FGI Industries Ltd. [FGI] Filings

10-Q 1 fgi-20230331x10q.htm 10-Q

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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, 2023

☐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 12, 2023 was 9,500,000.

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TABLE OF CONTENTS

		Page

Special Note Regarding Forward-Looking Statements		3

General		4

PART I- FINANCIAL INFORMATION		5

Item 1.	Financial Statements.	5

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.	6

	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2023 and 2022.	7

	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022.	8

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022.	9

	Notes to Unaudited Condensed Consolidated Financial Statements.	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	41

Item 4.	Controls and Procedures.	41

PART II- OTHER INFORMATION		43

Item 1.	Legal Proceedings.	43

Item 1A.	Risk Factors.	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	43

Item 3.	Defaults Upon Senior Securities.	44

Item 4.	Mine Safety Disclosures.	44

Item 5.	Other Information.	44

Item 6.	Exhibits.	44

SIGNATURES		45

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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 and 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 length and severity of the ongoing COVID-19 pandemic, including its 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

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●

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, 2021, 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.

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements.

FGI INDUSTRIES LTD.

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	6

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2023 and 2022	7

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022	8

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	9

Notes to Unaudited Condensed Consolidated Financial Statements	10-32

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FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	As of		As of
	March 31, 2023		December 31, 2022
	USD		USD
ASSETS

CURRENT ASSETS
Cash	$	7,380,212	$	10,067,428
Accounts receivable, net		12,106,710		14,295,859
Inventories, net		9,876,132		13,292,591
Prepayments and other current assets		2,928,377		2,588,081
Prepayments and other receivables – related parties		5,304,314		5,643,649
Total current assets		37,595,745		45,887,608

PROPERTY AND EQUIPMENT, NET		1,308,697		1,269,971

OTHER ASSETS
Operating lease right-of-use assets, net		16,263,039		9,815,572
Deferred tax assets, net		1,365,703		1,265,539
Other noncurrent assets		2,172,009		2,128,240
Total other assets		19,800,751		13,209,351
Total assets	$	58,705,193	$	60,366,930

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Short-term loans	$	8,426,548	$	9,795,052
Accounts payable		8,159,699		14,718,969
Accounts payable – related parties		568,406		104,442
Income tax payable		163,801		33,350
Operating lease liabilities – current		1,191,178		1,543,031
Accrued expenses and other current liabilities		3,003,691		3,580,359
Total current liabilities		21,513,323		29,775,203

OTHER LIABILITIES
Operating lease liabilities – noncurrent		14,611,015		7,847,317
Total liabilities		36,124,338		37,622,520

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, 2023 and 2022)		—		—
Ordinary shares ($0.0001 par value, 200,000,000 shares authorized, 9,500,000 and 7,000,000 shares issued and outstanding as of March 31, 2023 and 2022)		950		950
Additional paid-in capital		20,579,580		20,459,859
Retained earnings		3,376,545		3,679,920
Accumulated other comprehensive loss		(1,376,220)		(1,396,319)
Total shareholders’ equity		22,580,855		22,744,410
Total liabilities and shareholders’ equity	$	58,705,193	$	60,366,930

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

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FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	For the Three Months Ended
	March 31,
	2023		2022
		USD		USD
REVENUES	$	27,162,266	$	43,575,239

COST OF REVENUES		19,960,108		36,050,653

GROSS PROFIT		7,202,158		7,524,586

OPERATING EXPENSES
Selling and distribution		4,711,089		4,677,352
General and administrative		2,142,245		1,842,807
Research and development		351,751		313,681
Total operating expenses		7,205,085		6,833,840

(LOSS) INCOME FROM OPERATIONS		(2,927)		690,746

OTHER (EXPENSES) INCOME
Interest income		1,375		31
Interest expense		(249,637)		(131,752)
Other (loss) income, net		(19,557)		98,845
Total other (expenses), net		(267,819)		(32,876)

