FGI Industries .(FGI) - 2023 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section provides cautionary language regarding forward-looking statements, emphasizing inherent risks and uncertainties General Information This section provides general introductory information about the company and its filing PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of FGI Industries Ltd. for the periods ended June 30, 2023, and December 31, 2022, including balance sheets, statements of income and comprehensive income, statements of changes in shareholders' equity, statements of cash flows, and detailed notes to these financial statements Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates Condensed Consolidated Balance Sheets | Metric | June 30, 2023 (Unaudited) | December 31, 2022 (Audited) | | :-------------------------------- | :-------------------------- | :-------------------------- | | ASSETS | | | | Total current assets | $43,846,939 | $45,887,608 | | Property and equipment, net | $1,426,832 | $1,269,971 | | Total other assets | $19,185,981 | $13,209,351 | | Total assets | $64,459,752 | $60,366,930 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $27,302,279 | $29,775,203 | | Total other liabilities | $14,330,405 | $7,847,317 | | Total liabilities | $41,632,684 | $37,622,520 | | Total shareholders' equity | $22,827,068 | $22,744,410 | | Total liabilities and shareholders' equity | $64,459,752 | $60,366,930 | - Total assets increased by $4,092,822 (6.78%) from December 31, 2022, to June 30, 2023, primarily driven by an increase in other assets, particularly operating lease right-of-use assets[16] - Total liabilities increased by $4,010,164 (10.66%) over the same period, mainly due to a significant rise in noncurrent operating lease liabilities[16] Unaudited Condensed Consolidated Statements of Income and Comprehensive Income This section reports the company's financial performance, including revenues, expenses, and net income over specific periods Unaudited Condensed Consolidated Statements of Income and Comprehensive Income | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $29,189,913 | $47,809,014 | $56,352,179 | $91,384,254 | | Cost of Revenues | $21,179,511 | $39,388,061 | $41,139,619 | $75,438,715 | | Gross Profit | $8,010,402 | $8,420,953 | $15,212,560 | $15,945,539 | | Income from Operations | $580,275 | $1,729,349 | $577,348 | $2,420,095 | | Net Income (Loss) | $88,481 | $1,170,530 | $(214,894) | $1,700,723 | | Basic EPS | $0.01 | $0.13 | $(0.02) | $0.19 | | Diluted EPS | $0.01 | $0.10 | $(0.02) | $0.15 | - Revenues decreased significantly by 38.9% for the three months and 38.3% for the six months ended June 30, 2023, compared to the prior year periods[18] - Net income for the three months ended June 30, 2023, decreased by 92.4% YoY, and the company reported a net loss for the six months ended June 30, 2023, compared to net income in the prior year[18] Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity This section details changes in the company's equity accounts, including ordinary shares, retained earnings, and comprehensive loss Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity | Metric | Balance at December 31, 2022 | Balance at June 30, 2023 | | :-------------------------------- | :--------------------------- | :----------------------- | | Ordinary shares | $950 | $950 | | Additional paid-in capital | $20,459,859 | $20,732,415 | | Retained earnings | $3,679,920 | $3,465,026 | | Accumulated other comprehensive loss | $(1,396,319) | $(1,371,323) | | Total shareholders' equity | $22,744,410 | $22,827,068 | - Total shareholders' equity increased slightly from $22,744,410 at December 31, 2022, to $22,827,068 at June 30, 2023, primarily due to share-based compensation offsetting the net loss[19] Unaudited Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities over specific periods Unaudited Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(1,007,456) | $(12,990,336) | | Net cash used in investing activities | $(235,941) | $(42,752) | | Net cash (used in) provided by financing activities | $(1,931,372) | $12,403,568 | | Effect of exchange rate fluctuation on cash | $2,103 | $(128,071) | | Net changes in cash | $(3,172,666) | $(757,591) | | Cash, beginning of year | $10,067,428 | $3,883,896 | | Cash, end of year | $6,894,762 | $3,126,305 | - Net cash used in operating activities significantly decreased from $12.99 million in H1 2022 to $1.01 million in H1 2023, indicating improved operational cash management despite a net