FGI Industries .(FGI) - 2021 Q4 - Annual Report

Part I Business FGI Industries Ltd. is a global supplier of kitchen and bath products, focusing on the R&R market with private label and branded offerings, pursuing a "BPC" growth strategy after its 2022 IPO - FGI is a global supplier of bath and kitchen products, with major customers including The Home Depot, Menards, Ferguson, and Lowe's, and the majority of its products are sold under customers' private label brands[28] - In January 2022, FGI completed an IPO, raising approximately $12.5 million in net proceeds[31] - The company's "BPC" growth strategy focuses on increasing the share of its own Brands, expanding into new Product categories, and growing in key sales Channels like e-commerce and commercial distribution[42] Net Sales by Product Category (2021) | Product Category | 2021 Net Sales Share | | :--- | :--- | | Sanitaryware | 61.2% | | Bath Furniture | 30.3% | | Other | 8.5% | Net Sales by Customer Channel (2021) | Customer Channel | 2021 Net Sales Share | | :--- | :--- | | Mass Retailers | ~39% | | Wholesalers | ~25% | | E-Commerce | ~23% | | Commercial | ~11% | | Independent Dealers | 2% | Risk Factors The company faces significant strategic and operational risks, including high dependence on the R&R market, concentrated customer and supplier base, economic downturns, and control by its majority shareholder - The company's business is heavily reliant on residential repair and remodel (R&R) activity, which is sensitive to economic cycles, consumer confidence, and housing market trends[90][91] - Sales are concentrated, with the top ten customers representing over 77% of net sales in 2021, and The Home Depot alone accounted for approximately 24% of 2021 net sales[103] - FGI is highly dependent on a single Chinese supplier, Tangshan Huida Ceramic Group Co., Ltd, which accounted for approximately 66% of its accounts payable balance as of December 31, 2021[104] - Foremost Groups Ltd. holds approximately 72% of the voting power of the company's ordinary shares, enabling it to exert significant control over corporate decisions[158][159] - The company has limited operations in China but sources many products from there, exposing it to risks from changes in Chinese laws, regulations, and political conditions, including potential oversight from the Cyberspace Administration of China (CAC)[120][122] Unresolved Staff Comments As a smaller reporting company, FGI Industries Ltd. is exempt from providing information for this item - The company is a smaller reporting company and is not required to provide information under this item[182] Properties The company operates its headquarters and warehouses in New Jersey, with additional facilities across the US, Canada, Germany, China, and Taiwan - The company operates from its headquarters in East Hanover, NJ, and has additional facilities in the US (Indiana, California), Canada (Toronto), Germany (Dusseldorf), China (Tangshan), and Taiwan (Taipei)[183] Legal Proceedings The company is engaged in two significant legal matters: ongoing litigation against Ayers Bath and a new arbitration initiated by supplier Huida regarding an exclusive distribution agreement - FGI USA is involved in ongoing litigation related to the bankruptcy of Ayers Bath, seeking to recover damages for breach of an exclusivity agreement with supplier Huida[187][188] - In September 2021, supplier Huida initiated arbitration proceedings seeking to determine that the exclusive distribution agreement with FGI USA is not unlimited in duration and should be amended or made terminable[189] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[191] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's ordinary shares began trading on Nasdaq in January 2022, with no cash dividends paid or anticipated, and no share repurchases in 2021 - Ordinary shares began trading on Nasdaq under the symbol "FGI" on January 27, 2022[195] - The company does not anticipate paying cash dividends in the foreseeable future[197] - No share repurchases were made during the twelve months ended December 31, 2021[199] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2021, FGI reported significant revenue growth to $181.9 million but a decline in gross margin, with net income boosted by PPP loan forgiveness and a covenant waiver obtained Results of Operations Fiscal year 2021 saw revenues increase by 34.9% to $181.9 million, driven by strong product line growth, despite gross margin contraction due to cost pressures, resulting in a 67.1% rise in net income Financial Performance Summary (2021 vs 2020) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $181.9M | $134.8M | +34.9% | | Gross Profit | $32.2M | $28.4M | +13.4% | | Gross Margin | 17.7% | 21.1% | -340 bps | | Income from Operations | $7.7M | $6.3M | +22.9% | | Net Income | $7.9M | $4.7M | +67.1% | Revenue by Product Line (2021 vs 2020) | Product Line | 2021 Revenue | 2020 Revenue | Growth (%) | | :--- | :--- | :--- | :--- | | Sanitaryware | $111.3M | $88.4M | +25.9% | | Bath Furniture | $55.1M | $38.2M | +44.3% | | Other | $15.5M | $8.2M | +88.9% | Revenue by Geographic Location (2021 vs 2020) | Geography | 2021 Revenue | 2020 Revenue | Growth (%) | | :--- | :--- | :--- | :--- | | United States | $112.7M | $83.7M | +34.7% | | Canada | $50.4M | $35.0M | +43.9% | | Europe | $18.8M | $16.1M | +16.8% | Liquidity and Capital Resources As of December 31, 2021, the company had $3.9 million in cash, relying on operating cash flow and an $18 million credit facility, while