,612 $ 38,544,062 $ (8,611,450) (22.3) Cost of revenues ​ 22,103,325 ​ 30,503,452 ​ (8,400,127) (27.5) Gross profit ​ 7,829,287 ​ 8,040,610 ​ (211,323) (2.6) Selling and distribution expenses ​ 4,572,593 ​ 4,268,355 ​ 304,238 7.1 General and administrative expenses ​ 2,351,307 ​ 1,865,325 ​ 485,982 26.1 Research and development expenses ​ 423,697 ​ 238,638 ​ 185,059 77.5 Income from operations ​ 481,690 ​ 1,668,292 ​ (1,186,602) (71.1) Operating margins ​ 1.6 % 4.3 % (270) bps Total other income (expenses), net ​ 34,318 ​ (86,977) ​ 121,295 139.5 Provision for income taxes ​ 172,516 ​ 309,173 ​ (136,657) (44.2) Net income ​ $ 343,492 ​ $ 1,272,142 ​ $ (928,650) (73.0) Adjusted income from operations (1) ​ $ 603,179 ​ $ 1,728,011 ​ $ (1,124,832) (65.1) Adjusted operating margins (1) ​ 2.0 % 4.5 % (250) bps — Adjusted net income (1) ​ $ 442,020 ​ $ 1,321,112 ​ $ (879,092) (66.5) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ Change ​ ​ 2023 ​ 2022 ​ Amount ​ Percentage ​ USD USD USD % Revenues ​ $ 86,284,791 $ 129,928,316 $ (43,643,525) (33.6) Cost of revenues ​ 63,242,944 ​ 105,942,167 ​ (42,699,223) (40.3) Gross profit ​ 23,041,847 ​ 23,986,149 ​ (944,302) (3.9) Selling and distribution expenses ​ 14,084,200 ​ 13,308,414 ​ 775,786 5.8 General and administrative expenses ​ 6,746,055 ​ 5,801,294 ​ 944,761 16.3 Research and development expenses ​ 1,152,554 ​ 788,054 ​ 364,500 46.3 Income from operations ​ 1,059,038 ​ 4,088,387 ​ (3,029,349) (74.1) Operating margins ​ 1.2 % 3.1 % (190) bps — Total other expenses, net ​ (533,849) ​ (293,265) ​ (240,584) 82.0 Provision for income taxes ​ 396,591 ​ 822,257 ​ (425,666) (51.8) Net income ​ $ 128,598 ​ $ 2,972,865 ​ $ (2,844,267) (95.7) Adjusted income from operations (1) ​ $ 1,473,506 ​ $ 4,503,508 ​ $ (3,030,002) (67.3) Adjusted operating margins (1) ​ 1.7 % 3.5 % (180) bps — Adjusted net income (1) ​ $ 464,732 ​ $ 3,313,264 ​ $ (2,848,532) (86.0) (1) See “Non-GAAP Measures” below for more information on our use of these adjusted figures and a reconciliation of these financial measures to their closest U.S. generally accepted accounting principles (“GAAP”) comparators. Revenues Our revenues decreased by $8.6 million, or 22.3%, to $29.9 million for the three months ended September 30, 2023, from $38.5 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, our revenue decreased by $43.6 million, or 33.6%, to $86.3 million from $129.9 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. ​ 37 Table of Contents Revenue categories by product are summarized as follow : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended September 30, Change ​ 2023 ​ Percentage ​ 2022 ​ Percentage ​ Percentage ​ USD % USD % % Sanitaryware ​ $ 20,740,380 69.3 $ 25,490,296 66.1 (18.6) Bath Furniture ​ 2,531,430 8.5 ​ 5,607,990 14.5 (54.9) Shower System ​ ​ 4,931,437 ​ 16.5 ​ ​ 5,441,566 ​ 14.1 ​ (9.4) Other ​ 1,729,365 5.7 ​ 2,004,210 5.3 (13.7) Total ​ $ 29,932,612 100.0 ​ $ 38,544,062 100.0 (22.3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, Change ​ 2023 ​ Percentage ​ 2022 ​ Percentage ​ Percentage ​ USD % USD % % Sanitaryware ​ $ 54,949,082 63.7 $ 84,564,251 65.1 (35.0) Bath Furniture ​ 12,304,688 14.3 ​ 23,397,263 18.0 (47.4) Shower System ​ ​ 14,248,679 ​ 16.5 ​ ​ 17,885,424 ​ 13.8 ​ (20.3) Other ​ 4,782,342 5.5 ​ 4,081,378 3.1 17.2 Total ​ $ 86,284,791 100.0 ​ $ 129,928,316 100.0 (33.6) ​ We derive the majority of our revenues from sales of Sanitaryware, which accounted for 69.3% and 63.7% of our total revenues for the three and nine months ended September 30, 2023, compared to 66.1% and 65.1% for the comparable periods of 2022. Revenues generated from the sales of Sanitaryware decreased by 18.6% to $20.7 million and 35.0% to $54.9 million for the three and nine months ended September 30, 2023, respectively, from $25.5 million and $84.6 million in same period of 2022. The revenue decline was due to ongoing inventory de-stocking, primarily in the pro channel, and more muted demand trends. Sanitaryware revenue increased 10.2% sequentially from the second quarter of 2023, the second consecutive