(LOSS) INCOME BEFORE INCOME TAXES		(270,746)		657,870

PROVISION FOR INCOME TAXES
Current		132,793		171,499
Deferred		(100,164)		(43,822)
Total provision for income taxes		32,629		127,677

NET (LOSS) INCOME		(303,375)		530,193

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation adjustment		20,099		(57,180)

COMPREHENSIVE (LOSS) INCOME	$	(283,276)	$	473,013

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
Basic		9,500,000		8,833,333
Diluted		9,508,750		10,941,667

EARNINGS PER SHARE
Basic	$	(0.03)	$	0.06
Diluted	$	(0.03)	$	0.05

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

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FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY


													Accumulated
							Additional		Parent’s				Other
	Preference shares		Ordinary shares				Paid-in		net		Retained		Comprehensive
	Shares	Amount	Shares		Amount		Capital		Investment		Earnings		Loss		Total
Balance at December 31, 2021	—	—	7,000,000	$	700		—	$	7,549,010		—		—	$	7,549,710
Consummation of separation transaction upon completion of reorganization	—	—	—		—	$	8,203,742		(7,549,010)		—	$	(654,732)		—
Share-Based compensation	—	—	—		—		39,812				—		—		39,812
Issuance of ordinary shares upon Initial Public Offering (“IPO”), net			2,500,000		250		12,370,550			$	—				12,370,800
Net income	—	—	—		—		—		—		530,193		—		530,193
Foreign currency translation adjustments	—	—	—		—		—		—		—		(57,180)		(57,180)
Balance at March 31, 2022	—	—	9,500,000	$	950	$	20,614,104		—	$	530,193	$	(711,912)	$	20,433,335


													Accumulated
							Additional		Parent’s				Other
	Preference shares		Ordinary shares				Paid-in		net		Retained		Comprehensive
	Shares	Amount	Shares		Amount		Capital		Investment		Earnings		Loss		Total
Balance at December 31, 2022	—	—	9,500,000	$	950		20,459,859	$	—		3,679,920		(1,396,319)	$	22,744,410
Share-Based compensation	—	—	—		—		119,721				—		—		119,721
Net loss	—	—	—		—		—		—		(303,375)		—		(303,375)
Foreign currency translation adjustments	—	—	—		—		—		—		—		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

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

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FGI INDUSTRIES LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Three Months Ended March 31,
	2023		2022
	USD		USD
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(303,375)	$	530,193
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization		35,560		68,957
Share-based compensation		119,721		39,812
Provision for doubtful accounts		56,932		67,644
Provision of (reversal of) defective return		460,258		(284,548)
Foreign exchange transaction gain (loss)		33,906		(20,460)
Deferred income taxes		(100,164)		(32,708)
Adjustment for Right of use assets		(89,093)		—
Changes in operating assets and liabilities
Accounts receivable		1,671,959		5,942,915
Inventories		3,416,459		(317,256)
Prepayments and other current assets		(340,296)		(1,055,788)
Prepayments and other receivables – related parties		339,335		(4,200,435)
Other noncurrent assets		(43,769)		(606,253)
Income taxes		130,451		(616,952)
Right-of-use assets		385,477		313,929
Accounts payable		(6,559,270)		(8,085,105)
Accounts payable-related parties		463,964		—
Operating lease liabilities		(332,006)		(311,233)
Accrued expenses and other current liabilities		(576,668)		(499,440)
Net cash used in operating activities		(1,230,619)		(9,066,727)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(74,173)		(24,383)
Net cash used in investing activities		(74,173)		(24,383)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from revolving credit facility		(1,368,504)		1,664,130
Net proceeds from issuance of ordinary shares in IPO		—		12,370,800
Excess payment over carrying value on long-lived assets acquisition from common-control affiliate
Net cash (used in) provided by financing activities		(1,368,504)		14,034,930

EFFECT OF EXCHANGE RATE FLUCTUATION ON CASH		(13,920)		(34,378)

NET CHANGES IN CASH		(2,687,216)		4,909,442
CASH, BEGINNING OF YEAR		10,067,428		3,883,896
CASH, END OF YEAR	$	7,380,212	$	8,793,338

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest		(250,263)		(130,954)
Cash paid during the period for income taxes		(2,263)		(784,689)

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.

