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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:

March 31, 2024

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number: 001-41207

FGI Industries Ltd.

(Exact name of registrant as specified in its charter)

Cayman Islands

98-1603252

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

906 Murray Road

East Hanover, New Jersey 07936

(Address of principal executive offices)

(Zip Code)

(973) 428-0400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

   

Trading Symbol(s)

   

Name of each exchange on which registered

Ordinary Shares, $0.0001 par value

FGI

Nasdaq Capital Market

Warrants to purchase Ordinary Shares, $0.0001 par value

FGIWW

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares outstanding of the registrant's common stock on May 8, 2024 was 9,547,607.

TABLE OF CONTENTS

    

Page

Special Note Regarding Forward-Looking Statements

3

General

4

PART I- FINANCIAL INFORMATION

5

Item 1.

Financial Statements.

5

Condensed Consolidated Balance Sheets as of March 31, 2024 (Unaudited) and December 31, 2023 (Audited).

6

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023.

7

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2024 and 2023.

8

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023.

9

Notes to Unaudited Condensed Consolidated Financial Statements.

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

42

Item 4.

Controls and Procedures.

42

PART II- OTHER INFORMATION

43

Item 1.

Legal Proceedings.

43

Item 1A.

Risk Factors.

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

44

Item 3.

Defaults Upon Senior Securities.

44

Item 4.

Mine Safety Disclosures.

44

Item 5.

Other Information.

44

Item 6.

Exhibits.

45

SIGNATURES

46

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical facts, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. In addition, statements that “we believe” or similar statements reflect our beliefs and opinions on the relevant subject. We have based these forward- looking statements on our current expectations about future events. While we believe these expectations are reasonable, such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Risks and uncertainties that could cause our actual results to differ from those expressed in, or implied by, our forward- looking statements include, but are not limited to:

the levels of residential repair and remodel activity, and to a lesser extent, new home construction;
the effects of inflationary pressures, financial market uncertainty and rising interest rates on the demand for our products, our costs and our ability to access capital;
our ability to maintain our strong brands and reputation and to develop innovative products;
our ability to maintain our competitive position in our industries;
our reliance on key suppliers and customers;
the occurrence of public health emergencies, such as the COVID-19 pandemic, including the impact on domestic and international economic activity, consumer confidence, our production capabilities, our employees and our supply chain;
the cost and availability of materials and the imposition of tariffs;
risks associated with our international operations and global strategies;
our ability to achieve the anticipated benefits of our strategic initiatives;
our ability to successfully execute our acquisition strategy and integrate businesses that we may acquire;
risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology;
our ability to attract, develop and retain talented and diverse personnel;
our ability to obtain additional capital to finance our planned operations;
regulatory developments in the United States and internationally;
our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others; and

3

other risks and uncertainties, including those listed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, as well as subsequent reports we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”) (available at www.sec.gov).

These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements may not be achieved or occur at all. You should read this Quarterly Report on Form 10-Q and the documents that we reference and have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

GENERAL

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company,” “FGI,” “we,” “us” or “our” refer to FGI Industries Ltd.

4

FGI INDUSTRIES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of

As of

March 31, 2024

December 31, 2023

    

USD

    

USD

    

(Unaudited)

ASSETS

CURRENT ASSETS

 

  

 

  

Cash

$

3,319,066

$

7,777,241

Accounts receivable, net

 

15,745,167

 

16,195,543

Inventories, net

 

11,550,962

 

9,923,852

Prepayments and other current assets

 

4,975,620

 

4,617,751

Prepayments and other receivables – related parties

 

12,977,788

 

7,600,283

Total current assets

 

48,568,603

 

46,114,670

PROPERTY AND EQUIPMENT, NET

 

2,431,337

 

1,910,491

OTHER ASSETS

 

  

 

  

Intangible assets

 

102,227

 

102,227

Operating lease right-of-use assets, net

 

14,705,781

 

15,203,576

Deferred tax assets, net

 

1,217,376

 

1,168,833

Other noncurrent assets

 

1,609,790

 

1,245,133

Total other assets

 

17,635,174

 

17,719,769

Total assets

$

68,635,114

$

65,744,930

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

CURRENT LIABILITIES

 

  

 

  

Short-term loans

$

11,442,651

$

6,959,175

Accounts payable

 

14,520,915

 

