The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
79,762
78,640
覈銷
(190,650)
(272,604)
期末餘額
$
133,991
$
244,879
Operating Activities
截至九個月結束時 九月三十日,
截至年末 12月31日，
2024
2023
美元指數
美元
期初餘額
$
744,284
$
1,595,838
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
Information relating to the lease term and discount rate are as follows:
As of September 30, 2024
As of December 31, 2023
Weighted-average remaining lease term
Operating leases
9.0 years
9.4 years
Weighted-average discount rate
Operating leases
5.7
%
5.7
%
As of September 30, 2024, the maturities of operating lease liabilities were as follows:
For the 12 months ending September 30,
2025
$
2,538,099
2026
2,635,492
2027
2,650,249
2028
2,301,432
2029
1,682,400
Thereafter
5,765,659
Total lease payments
17,573,331
Less: imputed interest
(3,729,584)
Present value of lease liabilities
$
13,843,747
Note 8 — Short-term loans
Bank loan
Our wholly-owned subsidiary FGI Industries has a line of credit agreement (the “Credit Agreement”) with East West Bank, which is collateralized by all assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately 49.89% of the voting control of Foremost. The current amount of maximum borrowings is $18,000,000 and the Credit Agreement has a maturity date of December 21, 2024. This is an assets-based line of credit, the borrowing limit is calculated based on certain percentage of accounts receivable and inventory balances.
Pursuant to the Credit Agreement, FGI Industries is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter; (b) an effective tangible net worth (defined as total book net worth plus minority interest, less amounts due from officers, shareholders and affiliates, minus intangible assets and accumulated amortization, plus debt subordinated to East West Bank) of not less than $10,000,000, tested at the end of each fiscal quarter, on a consolidated basis; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth, which is defined as total book net worth plus minority interest, less loans to officers, shareholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter, on a consolidated basis. As of September 30, 2024, FGI Industries was in compliance with these financial covenants.
The loan bears interest at rate equal to, at the Company’s option, either (i) 0.25 percentage points less than the Prime Rate quoted by the Wall Street Journal or (ii) the SOFR Rate (as administered by CME Group Benchmark Administration Limited and displayed by Bloomberg LP) plus 2.20% per annum (in either case, subject to a minimum rate of 4.500% per annum). The interest rate as of September 30, 2024, and December 31, 2023 was 7.75% and 8.25%, respectively.
Each sum of borrowings under the Credit Agreement is deemed due on demand and is classified as a short-term loan. The outstanding balance of such loan was $9,161,641 and $6,959,175 as of September 30, 2024, and December 31, 2023, respectively.
HSBC Canada Bank Loan / Foreign Exchange Facility
FGI Canada Ltd. has a line of credit agreement with HSBC Canada (the “Canadian Revolver”). The revolving line of credit with HSBC Canada allows for borrowing up to CAD7,500,000 (USD5,474,453 as of the September 30, 2024 exchange rate). This is an assets-based line of credit, the borrowing limit is calculated based on certain percentage of accounts receivable and inventory balances. Pursuant to the Canadian Revolver, FGI Canada Ltd. is required to maintain (a) a debt to tangible net worth ratio of no more than 3.00 to 1.00; and (b) a ratio of current assets to current liabilities of at least 1.25 to 1.00. The loan bears interest at a rate of Prime rate plus 0.50%. As of September 30, 2024, FGI Canada Ltd. was not in compliance with certain financial covenants in the Canadian Revolver related to its debt to tangible net worth ratio. As of the date of this quarterly report, FGI Canada Ltd. has requested a waiver from the lender, which is being processed by the lender. In the absence of an executed waiver, the Company has classified the outstanding balance of the loan as a current liability on the unaudited condensed consolidated balance sheet as of September 30, 2024. The Company has sufficient liquidity to repay the loan in full if immediate settlement were required.
Borrowings under this line of credit amounted to $1,026,392 and $0 as of September 30, 2024, and December 31, 2023, respectively. The facility maturesat the discretion of HSBC Canada upon 60 days’ notice.
FGI Canada Ltd. also has a revolving foreign exchange facility with HSBC Canada of up to a permitted maximum of USD3,000,000. The advances are available to purchase foreign exchange forward contracts from time to time up to six months, subject to an overall maximum aggregate USD Equivalent outstanding face value not exceeding $3,000,000.
CTBC Credit Facility
On January 25, 2024, FGI International entered into an omnibus credit line (the “CTBC Credit Line”) with CTBC Bank Co., Ltd. (“CTBC”). Under the CTBC Credit Line, FGI International may borrow, from time to time, up to $2.3 million, with borrowings limited to 90% of FGI International’s export “open account” trade receivables. The CTBC Credit Line will bear interest at a rate of “Base Rate”, which is based on monthly or quarterly Taipei Interbank Offered in effect from time to time, plus 120 base points and handling fees, unless otherwise agreed to by the parties. The CTBC Credit Line is unsecured and is fully guaranteed by the Company and partially guaranteed by Liang Chou Chen. Borrowings under this line of credit amounted to $2,297,464 and $0 as of September 30, 2024 and December 31, 2023, respectively.
Note 9 — Shareholders’ Equity
FGI was incorporated in the Cayman Islands on May 26, 2021 in connection with the planned Reorganization, as described in Note 1. The Company is authorized to issue 50,000,000 ordinary shares with a par value of $0.001 per share.
On January 27, 2022, the Company completed the Reorganization upon the consummation of the initial public offering (“IPO”). After the Reorganization and the IPO, the Company’s authorized share capital is $21,000 divided into (i) 200,000,000 Ordinary Shares of par value of $0.0001 each, and (ii) 10,000,000 Preference Shares of par value of $0.0001 each; 9,500,000 ordinary shares were issued and outstanding accordingly. The Company believes it is appropriate to reflect
these share issuances as nominal share issuances on a retroactive basis similar to a stock split pursuant to ASC 260. The Company has retroactively adjusted all shares and per share data for all the periods presented.
Initial Public Offering
On January 27, 2022, the Company consummated its IPO of 2,500,000 units (“Units”), each consisting of (i) one ordinary share, $0.0001 par value per share, of the Company (the “Shares”), and (ii) one warrant of the Company (the “Warrants”) entitling the holder to purchase one Share at an exercise price of $6.00 per Share. The Shares and Warrants were issued separately in the offering, and may be transferred separately immediately upon issuance. The Units were sold at a price of $6.00 per Unit.The Warrants included in the units were immediately exercisable following the consummation of the offering, have an exercise price equal to the initial public offering price, and expire five years from the date of issuance.
For the purposes of covering any over-allotments in connection with the distribution and sale of the Units, the Company granted a 45-day option to the underwriters to purchase (the “Over-allotment Option”), in the aggregate, up to 375,000 ordinary shares (the “Option Shares”) and Warrants to purchase up to 375,000 ordinary shares (the “Option Warrants”), which was exercisable in any combination of Option Shares and/or Option Warrants at the per Share purchase price and/or the per Warrant purchase price, respectively. On January 25, 2022, the underwriters exercised in full their option to purchase up to an additional 375,000 Warrants at the price of $0.01 per Option Warrant. Management determined that these Warrants meet the definition of a derivative under ASC 815-40; however, they fall under the scope exception, which states that contracts issued that both a) indexed to its own stock; and b) classified in shareholders' equity are not considered derivatives. The Warrants were recorded at their fair value on the date of grant as a component of equity.
