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 theSecurities and Exchange Commission onMarch 31, 2022 (the "2021 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 2021 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 2021 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.
Insight
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 2022:
Commitment to product innovation. We have a history of being an innovator in
the kitchen and bathroom markets and develop “trendy” products and bring
market before the competition. We have developed deep marketing
? skills, advanced design capabilities and product development expertise. A
a recent example of our innovative product development includes the Jetcoat
Shower enclosure systems, which offer a stylish design option without the hassle of
messy grout. We plan to continue investing in research and development to
drive product innovation in 2022.
“BPC” strategy (Brands, Products, Channels) to drive organic above the market
growth. We focus on increasing the range of branded products as
a percentage of sales, which should result in larger available markets
and gross margin expansion. Our own brands reached nearly 40% of sales, while
? by the end of 2021, compared to less than 1% at the end of 2010. We focus on
expand our position in channels such as e-commerce, providing
growth opportunities with existing brick and mortar customers, as well as
grow with e-commerce customers. The e-commerce channel accounted for 21%
sales in 2020, compared to only 2% at the end of 2010.
Drive margin expansion. Margin expansion remains a key pillar of our value
emphasis on creation. We believe our BPC strategy will support improved margins
through the growth of branded products, new product categories and new channels.
? Headwinds from supply chain disruptions and inflationary pressures
operating margins in 2021; however, we have recently adopted measures to compensate
these challenges, and expect to resume margin expansion in the second half of
2022 as these initiatives materialize.
Efficient deployment of capital. We benefit from a small capitalization business model
allowing us to generate strong free cash flow conversion. We plan to use
our strong free cash flow to reinvest in core business and drive growth
through the development of existing brands and the expansion of new product categories. We’re going
? also seek selective, over time, focused, targeted acquisition opportunities
in major kitchen and bath end markets. We plan to maintain discipline
capital deployment approach, with most material internal investments
currently subject to a company-wide 20%+ expected return on capital hurdle
rate.
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Deep manufacturing partners and customer relationships. We have developed
strong manufacturing and supply partners over the past 30 years, which we
believe will continue to give us a competitive edge in the markets we
? to serve. We also have a close relationship with an established global customer
base, offering end-to-end solutions to support category growth. Although recent
supply chain and inflationary pressures have been a headwind, our sustainability
partnerships with manufacturing and supply partners have helped mitigate
these challenges.
We were incorporated in theCayman Islands onMay 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 inFGI Industries, Inc. ("FGI Industries "),FGI Europe Investment Limited , an entity formed in theBritish Virgin Islands , andFGI International, Limited , an entity formed under the laws ofHong Kong , each a wholly-owned subsidiary of Foremost, to the newly formedFGI 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.
Operating results
For the three months ended
The following table summarizes the results of our operations for the three months ended
For the three months ended
March 31, Change
2022 2021 Amount Percentage
USD USD USD %
Revenues $ 43,575,239 $ 36,375,689 $ 7,199,550 19.8
Cost of revenues 36,050,653 29,058,658 6,991,995 24.1
Gross profit 7,524,586 7,317,031 207,555 2.8
Selling and distribution expenses 4,677,352 3,940,470 736,882 18.7 General and administrative expenses 1,842,807 1,359,022 483,785 35.6 Research and development expenses 313,681 133,768
179,913 134.5 Income from operations 690,746 1,883,771 (1,193,025) (63.3) Operating margins 1.6 % 5.2 % (360) bps
Total other (expenses) income, net (32,876) 1,533,130
(1,566,006) 102.1 Provision for income taxes 127,677 455,487 (327,810) (72.0) Net income$ 530,193 $ 2,961,414 $ (2,431,221) (82.1)
Adjusted income from operations(1)$ 923,058 $ 1,999,671
$ (1,076,613) (53.8) Adjusted operating margins(1) 2.1 % 5.5 % (340) bps - Adjusted net income(1)$ 720,689 $ 1,678,114 $ (957,425) (57.1)
See “Non-GAAP Measures” below for more information on our use of these (1) adjusted figures and a reconciliation of these financial measures to their
the closest
Revenues Our revenues increased by$7.2 million , or 19.8%, to$43.6 million for the three months endedMarch 31, 2022 , from$36.4 million for the three months endedMarch 31, 2021 . The growth in our revenues was primarily attributable to 32