14,524,607

Accounts payable – related parties

732,285

735,308

Income tax payable

 

 

189,119

Operating lease liabilities – current

 

1,691,998

 

1,595,998

Accrued expenses and other current liabilities

 

3,427,282

 

4,039,499

Total current liabilities

 

31,815,131

 

28,043,706

OTHER LIABILITIES

 

  

 

  

Operating lease liabilities – noncurrent

 

13,234,062

 

13,674,452

Total liabilities

 

45,049,193

 

41,718,158

COMMITMENTS AND CONTINGENCIES

 

  

 

  

SHAREHOLDERS’ EQUITY

 

  

 

  

Preference Shares ($0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2024 and December 31, 2023)

 

 

Ordinary shares ($0.0001 par value, 200,000,000 shares authorized, 9,547,607 shares issued and outstanding as of March 31, 2024 and December 31, 2023)

 

955

 

955

Additional paid-in capital

20,997,418

20,877,832

Retained earnings

4,001,335

4,413,524

Accumulated other comprehensive loss

(1,134,077)

(1,111,499)

FGI Industries Ltd. shareholders’ equity

 

23,865,631

 

24,180,812

Non-controlling interests

(279,710)

(154,040)

Total shareholders’ equity

23,585,921

24,026,772

Total liabilities and shareholders’ equity

$

68,635,114

$

65,744,930

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the Three Months Ended

March 31, 

     

2024

     

2023

 

USD

 

USD

REVENUES

$

30,753,519

$

27,162,266

COST OF REVENUES

 

22,340,036

 

19,960,108

GROSS PROFIT

 

8,413,483

 

7,202,158

OPERATING EXPENSES

 

 

Selling and distribution

6,130,886

4,711,089

General and administrative

 

2,282,858

 

2,142,245

Research and development

 

320,673

 

351,751

Total operating expenses

 

8,734,417

 

7,205,085

LOSS FROM OPERATIONS

 

(320,934)

 

(2,927)

OTHER INCOME (EXPENSES)

 

 

Interest income

554

1,375

Interest expense

 

(222,207)

 

(249,637)

Other income (expenses), net

 

27,017

 

(19,557)

Total other expenses, net

 

(194,636)

 

(267,819)

LOSS BEFORE INCOME TAXES

 

(515,570)

 

(270,746)

PROVISION FOR (BENEFIT OF) INCOME TAXES

 

 

Current

70,832

132,793

Deferred

 

(48,543)

 

(100,164)

Total provision for income taxes

 

22,289

 

32,629

NET LOSS

(537,859)

(303,375)

Less: net loss attributable to non-controlling shareholders

(125,670)

Net loss attributable to FGI Industries Ltd. shareholders

(412,189)

(303,375)

OTHER COMPREHENSIVE (LOSS) INCOME

 

 

Foreign currency translation adjustment

(22,578)

20,099

COMPREHENSIVE LOSS

(560,437)

(283,276)

Less: comprehensive loss attributable to non-controlling shareholders

(125,670)

Comprehensive loss attributable to FGI Industries Ltd. shareholders

$

(434,767)

$

(283,276)

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES

 

 

Basic

9,547,607

9,500,000

Diluted

9,547,607

9,500,000

LOSS PER SHARE

Basic

$

(0.04)

$

(0.03)

Diluted

$

(0.04)

$

(0.03)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY

Accumulated

Total FGI

Additional

Other

Industries Ltd.

Non-

Total

Preference Shares

Ordinary Shares

Paid-in

Retained

Comprehensive

Shareholders'

Controlling

Shareholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

  

Interests

  

Equity

Balance at December 31, 2023

$

9,547,607

$

955

$

20,877,832

$

4,413,524

$

(1,111,499)

$

24,180,812

$

(154,040)

$

24,026,772

Share-based compensation

119,586

119,586

119,586

Net loss

(412,189)

(412,189)

(125,670)

(537,859)

Foreign currency translation adjustments

(22,578)

(22,578)

(22,578)

Balance at March 31, 2024

$

9,547,607

$

955

$

20,997,418

$

4,001,335

$

(1,134,077)

$

23,865,631

$

(279,710)

$

23,585,921

Accumulated

Total FGI

Additional

Other

Industries Ltd.

