Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. You should carefully read the “Risk Factors” section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
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, custom 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 expect to continue to make significant investments across our business in order to continue to attract new customers, expand existing relationships, develop new products and manufacturing capabilities and expand into new jurisdictions, thereby prioritizing long-term growth over short-term profitability. We intend to drive long-term 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:
• 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 2026.
• “BPC” (Brands, Products, Channels) strategy to drive above-market organic growth. We have continued to invest in our BPC strategy despite the market challenges, which is expected to drive improved organic growth in the longer term. In 2025, we entered into a 5-year licensing agreement that will provide us access to an industry leading overflow toilet technology. We will continue to market this technology as FLUSH GUARD ® Overflow Technology. In addition, we continue to focus on our initiatives to expand geographically, with recently signed agreements providing entry into India, Eastern Europe and the UK.
• Enhanced margin performance. Our focus on higher-margin products has continued to deliver results, with gross margins reaching 27.0% in 2025 and 26.9% in 2024, a significant rise from 19.5% in 2022. This positive trajectory in margins reflects our commitment to optimizing our product mix and operational efficiency despite recent headwinds from tariffs. Looking ahead, we anticipate gross margins to remain in line with the levels achieved in 2025 and 2024.
• Efficient capital deployment. We will continue to prioritize capital deployment in support of organic growth opportunities, while continuing to evaluate strategic M&A opportunities. With total financial resources of $8.5 million as of December 31, 2025, 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. 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.
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We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization and separation from 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.
Reverse Share Split
On July 28, 2025, the Company filed an amendment (the “Amendment”) to the Company’s Amended and Restated Memorandum and Articles of Association with the Registrar of Companies in the Cayman Islands to effect a 1-for-5 reverse share split (the “Reverse Share Split”) of the Company’s ordinary shares, which was effected on July 31, 2025. Unless otherwise noted, the share and per share information in this Annual Report on Form 10-K have been adjusted to give effect to the Reverse Share Split.
Tariff Developments
Our business was significantly impacted by the changes in the U.S. tariff regime in 2025 and related responses from foreign jurisdictions. On February 20, 2026, the U.S. Supreme Court struck down certain tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Following the Supreme Court decision, the U.S. Administration announced a new 10% global tariff under Section 122 of the Trade Act of 1974, subject to certain carveouts. As of the filing date, it remains uncertain what impact these decisions will have on our future financial results, including the process and availability of obtaining refunds of amounts previously paid for the IEEPA tariffs or any fluctuations of the level of replacement tariffs imposed or the addition of any new tariffs through other means.
Results of Operations
For the Years Ended December 31, 2025 and 2024
The following table summarizes the results of our operations for the years ended December 31, 2025 and 2024, respectively, and provides information regarding the dollar and percentage increase (decrease) during such periods.
For the Year Ended
December 31, Change
2025 2024 Amount Percentage
USD
USD
USD %
Revenue $ 130,528,652 $ 131,818,073 $ (1,289,421) (1.0)
Cost of revenue 95,277,560 96,390,733 (1,113,173) (1.2)
Gross profit 35,251,092 35,427,340 (176,248) (0.5)
Selling and distribution expenses 25,129,256 25,627,634 (498,378) (1.9)
General and administrative expenses 11,106,563 10,199,914 906,649 8.9
Research and development expenses 1,417,329 1,699,383 (282,054) (16.6)
Loss from operations (2,402,056) (2,099,591) (302,465) 14.4
Operating margins (%) (1.8) (1.6) (20) bps
Total other expenses, net (1,936,958) (182,507) (1,754,451) 961.3
Provision for (benefit of) income taxes 2,786,392 (547,821) 3,334,213 (608.6)
Net loss (7,125,406) (1,734,277) (5,391,129) 310.9
Net loss attributable to FGI Industries Ltd. shareholders (6,139,526) (1,201,089) (4,938,437) 411.2
Adjusted loss from operations (1)
(2,382,150) (1,613,635) (768,515) 47.6
Adjusted operating margins (%) (1)
(1.8) (1.2) (60) bps
Adjusted net loss attributable to FGI Industries Ltd. shareholders (1)
$ (2,555,789) $ (939,648) $ (1,616,140) 172.0
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(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.
Revenue
Our revenue decreased by $1.3 million, or 1.0%, to $130.5 million for the year ended December 31, 2025, from $131.8 million for the year ended December 31, 2024. The decrease in our revenue was driven by decreases in sales of sanitaryware, bath furniture and shower system, partially offset by an increase in sales of kitchen cabinetry and others.
