The disclosures in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K filed with the
Securities and Exchange Commissionon March 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.
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. 31 Table of Contents
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
We were incorporated in the
Cayman Islandson May 26, 2021in connection with a reorganization (the "Reorganization") of our parent company, Foremost Groups Ltd.("Foremost"), and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc.(" FGI Industries"), FGI Europe Investment Limited, an entity formed in the British Virgin Islands, and FGI International, Limited, an entity formed under the laws of Hong Kong, each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd.Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost before the completion of the Reorganization and are presented as if we had been in existence and the Reorganization had been in effect for the entirely of each of the periods presented.
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 $ 7,199,55019.8 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
Revenues Our revenues increased by
$7.2 million, or 19.8%, to $43.6 millionfor the three months ended March 31, 2022, from $36.4 millionfor the three months ended March 31, 2021. The growth in our revenues was primarily attributable to 32
strong growth in Sanitaryware and Other product categories, partially offset by declines in
Bath 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 $ 28,179,19364.7 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 $ 43,575,239100.0 $ 36,375,689100.0 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 ended March 31, 2022and 2021, respectively. Revenues generated from the sales of Sanitaryware increased by 23.6% to $28.2 millionfor the three months ended March 31, 2022, from $22.8 millionfor the three months ended March 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 millionfor the three months ended March 31, 2022, from $11.5 millionfor the three months ended March 31, 2021. Bath Furnituresales accounted for 23.3% and 31.6% of our total revenue for the three months ended March 31, 2022and 2021, respectively. Volumes in Bath Furniturewere 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 millionfor the three months ended March 31, 2022from $2.1 millionfor the three months ended March 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
$ 27,353,19562.8 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 $ 43,575,239100.0 $ 36,375,689100.0 19.8 We generated the majority of our revenues in the United Statesmarket, which amounted to $27.4 millionfor the three months ended March 31, 2022and $22.1 millionfor 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, 2022and 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 millionand $9.6 millionfor the three months ended March 31, 2022and 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. 33
We also derive a small portion of our revenue from
Europe, which consists primarily of sales in Germany. This amounted to $3.9 millionand $4.7 millionfor the three months ended March 31, 2022and 2021, respectively, representing a 17.1% decrease. The decrease in sales represented softer demand from the impact of the COVID-19 pandemic.
Our gross profit increased by
$0.2 million, or 2.8%, to $7.5 millionfor the three months ended March 31, 2022, from $7.3 millionfor the three months ended March 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 the U.S.and Canada. Gross profit as a percentage of our sales decreased across all of our product lines to 17.3% for the three months ended March 31, 2022, as compared to 20.1% for the three months ended March 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 millionfor the three months ended March 31, 2022, from $3.9 millionfor the three months ended March 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 millionfor the three months ended March 31, 2022as compared to the three months ended March 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) millionfor the three months ended March 31, 2022, from $1.5 millionfor the three months ended March 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 millionfor the three months ended March 31, 2022, and $0.5 millionfor the three months ended March 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 millionfor the three months ended March 31, 2022, from $3.0 millionfor the three months ended March 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 of
March 31, 2022and December 31, 2021, we had cash and cash equivalents of $8.8 millionand $3.9 million, respectively. We had working capital of $13.8 millionas of March 31, 2022compared to $1.4 millionas of December 31, 2021. On January 27, 2022, we closed an underwritten public offering of 2.5 million units consisting of ordinary shares and warrants and received net proceeds, after commissions and expenses, of approximately $12.4 million. We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations well into the foreseeable future. However, we may need additional cash resources in the future if we experience changes in business conditions or other developments 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.
Eastern West Bank Credit Facility
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 of the assets of FGI Industriesand personally guaranteed by Liang Chou Chen, who holds approximately 49.75% of the voting control of Foremost. For the year ended December 31, 2018and through September 30, 2019, the Credit Agreement allowed for borrowings up to $25,000,000, which previously included a discretionary loan in the amount of $3,000,000that could only be drawn upon under certain circumstances as described in the Credit Agreement. The discretionary line expired on September 30, 2019. The non-discretionary line of credit was renewed through September 23, 2020, and maximum borrowings were decreased to $22,000,000. On August 13, 2020, the line of credit was renewed with an extended maturity date of September 23, 2022, and maximum borrowings were further decreased to $18,000,000. Pursuant to the Credit Agreement, FGI Industriesis 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 $10,000,000for the quarter ended March 31, 2021and 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 of December 31, 2021, FGI Industrieswas not in compliance with this financial covenant; however, East West Bankprovided a waiver for such non-compliance. As of March 31, 2022, East West Bankwaived 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 the Wall 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 of March 31, 2022and December 31, 2021was 3.75% and 3.50%, respectively. 35
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
April 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 ended December 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 the U.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 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, 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 millionfor the three months ended March 31, 2022and 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 millionand net income for the quarter of approximately $0.5 million. Net cash used in operating activities was approximately $0.8 millionfor the three months ended March 31, 2021and 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
Net cash provided by financing activities was approximately
$14.0 millionfor the three months ended March 31, 2022, which represents net proceeds from bank loans of $1.7 millionand net proceeds from issuance of units in the IPO of $12.4 million. Net cash used in financing activities was approximately $1.4 millionfor the three months ended March 31, 2021, which represents net proceeds from bank loans of less than $0.1 millionand a net decrease in parent company investment of $1.3 million.
Commitments and contingencies
Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment. Our capital expenditures amounted to less than
$0.1 millionfor each of the three months ended March 31, 2022and 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 ended
March 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.
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 37
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 -
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
Adjusted net income 804,321
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