Non-

Total

Preference Shares

Ordinary Shares

Paid-in

Retained

Comprehensive

Shareholders'

Controlling

Shareholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

  

Interests

  

Equity

Balance at December 31, 2022

$

9,500,000

$

950

$

20,459,859

$

3,679,920

$

(1,396,319)

$

22,744,410

$

$

22,744,410

Share-based compensation

119,721

119,721

119,721

Net loss

(303,375)

(303,375)

(303,375)

Foreign currency translation adjustments

20,099

20,099

20,099

Balance at March 31, 2023

$

9,500,000

$

950

$

20,579,580

$

3,376,545

$

(1,376,220)

$

22,580,855

$

$

22,580,855

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 

2024

2023

    

USD

    

USD

 

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$

(537,859)

$

(303,375)

Adjustments to reconcile net loss to net cash used in operating activities

Depreciation

87,871

35,560

Amortization

497,795

385,477

Share-based compensation

 

119,586

 

119,721

Provision for credit losses

 

18,412

 

56,932

Provision for defective return

671,184

460,258

Foreign exchange transaction loss

 

18,072

 

33,906

Deferred income tax benefit

 

(48,543)

 

(100,164)

Changes in operating assets and liabilities

 

 

Accounts receivable

(239,220)

1,671,959

Inventories

 

(1,627,111)

 

3,416,459

Prepayments and other current assets

 

(127,814)

 

(340,296)

Prepayments and other receivables – related parties

 

(5,377,506)

 

339,335

Other noncurrent assets

 

(364,657)

 

(43,769)

Income taxes

 

(419,174)

 

130,451

Accounts payable

 

(3,691)

 

(6,559,270)

Accounts payable-related parties

 

(3,022)

 

463,964

Operating lease liabilities

 

(344,389)

 

(421,099)

Accrued expenses and other current liabilities

 

(612,218)

 

(576,668)

Net cash used in operating activities

 

(8,292,284)

 

(1,230,619)

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Purchase of property and equipment

 

(609,035)

 

(74,173)

Net cash used in investing activities

 

(609,035)

 

(74,173)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net proceeds from (repayments of) revolving credit facility

 

4,483,476

 

(1,368,504)

Net cash provided by (used in) financing activities

 

4,483,476

 

(1,368,504)

EFFECT OF EXCHANGE RATE FLUCTUATION ON CASH

 

(40,332)

 

(13,920)

NET CHANGES IN CASH

 

(4,458,175)

 

(2,687,216)

CASH, BEGINNING OF PERIOD

 

7,777,241

 

10,067,428

CASH, END OF PERIOD

$

3,319,066

$

7,380,212

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

Cash paid during the period for interest

$

(213,953)

$

(250,263)

Cash paid during the period for income taxes

$

(486,521)

$

(2,263)

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

New addition on Right-of-use assets

$

$

(7,444,961)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

9

FGI INDUSTRIES LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Nature of business and organization

FGI Industries Ltd. (“FGI” or the “Company”) is a holding company organized on May 26, 2021, under the laws of the Cayman Islands. The Company has no substantive operations other than holding all of the outstanding equity of its operating subsidiaries as described below. The Company is a supplier of global kitchen and bath products and currently focuses on the following 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 repair and remodeling (“R&R”) activity and, to a lesser extent, new home or commercial construction. The Company sells its products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and independent dealers and distributors.

The accompanying unaudited condensed consolidated financial statements reflect the activities of FGI and each of the following entities after the Reorganization, as described below:

Name

    

Background

    

Ownership

FGI Industries, Inc.

   

  A New Jersey corporation

   

100% owned by FGI

(formerly named Foremost Groups, Inc.)

  Incorporated on January 5, 1988

  Sales and distribution in the United States

FGI Europe Investment Limited

  A British Virgin Islands holding company

100% owned by FGI

  Incorporated on January 1, 2007

FGI International, Limited

  A Hong Kong company

100% owned by FGI

  Incorporated on June 2, 2021

  Sales, sourcing and product development

FGI Canada Ltd.

  A Canadian company

100% owned by FGI Industries, Inc.

  Incorporated on October 17, 1997

  Sales and distribution in Canada

FGI Germany GmbH & Co. KG

  A German company

100% owned by FGI Europe Investment Limited

  Incorporated on January 24, 2013

  Sales and distribution in Germany

FGI China, Ltd.

