FGI INDUSTRIES LTD. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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The disclosures in this Quarterly Report on Form 10-Q are complementary to those
made in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on 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.

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 the Cayman Islands on May 26, 2021 in connection with a
reorganization (the "Reorganization") of our parent company, Foremost Groups
Ltd. ("Foremost"), and its affiliates, pursuant to which, among other actions,
Foremost contributed all of its equity interests in FGI Industries, Inc. ("FGI
Industries"), FGI Europe Investment Limited, an entity formed in the British
Virgin Islands, and FGI International, Limited, an entity formed under the laws
of Hong Kong, each a wholly-owned subsidiary of Foremost, to the newly formed
FGI Industries Ltd. Foremost was established in 1987 and has become a global
leader in kitchen and bath design, indoor and outdoor furniture, food service
equipment, and manufacturing. This discussion, and any financial information and
results of operations discussed herein, refers to the assets, liabilities,
revenue, expenses and cash flows that are directly attributable to the kitchen
and bath business of Foremost before the completion of the Reorganization and
are presented as if we had been in existence and the Reorganization had been in
effect for the entirely of each of the periods presented.

Operating results

For the three months ended March 31, 2022 and 2021

The following table summarizes the results of our operations for the three months ended March 31, 2022 and 2021 and provides information regarding the dollar and percentage increase (decrease) over those periods.

                                            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 WE generally accepted accounting principles (“GAAP”) comparators.


Revenues

Our revenues increased by $7.2 million, or 19.8%, to $43.6 million for the three
months ended March 31, 2022, from $36.4 million for the three months ended March
31, 2021. The growth in our revenues was primarily attributable to

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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      $ 28,179,193          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 ended
March 31, 2022 and 2021, respectively. Revenues generated from the sales of
Sanitaryware increased by 23.6% to $28.2 million for the three months ended
March 31, 2022, from $22.8 million for 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 million for
the three months ended March 31, 2022, from $11.5 million for the three months
ended March 31, 2021. Bath Furniture sales accounted for 23.3% and 31.6% of our
total revenue for the three months ended March 31, 2022 and 2021, respectively.
Volumes in Bath 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 ended March
31, 2022 from $2.1 million for 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 United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:

                          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 from Europe, which consists
primarily of sales in Germany. This amounted to $3.9 million and $4.7 million
for the three months ended March 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 ended March 31, 2022, from $7.3 million for 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
million for the three months ended March 31, 2022, from $3.9 million for 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
million for the three months ended March 31, 2022 as 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) million for the three months ended March 31, 2022, from $1.5 million for
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 million for the three months ended March
31, 2022, and $0.5 million for 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 million for the
three months ended March 31, 2022, from $3.0 million for the three months ended
March 31, 2021. This increase was a result of the combination of the changes
discussed above.

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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, 2022 and December 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 of March 31, 2022
compared to $1.4 million as 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.

From March 31, 2022our total debt is represented by a credit facility with
Eastern West Bank.

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 Industries and
personally guaranteed by Liang Chou Chen, who holds approximately 49.75% of the
voting control of Foremost. For the year ended December 31, 2018 and 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
$3,000,000 that 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 Industries is required to maintain (a) a
debt coverage ratio (defined as earnings before interest, taxes, depreciation
and amortization divided by current portion of long-term debt plus interest
expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter;
(b) an effective tangible net worth (defined as total book net worth plus
minority interest, less amounts due from officers, shareholders and affiliates,
minus intangible assets and accumulated amortization, plus debt subordinated to
East West Bank) of not less than $10,000,000 for the quarter ended March 31,
2021 and thereafter; 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
Industries was not in compliance with this financial covenant; however, East
West Bank provided a waiver for such non-compliance. As of March 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 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, 2022 and December 31, 2021 was 3.75% and 3.50%, respectively.

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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
$16,321,410 and $14,657,280 from March 31, 2022 and December 31, 2021respectively.

PPP loan

On 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 March 31, 2022 and 2021.

                                                              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.
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Investing Activities

Net cash used in investing activities was less than $0.1 million for each of the three months ended March 31, 2022 and 2021, which was attributable to the purchase of property, plant and equipment.

Fundraising activities

Net cash provided by financing activities was approximately $14.0 million for
the three months ended March 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 ended March 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 ended March 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 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.

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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