loss[21] - Net cash used in financing activities in H1 2023 was $1.93 million, primarily due to bank loan repayments, contrasting with $12.40 million provided by financing activities in H1 2022, which included IPO proceeds[21] Notes to Unaudited Condensed Consolidated Financial Statements Note 1 — Nature of business and organization FGI Industries Ltd. is a holding company specializing in global kitchen and bath products, including sanitaryware, bath furniture, shower systems, and kitchen cabinetry. The company underwent a reorganization on January 27, 2022, consolidating its K&B business under FGI. Financial statements are presented as if the reorganization was in effect for all periods, with allocated revenues and expenses for the K&B business - FGI Industries Ltd. is a holding company for a global kitchen and bath products business, including sanitaryware, bath furniture, shower systems, and kitchen cabinetry[24] - The company completed a reorganization on January 27, 2022, consolidating its K&B business under FGI, with financial statements presented as if this structure was always in place[26][27] Allocated Revenues, Cost of Revenues, and Operating Expenses (Irrelevant to K&B Business) from FGI Industries to Foremost Home, Inc. | Metric | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Revenues | $28,718 | $8,966,545 | $991,919 | $20,662,337 | | Cost of revenues | $(102) | $(7,081,295) | $(768,065) | $(16,548,199) | | Gross profit | $28,616 | $1,885,250 | $223,854 | $4,114,138 | | Income from operations | $16,435 | $558,933 | $269,833 | $1,389,076 | Note 2 — Summary of significant accounting policies This note outlines the significant accounting policies, including liquidity management, basis of presentation (U.S. GAAP, SEC rules), principles of consolidation, use of estimates, foreign currency translation, reclassification, cash, accounts receivable, inventories, prepayments, property and equipment, intangible assets, impairment for long-lived assets, leases, fair value measurement, revenue recognition, shipping and handling costs, share-based compensation, income taxes, comprehensive income, earnings per share, segment reporting, and recently adopted accounting pronouncements - The Company's management believes it has sufficient funds to meet working capital and debt obligations for the next 12 months, with cash and cash equivalents of approximately $6.9 million as of June 30, 2023[38][39] - Revenue is recognized when control of goods is transferred to customers, generally at shipment or delivery, with payment terms typically ranging from 15 to 60 days[68] Revenues by Product Line | Product Line | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :---------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Sanitaryware | $18,816,220 | $32,316,912 | $34,170,766 | $59,111,167 | | Bath Furniture | $4,813,239 | $7,711,420 | $9,779,897 | $17,827,232 | | Shower System | $4,286,672 | $6,482,738 | $9,317,229 | $12,443,858 | | Others | $1,273,782 | $1,297,944 | $3,084,287 | $2,001,997 | | Total | $29,189,913 | $47,809,014 | $56,352,179 | $91,384,254 | Revenues by Geographic Location | Geographic Location | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | United States | $19,033,168 | $29,645,440 | $36,565,294 | $56,998,636 | | Canada | $7,517,459 | $13,597,568 | $14,038,444 | $25,893,570 | | Europe | $2,639,286 | $4,566,006 | $5,748,441 | $8,492,048 | | Rest of World | — | — | — | — | | Total | $29,189,913 | $47,809,014 | $56,352,179 | $91,384,254 | Note 3 — Accounts receivable, net This note details the composition of accounts receivable, net, including the allowance for credit losses and accrued defective returns and discounts, and tracks their movements over the periods Accounts Receivable, Net | Metric | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :-------------------------- | :------------------------ | :------------------------------------- | | Accounts receivable | $16,044,650 | $16,330,540 | | Allowance for credit losses | $(458,632) | $(438,843) | | Accrued defective return and discount | $(1,279,706) | $(1,595,838) | | Accounts receivable, net | $14,306,312 | $14,295,859 | - Allowance for credit losses increased from $438,843 at December 31, 2022, to $458,632 at June 30, 2023, with an addition of $19,789 during the six months[87] - Accrued defective return and discount decreased from $1,595,838 at December 31, 2022, to $1,279,706 at June 30, 2023, indicating a reversal of $316,132[87] Note 4 — Inventories, net This note provides a breakdown of inventories, net, including finished products and reserves for slow-moving inventories, and tracks the movements of these reserves Inventories, Net | Metric | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :-------------------------------- | :------------------------ | :------------------------------------- | | Finished product | $10,510,836 | $13,956,121 | | Reserves for slow-moving inventories | $(676,483) | $(663,530) | | Inventories, net | $9,834,353 | $13,292,591 | - Inventories, net, decreased by $3,458,238 from December 31, 2022, to June 30, 2023[88] - Reserves for slow-moving inventories increased by $12,953 during the six months ended June 30, 2023[89] Note 5 — Prepayments and other assets This note details the components of prepayments and other assets, distinguishing between prepayments and other current assets Prepayments and Other Assets | Metric | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :-------------------------- | :------------------------ | :------------------------------------- | | Prepayments | $3,087,532 | $2,026,259 | | Others | $1,081,717 | $561,822 | | Total prepayments and other assets | $4,169,249 | $2,588,081 | - Total prepayments and other assets increased by $1,581,168 from December 31, 2022, to June 30, 2023[90] Note 6 — Property and equipment, net This note outlines the composition of property and equipment, net, including various asset categories and accumulated depreciation, and reports depreciation expenses for the periods Property and Equipment, Net | Asset Category | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :----------------------- | :------------------------ | :------------------------------------- | | Building | $946,066 | $946,066 | | Leasehold Improvements | $1,204,564 | $1,074,206 | | Machinery and equipment | $1,968,472 | $2,246,610 | | Furniture and fixtures | $400,212 | $516,310 | | Vehicles | $147,913 | $147,913 | | Molds | $26,377 | $26,377 | | Subtotal | $4,693,604 | $4,957,482 | | Less: accumulated depreciation | $(3,266,772) | $(3,687,511) | | Total | $1,426,832 | $1,269,971 | - Depreciation expenses for the six months ended June 30, 2023, and 2022, were $78,759 and $95,530, respectively[91] Note 7 — Leases This note details the Company's operating lease arrangements, including ROU assets, lease liabilities, remaining lease terms, and discount rates, along with the maturities of operating lease liabilities Operating Lease Related Assets and Liabilities | Metric | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :-------------------------------- | :------------------------ | :------------------------------------- | | Operating lease right-of-use assets | $15,964,503 | $9,815,572 | | Operating lease liabilities – current | $1,348,041 | $1,543,031 | | Operating lease liabilities – noncurrent | $14,330,405 | $7,847,317 | | Total operating lease liabilities | $15,678,446 | $9,390,348 | - Total lease expenses paid were $935,266 for the six months ended June 30, 2023, compared to $824,972 for the same period in 2022[93] - The weighted-average remaining lease term for operating leases was 9.7 years as of June 30, 2023, with a weighted-average discount rate of 5.6%[93] Note 8 — Short-term loans This note details the Company's short-term loan facilities, including the East West Bank Credit Agreement and the HSBC Canada Bank Loan/Foreign Exchange Facility, outlining borrowing limits, collateral, covenants, and interest rates - FGI Industries, Inc. has an $18,000,000 asset-based line of credit with East West Bank, collateralized by all assets of FGI Industries and personally guaranteed by Liang Chou Chen[94] - The outstanding balance of the East West Bank loan was $7,863,680 as of June 30, 2023, down from $9,795,052 at December 31, 2022, with an interest rate of 8.00% as of June 30, 2023[97][98] - FGI Canada Ltd. has a revolving line of credit with HSBC Canada up to CAD $7,500,000 (US $5,538,734), with no outstanding borrowings as of June 30, 2023[99][100] Note 9 — Shareholders' Equity This note describes the Company's share capital structure, including ordinary and preference shares, and details the Initial Public Offering (IPO) completed on January 27, 2022, including the issuance of units, warrants, and net proceeds - FGI's authorized share capital is $21,000, divided into 200,000,000 Ordinary Shares and 10,000,000 Preference Shares, both with a par value of $0.0001 each[102] - The Company completed its IPO on January 27, 2022, issuing 2,500,000 units (ordinary shares and warrants) at $6.00 per unit, generating net proceeds of approximately $12.4 million[103][108] - As of the report date, 2,875,000 warrants from the IPO and 50,000 warrants to underwriters were issued and outstanding, with none exercised[107][110] Note 10 — Stock-based compensation This note details the Company's stock-based compensation plans, including the 2021 Equity Incentive Plan and Employee Stock Purchase Plan, and summarizes the grants of Restricted Share Units (RSUs) and Share Options to officers, employees, and directors, along with their vesting conditions and fair values - The 2021 Equity Plan reserves 1,500,000 ordinary shares for equity awards, with an annual increase mechanism[115] - As of June 30, 2023, 410,458 Restricted Share Units (RSUs) were granted and non-vested, with fair values ranging from $2.08 to $3.90 per share[125] - As of June 30, 2023, 514,975 share options were outstanding, with a weighted-average exercise price of $2.41 and a weighted-average grant date fair value of $1.22[131] Share-Based Compensation Expense | Expense Category | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Selling and distribution expenses | $62,497 | $46,199 | | General and administrative expenses | $210,059 | $98,535 | | Total share-based compensation expenses | $272,556 | $144,734 | Note 11 — Income taxes This note provides a breakdown of pre-tax income by geographic source and the components of income tax expense, along with a reconciliation of the U.S. federal income tax rate to the Company's effective income tax rate. It also summarizes deferred tax assets and liabilities Total Pre-Tax Income and Provision for Income Taxes | Metric | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Total pre-tax income | $279,927 | $1,555,937 | $9,181 | $2,213,807 | | Total provision for income taxes | $191,446 | $385,407 | $224,075 | $513,084 | Effective Tax Rate Reconciliation | Factor | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Federal statutory rate | 21.0 % | 21.0 % | | State and local income taxes, net of federal benefit | (5.3) % | 0.6 % | | Foreign operations | 84.0 % | 0.1 % | | Permanent items | 2.5 % | 1.5 % | | Deferred rate changes | 9.6 % | — % | | Others | (0.9) % | 0.1 % | | Effective tax rate | 110.9 % | 23.3 % | - The effective tax rate for the six months ended June 30, 2023, was 110.9%, significantly higher than 23.3% in the prior year, largely due to foreign operations and deferred rate changes[137] Note 12 — Related party transactions and balances This note details transactions and balances with related parties, including purchases, prepayments, accounts payable, shared service expenses, and a property purchase, highlighting the common control relationships Purchases from Related Parties | Related Party | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Focal Capital Holding Limited | $2,121,969 | $1,483,401 | $4,969,730 | $5,653,194 | | Foremost Worldwide Co., Ltd | $427,516 | $1,986,444 | $1,080,745 | $1,986,444 | | Foremost Home Inc. (FHI) | $206,143 | — | $206,143 | — | | Total | $2,755,628 | $3,469,845 | $6,256,618 | $7,639,638 | Accounts Payable – Related Parties | Related Party | As of June 30, 2023 (USD) | As of December 31, 2022 (Audited, USD) | | :-------------------------------- | :------------------------ | :------------------------------------- | | Foremost Worldwide Co., Ltd | $756,960 | $104,442 | | F.P.Z FURNITURE (CAMBODIA) CO., LTD. | $562,631 | — | | Rizhao Foremost Woodwork Manufacturing Co., Ltd. | $3,508 | — | | Total | $1,323,099 | $104,442 | - FGI Industries, Inc. provided $661,976 in shared services to FHI for the six months ended June 30, 2023, while FGI received $145,242 in shared services from Foremost Worldwide Co., Ltd. for the same period[141][142] Note 13 — Concentrations of risks This note identifies key concentration risks, including credit risk in cash balances across various financial institutions, significant customer concentration in revenues and accounts receivable, and high vendor concentration in purchases and accounts payable - Significant credit risk exists in cash balances held in financial institutions, with $105,143 in the US, $3,605,638 in Canada, $2,115,395 in Taiwan, $39,124 in Europe, and $126,958 in Cambodia subject to credit risk as of June 30, 2023[147] - For the six months ended June 30, 2023, two customers accounted for 19.1% and 17.7% of total revenues, and three customers accounted for 19.0%, 17.6%, and 14.8% of total accounts receivable[150][151] - Tangshan Huida Ceramic Group Co., Ltd. (Huida) accounted for 53.4% of total purchases for the six months ended June 30, 2023, and 78.1% of total accounts payable as of June 30, 2023, indicating high vendor concentration[152] Note 14 — Commitments and contingencies This note briefly states that the Company is involved in legal and regulatory proceedings incidental to its operations but does not believe any will have a material adverse effect on its financial condition or results of operations - The Company is involved in various legal and regulatory proceedings but does not anticipate a material adverse effect on its financial condition or results of operations[153] Note 15 — Segment information The Company operates as a single reportable segment, as its chief operating decision maker reviews consolidated results for resource allocation and performance assessment - FGI Industries Ltd. has one reportable segment, as the CEO reviews consolidated results for resource allocation and performance evaluation[155][156] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, and future outlook Overview FGI is a global supplier of kitchen and bath products, focusing on sanitaryware, bath furniture, shower systems, and kitchen cabinetry. The company's strategic priorities for 2023 include product innovation, a 'BPC' (Brands, Products, Channels) strategy for organic growth, margin expansion, and efficient capital deployment, leveraging strong manufacturing and customer relationships - FGI is a global supplier of kitchen and bath products, including sanitaryware, bath furniture, shower systems, and kitchen cabinetry, primarily for repair and remodeling[159] - Commitment to product innovation, exemplified by Jetcoat Shower wall systems - "BPC" strategy to drive organic growth by increasing branded products (34% of sales in 2022) and expanding e-commerce channels (13% of sales in 2022) - Focus on margin expansion through branded products, new categories, and channels, expecting a rebound in H2 2022 - Efficient capital deployment with a capital-light model, reinvesting in core business, and seeking bolt-on acquisitions - Leveraging deep manufacturing partners and customer relationships to mitigate supply chain and inflation pressures[160][161][162] Recent Trends FGI is experiencing lower market demand, particularly in bath furniture, due to customer destocking and inventory corrections. While supply chain disruptions and inflationary pressures impacted margins in late 2021, productivity and pricing measures led to resumed margin expansion in H2 2022, with demand expected to recover in H2 2023 - Lower market demand, especially in bath furniture, is attributed to customer destocking and inventory corrections[163] - Supply chain disruptions and inflationary pressures impacted operating margins in late 2021, but productivity and pricing measures led to margin expansion in H2 2022[163] - Demand for bath furniture remains lower in H1 2023, but a recovery is anticipated in the second half of 2023[163] Results of Operations FGI's results of operations for Q2 and H1 2023 show significant revenue declines across major product categories and geographic regions, leading to decreased gross profit and net income (or net loss for H1). Despite volume weakness, gross profit margins improved due to pricing gains, a favorable product mix, and lower freight costs. Operating expenses increased due to public company costs and marketing efforts Summary of Operations (YoY Change) | Metric | Three Months Ended June 30, 2023 (YoY Change) | Six Months Ended June 30, 2023 (YoY Change) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------ | | Revenues | $(18,619,101) (-38.9%) | $(35,032,075) (-38.3%) | | Gross profit | $(410,551) (-4.9%) | $(732,979) (-4.6%) | | Income from operations | $(1,149,074) (-66.4%) | $(1,842,747) (-76.1%) | | Net income (loss) | $(1,082,049) (-92.4%) | $(1,915,617) (-112.6%) | | Operating margins | (160)bps | (160)bps | - Revenues decreased by 38.9% for Q2 2023 and 38.3% for H1 2023, primarily due to declines in Sanitaryware, Bath Furniture, and Shower Systems[167] - Gross profit margin improved to 27.4% (up 983 bps) for Q2 2023 and 27.0% (up 955 bps) for H1 2023, driven by higher-margin products, pricing gains, and reduced freight costs[178] - Operating expenses increased, with selling and distribution up 10.0% (QoQ) and 5.2% (YoY H1), and general and administrative up 7.6% (QoQ) and 11.7% (YoY H1), mainly due to increased marketing and public company costs[181][182] Revenues This section analyzes the company's revenue performance, detailing changes by product line and geographic location Revenue Changes by Product Line (YoY Percentage Change) | Product Line | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :---------------- | :------------------------------- | :----------------------------- | | Sanitaryware | (41.8)% | (42.2)% | | Bath Furniture | (37.6)% | (45.1)% | | Shower System | (33.9)% | (25.1)% | | Other | (1.9)% | 54.1% | - Sanitaryware revenue declined by 41.8% (QoQ) and 42.2% (YoY H1) due to ongoing inventory de-stocking in the pro channel, but showed a 23% sequential increase from Q1 2023[169] - Bath Furniture sales decreased by 37.6% (QoQ) and 45.1% (YoY H1) due to significant de-stocking and softening demand[170] - Other products revenue increased by 54.1% for the six months ended June 30, 2023, driven by strength in custom-kitchen cabinetry[172][174] Revenue Changes by Geographic Location (YoY Percentage Change) | Geographic Location | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :-------------------- | :------------------------------- | :----------------------------- | | United States | (35.8)% | (35.8)% | | Canada | (44.7)% | (45.8)% | | Europe | (42.2)% | (32.3)% | Gross Profit This section examines the company's gross profit and margin trends, highlighting factors influencing profitability - Gross profit decreased by 4.9% to $8.0 million for Q2 2023 and 4.6% to $15.2 million for H1 2023, despite revenue decline, due to pricing gains, favorable mix, and lower freight costs[178][180] - Gross profit margin improved significantly to 27.4% for Q2 2023 (up 983 basis points) and 27.0% for H1 2023 (up 955 basis points) compared to prior-year periods[178] Operating Expenses This section details changes in selling, distribution, general, administrative, and research and development expenses - Selling and distribution expenses increased by 10.0% to $4.8 million for Q2 2023 and 5.2% to $9.5 million for H1 2023, driven by increased participation in sales trade shows and promotions[181] - General and administrative expenses increased by 7.6% to $2.3 million for Q2 2023 and 11.7% to $4.4 million for H1 2023, primarily due to incremental public company costs and legal expenses[182] - Research and development expenses remained stable and relatively immaterial[183] Other Income (Expenses) This section reports non-operating income and expenses, primarily focusing on interest and other financial items - Total other expenses, net, increased by 73.2% to $0.3 million for Q2 2023 and 175.4% to $0.6 million for H1 2023, mainly due to higher interest expenses from increased interest rates[184][185] Provision for Income Taxes This section outlines the company's income tax expense, reflecting changes in taxable income and effective tax rates - Income tax expense decreased for both Q2 and H1 2023 compared to prior-year periods, reflecting the decrease in taxable income[186] Net Income This section presents the company's net income or loss, reflecting overall profitability after all expenses and taxes - Net income decreased by 92.4% to $0.1 million for Q2 2023 and resulted in a net loss of $(0.2) million for H1 2023, a 112.6% decrease from prior year's net income[187] Liquidity and Capital Resources FGI's liquidity is primarily supported by operating activities and credit facilities, with $6.9 million in cash and $16.5 million in working capital as of June 30, 2023. The company believes current capital is sufficient but may seek additional financing for growth opportunities or unforeseen business changes. Cash flows from operating activities improved significantly, while financing activities shifted from providing cash (IPO in 2022) to using cash for loan repayments in 2023 - As of June 30, 2023, FGI had $6.9 million in cash and $16.5 million in working capital, believing these are sufficient for foreseeable operations and debt obligations[189] - The East West Bank Credit Facility has an outstanding balance of $7,863,680 as of June 30, 2023, with an interest rate of 8.00%[195][194] - Net cash used in operating activities improved significantly from $(12.99) million in H1 2022 to $(1.01) million in H1 2023[200] - Net cash used in financing activities was $(1.93) million in H1 2023 due to loan repayments, contrasting with $12.40 million provided in H1 2022 from IPO proceeds[200] East West Bank Credit Facility This section details the terms, outstanding balance, and covenants of the company's credit facility with East West Bank - FGI Industries has an $18,000,000 line of credit with East West Bank, collateralized by all assets of FGI Industries and personally guaranteed by Liang Chou Chen[192] - The loan bears interest at a rate equal to 0.25 percentage points less than the Prime Rate or SOFR Rate plus 2.20% per annum, with a minimum rate of 4.500%. The interest rate was 8.00% as of June 30, 2023[194] - FGI Industries obtained a waiver for its U.S. standalone audited annual statements, which were due by April 30, 2023, under the Credit Agreement[193] HSBC Canada Bank Loan This section describes the revolving line of credit and foreign exchange facility with HSBC Canada - FGI Canada Ltd. has a revolving line of credit with HSBC Canada up to CAD $7,500,000 (US $5,538,734 as of June 30, 2023), with no outstanding borrowings[197][198] - FGI Canada Ltd. also has a revolving foreign exchange facility up to US $3,000,000[199] Operating Activities This section analyzes cash flows generated from or used in the company's primary business operations - Net cash used in operating activities was $1.0 million for H1 2023, a significant improvement from $13.0 million used in H1 2022[201][202] - Key drivers for cash usage in H1 2023 included increases in related party receivables ($3.0M), decreases in accounts payable ($1.9M), and increases in prepayments ($1.6M)[201] - Offsetting factors included decreases in inventories ($3.5M), increases in related party payables ($1.2M), and decreases in right-of-use assets ($0.9M)[201] Investing Activities This section details cash flows related to the acquisition and disposal of long-term assets - Net cash used in investing activities was $0.2 million for H1 2023, primarily for the purchase of property and equipment[203] Financing Activities This section outlines cash flows from debt, equity, and dividend transactions affecting the company's capital structure - Net cash used in financing activities was $1.9 million for H1 2023, representing repayments of bank loans[204] - In contrast, H1 2022 saw $12.4 million provided by financing activities, mainly from IPO proceeds[204] Commitments and Contingencies This section discusses the company's capital expenditure plans and potential future obligations - Capital expenditures were $0.2 million for H1 2023 and $0.1 million for H1 2022, with no significant capital expenditures expected in the immediate future[205] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet arrangements impacting liquidity or financial risk - The Company has no off-balance sheet arrangements that would affect its liquidity, capital resources, or market/credit risk[206] Critical Accounting Policies and Significant Accounting Estimates This section refers to the company's critical accounting policies and significant estimates as disclosed in prior filings - Management's discussion of critical accounting policies and significant estimates is consistent with the 2022 Form 10-K, with no new material events or circumstances affecting policies or estimates for H1 2023[207] Recently Issued Accounting Pronouncements This section directs readers to Note 2 for details on recently adopted accounting pronouncements - Refer to Note 2, 'Summary of significant accounting policies,' for details on recently issued accounting pronouncements[208] Non-GAAP Measures FGI uses non-GAAP measures like Adjusted Income from Operations, Adjusted Operating Margins, and Adjusted Net Income to evaluate performance, manage expenses, and identify trends. These adjustments exclude non-recurring expenses such as IPO-related compensation, legal fees, and business expansion expenses to provide a clearer view of underlying profitability - FGI uses non-GAAP measures (Adjusted Income from Operations, Adjusted Operating Margins, Adjusted Net Income) to evaluate business performance and profitability, excluding non-recurring expenses[210][212] Non-GAAP Reconciliation | Metric | Three Months Ended June 30, 2023 (USD) | Three Months Ended June 30, 2022 (USD) | Six Months Ended June 30, 2023 (USD) | Six Months Ended June 30, 2022 (USD) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Income from operations (GAAP) | $580,275 | $1,729,349 | $577,348 | $2,420,095 | | Adjusted income from operations (Non-GAAP) | $642,045 | $1,752,908 | $750,890 | $2,675,966 | | Adjusted operating margins (Non-GAAP) | 2.2% | 3.7% | 1.3% | 2.9% | | Net (Loss) Income (GAAP) | $88,481 | $1,170,530 | $(214,894) | $1,700,723 | | Adjusted net (loss) income (Non-GAAP) | $138,576 | $1,189,848 | $(74,151) | $1,910,537 | - Adjustments for H1 2023 included $50,000 for