Revenue categories by product are summarized as follow:
For the Year Ended December 31, Change
2025 Percentage 2024 Percentage Percentage
USD % USD % %
Sanitaryware $ 80,331,947 61.5 $ 81,109,955 61.5 (1.0)
Bath Furniture 14,204,305 10.9 14,739,205 11.2 (3.6)
Shower System 22,581,882 17.3 25,521,977 19.4 (11.5)
Others 13,410,518 10.3 10,446,936 7.9 28.4
Total $ 130,528,652 100.0 $ 131,818,073 100.0 (1.0)
We derive the majority of our revenue from sales of sanitaryware, which accounted for 61.5% and 61.5% of our total revenue for the years ended December 31, 2025 and 2024, respectively. Revenue generated from the sales of sanitaryware decreased by 1.0% to $80.3 million for the year ended December 31, 2025, from $81.1 million for the year ended December 31, 2024. Despite this modest decline, sanitaryware maintained its position as our largest product category. The stability in its share of total revenue reflects the ongoing resilience and steady demand for sanitaryware products, even as we continue to diversify our product portfolio and expand other categories in line with our long-term growth strategy.
Our revenue from bath furniture sales accounted for 10.9% and 11.2% of our total revenue for the years ended December 31, 2025 and 2024, respectively. Revenue generated from bath furniture sales decreased by 3.6% to $14.2 million for the year ended December 31, 2025 from $14.7 million for the year ended December 31, 2024. As part of our broader strategic focus on diversifying our product mix and expanding higher-growth categories, resources and sales efforts were increasingly allocated to other segments, which likely were factors in bath furniture sales during the period.
Revenue from shower systems made up approximately 17.3% and 19.4% of our total revenue for the years ended December 31, 2025 and 2024, respectively. Revenue from sales of shower systems decreased by 11.5% to $22.6 million for the year ended December 31, 2025 from $25.5 million for the year ended December 31, 2024. While shower system revenue dropped year-over-year in 2025, our recently launched programs have driven growth in recent quarters and we anticipate them continuing to be a positive driver moving forward, similar to our sanitaryware programs.
Our revenue from sales of other products (custom kitchen cabinetry and other small offerings) increased by 28.4% to $13.4 million for the three months ended December 31, 2025, compared to $10.4 million for the year ended December 31, 2024. This growth was primarily driven by a significant increase in sales volume for custom kitchen cabinetry, supported by the expansion of our network of kitchen cabinetry dealers in the United States. Additionally, revenue benefited from continued dealer acquisitions and the successful introduction of new product offerings, which further strengthened our market presence and customer reach.
We derive our revenue primarily from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:
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For the Year Ended December 31, Change
2025 Percentage 2024 Percentage Percentage
USD % USD % %
United States $ 80,692,411 61.8 $ 82,378,167 62.5 (2.0)
Canada 33,349,087 25.5 35,151,631 26.7 (5.1)
Europe 14,210,646 10.9 13,301,990 10.1 6.8
Rest of World 2,276,508 1.8 986,285 0.7 130.8
Total $ 130,528,652 100.0 $ 131,818,073 100.0 (1.0)
We generated the majority of our revenue in the United States market, which amounted to $80.7 million for the year ended December 31, 2025, and $82.4 million for the year ended December 31, 2024, representing a 2.0% decrease. This revenue accounted for 61.8% and 62.5% of our total revenue for the years ended December 31, 2025 and 2024, respectively. This modest decrease reflects our ability to minimize the broader effects of tariff-related disruptions through proactive supply chain management, pricing strategies, and close collaboration with our key customers. As a result, despite the significant headwinds from trade policies, our U.S. business demonstrated relative resilience and continued to represent a stable 61.8% of total revenue, underscoring the effectiveness of our efforts to manage external challenges and maintain our market position.
Our second largest market is Canada. Our revenue generated in the Canadian market was $33.3 million and $35.2 million for the years ended December 31, 2025 and 2024, respectively, representing a 5.1% decrease. This decline reflects a moderation in sales during the second half of the year, as retailers continued to slow purchases following strong activity in the first half. While the wholesale channel showed signs of improvement in the third quarter, this momentum was not sufficient to offset the overall softness in demand during the latter part of the year. Despite these headwinds, Canada remained our second largest market, accounting for 25.5% of total revenue, and we continue to closely monitor market dynamics and adjust our strategies to support long-term growth in the region.
We also derive our revenue from Europe, which consists primarily of sales in Germany. This amounted to $14.2 million and $13.3 million for the years ended December 31, 2025 and 2024, respectively, representing a 6.8% increase. Our warehouse business in Germany has been gaining traction in recent years.