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strong growth in Sanitaryware and Other product categories, partially offset by declines inBath Furniture . Revenue categories by product are summarized as follows: For the three months ended March 31, Change 2022 Percentage 2021 Percentage Percentage USD % USD % % Sanitaryware$ 28,179,193 64.7 22,805,413 62.7 23.6 Bath Furniture 10,115,812 23.3 11,482,661 31.6 (11.9) Other 5,280,234 12.0 2,087,615 5.7 152.9 Total$ 43,575,239 100.0$ 36,375,689 100.0 19.8 We derive the majority of our revenues from sales of Sanitaryware, which accounted for 64.7% and 62.7% of our total revenues for the three months endedMarch 31, 2022 and 2021, respectively. Revenues generated from the sales of Sanitaryware increased by 23.6% to$28.2 million for the three months endedMarch 31, 2022 , from$22.8 million for the three months endedMarch 31, 2021 . The increase in sales for this product line was primarily driven by continued volume strength in the pro channel. Our revenues from bath furniture sales decreased by 11.9% to$10.1 million for the three months endedMarch 31, 2022 , from$11.5 million for the three months endedMarch 31, 2021 .Bath Furniture sales accounted for 23.3% and 31.6% of our total revenue for the three months endedMarch 31, 2022 and 2021, respectively. Volumes inBath Furniture were up year-over-year; however, a less favorable product mix weighed on revenues. In addition, we experienced some order delays as certain customers had to push out orders into the second quarter of 2022 due to warehousing and supply chain issues. This is a timing issue, and we expect to ship the orders in the coming quarters. The revenues from sales of other products (shower systems and custom kitchen cabinetry) increased by 152.9% to$5.3 million for the three months endedMarch 31, 2022 from$2.1 million for the three months endedMarch 31, 2021 . The increase was primarily driven by volume growth resulting from continued strength in sales of the Jetcoat Shower wall systems.
We derive our income from
For the three months ended March 31, Change
2022 Percentage 2021 Percentage Percentage
USD % USD % %
United States $ 27,353,195 62.8 22,081,821 60.7 23.9
Canada 12,296,002 28.2 9,558,196 26.3 28.6
Europe 3,926,042 9.0 4,735,672 13.0 (17.1)
Total $ 43,575,239 100.0 $ 36,375,689 100.0 19.8
We generated the majority of our revenues in the United States market, which
amounted to $27.4 million for the three months ended March 31, 2022 and $22.1
million for the three months ended March 31, 2021 , representing a 23.9%
increase. These revenues accounted for 62.8% and 60.7% of our total revenues for
the three months ended March 31, 2022 and 2021, respectively. The increase in
the U.S. market was primarily driven by strong demand in the pro channel on our
Sanitary category along with improving demand in the R&R markets.
Our second largest market is Canada . Our revenues generated in the Canadian
market were $12.3 million and $9.6 million for the three months ended March 31,
2022 and 2021, respectively, representing a 28.6% increase. The increase was
primarily driven by strong demand in both retail and wholesale markets, as
compared to delayed shipments during the corresponding period last year.
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We also derive a small portion of our revenue fromEurope , which consists primarily of sales inGermany . This amounted to$3.9 million and$4.7 million for the three months endedMarch 31, 2022 and 2021, respectively, representing a 17.1% decrease. The decrease in sales represented softer demand from the impact of the COVID-19 pandemic.
Gross profit
Our gross profit increased by$0.2 million , or 2.8%, to$7.5 million for the three months endedMarch 31, 2022 , from$7.3 million for the three months endedMarch 31, 2021 . The increase in gross profit was primarily driven by the growth of sales, which we attribute to strong demand in the pro channel and R&R markets in theU.S. andCanada . Gross profit as a percentage of our sales decreased across all of our product lines to 17.3% for the three months endedMarch 31, 2022 , as compared to 20.1% for the three months endedMarch 31, 2021 . The reduction in our gross margin percentage is primarily attributable to the impact of higher raw materials and higher freight charges associated with recent global supply chain issues. While gross profit margin was down year-over-year, the Company is beginning to see the benefits of measures put in place to offset recent margin headwinds, as first quarter 2022 gross profit margin was up 277 basis points from the fourth quarter of 2021. 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$0.7 million , or 18.7%, to$4.7 million for the three months endedMarch 31, 2022 , from$3.9 million for the three months endedMarch 31, 2021 . The increase in selling and distribution expenses was a result of the growth in our sales, which led to an increase in commission, product display, logistics and warehouse costs. In addition, business sales activities are gradually returning to pre-COVID-19 levels, which led to increases in marketing, trade shows and travel. 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 35.6%, to$1.8 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The increase was primarily attributable to incremental public company costs and a one-time IPO bonus.
