What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-26 compared with 2023-04-17 · 98 added, 101 removed, 242 unchanged (45% of the section changed)

11 unchanged sentences

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, entering 2023:

The following initiatives represent key strategic priorities for us:

● Commitment to product innovation.

4 unchanged sentences

● “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 since 2021;

however, we have adopted measures to offset these challenges, and resumed margin expansion in the back half of 2022 as these initiatives took hold.

We have continued to invest in its BPC strategy despite the market challenges, which is expected to drive improved organic growth in the longer term.

We recently announced that we entered into a 5-year licensing agreement that will provide us access to an industry leading overflow toilet technology.

We will market this technology as FlushGuard Overflow Technology.

During the fourth quarter of 2023, we were awarded product placements at several large customers, including two of the largest commercial distributors in North America.

In addition, we continue to focus on our initiatives to expand geographically, with recently signed agreements providing entry into India, Eastern Europe, Australia, and the UK.

● Enhanced Margin Performance.

We generated gross margin of 29.2% in fourth quarter of 2023, up from 23.7% in the same period last year owing to the ongoing mix shift to higher margin products.

For the full year 2023, gross margin was 27.4%, up nearly 800 basis points from the 19.5% gross margin generated in the prior year.

During 2024, we expect gross margins to remain consistent with those generated during fiscal year 2023, with operating margin improvement driven by volume leverage.

● 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.

We will continue to prioritize capital deployment in support of organic growth opportunities, while continuing to evaluate strategic M&A opportunities.

With total liquidity of $ 24.4 million at December 31, 2023, the Company believes it has sufficient financial flexibility to fund its organic growth strategy.

● 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.

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 Europe Investment Limited, an entity formed in the British Virgin Islands (“FGI Europe”), and FGI International, Limited, an entity formed under the laws of Hong Kong (“FGI International”), each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries 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.

before the completion of Reorganization and are presented as if we had been in existence and the Reorganization had been in effect during the years ended December 31, 2022 and 2021.

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

2 unchanged sentences

However, we adopted several productivity and pricing measures to offset these headwinds and began to see resumed margin expansion in the second half of 2023.

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.

While the demand environment remains uneven with multiple industry forecasters predicting modest declines in home improvement spend in 2024, we expect to generate above-market growth.

Results of Operations

8 unchanged sentences

Operating margins

Total other (expenses) income, net

Total other expenses, net

Provision for income taxes

Net income attributable to FGI Industries Ltd.

Adjusted income from operations (1)

3 unchanged sentences

Our revenues decreased by $44.5 million, or 27.5%, to $117.2 million for the year ended December 31, 2023, from $161.7 million for the year ended December 31, 2022.

The decrease in our revenues was primarily by declines in bath furniture sales partially offset by continued growth in Shower System and Other categories.

The decrease in our revenues was primarily by declines in sanitaryware and bath furniture categories.

Revenue categories by product are summarized as follows:

3 unchanged sentences

We derive the majority of our revenues from sales of sanitaryware, which accounted for 64.4% and 64.8% of our total revenues for the years ended December 31, 2023 and 2022, respectively.

Revenues generated from the sales of sanitaryware increased by 0.3% to $104.8 million for the year ended December 31, 2022, from $104.5 million for the year ended December 31, 2021, which resulted from the growth in the United States, partially offset by pricing pressure in Canada.

Our revenues from bath furniture sales decreased significantly by 46.5% to $29.5 million for the year ended December 31, 2022 from $55.1 million for the year ended December 31, 2021.

Bath furniture sales accounted for 18.3% and 30.3% of our total revenue for 2022 and 2021, respectively.

The revenue pressure was a result of a more significant inventory correction in the channel combined with some more pronounced end market softness.

Revenues from sales of Shower Systems increased by 12.9% to $21.6 million for the year ended December 31, 2022 from $19.1 million for the year ended December 31, 2021.

Revenues generated from the sales of sanitaryware decreased by 27.9% to $75.6 million for the year ended December 31, 2023, from $104.8 million for the year ended December 31, 2022.