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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
	● Incorporated on October 17, 1997	Industries, Inc.
	● Sales and distribution in Canada
FGI Germany GmbH & Co. KG	● A German company	100% owned by FGI Europe
	● Incorporated on January 24, 2013	Investment Limited
	● Sales and distribution in Germany
FGI China, Ltd.	● A PRC limited liability company	100% owned by FGI
	● Incorporated on August 19, 2021	International, Limited
	● Sourcing and product development
FGI United Kingdom Ltd	● An UK company	100% owned by FGI Europe
	● Incorporated on December 10, 2021	Investment Limited
	● 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	● A Cambodian company	100% owned by FGI
Manufacturing Co., Ltd	● Incorporated on April 21, 2022
	● Manufacturing in Cambodia

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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.

Immediately before and after the Reorganization, each of the Company, FGI Industries, FGI Europe and FGI International, and each of their respective subsidiaries was and remains ultimately controlled by Foremost. As such, the accompanying unaudited condensed consolidated financial statements include the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the K&B Business before the Reorganization. The unaudited condensed consolidated financial statements are presented as if the Company had been in existence and the Reorganization had been in effect during the entirety of the three months ended March 31, 2022. However, such presentation may not necessarily reflect the results of operations, financial position and cash flows if the K&B Business had actually existed on a stand-alone basis during the periods presented before the completion of the Reorganization.

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 income and comprehensive income consist of all the revenues, costs and expenses of the K&B Business, including allocations to selling and distribution expenses,

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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.

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 three months ended March 31, 2023 and 2022, respectively.


	For the Three Months Ended
	March 31,
	2023		2022
	USD		USD
Revenues	$	963,201	$	11,695,792
Cost of revenues		(767,963)		(9,466,904)
Gross profit		195,238		2,228,888
Selling and distribution expenses		58,160		(1,072,811)
General and administrative expenses		—		(194,647)
Research and development expenses		—		(131,288)
Income from operations	$	253,398	$	830,142

The following table sets forth the revenues, cost of revenues and operating expenses that were directly related to the K&B Business allocated from Foremost Worldwide Co., Ltd., a wholly-owned subsidiary of Foremost, to FGI International for three months ended March 31, 2023 and 2022, respectively.


	For the Three Months Ended
	March 31,
	2023		2022
	USD		USD
Revenues	$	—	$	19,994,801
Cost of revenues		—		(18,586,498)
Gross profit		—		1,408,303
Selling and distribution expenses		—		(297,678)
General and administrative expenses		—		(116,962)
Research and development expenses		—		(11,776)
Income from operations	$	—	$	981,887

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.

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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, 2023, the Company had approximately $7.4 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 the report, our wholly owned subsidiary FGI Industries Inc. has obtained an extension for the Corporate Borrower Annual Statements, a U.S. standalone reporting obligation under the Credit Agreement with East West Bank, which were due by April 30, 2023.

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 doubtful accounts, 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.

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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 income and comprehensive income.

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 6.8770 and 6.9653 as of March 31, 2023 and December 31, 2022, respectively; shareholders’ equity or parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 6.8943 and 6.3532 for the three months ended March 31, 2023 and 2022, 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 1.3541 and 1.3541 as of March 31, 2023 and December 31, 2022, respectively; shareholders’ equity or parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 1.3541 and 1.2697 for the three months ended March 31, 2023 and 2022, 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 0.9194 and 0.9338 as of March 31, 2023 and December 31, 2022, respectively; parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 0.9337 and 0.8887 for the three months ended March 31, 2023 and 2022, respectively.