  A PRC limited liability company

100% owned by FGI International, Limited

  Incorporated on August 19, 2021

  Sourcing and product development

FGI United Kingdom Ltd

  An UK company

100% owned by FGI Europe Investment Limited

  Incorporated on December 10, 2021

  Sales and distribution in UK

FGI Australasia Pty Ltd

  An Australian company

100% owned by FGI

  Incorporated on September 8, 2022

  Sales and distribution in Australia

Covered Bridge Cabinetry Manufacturing Co., Ltd

  A Cambodian company

100% owned by FGI

  Incorporated on April 21, 2022

  Manufacturing in Cambodia

Isla Porter LLC

  A New Jersey company

60% owned by FGI Industries, Inc.

  Formed on June 2, 2023

  Sales and distribution in the United States

 

10

Reorganization

On January 27, 2022, the following reorganization steps were collectively completed: (i) the incorporation of FGI International, Limited (“FGI International”) and FGI China, Ltd., (ii) FGI Industries, Inc. (formerly Foremost Groups, Inc.) (“FGI Industries”), which operates the kitchen and bath (“K&B”) sales and distribution business in the United States and, through its wholly-owned Canadian subsidiary, Foremost International Limited, in Canada, distributed 100% of the outstanding shares of stock of Foremost Kingbetter Food Equipment Inc. (“FKB”), which operates a separate furniture line of business, to Foremost Groups Ltd. (“Foremost”), FGI Industries’ sole shareholder; (iii) Foremost contributed the FKB shares to Foremost Home Inc. (“FHI”), a newly-formed wholly-owned subsidiary of Foremost; and (iv) Foremost contributed 100% of the outstanding shares of stock of each of FGI Industries, FGI Europe Investment Limited (“FGI Europe”), which, directly and, through its wholly-owned German subsidiary, FGI Germany GmbH & Co., operates the K&B sales and distribution business in Europe, and FGI International, which, directly and through its wholly-owned Chinese subsidiary, FGI China, Ltd., operates the K&B sales and distribution business in the remainder of the world, K&B product development and sourcing of K&B products in China, to the Company (collectively, the “Reorganization”), such that, immediately following the Reorganization, (x) Foremost owns 100% of the equity interests in each of the Company and FHI, (y) the Company owns 100% of the equity interests in each of FGI Industries, FGI Europe and FGI International, which collectively, and through subsidiaries, operate the K&B business worldwide (the “K&B Business”), and (z) FHI owns 100% of the equity interests in FKB.

On January 14, 2022 FGI Industries, a wholly-owned subsidiary of the Company, entered into a shared services agreement (the “FHI Shared Services Agreement”) with Foremost Home Industries, Inc., a newly-formed wholly-owned subsidiary of Foremost (“FHI”). Pursuant to the FHI Shared Services Agreement, FGI Industries provides FHI with general and administrative services, information technology systems services and human resources services, as well as warehouse space services and supply chain services in the United States. Under the FHI Shared Services Agreement, FHI will reimburse any reasonable and documented out-of-pocket fees incurred by FGI Industries as well as pay a service fee for each service. For warehouse services, FHI will pay FGI Industries a $500,000 annual fee as well as a fee equal to 4% of gross product sales of all products stored in such warehouses. For all other services provided, FHI will pay a service fee equal to the total costs incurred by FGI Industries for such service generally divided by the number of FHI employees relative to FGI Industries employees. The FHI Shared Services Agreement will have an initial term of one year and will renew automatically unless cancelled by either party upon the giving of at least 60 days in advance of the expiration of the then-current term.

On January 14, 2022, the Company entered into a shared services agreement (the “Worldwide Shared Services Agreement”) with Foremost Worldwide Co., Ltd. (“Foremost Worldwide”) pursuant to which Foremost Worldwide provides FGI Industries with general and administrative services, information technology system services and human resources services, in Taiwan. The terms of the Worldwide Services Agreement as between the service provider and recipient are substantially identical to those of the FHI Shared Services Agreement, including calculation of service fees and termination provisions, with Foremost Worldwide providing services and FGI Industries paying Foremost Worldwide for such services. On January 1, 2023, the Worldwide Services Agreement was amended and restated to include additional digital online and related services.