Gross Profit
Gross profit was $35.3 million for the year ended December 31, 2025, reflecting a 0.5% decrease compared to the prior year. Gross profit margin percentage stood at 27.0% for the year ended December 31, 2025, a 10-basis-point increase from 26.9% in 2024.
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 $0.5 million, or 1.9%, to $25.1 million for the year ended December 31, 2025, from $25.6 million for the year ended December 31, 2024. This reduction is a result of our continued focus on operational efficiency and cost management initiatives.
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 $0.9 million, or 8.9%, to $11.1 million for the year ended December 31, 2025, as compared to the year ended December 31, 2024. The increase was primarily due to inflationary pressures and additional expenditures related to corporate support activities.
Research and development expenses primarily comprised personnel costs and product development expenditures. Our R&D activities remained stable and had a minimal impact on our overall consolidated results of operations.
Other Income (Expenses)
We incurred insignificant other income and expenses during the years ended December 31, 2025 and 2024. Other income and expenses primarily include interest income and expenses, as well as miscellaneous non-operating income and expenses.
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Total other expenses, net increased by approximately $1.8 million to $1.9 million for the year ended December 31, 2025, from $0.2 million for the year ended December 31, 2024. This increase was primarily driven by losses from foreign currency transactions.
Provision for Income Taxes
We recorded provision for income tax of $2.8 million for the year ended December 31, 2025, primarily due to the requirement to maintain a full valuation allowance on deferred tax assets in our U.S. subsidiaries as a result of recurring losses. While this accounting treatment is required under current standards, we remain focused on executing our strategic initiatives and are encouraged by the progress we are making, which we believe positions us well for potential future improvements in our operating results. Any sustained positive performance in future periods will be evaluated in accordance with applicable accounting guidance to determine the appropriate level of valuation allowance.
Net Loss
For the year ended December 31, 2025, we reported a net loss of $7.1 million, compared to a net loss of $1.7 million in 2024, reflecting a $5.4 million decrease. This change was driven by a combination of factors discussed above.
Liquidity and Capital Resources
The Company's consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue to operate in the normal course of business and will be able to realize its assets and discharge its liabilities as they become due. The Company has incurred net loss of $7.1 million and $1.7 million for the twelve months ended December 31, 2025 and the year ended December 31, 2024, respectively. In addition, the Company had net cash provided by operating activities of $0.7 million and net cash used in operating activities of $7.4 million for the same respective periods. As of December 31, 2025, the Company had approximately $1.9 million in cash and cash equivalents and had $11.9 million outstanding under its credit facilities, which were used primarily for working capital purposes.
As discussed in Note 8 to the consolidated financial statements, FGI Industries was not in compliance with certain financial covenants related to its debt coverage ratio as of December 31, 2025. In March 2026, the Company amended and restated its Credit Agreement with East West Bank and is currently in compliance with all covenants. As of December 31, 2025, FGI Canada was not in compliance with certain covenants related to its debt to tangible net worth ratio. RBC agreed to waive its right to call the debt related to this noncompliance.
However, the Company has been facing and expects to continue to face adverse impacts from elevated tariff costs on imported goods. These increased costs have put pressure on gross margins and have contributed to the overall liquidity challenges.
In response to the conditions, the Company implemented a number of actions, including:
• Termination of the lease for one of its warehouse facilities in the first quarter of 2025, which resulted in a non-recurring lease exit cost. The facility had idle capacity, and the termination reduced the Company’s ongoing fixed overhead expenses.
• Execution of cost control initiatives across multiple operating departments, targeting to lower recurring operating expenses.
• Commercial launch and promotion of new product lines, including anti-overflow toilets, shower systems, and custom kitchen cabinetry, which have begun generating increased revenue.
• Successful renewal of the Company’s credit facility with East West Bank, extending the maturity and maintaining access to committed financing.
As a result of these actions, the Company expects to improve its liquidity and reduce its cost structure. The Company’s management is of the opinion that it has sufficient funds to meet the Company’s working capital requirements and debt obligations as they become due over the next twelve (12) months.
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East West Bank Credit Facility
The Company's wholly-owned subsidiary, FGI Industries, 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 49.91% of the voting control of Foremost. The current amount of maximum borrowings is $18,000,000 and the Credit Agreement had an original maturity date of December 21, 2024. East West Bank has agreed to extend the maturity date on several occasions, most recently through April 3, 2026 while the parties discuss a renewal of the facility.
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, tested at the end of each fiscal quarter, on a 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 a consolidated basis. As of December 31, 2025, FGI Industries was not in compliance with certain financial covenants related to its debt coverage ratio. The Company has classified the outstanding balance of the loan as a current liability on the consolidated balance sheet as of December 31, 2025.