Reclassification

Certain prior year amounts have been reclassified to conform with the current year presentation, specifically the interest expenses and accrued expenses and other current liabilities in consolidated statements of cash flow. These reclassifications have no effect on the consolidated balance sheets and results of operations previously reported.

Cash

Cash consists of cash on hand, demand deposits and time 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, 2023 and December 31, 2022.

Accounts receivable, net

Bills and trade receivables include trade accounts due from customers. In establishing the required allowance for doubtful accounts, 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 bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

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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		3 – 5 years
Furniture and fixtures		3 – 5 years
Vehicles		5 years
Molds		3 – 5 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, 2023 and December 31, 2022, no impairment of long-lived assets was recognized.

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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 unaudited 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.

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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,
	2023		2022
	USD		USD
Revenues by product line
Sanitaryware	$	15,354,546	$	26,794,255
Bath Furniture		4,966,659		10,115,812
Shower System		5,030,557		5,961,119
Others		1,810,504		704,053
Total	$	27,162,266	$	43,575,239


	Revenues				Total assets
	For the Three Months Ended				As of		As of
	March 31,				March 31,		December 31,
	2023		2022		2023		2022
	USD		USD		USD		USD
Revenues/ total asset by geographic location
United States	$	17,532,126	$	27,353,195	$	33,797,006	$	38,364,005
Canada		6,520,984		12,296,002		19,622,656		14,584,946
Europe		3,109,156		3,926,042		368,696		343,946
Rest of World		—		—		4,916,835		7,074,033
Total	$	27,162,266	$	43,575,239	$	58,705,193	$	60,366,930

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, 2023 and 2022, shipping and handling expense was $103,714 and $247,109, 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

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classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.

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 $119,720 and $39,812 for the three months ended March 31, 2023 and 2022, 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, 2023, the tax years ended December 31, 2019 through December 31, 2021 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.

Comprehensive income

Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under US 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.

Earnings per share

The Company computes earnings 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

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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, 2023 and 2022:


	For the Three Months Ended		For the Three Months Ended
	March 31,		March 31,
		2023		2022
	USD		USD
Numerator:
Net income attributable to FGI Industries Ltd	$	(303,375)	$	530,193

Denominator:
Weighted-average number of ordinary shares outstanding — basic		9,500,000		8,833,333
Potentially dilutive shares from outstanding options/warrants		8,750		2,108,334
Weighted-average number of ordinary shares outstanding — diluted		9,508,750		10,941,667

Earnings per share — basic	$	(0.03)	$	0.06
Earnings per share — diluted	$	(0.03)	$	0.05

Potential ordinary shares that have an anti-dilutive effect are excluded from the calculation of diluted EPS 916,682 and 2,925,000 number of options and warrants, respectively, were excluded from diluted EPS because their effects were anti-dilutive.

Segment reporting

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for detailing the Company’s business segments.

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance became effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. In November 2019, the FASB issued ASU 2019-10, which finalized the delay of such effective date to fiscal years beginning after December 15, 2022 for private and all other companies, including emerging growth companies. As an emerging growth company, the Company adopted this guidance from January 1, 2023 and did not have an impact on its unaudited condensed consolidated financial statements.

The Company considers the applicability and impact of all ASUs. ASUs not listed above were assessed and determined not to be applicable.

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Note 3 — Accounts receivable, net

Accounts receivable, net consisted of the following:


	As of		As of
	March 31, 2023		December 31, 2022
	USD		USD
Accounts receivable	$	14,658,581	$	16,330,540
Allowance for doubtful accounts		(495,775)		(438,843)
Accrued defective return and discount		(2,056,096)		(1,595,838)
Accounts receivable, net

FGI Industries Ltd. [FGI] Filings
10-Q	[2023-05-15]
10-K	[2023-04-17]
10-Q	[2022-11-14]
10-Q	[2022-08-15]
10-Q	[2022-05-13]
10-K	[2022-03-31]
S-1	[2021-09-10]