The assets and liabilities have been stated at historical carrying amounts. Only those assets and liabilities that are specifically identifiable to the K&B Business are included in the Company’s unaudited condensed consolidated balance sheets. The Company’s unaudited condensed consolidated statements of operations and comprehensive loss consist of all the revenues, costs and expenses of the K&B Business, including allocations to selling and distribution expenses, general and administrative expenses, and research and development expenses, and which were incurred by FGI but related to the K&B Business prior to the Reorganization.

All revenues and cost of revenues attributable to selling of K&B products were allocated to the Company. Operating expenses were allocated to the Company based on employees and activities that are involved in the K&B Business. Any expenses that were not directly attributable to any specific business were allocated to the Company based on the proportion of the number of employees of the K&B Business to the total number of employees of both the K&B Business and FHI.

11

The following table sets forth the revenues, cost of revenues and operating expenses that were irrelevant to the K&B Business allocated from FGI Industries to Foremost Home, Inc. for the three months ended March 31, 2024 and 2023, respectively.

For the Three Months Ended

March 31, 

2024

2023

    

USD

    

USD

 

Revenues

$

$

963,201

Cost of revenues

 

 

(767,963)

Gross profit

 

 

195,238

Selling and distribution expenses

 

 

58,160

General and administrative expenses

 

 

Research and development expenses

 

 

Income from operations

$

$

253,398

 

 

Since October 2022, the books and records of FGI International have been completely separated from Foremost Worldwide Co., Ltd., a wholly-owned subsidiary of Foremost.

Income tax liability is calculated based on a separate return basis as if the K&B Business had filed separate tax returns before the completion of the Reorganization. Immediately following the Reorganization, the K&B Business began to file separate tax returns and report taxation based on the actual tax return of each legal entity.

Management believes the basis and amounts of these allocations are reasonable. While the expenses allocated to the Company for these items are not necessarily indicative of the expenses that would have been incurred if the Company had been a separate, stand-alone entity, the Company does not believe that there is any significant difference between the nature and amounts of these allocated expenses and the expenses that would have been incurred if the Company had been a separate, stand-alone entity.

12

Note 2 — Summary of significant accounting policies

Liquidity

Historically, the Company finances its operations through internally generated cash, short-term loans and payables. As of March 31, 2024, the Company had approximately $3.3 million in cash and cash equivalents, which primarily consists of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. As further described in Note 8, as of the date of this quarterly report, our wholly owned subsidiary FGI Industries Inc. has obtained a waiver for the Corporate Borrower’s Audited Annual Statements, a U.S. standalone reporting obligation under the Credit Agreement with East West Bank, which were due by April 30, 2024.

If the Company is unable to realize its assets within the normal operating cycle of a twelve (12) month period, the Company may have to consider supplementing its available sources of funds through the following sources: 

· other available sources of financing from other banks and financial institutions;

· sales of additional securities to the public or other investors; and

· financial support from the Company’s shareholders.

Based on the above considerations, 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.

Basis of presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commissions (the “SEC”), regarding financial reporting, and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operation results.

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.

Subsidiaries are those entities which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at a meeting of directors.

Use of estimates and assumptions

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include the useful lives of property and equipment, allowance for credit losses, inventory reserve, accrued defective return, provision for contingent liabilities, revenue recognition, deferred taxes and uncertain tax position. Actual results could differ from these estimates.

Foreign currency translation and transaction

The functional currencies of the Company and its subsidiaries are the local currency of the country in which the subsidiaries operate, except for FGI International, which is incorporated in Hong Kong and adopted the United States Dollar (“U.S. Dollar” or “USD”) as its functional currency. The reporting currency of the Company is the U.S. Dollar.

13

Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the time of capital contributions. The results of operations and the cash flows denominated in foreign currencies are translated at the average rates of exchange during the reporting period. Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the unaudited condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the unaudited condensed consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in the unaudited condensed consolidated statements of changes in shareholders’ equity. Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency in the unaudited condensed consolidated statements of operations and comprehensive loss.

For the purpose of presenting the financial statements of subsidiaries using the Renminbi (“RMB”) as their functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 7.2550 and 7.1006 as of March 31, 2024 and December 31, 2023, respectively; shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 7.1672 and 6.8943 for the three months ended March 31, 2024 and 2023, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Canadian Dollar (“CAD”) as its functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 1.3246 and 1.3246 as of March 31, 2024 and December 31, 2023, respectively; shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 1.3246 and 1.3541 for the three months ended March 31, 2024 and 2023, respectively.