The revenue decline was due to ongoing inventory de-stocking, primarily in the pro channel, and more muted demand trends.

Sanitaryware revenue increased sequentially in the fourth quarter of 2023, the third consecutive quarter of sequential revenue gains, as the pro channel is showing signs of improvement and new customer programs are also beginning to benefit results.

Our revenues from bath furniture sales decreased by 50.0% to $14.8 million for the year ended December 31, 2023 from $29.5 million for the year ended December 31, 2022.

Bath furniture sales accounted for 12.6% and 18.3% of our total revenue for 2023 and 2022, respectively as the bath furniture market continues to be impacted by macro headwinds and a trade-down to lower ticket products.

Our product mix in bath furniture has been moved heavily focused on higher-end products, which, given the customer trade-downs, was more adversely impacted than other value-focused peers in the space.

Based on the ongoing shift in customer demand to more value-priced offerings, we are launching product offerings in the mid-tier category to better address current demand and have already won several key customer awards featuring the new bath furniture.

Revenues from sales of Shower Systems decreased by 7.4% to $20.0 million for the year ended December 31, 2023 from $21.6 million for the year ended December 31, 2022.

Shower systems make up approximately 17.1% and 13.3% of our total revenue for 2023 and 2022, respectively.

This increase was due to this increase was due to strong sales of shower walls and shower doors with certain of our large customers .

However, our revenues from sales of Shower System have been increasing sequentially since the third quarter of 2023.

Recently launched programs are gaining momentum, including the online shower door program with a large Canadian retailer and the shower wall systems roll-out at up to 300 locations of a large U.S.

retailer with initial shipments that began in December 2023.

We also generate revenues from sales of Other products (custom kitchen cabinetry and others), which, in the aggregate, accounted for 5.9% and 3.6% of our total revenues for the years ended December 31 ,2023 and 2022.

The increase in Other was primarily driven by strong volume growth of custom kitchen cabinetry sales to our expanding network of kitchen cabinetry dealers in the United States.

Revenue benefited from continued dealer growth and new product launches.

We remain on track to launch our new kitchen cabinetry initiative in the first half of 2024.

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

3 unchanged sentences

Rest of World

We generated the majority of our revenues in the United States market, which amounted to $103.3 million for the year ended December 31, 2022, and $112.7 million for the year ended December 31, 2021, representing an 8.4%

We generated the majority of our revenues in the United States market, which amounted to $74.6 million for the year ended December 31, 2023, and $103.3 million for the year ended December 31, 2022, representing a 27.8% decrease.

These revenues accounted for 63.6% and 63.8% of our total revenues for 2023 and 2022, respectively.

7 unchanged sentences

The decrease was attributable to decreased demand that was impacted by global supply chain interruptions and inflation issues.

Gross profit was $31.5 million during year 2022, a decrease of 2.2% 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 percentage improved to 19.5% during year 2022, up 180 basis points from 17.7% 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 to remain in place, which combined with an expected rebound in the Bath Furniture segment in the second half of 2023, should enable the Company to drive additional gross margin gains over time.

Gross profit was $32.1 million during year 2023, an increase of 1.8% compared to the prior year, as a result of pricing gains, a more favorable mix, and lower freight costs, despite volume weaknesses.

Gross profit margin percentage improved to 27.4% during 2023, up 790 basis points from 19.5% in the prior year, as 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.

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 $0.1 million, or 0.6%, to $17.5 million for the year ended December 31, 2022, from $17.6 million for the year ended December 31, 2021.

The decrease was a result of the lower sales in the year 2022 compared to the prior year, which caused the decrease in sales co-op and shipping freight costs, partially offset by higher marketing and travel expenses.

Our selling and distribution expenses increased by $2.4 million, or 13.9%, to $20.0 million for the year ended December 31, 2023, from $17.5 million for the year ended December 31, 2022.

The increase 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.

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 $0.6 million, or 7.6%, to $8.4 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

The increase was primarily attributable to incremental public company costs and a one-time bonus expense related to our IPO.

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.