quarter of sequential revenue gains, as some customers are beginning to return to more normal order patterns and new customer programs are benefitting results. ​ Our revenues from bath furniture sales accounted for 8.5% and 14.3% of our total revenue for the three and nine months ended September 30, 2023, compared to 14.5% and 18.0% for the comparable period of 2022. Bath Furniture sales decreased by 54.9% to $2.5 million and 47.4% to $12.3 million for the three and nine months ended September 30, 2023, compared to $5.6 million and $23.4 million in the same period of 2022. The broader bath furniture market continues to be more heavily impacted by the recent macro headwinds than other product categories. Our product mix in bath furniture is more focused on higher-end priced products, which is experiencing more pronounced weakness than lower cost products in the space. As a result of these recent market trends, we are expanding our product offering in the mid-tier category to better address current demand. Revenues from sales of Shower Systems decreased by 9.4% to $4.9 million and 20.3% to $14.2 million for the three and nine months ended September 30, 2023, compared to $5.4 million and $17.9 million for the comparable period of 2022. Shower systems make up approximately 16.5% and 16.5% of our total revenue for the three and nine months ended September 30, 2023, compared to 14.1% and 13.8% for the comparable period of 2022. However, our revenues from sales of Shower System increased by 15% sequentially from the second quarter of 2023. While the shower business has experienced some modest inventory de-stocking, demand trends remain steady and recently launched programs are gaining momentum. These new programs include the online shower door program with a large Canadian retailer, as well as the new shower wall systems roll-out at up to 300 locations of a large U.S. retailer during the fourth quarter of 2023. The revenues from sales of other products (custom kitchen cabinetry and other small offerings) decreased by 13.7% to $1.7 million and increased 17.2% to $4.8 million for the three and nine months ended September 30, 2023, compared to $2.0 million and $4.1 million in the same period of 2022. This revenue category increased by 35.8% as compared to the second quarter of 2023. We believe momentum in the business remains strong, as the Company continues to add new dealers to the network and the new kitchen cabinetry initiative is on track for launch in early 2024. 38 Table of Contents Revenue Categories by Geographic Location We derive our revenues primarily from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended September 30, ​ Change ​ ​ 2023 ​ Percentage ​ 2022 ​ Percentage ​ Percentage ​ USD % USD % % United States $ 18,356,278 61.3 $ 23,866,921 61.9 (23.1) Canada ​ 9,081,571 30.4 ​ 9,494,803 24.6 (4.4) Europe ​ ​ 2,460,762 ​ 8.2 ​ ​ 4,849,551 ​ 12.6 ​ (49.3) Rest of World ​ 34,001 0.1 ​ 332,787 0.9 — Total ​ $ 29,932,612 100.0 ​ $ 38,544,062 100.0 (22.3) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, ​ Change ​ ​ 2023 ​ Percentage ​ 2022 ​ Percentage ​ Percentage ​ USD % USD % % United States $ 54,921,572 63.7 $ 80,865,556 62.2 (32.1) Canada ​ 23,120,014 26.8 ​ 35,388,374 27.2 (34.7) Europe ​ ​ 8,209,204 ​ 9.5 ​ ​ 13,341,599 ​ 10.3 ​ (38.5) Rest of World ​ 34,001 0.0 ​ 332,787 0.3 — Total ​ $ 86,284,791 100.0 ​ $ 129,928,316 100.0 (33.6) ​ We generated the majority of our revenues in the United States market, which amounted to $18.4 million and $54.9 million for the three and nine months ended September 30, 2023, compared to $23.9 million and $80.9 million for the three and nine months ended September 30, 2022, representing a 23.1% and 32.1% decrease for the three- and nine-month periods. These revenues accounted for 61.3%, 63.7% and 61.9%, 62.2% of our total revenues for the three and nine months ended September 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 $9.1 million and $23.1 million for the three and nine months ended September 30, 2023, compared to $9.5 million and $35.4 million for the three and nine