The aggregated fair value of these Warrants on January 27, 2022 was $4.16 million. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying stock of $1.448; risk free rate of 1.66%; expected term of five years; exercise price of the warrants of $6.00; volatility of 44.00%; and expected future dividends of $0. As of the date of this report, 2,875,000 warrants were issued and outstanding; and none of the warrants has been exercised.
The gross proceeds from the IPO were approximately $15.0 million with net proceeds of approximately $12.4 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. Immediately following the consummation of the IPO, there were an aggregate of 9,500,000 ordinary shares issued and outstanding. As a result of the IPO, the ordinary shares and Warrants now trade on the Nasdaq Capital Market under the symbol “FGI” and “FGIWW”, respectively.
Public Offering Warrants
In connection with and upon the closing of the IPO on January 27, 2022, the Company issued warrants equal to 2% of the Shares issued in the IPO, or 50,000 ordinary shares, to the representative of the underwriters for the IPO. The warrants carry a term of five years, shall not be exercisable for a period of 180 days from the closing of the IPO and shall be exercisable at a price equal to the IPO price per share. Management determined that these warrants meet the definition of a derivative under ASC 815-40; however, they fall under the scope exception, which states that contracts issued that are both a) indexed to its own stock; and b) classified in shareholders' equity are not considered derivatives. The warrants were recorded at their fair value on the date of grant as a component of equity.
The aggregated fair value of these IPO warrants on January 27, 2022 was $0.1 million. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying stock of $1.448; risk free rate of 1.66%; expected term of five years; exercise price of the warrants of $6.00; volatility of 44.00%; and expected future dividends of $0. As of the date of this report, warrants exercisable for 50,000 shares were issued and outstanding; and none of the warrants have been exercised.
Note 10 — Stock-based compensation
2021 Equity Plan and Employee Stock Purchase Plan
On October 7, 2021, the board of directors adopted the 2021 Equity Incentive Plan (the “2021 Equity Plan”). The 2021 Equity Plan permits the grant of equity and equity-based incentive awards, including non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. The purpose of the 2021 Equity Plan is to attract and retain the best available personnel for positions of responsibility within the
Company, to provide additional incentives to them to align their interests with those of the Company’s shareholders and to thereby promote the Company’s long-term business success.
On October 7, 2021, the board approved the adoption of the FGI Industries Ltd. Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s shareholders on October 7, 2021, and became effective on the effective date of the Company’s consummation of the IPO of its ordinary shares. The ESPP offers eligible employees the opportunity to acquire a stock ownership interest in the Company through periodic payroll deductions that will be applied towards the purchase of ordinary shares at a discount from the then-current market price.
The board set the maximum aggregate number of ordinary shares reserved and available pursuant to the 2021 Equity Plan at 1,500,000 shares. The number of ordinary shares reserved for issuance under our 2021 Equity Plan will automatically increase on the first day of each year, commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to the lesser of (a) 4.5% of the total number of ordinary shares outstanding on December 31 of the immediately preceding calendar year, (b) 600,000 ordinary shares, or (c) such lesser number of shares as determined by the Board. The Equity Plan became effective on September 28, 2021.
The Company believes the options or awards granted contain an explicit service condition and/or performance condition. Under ASC 718-10-55-76, if the vesting (or exercisability) of an award is based on the satisfaction of both a service and performance condition, the entity must initially determine which outcomes are probable and recognize the compensation cost over the longer of the explicit or implicit service period. Because an initial public offering generally is not considered to be probable until the initial public offering is effective, no compensation cost was recognized until the IPO occurred.
Restricted shares units (“RSU”)
In January 2022, the Company issued 183,750 restricted share units (“RSUs”) to certain officers and employees under the 2021 Equity Plan as compensation awards. The fair value for these RSUs was $716,625 based on the closing share price of $3.90 as of January 27, 2022. These awards will vest in three equal installments on each anniversary of the grant date over three years. As of September 30, 2024, 122,500 of these granted RSUs were vested.
In April 2022, the Company issued 8,750 RSUs to an employee under the 2021 Equity Plan as compensation awards. The fair value for these RSUs was $22,050 based on the closing share price of $2.52 as of April 13, 2022. These awards will vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining shares will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service, commencing on the grant date. As of September 30, 2024, 7,049 of these granted RSUs were vested.
In May 2022, the Company issued 87,611 RSUs under the 2021 Equity Plan to Company officers to incentivize their performance and continue to align their interests with the Company’s shareholders. All these awards are subjected to performance conditions through December 31, 2024. The grant date fair value for these RSUs was $198,000 based on the closing share price of $2.26 as of May 11, 2022. If the maximum performance is met, the Company will issue an additional 43,805 RSUs under these awards with a grant date fair value of $99,000. As of September 30, 2024, all RSUs were canceled and none of them were vested.
In May 2022, the Company issued 16,363RSUs to its independent directors under the 2021 Equity Plan as compensation award. All these awards are subjected to performance conditions through December 31, 2024. The fair value for these RSUs was $36,000 based on the closing share price of $2.20 as of May 17, 2022. As of September 30, 2024, none of these RSUs were vested.
In March 2023, the Company issued 96,635 RSUs under the 2021 Equity Plan to Company officers to incentivize their performance and continue to align their interests with the Company’s shareholders. All these awards are subjected to performance conditions through December 31, 2025. The grant date fair value for these RSUs was $201,000 based on the closing share price of $2.08 as of March 29, 2023. If the maximum performance is met, the Company will issue an additional 48,317 RSUs under these awards with a grant date fair value of $100,500. As of September 30, 2024, none of these RSUs were vested.
In March 2023, the Company issued 17,349RSUs to its independent directors under the 2021 Equity Plan as compensation award. All these awards are subjected to performance conditions through December 31, 2025. The grant date fair value for these RSUs was $36,000 based on the closing share price of $2.08 as of March 29, 2023. As of September 30, 2024, 8,675 of these RSUs were vested.
In March 2024, the Company issued 413,354 RSUs under the 2021 Equity Plan to the Company’s directors, officers and employees. All these awards are subjected to performance conditions through December 31, 2026. The grant date fair value for these RSUs was $620,031 based on the closing share price of $1.50 as of March 22, 2024. If the maximum performance is met, the Company will issue an additional 206,677 RSUs under these awards with a grant date fair value of $310,016. As of September 30, 2024, none of these RSUs were vested.
In April 2024, the Company issued 13,333 RSUs under the 2021 Equity Plan to one of the Company’s employees. This award is subject to performance obligations through December 31, 2024. The grant date fair value for these RSUs was $20,000 based on the closing share price of $1.50 as of April 1, 2024. If the maximum performance is met, the Company will issue an additional 6,667 RSUs under these awards with a grant date fair value of $10,000. As of September 30, 2024, none of these RSUs were vested.