1 unchanged sentence

Other Income (Expenses)

Other income (expenses) decreased by $1.7 million, or (148.3)%, to $(0.6) million for the year ended December 31, 2022, from $1.1 million for the year ended December 31, 2021.

This decrease was the result of one-time income recognized in 2021 upon the forgiveness of the PPP loan.

We incurred insignificant other income and expenses during the years ended December 31, 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 $0.4 million or 66.2%, to $0.9 million for the year ended December 31, 2023, from $0.6 million for the year ended December 31, 2022.

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

Provision for Income Taxes

5 unchanged sentences

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 December 31, 2022 and 2021, we had cash and cash equivalents of $10.1 million and $3.9 million, respectively.

We had working capital of $16.1 million as of December 31, 2022 compared to a working capital of $1.4 million as of December 31, 2021.

As of December 31, 2023, we had cash and working capital of $7.8 million and $18.1 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.

5 unchanged sentences

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;

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 assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately 49.89% of the voting control of Foremost.

On November 25, 2022, the line was extended, to a new maturity date of December 21, 2024, and the current amount of maximum borrowings is $18,000,000.

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

expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter;

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 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 December 31, 2022, FGI Industries was in compliance with this financial covenant.

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) .

As of December 31, 2023 and 2022, FGI Industries was in compliance with these financial covenants.

The loan bears interest at 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 December 31, 2023 and December 31, 2022 was 8.25% and 7.25%, respectively.

5 unchanged sentences

The revolving line of credit with HSBC Canada allows for borrowing up to CAD $7,500,000 (US $5,662,087 as of the December 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.

3 unchanged sentences

As of December 31, 2023 and 2022, FGI Canada Ltd.

was in compliance with this financial covenant.

was in compliance with these financial covenants.

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

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

On April 9, 2020, FGI USA 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 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 FGI USA 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 SBA to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the PPP rules.

FGI USA 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, FGI USA 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 consolidated statements of income and comprehensive income.

CTBC Bank Credit Line

Subsequent to the year end, FGI International e ntered into an omnibus credit line (the “Credit Line”) with CTBC Bank Co., Ltd.

Under the Credit Line, FGI International may borrow, from time to time, up to $2.3 million, with borrowings limited to 90% of FGI International’s export “open account” trade receivables.

The Credit Line will bear interest at a rate of “Base Rate”, which is based on monthly or quarterly Taipei Interbank Offered in effect from time to time, plus 120 base points and handling fees, unless otherwise agreed to by the parties.

The following table summarizes the key components of our cash flows for the years ended December 31, 2023, and 2022.

For the Year Ended December 31,

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate fluctuation on cash

3 unchanged sentences

Operating Activities

Net cash provided by operating activities was approximately $1.0 million for the year ended December 31, 2022 compared to cash used in operating activities of $3.2 million for the year ended December 31, 2021.

The increase was primarily attributable to a decrease in accounts receivable of approximately $13.5 million, a decrease in inventories of approximately $8.0 million, and net income for the year of approximately $3.7 million, , a decrease in other noncurrent

assets of approximately $0.9 million, a decrease in right-of-used assets of approximately $0.9 million, an increase in accounts payable-related parties of approximately $0.1 million.

These drivers were partially offset by a decrease in accounts payable of approximately $17.3 million, plus an increase in prepayments and other receivables - related parties of approximately $2.5 million, a decrease in accrued expenses and other current liabilities of approximately $1.9 million, a decrease in operating lease liabilities of approximately $1.4 million, a decrease in income taxes payable of approximately $1.2 million and an increase in prepayments and other current assets of approximately $1.0 million, non-cash items of approximately $0.6 million,.

Net cash used in operating activities was approximately $3.2 million for the year ended December 31, 2021 and was primarily attributable to an increase in accounts receivable of approximately $11.1 million, an increase in inventories of approximately $13.0 million, an increase in other noncurrent assets of approximately $2.8 million, which were partially offset by net income for the year of approximately $7.9 million, plus various non-cash items of approximately $0.7 million, an increase in accounts payable of approximately $12.5 million, and an increase in accrued expenses and other current liabilities of approximately $2.5 million.