The loan bears interest at a 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, 2025 and 2024 w as 6.50% and 7.25%, resp ectively.
On March 27, 2026, FGI Industries renewed its credit facility with East West Bank, extending the maturity to April 17, 2027. The renewal includes a tiered interest‑rate margin determined by the subsidiary’s trailing‑twelve‑month EBITDA and updates to certain financial covenants, including revised EBITDA requirements and limitations on intercompany balances. Following the renewal, the Company is in compliance with the revised covenant requirements. See Note 16 to the consolidated financial statements.
Each sum of borrowings under the Credit Agreement is classified as a short-term loan. The outstanding balance of such loan was $8.1 million and $9.6 million as of December 31, 2025 and 2024, respectively.
RBC Bank Loan
FGI Canada Ltd. (“FGI Canada”) has a line of credit agreement with Royal Bank of Canada (“RBC”), successor by amalgamation of HSBC Canada (the “Canadian Revolver”). The revolving line of credit with RBC allows for borrowing up to CAD7.5 million (USD5.5 million as of December 31, 2025). 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 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 December 31, 2025, FGI Canada was not in compliance with certain covenants related to its debt to tangible net worth ratio. RBC agreed to waive its right to call the debt related to this noncompliance.
Borrowings under this line of credit amounted to $1.7 million and $2.6 million as of December 31, 2025 and 2024, respectively. The facility matures at the discretion of RBC upon 60 days’ notice.
FGI Canada also has a revolving foreign exchange facility with RBC of up to a permitted maximum of USD3.0 million. The advances are available to purchase foreign exchange forward contracts from time to time up to six months, subject to an overall maximum aggregate USD Equivalent outstanding face value not exceeding USD3.0 million.
CTBC Credit Facility
On January 25, 2024, FGI International entered into an omnibus credit line (the “CTBC Credit Line”) with CTBC Bank Co., Ltd. (“CTBC”). Under the CTBC Credit Line, FGI International may borrow, from time to time, up to $2.5 million, with borrowings limited to 90% of FGI International’s export “open account” trade receivables. The CTBC Credit Line will bear interest at a rate of “Base Rate”, which is based on monthly or quarterly Taipei Interbank Offered in effect
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from time to time, plus 120 base points and handling fees, unless otherwise agreed to by the parties. The CTBC Credit Line is unsecured and is fully guaranteed by the Company and partially guaranteed by Liang Chou Chen. Borrowings under this line of credit amounted to $2.1 million and $2.3 million as of December 31, 2025 and 2024, respectively.
Cash Flows
The following table summarizes the key components of our cash flows for the years ended December 31, 2025, and 2024.
For the Year Ended December 31,
2025 2024
USD USD
Net cash provided by (used in) operating activities $ 673,220 $ (7,425,317)
Net cash used in investing activities (1,015,847) (2,875,816)
Net cash (used in) provided by financing activities (2,633,539) 7,543,192
Effect of exchange rate fluctuation on cash 317,807 (461,140)
Net changes in cash (2,658,359) (3,219,081)
Cash, beginning of year 4,558,160 7,777,241
Cash, end of year $ 1,899,801 $ 4,558,160
Operating Activities
Net cash provided by operating activities was approximately $0.7 million for the year ended December 31, 2025, compared to net cash used in operating activities of $7.4 million in the prior year. The improvement in operating cash flow in 2025 was primarily driven by effective management of working capital, including a significant reduction in accounts receivable and higher accounts payable balances, which more than offset the impact of a net loss for the year. Additionally, a decrease in prepayments and other current assets contributed positively to cash flow, reflecting tighter control over advance payments and operational outflows. These improvements were partially offset by increased payments of operating lease liabilities and continued investments in our business to support long-term growth. The shift from a significant cash outflow in 2024 to a modest inflow in 2025 demonstrates our ongoing efforts to enhance operational efficiency, optimize our working capital structure, and maintain financial flexibility in a dynamic market environment.
Investing Activities
Net cash used in investing activities was approximately $1.0 million and $2.9 million for the years ended December 31, 2025 and 2024, respectively, which was attributable to the purchases of property and equipment and intangible assets.
Financing Activities
Net cash used in financing activities was approximately $2.6 million for the year ended December 31, 2025, compared to net cash provided by financing activities of $7.5 million in the prior year. The cash outflow in 2025 primarily reflects net repayments on our revolving credit facilities as we focused on reducing outstanding debt and managing our capital structure in response to evolving business needs. In contrast, the prior year’s positive cash flow from financing activities was largely attributable to increased borrowings to support working capital requirements and operational growth. The transition from net cash inflows in 2024 to net outflows in 2025 underscores our commitment to prudent financial management and maintaining a balanced approach to liquidity and leverage as we continue to execute our strategic objectives.