For the purpose of presenting the financial statements of the subsidiary using the Euro (“EUR”) as its functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 0.9260 and 0.9059 as of March 31, 2024 and December 31, 2023, respectively; shareholders’ equity accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 0.9175 and 0.9337 for the three months ended March 31, 2024 and 2023, respectively.

Reclassification

Certain prior year amounts have been reclassified to conform with the current year presentation, specifically the depreciation and amortization in the unaudited condensed consolidated statements of cash flows. These reclassifications have no effect on the condensed consolidated balance sheets and the unaudited condensed consolidated statements of operations and comprehensive loss previously reported.

Cash

Cash consists of cash on hand and demand deposits placed with banks or other financial institutions that have original maturities of three months or less. The Company did not have any cash equivalents as of March 31, 2024 and December 31, 2023.

Accounts receivable, net

Bills and trade receivables include trade accounts due from customers. In establishing the required allowance for expected credit losses, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers. Management reviews its receivables on a regular basis to determine if the expected credit losses are adequate and adjusts the allowance when necessary. Delinquent account balances are written off against allowance for credit losses after management has determined that the likelihood of collection is not probable.

14

Inventories, net

Inventories are stated at the lower of cost and net realizable value. Cost consists of purchase price and related shipping and handling expenses, and is determined using the weighted average cost method, based on individual products. The methods of determining inventory costs are used consistently from year to year. A provision for slow-moving items is calculated based on historical experience. Management reviews this provision annually to assess whether, based on economic conditions, it is adequate.

Prepayments

Prepayments are cash deposited or advanced to suppliers for the purchase of goods or services that have not been received or provided. This amount is refundable and bears no interest. Prepayments and deposits are classified as either current or non-current based on the terms of the respective agreements. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.

Property and equipment, net

Property and equipment are stated at cost net of accumulated depreciation and impairment. Depreciation is provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows:

    

Useful Life

Building

20 years

Leasehold Improvements

Lesser of lease term and
expected useful life

Machinery and equipment

 

35 years

Furniture and fixtures

 

35 years

Vehicles

 

5 years

Molds

 

35 years

 

 

Intangible assets, net

The Company’s intangible assets with definite useful lives primarily consist of software acquired for internal use. The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company typically amortizes its intangible assets with definite useful lives on a straight-line basis over the estimated useful lives of ten years.

Impairment for long-lived assets

Long-lived assets, including property and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever material events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset group may not be recoverable. The Company assesses the recoverability of an asset group based on the undiscounted future cash flows the asset group is expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset group plus net proceeds expected from disposition of the asset group, if any, are less than the carrying value of the asset group. If an impairment is identified, the Company would reduce the carrying amount of the asset group to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of March 31, 2024 and December 31, 2023, no impairment of long-lived assets was recognized.

15

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, net (“ROU assets”), operating lease liabilities — current and operating lease liabilities — noncurrent on the condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the duration of the lease term while lease liabilities represent the Company’s obligation to make lease payments in exchange for the right to use an underlying asset. ROU assets and lease liabilities are measured based on the present value of fixed lease payments over the lease term at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and initial direct costs incurred, and is reduced by any lease incentives received. The Company reviews its ROU assets as material events occur or circumstances change that would indicate the carrying amount of the ROU assets are not recoverable and exceed their fair values. If the carrying amount of an ROU asset is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.

As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate on the commencement date of the lease as the discount rate in determining the present value of future lease payments. The Company determines the incremental borrowing rate for each lease by using the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The Company’s lease terms may include options to extend or terminate the lease when there are relevant economic incentives present that make it reasonably certain that the Company will exercise that option. The Company accounts for any non- lease components separately from lease components.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Fair Value Measurement

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels of the fair value hierarchy are as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

Revenue recognition

The Company recognized revenue in accordance with Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers. Revenues are recognized when control of the promised goods or performance obligations for services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services.

16

The Company generates revenues from sales of kitchen and bath products, and recognizes revenue as control of its products is transferred to its customers, which is generally at the time of shipment or upon delivery based on the contractual terms with the Company’s customers. The Company’s customers’ payment terms generally range from 15 to 60 days of fulfilling its performance obligations and recognizing revenue.

The Company provides customer programs and incentive offerings, including co-operative marketing arrangements and volume-based incentives. These customer programs and incentives are considered variable consideration. The Company includes in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to the Company’s volume- based incentives. This determination is updated on a monthly basis.