Net cash provided by operating activities was approximately $1.4 million for the year ended December 31, 2023 compared to $1.0 million for the year ended December 31, 2022.

The increase was primarily attributable to a decrease in inventory of approximately $3.4 million, and non-cash items of approximately $2.7 million, a decrease in other noncurrent assets of approximately $0.9 million, an increase in accounts payable – related parties of approximately $0.6 million, and net income for the year of approximately $0.6 million.

These drivers were partially offset by an increase in prepayments and other current assets of approximately $2.0 million, plus an increase in prepayments and other receivables - related parties of approximately $2.0 million, a decrease in operating lease liabilities of approximately $1.3 million, an increase in accounts receivable of approximately $1.1 million, and reversal of defective return of approximately $0.9 million.

Net cash provided by operating activities was approximately $1.0 million for the year ended December 31, 2022 which was primarily attributable to a decrease in accounts receivable of approximately $13.5 million, a decrease in inventories of approximately $8.0 million, and net income for the year of approximately $3.7 million, a decrease in other noncurrent assets of approximately $0.9 million, a decrease in right-of-used assets of approximately $0.9 million, an increase in accounts payable-related parties of approximately $0.1 million.

These drivers were partially offset by a decrease in accounts payable of approximately $17.3 million, plus an increase in prepayments and other receivables - related parties of approximately $2.5 million, a decrease in accrued expenses and other current liabilities of approximately $1.9 million, a decrease in operating lease liabilities of approximately $1.4 million, a decrease in income taxes payable of approximately $1.2 million and an increase in prepayments, other current assets of approximately $1.0 million, and non-cash items of approximately $0.6 million.

Investing Activities

Net cash used in investing activities was approximately $0.9 million and $1.1 million for the years ended December 31, 2023 and 2022, respectively.

The increase in cash used was primarily attributable to increases in the purchase of property and equipment.

We purchased property and equipment of $0.8 million and intangible assets of $0.1 million in 2023, as compared to purchase of property and equipment of $1.1 million in 2022.

Financing Activities

Net cash used in financing activities was approximately $2.8 million for the year ended December 31, 2023, which represented the net repayments of revolving credit facility.

Net cash provided financing activities was approximately $7.0 million for the year ended December 31, 2022, which primarily represents the net proceeds from issuance of units in the IPO of $12.4 million and partially offset by repayment of bank loans of $4.9 million and a decrease of $0.5 million excess payment over carrying value resulted from long-lived assets acquisition from affiliate.

Net cash provided financing activities was approximately $3.3 million for the year ended December 31, 2021, which represents the net proceeds from bank loans of $5.3 million and net decrease in parent company investment of $1.9 million.

Commitments and Contingencies

10 unchanged sentences

We have identified certain accounting policies that are significant to the preparation of the consolidated financial statements.

These accounting

policies are important for an understanding of our financial condition and results of operations.

These accounting policies are important for an understanding of our financial condition and results of operations.

Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

4 unchanged sentences

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented.

Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment, allowance for doubtful accounts, inventory reserve, accrued defective return, provision for contingent liabilities, revenue recognition, deferred taxes and uncertain tax position.

Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment, allowance for credit losses, inventory reserve, accrued defective return, provision for contingent liabilities, revenue recognition, deferred taxes and uncertain tax position.

Actual results could differ from these estimates.

7 unchanged sentences

Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in the consolidated statements of changes in parent’s net investment.

Translation adjustments arising from the use of different exchange rates from period to period are included as a separate

component of accumulated other comprehensive income included in the consolidated statements of changes in parent’s net investment.

Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency in the consolidated statements of income and comprehensive income.

For the purpose of presenting the financial statements of subsidiaries using the Renminbi (“RMB”) as functional currency, our assets and liabilities are expressed in U.S.

For the purpose of presenting the financial statements of subsidiaries using the Renminbi (“RMB”) as functional currency, the Company’s assets and liabilities are expressed in U.S.