months ended September 30, 2022, representing a 4.4% and 34.7% decrease for the three- and nine-month 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 $2.5 million and $8.2 million for the three and nine months ended September 30, 2023, compared to $4.8 million and $13.3 million for the three and nine months ended September 30, 2022, representing a 49.3% and 38.5% decrease for the three- and nine-month periods. The decrease in the first nine months was attributable to customers reducing inventory levels to below historical average. Gross Profit Gross profit was $7.8 million and $23.0 million for the three and nine months ended September 30, 2023, a decrease of 2.6% and 3.9% 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 26.2% and 26.7% for the three and nine months ended September 30, 2023, up 530 basis points and 824 basis points from 20.9% and 18.5% in the prior-year periods. Gross margins continue benefit from a shift in revenue mix towards higher-margin products, lower logistics costs, and the full benefit of pricing actions taken during 2022. Our gross profit decreased by $0.2 million, or 2.6%, to $7.8 million for the three months ended September 30, 2023, from $8.0 million for the three months ended September 30, 2022. Our gross profit decreased by $0.9 million, or 3.9%, to $23.0 million for the nine months ended September 30, 2023, from $24.0 million for the nine months ended 39 Table of Contents September 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. 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 7.1%, to $4.6 million for the three months ended September 30, 2023, from $4.3 million for the three months ended September 30, 2022, and increased by $0.8 million, or 5.8%, to $14.1 million for the nine months ended September 30, 2023, from $13.3 million for the nine months ended September 30, 2022, respectively. The increase in first nine months was a result of participating more sales trade show events and promotions as pandemic restrictions were eased, which caused the increase in marketing, sample and travel related expenses, partially offset by lower commission, sales coop and shipping freight expenses impacted by sales volume loss in first nine months of 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 $0.5 million, or 26.1%, to $2.4 million for the three months ended September 30, 2023, from $1.9 million for the three months ended September 30, 2022, an increased by $0.9 million, or 16.3%, to $6.7 million for the nine months ended September 30, 2023, from $5.8 million for the nine months ended September 30, 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. Our research and development activities remained stable and are relatively immaterial to our unaudited condensed consolidated statements of income and comprehensive income. Other Income (Expenses) We incurred insignificant other income and expenses during the three months ended September 30, 2023 and 2022. Other income and expenses primarily include interest income and expenses, as well as miscellaneous non-operating income and expenses. Other expenses, net increased by approximately $0.2 million or 82.0%, to $0.5 million for the nine months ended September 30, 2023, from $0.3 million for the nine months ended September 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 $0.2 million for the three months ended September 30, 2023, and $0.3 million for the three months ended September 30, 2022. The decrease resulted from the decrease in taxable income. We recorded income tax expense of $0.4 million for the nine months ended September 30, 2023, and $0.8 million for the nine months ended September 30, 2022. The decrease resulted from the decrease in taxable income. Net Income Our net income decreased by $0.9 million, or 73.0%, to $0.3 million for the three months ended September 30, 2023, from $1.3 million For the three months ended September 30, 2022, and decreased by $2.8 million, or 95.7%, to $0.1 million for the nine months ended September 30, 2023, from $3.0 million for the nine months ended September 30, 2022, respectively. This decrease