Certain product sales include a right of return. The Company estimates future product returns at the time of sale based on historical experience and records a corresponding reduction in accounts receivable.

The Company records receivables related to revenue when it has an unconditional right to invoice and receive payment.

The Company’s disaggregated revenues are summarized as follows:

For the Three Months Ended

March 31, 

2024

2023

     

USD

     

USD

 

Revenues by product line

  

 

  

Sanitaryware

$

20,517,562

$

15,354,546

Bath Furniture

 

3,089,211

 

4,966,659

Shower System

5,760,869

5,030,557

Others

 

1,385,877

 

1,810,504

Total

$

30,753,519

$

27,162,266

 

 

Total revenues

Total assets

For the Three Months Ended

As of

As of

March 31, 

March 31, 

December 31,

2024

2023

2024

2023

    

USD

    

USD

USD

    

USD

 

Revenues/ total assets by geographic location

United States

$

19,597,905

$

17,532,126

$

42,304,776

$

38,401,665

Canada

 

7,881,081

 

6,520,984

 

15,822,000

 

17,850,709

Europe

3,195,188

3,109,156

605,910

528,068

Rest of World

 

79,345

 

 

9,902,428

 

8,964,488

Total

$

30,753,519

$

27,162,266

$

68,635,114

$

65,744,930

 

 

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and are included in selling and distribution expenses on the accompanying statement of operations. For the three months ended March 31, 2024 and 2023, shipping and handling expense was $261,989 and $103,714, respectively.

Share-based compensation

The Company accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). In accordance with ASC 718, the Company determines whether an award should be classified and accounted for as a liability award or an equity award. All the Company’s share-based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.

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The Company has elected to recognize share-based compensation using the straight-line method for all share-based awards granted over the requisite service period, which is the vesting period. The Company accounts for forfeitures as they occur in accordance with ASC 718. The Company, with the assistance of an independent third-party valuation firm, determines the fair value of the stock options granted to employees. The Black Scholes Model is applied in determining the estimated fair value of the options granted to employees and non-employees. The Company recognized share-based compensation $119,586 and $119,721 for the three months ended March 31, 2024 and 2023, respectively.

Income Taxes

Deferred taxes are recognized based on the future tax consequences of the differences between the carrying value of assets and liabilities and their respective tax bases. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

If, based upon all available evidence, both positive and negative, it is more likely than not (i.e., more than 50 percent likely) that such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three- year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.

The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. The Company believes that there is an increased potential for volatility in its effective tax rate because this threshold allows for changes in the income tax environment and, to a greater extent, the inherent complexities of income tax law in a substantial number of jurisdictions, which may affect the computation of its liability for uncertain tax positions.

The Company records interest and penalties on our uncertain tax positions in income tax expense.

As of March 31, 2024, the tax years ended December 31, 2020 through December 31, 2022 for FGI Industries, Inc. remain open for statutory examination by tax authority.

We record the tax effects of Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) related to our foreign operations as a component of income tax expense in the period in which the tax arises.

Non-controlling interests

The Company’s non-controlling interests represent the minority shareholders’ ownership interests related to the Company’s subsidiary, including 40% in Isla Porter LLC. The non-controlling interests are presented in the unaudited consolidated balance sheets, separate from equity attributable to the shareholders of the Company. Non-controlling interests in the results of operations of the Company are presented on the unaudited condensed consolidated statement of income and comprehensive income as allocations of the net income or loss for the period between non-controlling shareholders and the shareholders of the Company.

Comprehensive income (loss)

Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under U.S. GAAP are recorded as an element of equity but are excluded from net income. Other comprehensive income consists of a foreign currency translation adjustment resulting from the Company not using the U.S. Dollar as its functional currencies.

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Earnings (loss) per share

The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential ordinary shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023:

For the Three Months Ended

March 31, 

2024

2023

    

USD

    

USD

Numerator:

Net loss attributable to FGI Industries Ltd. Shareholders

$

(412,189)

$

(303,375)

Denominator:

 

 

Weighted-average number of ordinary shares outstanding basic

9,547,607

9,500,000

Potentially dilutive shares from outstanding options/warrants

Weighted-average number of ordinary shares outstanding — diluted

9,547,607

9,500,000

Loss per share — basic