Research and development expenses mainly consist of personnel costs and product development costs. Our research and development activities have remained stable and are relatively insignificant to our unaudited condensed consolidated statements of earnings and comprehensive income.
Other income (expenses)
Other income (expenses) decreased by$1.6 million , or (102.1)%, to less than$(0.1) million for the three months endedMarch 31, 2022 , from$1.5 million for the three months endedMarch 31, 2021 . This decrease was the result of one-time income recognized in the first quarter of 2021 upon the forgiveness of the
PPP loan . Provision for Income Taxes We recorded income tax expense of$0.1 million for the three months endedMarch 31, 2022 , and$0.5 million for the three months endedMarch 31, 2021 . The decrease resulted from the decrease in our reported income before taxes of
$2.8 million , or 80.7%. Net Income
Our net income decreased by$2.4 million , or 82.1%, to$0.5 million for the three months endedMarch 31, 2022 , from$3.0 million for the three months endedMarch 31, 2021 . This increase was a result of the combination of the changes discussed above. 34 Table of Contents
Cash 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 ofMarch 31, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$8.8 million and$3.9 million , respectively. We had working capital of$13.8 million as ofMarch 31, 2022 compared to$1.4 million as ofDecember 31, 2021 . OnJanuary 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 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.
From
Eastern West Bank Credit Facility
Our wholly owned subsidiary,FGI Industries (formerly namedForemost Groups, Inc. ), has a line of credit agreement (the "Credit Agreement") withEast West Bank , which is collateralized by all of the assets ofFGI Industries and personally guaranteed byLiang Chou Chen , who holds approximately 49.75% of the voting control of Foremost. For the year endedDecember 31, 2018 and throughSeptember 30, 2019 , the Credit Agreement allowed for borrowings up to$25,000,000 , which previously included a discretionary loan in the amount of$3,000,000 that could only be drawn upon under certain circumstances as described in the Credit Agreement. The discretionary line expired onSeptember 30, 2019 . The non-discretionary line of credit was renewed throughSeptember 23, 2020 , and maximum borrowings were decreased to$22,000,000 . OnAugust 13, 2020 , the line of credit was renewed with an extended maturity date ofSeptember 23, 2022 , and maximum borrowings were further decreased to$18,000,000 . 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 toEast West Bank ) of not less than$10,000,000 for the quarter endedMarch 31, 2021 and thereafter; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth, which is defined as total book net worth plus minority interest, less loans to officers, shareholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter. As ofDecember 31, 2021 ,FGI Industries was not in compliance with this financial covenant; however,East West Bank provided a waiver for such non-compliance. As ofMarch 31, 2022 ,East West Bank waived testing of this financial covenant. The loan bears interest at a rate per annum equal to 0.25 percentage points above the Prime Rate as quoted by theWall Street Journal . Under no circumstances will the interest rate on this loan be less than 3.250% per annum or more than the maximum rate allowed by applicable law. The interest rate as ofMarch 31, 2022 andDecember 31, 2021 was 3.75% and 3.50%, respectively. 35
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Each amount borrowed under the Credit Agreement is deemed payable on demand and is classified as a short-term loan. The outstanding balance of this loan was
PPP loan
OnApril 9, 2020 ,Foremost Group, Inc. entered into a loan agreement in connection with the Paycheck Protection Program ("PPP") and received proceeds of approximately$1.68 million (the "PPP loan") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Interest on the loan accrued at a fixed interest rate of 1.0%. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the year endedDecember 31, 2020 ,Foremost Groups, Inc. used all of the PPP loan proceeds to pay for qualified expenses. 100% of the PPP loan proceeds were used for payroll related expenses. Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit by theU.S. Small Business Administration ("SBA") to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the PPP rules.Foremost Groups, Inc. submitted its application and supporting documentation for forgiveness onDecember 22, 2020 . As ofDecember 31, 2020 , the balance of the PPP loan was included in the short-term loan on the consolidated balance sheet. OnFebruary 8, 2021 ,Foremost Groups, Inc. received approval of forgiveness of the PPP loan from the SBA. Upon such approval, the entire balance, including principal and interest, was forgiven and recorded as other income on our unaudited condensed consolidated statements of income and comprehensive income.