was a result of the combination of the changes discussed above. Liquidity and Capital Resources Our principal sources of liquidity are cash generated from operating activities and cash borrowed under credit facilities, which we believe provides sufficient liquidity to support our financing needs. As of September 30, 2023, we 40 Table of Contents had cash and working capital of $5.4 million and $17.2 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. We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations well into the foreseeable future. However, we may need additional cash resources in the future if we experience changes in business conditions or other developments, such as rising interest rates, inflation and increased costs, and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. For example, from time to time we may provide loans or other operational support to Foremost to assist Foremost in capital expenditures or other efforts related to the manufacturing services that Foremost provides to us, which could limit the assets available for other corporate purposes or require additional resources. If it is determined that the cash requirements exceed our amount of cash on hand, we may seek to issue debt or equity securities, and there can be no assurances that additional financing will be available on acceptable term, if at all. As of September 30, 2023, FGI’s total outstanding debt consisted of 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 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, on consolidated basis; 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, on consolidated basis. 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 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 September 30, 2023 and December 31, 2022 was 8.25% 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 $7,962,203 and $9,795,052 as of September 30, 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 September 30, 2023 41 Table of Contents 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 September 30, 2023, FGI Canada Ltd. was in compliance with this financial covenant. Borrowings under this line of credit amounts to $0 as of September 30, 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 nine months ended September 30, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, ​ ​ 2023 ​ 2022 ​ USD USD Net cash used in operating activities ​ $ (2,595,047) ​ $ (6,331,971) Net cash used in investing activities ​ (274,971) ​ (1,350,974) Net cash (used in) provided by financing activities ​ (1,832,849) ​ 10,721,169 Effect of exchange rate fluctuation on cash ​ 5,386 ​ (941,101) Net changes in cash ​ (4,697,481) ​ 2,097,123 Cash, beginning of period ​ 10,067,428 ​ 3,883,896 Cash, end of period ​ $ 5,369,947 ​ $ 5,981,019 ​ Operating Activities Net cash used in operating activities was approximately $2.6 million for the nine months ended September 30, 2023 and was primarily attributable to an increase in prepayments and other receivables - related parties of approximately $5.4 million, an increase in prepayments and other current assets of approximately $1.9 million, an increase in accounts receivable of approximately $1.6 million, a decrease in operating lease liabilities of approximately $0.9 million, a decrease in accounts payable of approximately $0.7 million, plus non-cash items of approximately $0.5 million. These drivers were partially offset by a decrease in inventories of approximately $3.7 million, an increase in accounts payable-related parties of approximately $2.4 million, and a decrease in right-of-used assets of approximately $1.3 million, a decrease in other noncurrent assets of approximately $0.6 million, an increase in income taxes payable of approximately $0.2 million, and net income for the nine months of approximately $0.1 million, an increase in accrued expenses and other current liabilities of approximately $0.1 million. Net cash 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. 