IPO legal fees and $123,542 for business expansion expenses[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including interest rate, foreign currency, and commodity price risks Item 4. Controls and Procedures This section evaluates the effectiveness of the company's disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures As of June 30, 2023, FGI's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective due to identified material weaknesses in internal control over financial reporting - As of June 30, 2023, FGI's disclosure controls and procedures were deemed not effective[217] Evaluation of the Effectiveness of Internal Control over Financial Reporting Management identified material weaknesses in internal control over financial reporting as of December 31, 2022, including weaknesses in IT security, insufficient documentation of financial processes and controls, and inadequate segregation of duties. Remediation efforts are underway, including hiring additional accounting personnel and establishing an internal audit function, with anticipated remediation of some weaknesses by year-end 2023 - Identified material weaknesses include weaknesses in IT security environment, controls, and procedures, including lack of formal IT policies - Lack of sufficient documentation of existing financial processes, risk assessment, and internal controls activities - Inadequate segregation of duties for certain functions due to limited staff and resources[219][220] - Management concluded that these material weaknesses create a reasonable possibility of material misstatement in financial statements not being prevented or detected[219] - Remediation initiatives include hiring additional accounting personnel, establishing an internal audit function, and completing cybersecurity training, with some weaknesses expected to be remediated by the end of 2023[220][222] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, other than the remediation efforts described - No material changes in internal control over financial reporting occurred during Q2 2023, apart from the ongoing remediation efforts for identified material weaknesses[223] PART II - OTHER INFORMATION Item 1. Legal Proceedings FGI is involved in legal proceedings, including the ongoing Ayers Bath Litigation, where FGI USA is seeking to recover damages related to an exclusivity agreement. While the ultimate outcome is uncertain, the company does not believe these proceedings will have a material adverse effect on its financial condition - FGI is involved in legal proceedings, including the Ayers Bath Litigation, where FGI USA is seeking to recover damages from an exclusivity agreement violation[225][226] - The District Court has allowed FGI USA to propose an amendment to its complaint, filed on June 27, 2023, with Tangshan Ayers moving to compel arbitration[227] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to the risk factors from the 2022 Form 10-K have occurred as of this filing[228] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms the details of the Company's Initial Public Offering (IPO) on January 27, 2022, including the issuance of units and warrants, net proceeds of approximately $12.4 million, and states that there has been no material change in the expected use of these proceeds - The IPO on January 27, 2022, involved the sale of 2,500,000 units (ordinary shares and warrants) at $6.00 per unit, yielding net proceeds of approximately $12.4 million[229] - No material change has occurred in the expected use of the net proceeds from the IPO as described in previous filings[231] Item 3. Defaults Upon Senior Securities The Company reports no defaults upon senior securities - There are no defaults upon senior securities[232] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to FGI Industries Ltd[233] Item 5. Other Information The Company reports no other information - No other information is reported in this section[234] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including organizational documents, certifications, and XBRL-formatted financial data - Exhibit 3.1: Second Amended and Restated Memorandum and Articles of Association of FGI Industries Ltd - Exhibit 31.1 & 31.2: Rule 13(a)-14(a)/15(d)-14(a) Certifications of Principal Executive Officer and Principal Financial Officer - Exhibit 32.1: Section 1350 Certification of Principal Executive Officer and Principal Financial Officer - Exhibit 101 & 104: Inline XBRL formatted financial statements and cover page interactive data file[236] SIGNATURES