The following table summarizes the main components of our cash flows for the three months ended
For the Three Months Ended March 31,
2022 2021
USD USD
Net cash used in operating activities $ (9,066,727) $ (814,677)
Net cash used in investing activities (24,383) (1,678)
Net cash provided by (used in) financing activities 14,034,930 (1,375,776)
Effect of exchange rate fluctuation on cash (34,378) 17,473
Net changes in cash 4,909,442 (2,174,658)
Cash, beginning of period 3,883,896 4,018,558
Cash, end of period $ 8,793,338 $ 1,843,900
Operating Activities
Net cash used in operating activities was approximately $9.1 million for the
three months ended March 31, 2022 and was primarily attributable to a decrease
in accounts payable of approximately $8.1 million , an increase in prepayments
and other receivables - related parties of approximately $4.2 million , an
increase in prepayments and other current assets of approximately $1.1 million ,
an increase in other noncurrent assets of approximately $0.6 million , a decrease
in accrued expenses and other current liabilities of approximately $0.6 million ,
and an increase in inventories of approximately $0.3 million , plus various
non-cash items of approximately $0.1 million , which were partially offset by a
decrease in accounts receivable of approximately $5.9 million and net income for
the quarter of approximately $0.5 million .
Net cash used in operating activities was approximately $0.8 million for the
three months ended March 31, 2021 and was primarily attributable to a decrease
in accounts payable of approximately $4.0 million , an increase in accounts
receivable of approximately $1.3 million , an increase in other noncurrent assets
of approximately $0.8 million , and a decrease in operating lease liabilities of
approximately $0.1 million , which were partially offset by net income for the
quarter of approximately $3.0 million , various non-cash items of approximately
$0.9 million , an increase in accounts payable -related parties of approximately
$0.5 million , and a decrease in inventories of approximately $0.1 million .
36 Table of Contents Investing Activities
Net cash used in investing activities was less than
Fundraising activities
Net cash provided by financing activities was approximately$14.0 million for the three months endedMarch 31, 2022 , which represents net proceeds from bank loans of$1.7 million and net proceeds from issuance of units in the IPO of$12.4 million . Net cash used in financing activities was approximately$1.4 million for the three months endedMarch 31, 2021 , which represents net proceeds from bank loans of less than$0.1 million and a net decrease in parent company investment of$1.3 million .
Commitments and contingencies
Capital expenditure
Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment. Our capital expenditures amounted to less than$0.1 million for each of the three months endedMarch 31, 2022 and 2021. We do not expect to incur significant capital expenditures in the immediate future.
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 2021 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 three months endedMarch 31, 2022 .
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.
We define Adjusted Income from Operations as GAAP income from operations
excluding the impact of certain non-recurring expenses, including IPO-related
compensation and stock-based compensation expense and expenses related to
COVID-19 protocols. We define Adjusted Net Income as GAAP net income excluding
the tax-effected impact of certain non-recurring expenses and income, such as
IPO-related compensation and stock-based compensation expense, expenses
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related to COVID-19 protocols and the impact of our PPP loan. We define adjusted operating margins as adjusted operating profit 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
March 31,
2022 2021
Income from operations 690,746 1,883,771
Adjustments:
Non-recurring IPO-related compensation and stock-based
compensation expense 232,312 -
COVID one-time expenses -
115,900
Adjusted income from operations 923,058
1,999,671
Revenue 43,575,239 36,375,689
Adjusted operating margins 1.6 % 5.2 %
For the three months ended
March 31,
2022 2021
Net Income 530,193 2,961,414
Adjustments:
Non-recurring IPO-related compensation and stock-based
compensation expense 232,312 -
Other income (PPP Loan) - (1,680,900)
COVID one-time expenses - 115,900
Total 762,505 1,396,414
Tax impact of adjustment at 18% effective rate 41,816
(281,700)
Adjusted net income 804,321
1,114,714
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