42 Table of Contents Investing Activities Net cash used in investing activities was $0.3 million and approximately $1.4 million for the nine months ended September 30, 2023, and 2022, respectively, which was attributable to the purchases of property and equipment. Financing Activities Net cash used in financing activities was approximately $1.8 million for the nine months ended September 30, 2023, which represents net repayment of bank loans. Net cash provided by financing activities was approximately $10.7 million for the nine months ended September 30, 2022, which represents net repayment of bank loans of $1.6 million and net proceeds from issuance of units in the IPO of $12.4 million. Commitments and Contingencies Capital Expenditures Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment. Our capital expenditures amounted to $0.3 million and $1.4 million for the nine months ended September 30, 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 A discussion of our critical accounting policies and significant accounting estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K. The preparation of the unaudited condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the nine months ended September 30, 2023. Recently Issued Accounting Pronouncements See Note 2, “Summary of significant accounting policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q. Non-GAAP Measures In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following non-GAAP measures to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions. Our non-GAAP measures are: Adjusted Income from Operations, Adjusted Operating Margins and Adjusted Net Income. These non-GAAP financial measures are not prepared in accordance with GAAP. They are supplemental financial measures of our performance only, and should not be considered substitutes for net income, income from operations or any other measure derived in accordance with GAAP and may not be comparable to similarly titled measures reported by other entities. 43 Table of Contents We define Adjusted Income from Operations as GAAP income from operations excluding the impact of certain non-recurring expenses, including IPO-related compensation (cash and stock-based), 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. We use these non-GAAP measures, along with GAAP measures, to evaluate our business, measure our financial performance and profitability and our ability to manage expenses, after adjusting for certain one-time expenses, identify trends affecting our business and assist us in making strategic decisions. We believe these non-GAAP measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance over time on a consistent basis. The following table reconciles Income from Operations to Adjusted Income from Operations and Adjusted Operating Margins, as well as Net income to Adjusted Net Income for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ ​ 2023 2022 2023 2022 ​ Income from operations ​ $ 481,690 ​ $ 1,668,292 ​ ​ $ 1,059,038 ​ $ 4,088,387 ​ ​ Adjustments: ​ ​ ​ ​ ​ ​ ​ ​ Non-recurring IPO-related compensation ​ ​ 59,719 ​ ​ 59,719 ​ ​ ​ 179,156 ​ ​ 415,121 ​ ​ IPO legal fee ​ ​ — ​ ​ — ​ ​ ​ 50,000 ​ ​ — ​ ​ Business expansion expense ​ ​ 61,770 ​ ​ — ​ ​ ​ 185,312 ​ ​ — ​ ​ Adjusted income from operations ​ 603,179 ​ 1,728,011 ​ ​ ​ 1,473,506 ​ 4,503,508 ​ ​ Revenue ​ $ 29,932,612 ​ $ 38,544,062 ​ ​ $ 86,284,791 ​ $ 129,928,316 ​ ​ Adjusted operating margins ​ 2.0 % ​ 4.5 % ​ ​ 1.7 % ​ 3.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2023 2022 2023 2022 Net income ​ $ 343,492 ​ $ 1,272,142 ​ $ 128,598 ​ $ 2,972,865 ​ Adjustments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-recurring IPO-related compensation ​ ​ 59,719 ​ ​ 59,719 ​ ​ 179,156 ​ ​ 415,121 ​ IPO legal fee ​ ​ — ​ ​ — ​ ​ 50,000 ​ ​ — ​ Business expansion expense ​ ​ 61,770 ​ ​ — ​ ​ 185,312 ​ ​ — ​ Total ​ ​ 464,981 ​ ​ 1,331,861 ​ ​ 543,066 ​ ​ 3,387,986 ​ Tax impact of adjustment at 18% effective rate ​ ​ (22,961) ​ ​ (10,749) ​ ​ (78,334) ​ ​ (74,722) ​ Adjusted net income ​ $ 442,020 ​ $ 1,321,112 ​ $ 464,732 ​ $ 3,313,264 ​ ​ ​ Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required for smaller reporting companies.