securing a waiver for a financial covenant non-compliance Cash Flow Summary (2021 vs 2020) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3.2M) | $5.8M | | Net cash used in investing activities | $(0.1M) | $(0.1M) | | Net cash provided by (used in) financing activities | $3.3M | $(4.3M) | - The company has an $18 million line of credit with East West Bank, maturing in September 2022, with an outstanding balance of $14.7 million as of December 31, 2021[220][221] - The company was not in compliance with a financial covenant at December 31, 2021, but East West Bank provided a waiver[220] - A Paycheck Protection Program (PPP) loan of approximately $1.68 million was fully forgiven in February 2021[223] Non-GAAP Measures The company utilizes non-GAAP measures like Adjusted Net Income, which for 2021 was $6.3 million, differing from GAAP primarily due to the exclusion of PPP loan forgiveness Reconciliation of Net Income to Adjusted Net Income (2021) | Metric | 2021 | | :--- | :--- | | Net Income (GAAP) | $7,905,916 | | Adjustments: | | | COVID one-time expenses | $115,900 | | Other income (PPP Loan Forgiveness) | ($1,680,900) | | Tax impact of adjustments | ($56,344) | | Adjusted Net Income (Non-GAAP) | $6,284,572 | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021 and 2020, including the auditor's report, balance sheets, income statements, and cash flow statements - The financial statements were audited by Marcum LLP, which issued an unqualified opinion[270][273] Key Balance Sheet Items (as of Dec 31, 2021) | Account | Amount | | :--- | :--- | | Total Current Assets | $56.2M | | Total Assets | $69.2M | | Total Current Liabilities | $54.7M | | Total Liabilities | $61.6M | | Total Parent's Net Investment | $7.5M | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes reported, and a management report on internal control is not yet required - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[380] - A management report on internal control over financial reporting is not included, as permitted for newly public companies[381] Part III Directors, Executive Officers, and Corporate Governance This section outlines the company's directors and executive officers, including key leadership and the independent audit committee, and notes the adoption of a code of business conduct - The executive team includes David Bruce (CEO), John Chen (Executive Chairman), and Perry Lin (CFO)[386][387][388] - The Audit Committee consists of independent directors Todd Heysse (Chair), Kellie Zesch Weir, and Jae Chung, with Mr. Heysse qualified as an "audit committee financial expert"[395] Executive Compensation This section details the 2021 compensation for named executive officers, including CEO David Bruce's $346,842 total compensation, and outlines employment agreements and non-employee director remuneration 2021 Summary Compensation Table | Name and Principal Position | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | David Bruce, CEO | 237,835 | 96,636 | 12,371 | 346,842 | | John Chen, Executive Chairman | 250,000 | — | 1,151 | 251,151 | | Perry Lin, CFO | 137,245 | 5,000 | 4,051 | 146,296 | - Post-IPO, CEO David Bruce's initial base salary is set at $300,000, and CFO Perry Lin's is $160,000 under their new employment agreements[404][405] - Non-employee directors receive a $40,000 annual cash retainer and an annual equity award, with additional fees for committee service[409] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters As of March 24, 2022, Foremost Groups Ltd. is the dominant shareholder with 71.8% ownership, while executive officers and directors hold less than 1% individually, and equity plans are in place Beneficial Ownership (as of March 24, 2022) | Name | Percentage of Shares Beneficially Owned | | :--- | :--- | | Foremost Groups Ltd. | 71.8% | | Directors and executive officers as a group (9 persons) | < 1% | Certain Relationships and Related Transactions, and Director Independence The company engages in various related party transactions with its majority shareholder, Foremost Groups Ltd., covering shared services and product sourcing, and has determined three directors are independent - FGI has entered into shared services, sourcing, and purchase agreements with its parent company, Foremost, and its affiliates, governing administrative support and product procurement[419][420] - A registration rights agreement grants Foremost "demand" and "piggyback" rights for the resale of its shares[424] - The Board of Directors has adopted a written related party transaction policy to be overseen by the audit committee[426] - The board has determined that directors Todd Heysse, Kellie Zesch Weir, and Jae Chung are independent[430] Principal Accountant Fees and Services For fiscal year 2021, the company accrued $456,000 in total fees to its principal accountant, Marcum LLP, entirely for audit services Accountant Fees for Fiscal Year 2021 | Fee Category | Amount | | :--- | :--- | | Audit Fees | $456,000 | | Audit-Related Fees | $0 | | Tax Fees | $0 | | All Other Fees | $0 | | Total Fees | $456,000 | Part IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and certifications, with financial schedules omitted - This section contains an index of all exhibits filed with the Form 10-K, such as the company's articles of association, warrant agreements, material contracts with related parties, and executive employment agreements[438][439] Form 10-K Summary This item is omitted at the company's discretion - The Form 10-K summary is omitted at the company's option[440]