Commitments and Contingencies
Capital Expenditures
Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment and intangible assets. Our capital expenditures amounted to approximately $1.0 million and $2.9 million for the years ended
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December 31, 2025 and 2024, 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 Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. While all estimates are subject to uncertainty, certain accounting estimates are considered critical because they are highly dependent on management’s judgment, involve significant uncertainty, and could materially impact our financial condition or results of operations if actual results differ from those estimates. The following discussion addresses the critical accounting estimates that require our most difficult, subjective, or complex judgments.
Allowance for Credit Losses on Accounts Receivable
We maintain an allowance for expected credit losses on accounts receivable based on a combination of historical collection experience, the aging of receivables, current economic conditions, industry trends, and the financial condition of our customers. Management regularly reviews the adequacy of the allowance, considering both quantitative and qualitative factors. Changes in customer creditworthiness, macroeconomic conditions, or unexpected events could result in actual losses differing materially from our estimates. A significant increase in uncollectible accounts could adversely affect our results of operations.
Inventory Valuation and Obsolescence Reserves
Inventories are stated at the lower of cost or net realizable value. We record reserves for slow-moving, excess, or obsolete inventory based on historical experience, current inventory levels, forecasted demand, and market conditions. The estimation process requires significant judgment regarding future sales, product life cycles, and market trends. If actual demand or market conditions differ from our assumptions, additional write-downs or reversals may be required, which could materially impact our gross margin and operating results.
Valuation Allowance for Deferred Tax Assets
We recognize deferred tax assets for deductible temporary differences and net operating loss carryforwards to the extent that it is more likely than not that these assets will be realized. The assessment of recoverability involves evaluating both positive and negative evidence, including recent financial performance, cumulative losses, forecasts of future taxable income, and tax planning strategies. Given our recent history of net losses, we have recorded a valuation allowance against certain deferred tax assets. Changes in our assessment of future profitability or tax law could result in significant adjustments to the valuation allowance, impacting our effective tax rate and net income.
Share-Based Compensation
The fair value of share-based awards, including stock options and restricted stock units, is estimated using the Black-Scholes option pricing model or other appropriate valuation techniques. These models require management to make assumptions regarding expected volatility, risk-free interest rates, expected term, and forfeiture rates. Changes in these assumptions could materially affect the amount of share-based compensation expense recognized in our financial statements.
Revenue Recognition – Variable Consideration and Returns
We recognize revenue when control of goods transfers to customers, typically upon shipment or delivery. We estimate variable consideration, including customer incentives, rebates, and expected product returns, based on historical experience and current trends. These estimates require significant judgment and are updated as new information becomes available. Actual results may differ from our estimates, resulting in adjustments to revenue in future periods.
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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.
We define Adjusted Operating Income as GAAP income from operations excluding the impact of certain non-recurring income and expenses, including IPO-related compensation (cash and share-based), legal fees and business expansion expenses. We define Adjusted Net Income as GAAP income before income taxes excluding the impact of certain non-recurring income and expenses, such as IPO-related compensation, legal fees and business expansion expenses, income taxes at historical average effective rate, as well as net income attributable to non-controlling shareholders. 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 GAAP income from operations to Adjusted Operating Income and Adjusted Operating Margins, as well as GAAP net income to Adjusted Net Income for the periods presented.
For the Year Ended
December 31,
2025 2024
USD USD
Loss from operations $ (2,402,056) $ (2,099,591)
Adjustments:
Non-recurring IPO-related share-based compensation 19,906 238,876
Business expansion expense — 247,080
Adjusted Operating Loss $ (2,382,150) $ (1,613,635)
Revenue $ 130,528,652 $ 131,818,073
Adjusted Operating Margins (%) (1.8) (1.2)
For the Year Ended
December 31,
2025 2024
USD USD
Loss before income taxes $ (4,339,014) $ (2,282,098)
Adjustments:
Non-recurring IPO-related share-based compensation 19,906 238,876
Business expansion expense — 247,080
Adjusted loss before income taxes (4,319,108) (1,796,142)
Less: income taxes at 18% rate (777,439) (323,306)
Less: net loss attributable to non-controlling shareholders (985,880) (533,188)
Adjusted Net Loss $ (2,555,789) $ (939,648)
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined in Regulation S-K and are not required to provide the information under this item.
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