The following is a summary of the restricted shares granted:
Restricted shares grants
Shares
Non-vested as of January 1, 2023
296,474
Granted
113,984
Vested
(66,111)
Canceled
(87,611)
Non-vested as of December 31, 2023
256,736
Granted
426,687
Vested
(72,112)
Canceled
—
Non-vested as of September 30, 2024
611,311
The following is a summary of the status of restricted shares as of September 30, 2024:
Outstanding Restricted Shares
Fair Value per share
Number
Average Remaining Amortization Period (Years)
$
3.90
61,250
0.33
$
2.52
1,701
0.50
$
2.20
16,363
0.25
$
2.08
96,635
1.50
$
2.08
8,675
1.50
$
1.50
413,354
2.50
$
1.50
13,333
0.25
611,311
Share options (“Options”)
In March 2022, the Company issued 98,747 share options under the 2021 Equity Plan with an exercise price per share of $3.07 and a contractual life of 10 years to the Company’s executive officers and directors to incentivize their performance and continue to align their interests with the Company’s shareholders. The grant date fair value for these options was $141,401 determined using the Black-Scholes simplified method at the per option fair value of $1.43. All these options will vest as to one-third of the options on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service. As of September 30, 2024, 82,289 of these granted options were vested.
In April 2022, the Company issued 97,371 share options under the 2021 Equity Plan with an exercise price per share of $2.52 and a contractual life of 10 years to the Company’s employees to incentivize their performance and continue to align their interests with the Company’s shareholders. The grant date fair value for these options was $114,972 determined using the Black-Scholes simplified method at the per option fair value of $1.18. All these options will vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive
equal monthly installments upon completion of each additional month of service. As of September 30, 2024, 78,438 of these granted options were vested.
In May 2022, the Company issued 159,881 share options under the 2021 Equity Plan with an exercise price per share of $2.26 and a contractual life of 10 years to Company officers to incentivize their performance and continue to align their interests with the Company’s shareholders. The fair value for these options was $171,462 determined using the Black-Scholes simplified method at the per option fair value of $1.07. The number of options granted were subject to performance conditions through December 31, 2022, which could result in additional options awarded if maximum performance metrics were met. In addition to the performance criteria, the options vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service, commencing on the grant date. The options paid out at threshold under the performance metrics, and no additional options were awarded. As of September 30, 2024, 124,352 of these granted options were vested.
In March 2023, the Company issued 158,976 share options under the 2021 Equity Plan with an exercise price per share of $2.08 and a contractual life of 10 years to Company officers to incentivize their performance and continue to align their interests with the Company’s shareholders. The grant date fair value for these options was $201,000 determined using the Black-Scholes simplified method at the per option fair value of $1.26. All these options are subjected to performance conditions through December 31, 2023, which could result in additional options awarded if maximum performance metrics are met. In addition to the performance criteria, the options will vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service, commencing on the grant date. As of September 30, 2024, all options were canceled and none of them were vested.
In March 2024, the Company issued 529,635 share options under the 2021 Equity Plan with an exercise price per share of $1.50 and a contractual life of 10 years to Company officers to incentivize their performance and continue to align their interests with the Company’s shareholders. The grant date fair value for these options was $447,000 determined using the Black-Scholes simplified method at the per option fair value of $0.84. All these options are subjected to performance conditions through December 31, 2024, which could result in additional options awarded if maximum performance metrics are met. In addition to the performance criteria, the options will vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service, commencing on the grant date. As of September 30, 2024, none of these granted options were vested.
In April 2024, the Company issued 167,994 share options under the 2021 Equity Plan with an exercise price per share of $1.32 and a contractual life of 10 years to the Company’s employees to incentivize their performance and continue to align their interests with the Company’s shareholders. The grant date fair value for these options was $126,163 determined using the Black-Scholes simplified method at the per option fair value of $0.75. All these options will vest as to one-third of the shares on the one-year anniversary of the grant date. The remaining options will vest in a series of 24 successive equal monthly installments upon completion of each additional month of service. As of September 30, 2024, none of these granted options were vested.
The options granted to employees are measured based on the grant date fair value of the equity instrument. They are accounted for as equity awards and contain service or performance vesting conditions. The following table summarizes the Company’s employee share option activities:
Number of Options
Weighted Average Exercise Price
Weighted Average Grant Date Fair Value
Weighted Average Remaining Contractual Term
Average Intrinsic Value
USD
USD
Years
USD
Share options outstanding at December 31, 2023
355,999
2.56
1.20
9.35
—
Granted
697,629
1.46
0.82
10.00
—
Forfeited
—
N/A
N/A
N/A
N/A
Exercised
—
N/A
N/A
N/A
N/A
Expired
—
N/A
N/A
N/A
N/A
Share options outstanding at September 30, 2024
1,053,628
1.83
0.95
8.84
—
Vested and exercisable at September 30, 2024
285,079
2.57
1.21
7.54
—
For the nine months ended September 30, 2024 and 2023, the total fair value of options awarded was $573,163 and $201,000, respectively.
The aggregate intrinsic value in the table above represents the difference between the exercise price of the awards and the fair value of the underlying Ordinary Shares at each reporting date, for those awards that had exercise price below the estimated fair value of the relevant Ordinary Shares.
Fair value of options
The Company used the Black-Scholes simplified method for the nine months ended September 30, 2024 and 2023. The assumptions used to value the options granted to employees were as follows:
April 2024
March 2024
March 2023
Risk-free interest rate (%)
4.54
4.21
3.65
Expected volatility range (%)
55.32
55.11
63.36
Fair market value per ordinary share as at grant dates
$
1.32
$
1.50
$
2.08
The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected volatility is estimated based on the volatility of ordinary shares or common stock of several comparable companies in the same industry. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the future.
The Company has elected to recognize share-based compensation expense using a straight-line method for all the employee equity awards granted with graded vesting based on service conditions, provided that the amount of compensation cost recognized at any date is at least equal to the portion of the grant date fair value of the equity awards that are vested at that date.
The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:
For the Nine Months Ended September 30,
2024
2023
USD
USD
Selling and distribution expenses
$
116,584
$
93,746
General and administrative expenses
420,013
238,147
Total share-based compensation expenses
$
536,597
$
331,893
As of September 30, 2024, there was $1,280,193 in total unrecognized employee share-based compensation expense related to unvested options and RSUs, which may be adjusted for actual forfeitures occurring in the future. Total unrecognized compensation cost may be recognized over a weighted-average period of 2.14 years.
Note 11 — Income taxes
The source of pre-tax income and the components of income tax expense are as follows:
Reconciliations between taxes at the U.S. federal income tax rate and taxes at the Company’s effective income tax rate on earnings before income taxes are as follows:
For the Nine Months Ended September 30,
2024
2023
%
%
Federal statutory rate
21.0
21.0
Increase (decrease) in tax rate resulting from:
State and local income taxes, net of federal benefit
6.1
(1.7)
Foreign operations
(16.2)
21.5
Permanent items
(10.8)
0.7
Deferred adjustments
(0.1)
2.1
Others
0.7
0.1
Effective tax rate
0.7
43.7
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the consolidated balance sheets:
As of September 30, 2024
As of December 31, 2023
USD
USD
Deferred tax assets
Allowance for credit losses
$
31,996
$
58,476
Other reserve
108,814
61,371
Accrued expenses
146,771
143,823
Lease liability
1,541,398
1,769,328
Charitable contributions
8,306
8,181
Business interest limitation
519,320
242,862
Net operating loss – federal
602,265
310,099
Net operating loss – state
102,852
27,337
Other
195,389
66,063
Total deferred tax assets
3,257,111
2,687,540
Less: valuation allowance
—
—
Net deferred tax assets
3,257,111
2,687,540
Deferred tax liabilities
Fixed assets
1,471,219
1,728,364
Intangibles
(233,765)
(209,657)
Total deferred tax liabilities
1,237,454
1,518,707
Deferred tax assets, net of deferred tax liabilities
$
2,019,657
$
1,168,833
The deferred tax assets related to the Company’s net operating losses of $4,520,993 (Federal $2,867,922 and States $1,653,071) and $1,836,077 (Federal $1,476,655 and States $359,422) as of September 30, 2024 and December 31, 2023, respectively. The Federal Net Operating losses have no expiration date. The States Net Operating losses have either 20 years or no expiration date. The Company had no material unrecognized tax benefits at September 30, 2024 or, December 31, 2023. The Company has not taken any tax positions for which it is reasonably possible that unrecognized tax benefits will significantly increase within the next 12 months.
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax. There was no material impact of the IR Act on the Company’s consolidated financial statements.
Note 12 — Related party transactions and balances
Sales to a related party
Name of Related Party
Relationship
Nature of Transactions
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
USD
USD
USD
USD
Foremost Worldwide Co., Ltd.
An entity under common control
Sales
$
408,977
$
—
$
408,977
$
—
$
408,977
$
—
$
408,977
$
—
Purchases from related parties
Name of Related Party
Relationship
Nature of Transactions
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
USD
USD
USD
USD
Focal Capital Holding Limited
An entity under common control
Purchase
$
1,903,797
$
980,910
$
4,658,602
$
5,950,640
Foremost Worldwide Co., Ltd.
An entity under common control
Purchase
1,883,192
717,188
5,837,250
1,755,577
Rizhao Foremost Woodwork Manufacturing Co., Ltd.
An entity under common control
Purchase
15,874
—
39,943
—
F.P.Z. Furniture (Cambodia) Co., Ltd.
An entity under common control
Purchase
—
575,060
—
575,060
Foremost Australasia Pty Ltd
An entity under common control
Purchase
—
413,339
—
413,339
$
3,802,863
$
2,686,497
$
10,535,795
$
8,694,616
The ending balance of such transactions as of September 30, 2024 and December 31, 2023 are listed of the following:
Shared Service and Miscellaneous expenses – related party
FGI Industries is party to the FHI Shared Services Agreement with FHI. Total amounts provided to FHI under the FHI Share Services Agreement were $189,081 and $178,249 for the three months ended September 30, 2024 and 2023, respectively, and $552,043 and $655,230 for the nine months ended September 30, 2024 and 2023, respectively, which were booked under selling and distribution expenses and administration expenses.
FGI is party to the Worldwide Shared Services Agreement with Foremost Worldwide. Total amounts provided from Foremost Worldwide under the Worldwide Shared Services Agreement were $82,908 and $72,408 for the three months ended September 30, 2024 and 2023, respectively, and $217,504 and $217,650 for the nine months ended September 30, 2024 and 2023, respectively.
Other Receivables (Payables) — related parties
Name of Related Party
Relationship
Nature of Transactions
As of September 30, 2024
As of December 31, 2023
USD
USD
Foremost Home Inc. (“FHI”)
An entity under common control
Shared services and Miscellaneous expenses
2,215,919
1,183,612
Foremost Worldwide Co., Ltd.
An entity under common control
Shared services and Miscellaneous expenses
(45,026)
(251,008)
Focal Capital Holding Limited
An entity under common control
Shared services and Miscellaneous expenses
(11,306)
—
F.P.Z. Furniture (Cambodia) Co., Ltd.
An entity under common control
Shared services and Miscellaneous expenses
(257,130)
—
$
1,902,457
$
932,604
Loan guarantee by a related party
Liang Chou Chen holds approximately 49.89% of the voting control of Foremost, the Company’s majority shareholder and is a guarantor of the loans under the Credit Agreement and under the CTBC Credit Line. See Note 8 for details.
Note 13 — Concentrations of risks
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. The Federal Deposit Insurance Corporation pays compensation up to a limit of USD250,000 if the bank with which a depositor holds its eligible deposit fails. As of September 30, 2024, a cash balance of USD372,731 was maintained at financial institutions in the United States, of which USD93,835 was subject to credit risk. The Canadian Deposit Insurance Corporation pays compensation up to a limit of CAD100,000 (approximately USD73,000) if the bank with
which an individual/a company holds its eligible deposit fails. As of September 30, 2024, a cash balance of CAD205,760 (USD150,190) was maintained at financial institutions in Canada, of which CAD105,760 (USD77,197) was subject to credit risk. The Taiwan Central Deposit Insurance Corporation pays compensation up to a limit of New Taiwan Dollar 3,000,000 (approximately USD93,000) if the bank with which an individual/a company holds its eligible deposit fails. As of September 30, 2024, an aggregated cash balance of USD1,535,430 was maintained at financial institutions in Taiwan, of which USD1,221,203 was subject to credit risk. The European Banking Authority pays compensation up to a limit of EUR100,000 (approximately USD112,000) if the bank with which an individual/a company holds its eligible deposit fails. As of September 30, 2024, cash balance of EUR366,827 (USD409,588) was maintained at financial institutions in Europe, of which EUR266,827 (USD297,931) was subject to credit risk. As of September 30, 2024, cash balance of USD142,166 was maintained at financial institutions in Kingdom of Cambodia, all of which was subject to credit risk. The Australian Prudential Regulation Authority pays compensation up to a limit of AUD250,000 (approximately USD172,592) if the bank with which an individual/a company holds its eligible deposit fails. As of September 30, 2024, cash balance of AUD292,986 (USD202,269) was maintained at financial institutions in Australia, of which AUD42,986 (USD29,676) was subject to credit risk. The Reserve Bank of India pays compensation up to a limit of INR500,000 (approximately USD5,973) if the bank with which an individual/a company holds its eligible deposit fails. As of September 30, 2024, cash balance of INR1,566,366 (USD18,712) was maintained at financial institutions in India, of which INR1,066,366 (USD12,739) was subject to credit risk. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
The Company is also exposed to risk from its accounts receivable and other receivables. These assets are subjected to credit evaluations. An allowance has been made for estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.
Customer concentration risk
For the three months ended September 30, 2024, two customers accounted for 19.5% and 15.1% of the Company’s total revenue, respectively. For the three months ended September 30, 2023, three customers accounted for 14.5%, 14.3% and 13.9% of the Company’s total revenue, respectively. No other customer accounted for more than 10% of the Company’s revenue for the three months ended September 30, 2024 and 2023.
For the nine months ended September 30, 2024, two customers accounted for 17.5% and 16.8% of the Company’s total revenue, respectively. For the nine months ended September 30, 2023, two customers accounted for 17.4% and 16.6% of the Company’s total revenue, respectively. No other customer accounted for more than 10% of the Company’s revenue for the nine months ended September 30, 2024 and 2023.
As of September 30, 2024, three customers accounted for 27.6%, 15.0% and 10.8% of the total balance of accounts receivable, respectively.As of December 31, 2023, four customers accounted for 27.2%, 19.0%, 12.0% and 11.1% of the total balance of accounts receivable, respectively. No other customer accounted for more than 10% of the Company’s accounts receivable as of September 30, 2024 and December 31, 2023.
Vendor concentration risk
For the three months ended September 30, 2024, Tangshan Huida Ceramic Group Co., Ltd (“Huida”) accounted for 57.3% of the Company’s total purchases, respectively. For the three months ended September 30, 2023, Huida accounted for 55.8% of the Company’s total purchases, respectively. No other supplier accounted for more than 10% of the Company’s total purchases for the three months ended September 30, 2024 and 2023.
For the nine months ended September 30, 2024, Tangshan Huida Ceramic Group Co., Ltd (“Huida”) accounted for 55.6% of the Company’s total purchases. For the nine months ended September 30, 2023, Huida and another vendor accounted for 54.5% and 10.1% of the Company’s total purchases, respectively. No other supplier accounted for more than 10% of the Company’s total purchases for the nine months ended September 30, 2024 and 2023.
As of September 30, 2024, Huida accounted for 72.0% of the total balance of accounts payable. As of December 31, 2023, Huida accounted for 71.4% of the total balance of accounts payable. No other supplier accounted for more than 10% of the Company’s accounts payable as of September 30, 2024 and December 31, 2023.
From time to time, the Company is involved in legal and regulatory proceedings that are incidental to the operation of its businesses. These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of the particular claims, the Company does not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on its results of operations or financial condition.
Note 15 — Segment information
The Company follows ASC 280, “Segment Reporting,” which requires that companies disclose segment data based on how management makes decisions about allocating resources to each segment and evaluating their performances. The Company has one reporting segment. The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company, and hence the Company has only one reportable segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The disclosures in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2024 (the “2023 Form 10-K”). You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report on Form 10-Q as well as our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q and of our 2023 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate.
Overview
FGI is a global supplier of kitchen and bath products. Over the course of 30 years, we have built an industry-wide reputation for product innovation, quality, and excellent customer service. We are currently focused on the following product categories: sanitaryware (primarily toilets, sinks, pedestals and toilet seats), bath furniture (vanities, mirrors and cabinets), shower systems, customer kitchen cabinetry and other accessory items. These products are sold primarily for R&R activity and, to a lesser extent, new home or commercial construction. We sell our products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and specialty stores.
Consistent with our long-term strategic plan, we intend to drive value creation for our shareholders through a balanced focus on product innovation, organic growth, and efficient capital deployment. The following initiatives represent key strategic priorities for us:
•Commitment to product innovation. We have a history of being an innovator in the kitchen and bath markets and developing “on-trend” products and bringing them to market ahead of the competition. We have developed deep marketing skills, leading design capabilities, and product development expertise. A recent example of our innovative product development includes the Jetcoat shower wall systems, which offer a stylized design option without the fuss of messy grout. We expect to continue to invest in research and development to drive product innovation in 2024.
•“BPC” (Brands, Products, Channels) strategy to drive above-market organic growth. We have continued to invest in our BPC strategy despite the market challenges, which is expected to drive improved organic growth in the longer term. We recently announced that we entered into a 5-year licensing agreement that will provide us access to an industry leading overflow toilet technology. We will continue to market this technology as FlushGuard Overflow Technology. During the fourth quarter of 2023, we were awarded product placements at several large customers, including two of the largest commercial distributors in North America. In addition, we continue to focus on our initiatives to expand geographically, with recently signed agreements providing entry into India, Eastern Europe and the UK.
•Enhanced margin performance. We generated gross margin of 27.7% in the first nine months of 2024, up from 26.7% in the same period last year, owing to the ongoing shift to higher margin products. During the remainder of 2024, we expect gross margins to remain consistent with those generated during fiscal year 2023.
•Efficient capital deployment. We will continue to prioritize capital deployment in support of organic growth opportunities, while continuing to evaluate strategic M&A opportunities. With total liquidity of $16.3 million as of September 30, 2024, the Company believes it has sufficient financial flexibility to fund its organic growth strategy.
•Deep manufacturing partners and customer relationships. We have developed strong manufacturing and sourcing partners over the last 30+ years, which we believe will continue to give us a competitive advantage in the markets we serve. We also have deep relationships with an established global customer base, offering end-to-end solutions to support category growth. While recent supply chain and inflation pressures have been a headwind, our durable partnerships with manufacturing and sourcing partners have helped to mitigate these challenges.
We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization (the “Reorganization”) of our parent company, Foremost Groups Ltd. (“Foremost”), and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries Inc. (“FGI Industries”), FGI Europe
Investment Limited, an entity formed in the British Virgin Islands, and FGI International, Limited, an entity formed under the laws of Hong Kong, each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost before the completion of the Reorganization and are presented as if we had been in existence and the Reorganization had been in effect for the entirely of each of the periods presented.
Results of Operations
The following table summarizes the results of our operations for the three and nine months ended September 30, 2024 and 2023 and provides information regarding the dollar and percentage increase (decrease) during such periods.
For the Three and Nine Months Ended September 30, 2024 and 2023
For the Three Months Ended September 30,
Change
2024
2023
Amount
Percentage
USD
%
Revenue
$
36,099,179
$
29,932,612
$
6,166,567
20.6
Cost of revenue
26,790,957
22,103,325
4,687,632
21.2
Gross profit
9,308,222
7,829,287
1,478,935
18.9
Selling and distribution expenses
6,284,932
4,572,593
1,712,339
37.4
General and administrative expenses
2,637,141
2,351,307
285,834
12.2
Research and development expenses
451,975
423,697
28,278
6.7
Income from operations
(65,826)
481,690
(547,516)
(113.7)
Operating margins (%)
(0.2)
1.6
(180)
bps
Total other (expenses) income, net
(364,885)
34,318
(399,203)
(1163.2)
Provision for income taxes
267,537
172,516
95,021
55.1
Net (loss) income
(698,248)
343,492
(1,041,740)
(303.3)
Net (loss) income attributable to FGI Industries Ltd. shareholders
(550,137)
409,535
(959,672)
(234.3)
Adjusted income from operations(1)
55,663
603,179
(547,516)
(90.8)
Adjusted operating margins (%)(1)
0.2
2.0
(180)
bps
Adjusted net (loss) income attributable to FGI Industries Ltd. shareholders(1)
Net (loss) income attributable to FGI Industries Ltd. shareholders
(798,761)
194,641
(993,402)
(510.4)
Adjusted (loss) income from operations(1)
(472,655)
1,473,506
(1,946,161)
(132.1)
Adjusted operating margins (%)(1)
(0.5)
1.7
(220)
bps
Adjusted net (loss) income attributable to FGI Industries Ltd. shareholders(1)
$
(280,227)
$
836,562
$
(1,116,789)
(133.5)
_________________________________________________
(1)See “Non-GAAP Measures” below for more information on our use of these adjusted figures and a reconciliation of these financial measures to their closest U.S. generally accepted accounting principles (“GAAP”) comparators.
Revenue
Our revenue increased by $6.2 million, or 20.6%, to $36.1 million for the three months ended September 30, 2024, from $29.9 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, our revenue increased by $9.9 million, or 11.5%, to $96.2 million from $86.3 million for the same period last year. The increase in our revenue was primarily driven by increases in sales of shower system, bath furniture and custom kitchen cabinetry.
Revenue categories by product are summarized as follow:
We derive the majority of our revenue from sales of sanitaryware, which accounted for 59.4% and 61.6% of our total revenue for the three and nine months ended September 30, 2024, compared to 69.3% and 63.7% for the comparable periods of 2023. Revenue generated from the sales of sanitaryware increased by 3.4% to $21.5 million for the three months ended September 30, 2024 from $20.7 million for same period of 2023. For the nine months ended September 30, 2024, this revenue increased by 7.9% to $59.3 million from $54.9 million for the same period of 2023. The increase in revenue was due, in part, by a reversal of delayed shipments in the prior quarter stemming from our transition to a new enterprise software system and ocean freight disruptions.
Our revenue from bath furniture sales accounted for 11.5% and 11.7% of our total revenue for the three and nine months ended September 30, 2024, compared to 8.5% and 14.3% for the comparable periods of 2023. Bath Furniture sales increased by 64.4% to $4.2 million for the three months ended September 30, 2024, compared to $2.5 million for the same period of 2023. For the nine months ended September 30, 2024, revenue from Bath Furniture sales decreased by 8.3% to $11.3 million from $12.3 million for the same period of 2023. Our recently launched mid-tier products to better address the current demand environment of trading down to lower priced offering is gaining traction.
Revenue from sales of Shower Systems made up approximately 19.8% and 19.5% of our total revenue for the three and nine months ended September 30, 2024, compared to 16.5% and 16.5% for the comparable periods of 2023. Revenue from sales of shower systems increased by 44.9% to $7.1 million for the three months ended September 30, 2024, compared to $4.9 million for the comparable period of 2023. For the nine months ended September 30, 2024, revenue from sales of shower systems increased by 31.9% to $18.8 million from $14.2 million for the same period of 2023. Our recently launched programs continue to have a positive impact during the third quarter.
Our revenue from sales of other products (custom kitchen cabinetry and other small offerings) increased by 93.3% to $3.3 million for the three months ended September 30, 2024, compared to $1.7 million for the same period of 2023. For the nine months ended September 30, 2024, other revenue increased by 43.1% to $6.8 million from $4.8 million for the same period of 2023. The increase was primarily driven by volume growth resulting from continued strength in sales of the Covered Bridge custom-kitchen cabinetry businesses.
Revenue Categories by Geographic Location
We derive our revenue primarily from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:
We generated the majority of our revenue in the United States market, which amounted to $22.2 million for the three months ended September 30, 2024, compared to $18.4 million for the three months ended September 30, 2023, representing a 20.9% increase for the three-month periods. For the nine months ended September 30, 2024, however, revenue from United States market increased by 8.9% to $59.8 million, compared to $54.9 million for the same period of 2023. Such revenue accounted for 61.5% and 62.2% of our total revenue for the three and nine months ended September 30, 2024, respectively, compared to 61.3% and 63.7% for the three and nine months ended September 30, 2023, respectively. The increase in revenue was due, in part, by a reversal of delayed shipments in the prior quarter stemming from our transition to a new enterprise software system and ocean freight disruptions.
Our second largest market is Canada. Our revenue generated in the Canadian market was $9.9 million for the three months ended September 30, 2024, compared to $9.1 million for the three months ended September 30, 2023, representing a 9.2% increase. For the nine months ended September 30, 2024, revenue from Canadian market increased by 14.1% to $26.4 million, compared to $23.1 million for the same period in 2023. The increased sales in the Canada market were primarily driven by stabilized demand from wholesale customers.
We also derive revenue from Europe, which consists primarily of sales in Germany. This amounted to $3.4 million and $9.3 million for the three and nine months ended September 30, 2024, compared to $2.5 million and $8.2 million for the three and nine months ended September 30, 2023, representing a 38.9% and 13.0% increase for the three-month and nine-month periods, respectively.
Gross Profit
Gross profit was $9.3 million and $26.7 million for the three and nine months ended September 30, 2024, an increase of 18.9% and 15.8% compared to the same periods of 2023. Gross profit margin was 25.8% and 27.7% for the three and nine months ended September 30, 2024, down 40 and up 100 basis points from 26.2% and 26.7% for the three and nine months ended September 30, 2023, respectively.
Operating Expenses
Selling and distribution expenses primarily consisted of personnel costs, marketing and promotion costs, commission, and freight and leasing charges. Our selling and distribution expenses increased by $1.7 million, or 37.4%, to $6.3 million for the three months ended September 30, 2024, from $4.6 million for the three months ended September 30, 2023, and increased by $4.6 million, or 32.6%, to $18.7 million for the nine months ended September 30, 2024, from $14.1 million for the nine months ended September 30, 2023. The increase in selling and distribution expenses was largely attributable to increased personnel costs, marketing and promotion expenses and warehouse expenses as a result of inflation and our initiatives to drive sales growth.
General and administrative expenses primarily consisted of personnel costs, professional service fees, depreciation, travel, and office supply expenses. Our general and administrative expenses increased by $0.3 million, or 12.2%, to $2.6 million for the three months ended September 30, 2024, from $2.4 million for the three months ended September 30, 2023, and increased by $0.8 million, or 11.8%, to $7.5 million for the nine months ended September 30, 2024, from $6.7 million for the nine months ended September 30, 2023. The increase was primarily attributable to inflation and expenses incurred in connection with newly formed subsidiaries.
Research and development expenses mainly consisted of personnel costs and product development costs. Our research and development activities remained stable and are relatively immaterial to our unaudited condensed consolidated statements of operations and comprehensive (loss) income.
Other income (expenses) represents interest income and expenses, as well as non-recurring non-operating gains and losses. Other expenses, net decreased as a result of proceeds received from a settlement agreement and gains from foreign currency transactions.
Provision for Income Taxes
We recorded provision for income taxes of $0.3 million and benefit of income taxes of approximately $9,000 for the three and nine months ended September 30, 2024, and provision for income taxes of $0.2 millionand $0.4 million for the three and nine months ended September 30, 2023. The fluctuation in effective tax rate was primarily driven by foreign operations with various tax rates and non-deductible items.
Net (Loss) Income
We incurred net loss of $0.7 millionand net income of $0.3 millionfor the three months ended September 30, 2024 and 2023, respectively, and net loss of $1.3 millionand net income of$0.1 millionfor the nine months endedSeptember 30, 2024 and 2023, respectively. These changes had resulted from the combination of the changes discussed above.
Liquidity and Capital Resources
Our principal sources of liquidity are cash generated from operating activities and cash borrowed under credit facilities, which we believe provides sufficient liquidity to support our financing needs. As of September 30, 2024, we had cash and working capital of $3.0 million and $12.7 million, respectively. During the nine months ended September 30, 2024, we drew an aggregate of approximately $5.5 million on the Credit Agreement, the Canadian Revolver and the CTBC Credit Line for working capital replenishment.
We believe our revenue and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations well into the foreseeable future. However, we may need additional cash resources in the future if we experience changes in business conditions or other developments, such as rising interest rates, inflation and increased costs, and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. For example, from time to time we may provide loans or other operational support to Foremost to assist Foremost in capital expenditures or other efforts related to the manufacturing services that Foremost provides to us, which could limit the assets available for other corporate purposes or require additional resources. If it is determined that the cash requirements exceed our amount of cash on hand, we may seek to issue debt or equity securities, and there can be no assurances that additional financing will be available on acceptable term, if at all.
As of September 30, 2024, FGI’s total outstanding debt consisted of the Credit Agreement with East West Bank and the CTBC Credit Line with CTBC Bank (each discussed below).
East West Bank Credit Facility
Our wholly owned subsidiary, FGI Industries, has a line of credit with East West Bank pursuant to a Business Loan Agreement (the “Credit Agreement”) with East West Bank, which is collateralized by all of the assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately 49.89% of the voting control of Foremost. On November 25, 2022, the Credit Agreement was amended and restated with a maximum borrowing amount of $18,000,000 and a maturity date of December 21, 2024.
Pursuant to the Credit Agreement, FGI Industries is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter; (b) an effective tangible net worth (defined as total book net worth plus minority interest, less amounts due from officers, shareholders and affiliates, minus intangible assets and accumulated amortization, plus debt subordinated to East West Bank) of not less than $10,000,000 for the quarter ended June 30, 2021 and thereafter, on a consolidated basis; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth, which is defined as total book net worth plus minority interest, less loans to officers, shareholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter, on a consolidated basis. As of September 30, 2024, FGI Industries was in compliance with this financial covenant. As described in Item 1. Note 8, FGI Industries is also required to provide the lender with certain
periodic financial information, including annual audited financial statements of FGI Industries on a non-consolidated basis. As of the date of this report, FGI Industries has obtained a waiver for such Corporate Borrower’s Audited Annual Statements, a U.S. standalone reporting obligation under the Credit Agreement, which were due by April 30, 2024.
The loan bears interest rate equal to, at the Company’s option, either (i) 0.25 percentage points less than the Prime Rate quoted by the Wall Street Journal or (ii) the SOFR Rate (as administered by CME Group Benchmark Administration Limited and displayed by Bloomberg LP) plus 2.20% per annum (in either case, subject to a minimum rate of 4.500% per annum). The interest rate as of September 30, 2024 and December 31, 2023 was 7.75% and 8.25%, respectively.
Each sum of borrowings under the Credit Agreement is deemed due on demand and is classified as a short-term loan. The outstanding balance of such loan was $9,161,641 and $6,959,175 as of September 30, 2024 and December 31, 2023, respectively.
HSBC Canada Bank Loan
FGI Canada Ltd. has a line of credit agreement with HSBC Canada (the “Canadian Revolver”). The revolving line of credit with HSBC Canada allows for borrowing up to CAD7,500,000 (USD5,474,453 as of September 30, 2024). This is an assets-based line of credit, the borrowing limit is calculated based on certain percentage of accounts receivable and inventory balances. Pursuant to the Canadian Revolver, FGI Canada Ltd. is required to maintain (a) a debt to tangible net worth ratio of no more than 3.00 to 1.00; and (b) a ratio of current assets to current liabilities of at least 1.25 to 1.00. The loan bears interest at a rate of Prime rate plus 0.50%. As of September 30, 2024, FGI Canada Ltd. was not in compliance with certain financial covenants in the Canadian Revolver related to its debt to tangible net worth ratio. As of the date of this quarterly report, FGI Canada Ltd. has requested a waiver from the lender, which is being processed by the lender. In the absence of an executed waiver, the Company has classified the outstanding balance of the loan as a current liability on the unaudited condensed consolidated balance sheet as of September 30, 2024. The Company has sufficient liquidity to repay the loan in full if immediate settlement were required.
Borrowings under this line of credit amounted to $1,026,392 and $0 as of September 30, 2024 and December 31, 2023, respectively. The facility maturesat the discretion of HSBC Canada upon 60 days’ notice.
FGI Canada Ltd. also has a revolving foreign exchange facility up to a permitted maximum of USD3,000,000. The advances are available to purchase foreign exchange forward contracts from time to time up to six months, subject to an overall maximum aggregate USD Equivalent outstanding face value not exceeding the Foreign Exchange Facility Limit.
CTBC Credit Facility
On January 25, 2024, FGI International entered into an omnibus credit line (the “CTBC Credit Line”) with CTBC Bank Co., Ltd. (“CTBC”). Under the CTBC Credit Line, FGI International may borrow, from time to time, up to $2.3 million, with borrowings limited to 90% of FGI International’s export “open account” trade receivables. The CTBC Credit Line will bear interest at a rate of “Base Rate”, which is based on monthly or quarterly Taipei Interbank Offered in effect from time to time, plus 120 base points and handling fees, unless otherwise agreed to by the parties. The CTBC Credit Line is unsecured and is fully guaranteed by the Company and partially guaranteed by Liang Chou Chen. Borrowings under this line of credit amounted to $2,297,464 and $0 as of September 30, 2024 and December 31, 2023, respectively.
The following table summarizes the key components of our cash flows for the nine months ended September 30, 2024 and 2023.
For the Nine Months Ended September 30,
2024
2023
USD
USD
Net cash used in operating activities
$
(8,042,745)
$
(1,986,964)
Net cash used in investing activities
(2,044,264)
(883,054)
Net cash provided by (used in) financing activities
5,526,322
(1,832,849)
Effect of exchange rate fluctuation on cash
(171,892)
5,386
Net changes in cash
(4,732,579)
(4,697,481)
Cash, beginning of period
7,777,241
10,067,428
Cash, end of period
$
3,044,662
$
5,369,947
Operating Activities
Net cash used in operating activities was approximately $8.0 million for the nine months ended September 30, 2024 and was primarily attributable to an increase in prepayments and other receivables - related parties of approximately $6.0 million, an increase in inventories of approximately $3.9 million, an increase in accounts receivable of approximately $3.8 million, a decrease in operating lease liabilities of approximately $1.4 million, net loss of $1.3 million, a decrease in accounts payable - related parties of approximately $0.7 million, and an increase in other noncurrent assets of approximately $0.6 million. These drivers were partially offset by non-cash items of $2.2 million, an increase in accounts payable of approximately $5.7 million, an increase in accrued expenses and other current liabilities of approximately $1.1 million,and a decrease in prepayments and other current assets of approximately $0.8 million.
Net cash used in operating activities was approximately $2.0 million for the nine months ended September 30, 2023 and was primarily attributable to an increase in prepayments and other receivables - related parties of approximately $5.4 million, an increase in accounts receivable of approximately $1.6 million, an increase in prepayments and other current assets of approximately $1.3 million, a decrease in operating lease liabilities of approximately $0.9 million, and a decrease in accounts payable of approximately $0.7 million. These drivers were partially offset by non-cash items of $0.9 million, a decrease in inventories of approximately $3.7 million, an increase in accounts payable - related parties of approximately $2.4 million, and a decrease in other noncurrent assets of $0.6 million.
Investing Activities
Net cash used in investing activities was $2.0 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively, which was attributable to the purchases of property and equipment and intangible assets.
Financing Activities
Net cash provided by financing activities was approximately $5.5 million for the nine months ended September 30, 2024 which represents net proceeds from bank loans.
Net cash used in financing activities was approximately $1.8 million for the nine months ended September 30, 2023, which represents net repayment of bank loans.
Commitments and Contingencies
Capital Expenditures
Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment. Our capital expenditures amounted to $2.0 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively. We do not expect to incur significant capital expenditures in the immediate future.
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Critical Accounting Policies and Significant Accounting Estimates
A discussion of our critical accounting policies and significant accounting estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Form 10-K. The preparation of the unaudited condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenue and expenses during the applicable reporting period. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the nine months ended September 30, 2024.
Recently Issued Accounting Pronouncements
See Note 2, “Summary of significant accounting policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-GAAP Measures
In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following non-GAAP measures to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions. Our non-GAAP measures are: Adjusted Income from Operations, Adjusted Operating Margins and Adjusted Net Income. These non-GAAP financial measures are not prepared in accordance with GAAP. They are supplemental financial measures of our performance only, and should not be considered substitutes for net income, income from operations or any other measure derived in accordance with GAAP and may not be comparable to similarly titled measures reported by other entities.
We define Adjusted Income from Operations as GAAP income from operations excluding the impact of certain non-recurring expenses, including IPO-related compensation (cash and stock-based), legal fees and business expansion expenses. We define Adjusted Net Income as GAAP income before income taxes excluding the impact of certain non-recurring expenses and income, such as IPO-related compensation, legal fees and business expansion expenses, income taxes at historical average effective rate, as well as net income attributable to non-controlling shareholders. We define Adjusted Operating Margins as adjusted income from operations divided by revenue.
We use these non-GAAP measures, along with GAAP measures, to evaluate our business, measure our financial performance and profitability and our ability to manage expenses, after adjusting for certain one-time expenses, identify trends affecting our business and assist us in making strategic decisions. We believe these non-GAAP measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance over time on a consistent basis.
The following table reconciles Income from Operations to Adjusted Income from Operations and Adjusted Operating Margins, as well as Net income to Adjusted Net Income for the periods presented.
Less: net loss attributable to non-controlling shareholders
(148,111)
(66,043)
(460,761)
(66,043)
Adjusted net (loss) income
$
(105,451)
$
588,791
$
(280,227)
$
836,562
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, our disclosure controls and procedures were not effective.
Evaluation of the Effectiveness of Internal Control over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2024 because of the material weakness in our internal control over financial reporting described below.
Identified Material Weakness
Management noted that there is an inadequate segregation of duties related to certain accounting functions due to the size of the Company’s subsidiaries. In addition, the Company lacks evidence of management review controls activity taking place, such as but not limited to, the review and approval of journal entries and account reconciliations.
Accordingly, the Company concluded that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
Management’s Remediation Initiatives
As of September 30, 2024, and through the date of this filing we are in the process of implementing segregation of duties and are determining further initiatives to undertake in order to remediate this remaining material weakness and anticipate that these initiatives will be implemented by the end of fiscal year 2024.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
We may be subject to legal proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
Ayers Bath Litigation
As previously disclosed, FGI Industries (formerly known as Foremost Groups, Inc.), our wholly-owned subsidiary, was involved in litigation arising from its efforts to protect an exclusivity agreement with sanitaryware manufacturer Tangshan Huida Ceramic Group Co., Ltd. (“Huida”) through the second quarter of 2024. In June 2024, the parties entered into a settlement agreement with a mutual release of all claims related to the litigation. The settlement amount is reflected in other income (expenses), net.
Item 1A. Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2023, includes a detailed discussion of our risk factors. At the time of this filing, except as provided below, there have been no material changes to the risk factors that were included in the Form 10-K.
If we fail to meet Nasdaq’s continued listing requirements, it could result in a delisting of our ordinary shares.
If we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Under the Nasdaq Marketplace Rules, if the bid price of our common stock were to close below the required minimum $1.00 per share for 30 consecutive business days, we may receive a deficiency notice from Nasdaq regarding our failure to comply with Nasdaq
Marketplace Rule 5550(a)(2). If we receive such a notice, pursuant to Marketplace Rule 5810(c)(3)(A), we may become subject to a period of 180 calendar days to regain compliance with Rule 5550(a)(2). If at any time the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, we will regain compliance with Rule 5550(a)(2).
The per share price of our ordinary shares has fluctuated significantly and has been below $1.00 per share. Our stock price may not close at or above $1.00 per share and if the price remains below $1.00 per share, our stock could become subject to delisting. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the listing requirements of Nasdaq.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Proceeds from Initial Public Offering
On January 27, 2022, we closed our initial public offering (“IPO”) of 2,500,000 units (“Units”), each consisting of (i) one ordinary share, $0.0001 par value per share (the “Shares”), and (ii) one warrant (the “Warrants”) entitling the holder to purchase one Share at an exercise price of $6.00 per Share. The Warrants are immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The Shares and Warrants were issued separately in the IPO, and may be transferred separately immediately upon issuance. The underwriters exercised in full their option to purchase up to an additional 375,000 Warrants. The Units were sold at a price of $6.00 per Unit, and the net proceeds from the IPO were approximately $12.4 million, after deducting underwriting discounts and commissions of approximately $1.1 million and offering expenses of approximately $1.5 million payable by us. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
In connection with the IPO, we issued to the representative of the underwriters a warrant to purchase an aggregate of 50,000 Shares. The Benchmark Company acted as lead book-running manager, and Northland Capital Markets acted as joint book-running manager. The offer and sale of the shares were registered under the Securities Act of 1933, as amended (the “Securities Act”) on a Registration Statement on Form S-1 (File No. 333-259457), which was declared effective on January 24, 2022.
There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus, dated January 24, 2022, filed with the SEC on January 26, 2022, pursuant to Rule 424(b) of the Securities Act and our Post-Effective Amendment No.1 to Form S-1 filed on April 7, 2022.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Trading Plans
During the nine months ended September 30, 2024, no director or executive officer adopted, modified or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement", as each term is defined in Item 408(a) of Regulation S-K.
The following material from FGI Industries Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income; (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104
Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.