Dollars at the exchange rate on the balance sheet date, which was 7.1006 and 6.9653 as of December 31, 2023 and 2022, respectively;

parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 6.7164 and 6.4543 the years ended December 31, 2022 and 2021, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Canadian Dollar (“CAD”) as functional currency, our assets and liabilities are expressed in U.S.

shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 7.0945 and 6.7164 the years ended December 31, 2023 and 2022, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Canadian Dollar (“CAD”) as functional currency, the Company’s assets and liabilities are expressed in U.S.

Dollars at the exchange rate on the balance sheet date, which was 1.3246 and 1.3541 as of December 31, 2023 and 2022, respectively;

parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 1.2945 and 1.2549 for the years ended December 31, 2022 and 2021, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Euro (“EUR”) as functional currency, our assets and liabilities are expressed in U.S.

shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 1.3541 and 1.2945 for the years ended December 31, 2023 and 2022, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Euro (“EUR”) as functional currency, the Company’s assets and liabilities are expressed in U.S.

Dollars at the exchange rate on the balance sheet date, which was 0.9059 and 0.9338 as of December 31, 2023 and 2022, respectively;

parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 0.9474 and 0.8406 for the years ended December 31, 2022 and 2021, respectively.

shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 0.9527 and 0.9474 for the years ended December 31, 2023 and 2022, respectively.

Accounts receivable

Bills and trade receivables include trade accounts due from customers.

In establishing the required allowance for doubtful accounts, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers.

Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate and adjusts the allowance when necessary.

Delinquent account balances are written off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

Inventories are stated at the lower of cost or net realizable value.

Cost is determined using the weighted average cost method, based on individual products.

Accounts receivables include trade accounts due from customers.

In establishing the required allowance for credit losses, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers.

Management reviews its receivables on a regular basis to determine if the expected credit losses is adequate and adjusts the allowance when necessary.

Delinquent account balances are written off against allowance for credit losses after management has determined that the likelihood of collection is not probable.

Inventories, net

Inventories are stated at the lower of cost and net realizable value.

Cost consists of purchase price and related shipping and handling expenses, and is determined using the weighted average cost method, based on individual products.

The methods of determining inventory costs are used consistently from year to year.

A provision for slow-moving items is calculated based on historical experience.

Management reviews the provision annually to assess whether, based on economic conditions, it is adequate.

Management reviews this provision annually to assess whether, based on economic conditions, it is adequate.

Property and equipment

27 unchanged sentences

Revenue recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).

ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

We generate revenues from sales of kitchen and bath products and recognizes revenue as control of its products is transferred to its customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers.

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customer.

Revenues are recognized when control of the promised goods or performance obligations for services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services.

with our customers.

Our customers’ payment terms generally range from 15 to 60 days of fulfilling its performance obligations and recognizing revenue.

12 unchanged sentences

We have elected to recognize share-based compensation using the straight-line method for all share- based awards granted over the requisite service period, which is the vesting period.

We account for forfeitures as they occur in

accordance with ASU No.

We account for forfeitures as they occur in accordance with ASU No.

2016-09, Compensation — Stock Compensation (Topic 718):

21 unchanged sentences

In November 2019, the FASB issued ASU 2019-10 which finalized the delay of such effective date to fiscal years beginning after December 15, 2023 for private and all other companies including emerging growth companies.

As an emerging growth company, the Company adopted this guidance from January 1, 2023, and the adoption of the standard will not have an impact on our financial position or results of operation.

As an emerging growth company, the Company adopted this guidance from January 1, 2023, and the adoption of the standard did not have an impact on our financial position or results of operation.

Non-GAAP Measures

In addition to the measures presented in our 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:

14 unchanged sentences

Non-recurring IPO-related compensation

Arbitration legal fee

IPO and arbitration legal fee

Anti-dumping penalty(1)

COVID one-time expenses

Business expansion expense

Adjusted income from operations

3 unchanged sentences

Non-recurring IPO-related compensation

Arbitration legal fee

IPO and arbitration legal fee

Anti-dumping penalty(1)

COVID one-time expenses

Other income (PPP Loan)

Business expansion expense

Tax impact of adjustment at 18% effective rate

GILTI high tax re-selection

Adjusted net income

3 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis