906 Murray Road
East Hanover, NJ 07869
(973) 428-0400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

We are offering         of our ordinary shares. This is our initial public offering and no public market currently exists for our ordinary shares. We expect the initial public offering price to be between $    and $    per share. We have applied to list our ordinary shares on the Nasdaq Capital Market under the symbol “FGI”.

Investing in our ordinary shares involves a high degree of risk. Please read “Risk Factors” beginning on page 14 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements for this prospectus and future filings.

We are a Cayman Islands exempted company with operations in the United States, Canada, Europe, and Asia. We are not a Chinese operating company and conduct limited operations in China. For a detailed description of the risks facing the Company and the offering associated with our operations in China, please refer to “Risk Factors – Risks Relating to Doing Business in China.”

No offer or invitation, whether directly or indirectly, may be made to the public in the Cayman Islands to subscribe for our securities.

(1)

We refer you to “Underwriting” beginning on page 94 for additional information regarding underwriter compensation. Does not include additional compensation payable to The Benchmark Company or the underwriters. We have agreed to reimburse the underwriters for certain expenses incurred relating to this offering. In addition, we will issue to the representative a warrant to purchase the number of ordinary shares equal to two percent (2%) of the number of shares issued in this offering. The registration statement of which this prospectus forms a part also registers the issuance of the ordinary shares issuable upon exercise of the representative’s warrant.

​

We have granted the underwriters an option for a period of 30 days to purchase an additional        ordinary shares at the initial public offering price, less discounts and commissions. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $      , and the total proceeds to us, before expenses, will be $      , based on an assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on this cover page of the prospectus.

Immediately after the offering,        ordinary shares will be issued and outstanding, of which   % will be held by insiders and affiliates of FGI and   % will be held by public investors (       ordinary shares will be issued and outstanding if the underwriters exercise in full their option to purchase additional ordinary shares, of which   % will be held by insiders and affiliates of FGI and   % will be held by public investors).

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date.

Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

Through and including            , 2021 (25 days after the date of this prospectus), all dealers that effect transactions in our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

TRADEMARKS

“FGI” and the other trademarks, trade names or service marks of FGI Industries Ltd. appearing in this prospectus are the property of FGI Industries Ltd. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and tradenames.

INVESTORS OUTSIDE THE UNITED STATES

For investors outside of the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

ii

 

 

2

 

3

 

​

4

 

5

 

​

6

 

​

7

 

8

 

9

 

 

​

11

 

 

​

​

​

For the six months ended June 30,

​

​

For the year ended December 31,

​

​

​

​

2021

​

​

2020

​

​

2020

​

​

2019

​

Other Data(1):

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Adjusted income from operations

​

​

​

$

5,320,196

​

​

​

​

$

2,642,781

​

​

​

​

$

6,282,113

​

​

​

​

​

3,998,578

​

​

Adjusted operating margin

​

​

​

​

6.7%

​

​

​

​

​

4.2%

​

​

​

​

​

4.7%

​

​

​

​

​

3.2%

​

​

Adjusted net income

​

​

​

​

4,185,687

​

​

​

​

​

2,092,870

​

​

​

​

​

4,730,748

​

​

​

​

​

4,185,687

​

​

Free cash flow

​

​

​

​

625,021

​

​

​

​

​

(650,653)

​

​

​

​

​

5,723,227

​

​

​

​

​

625,021

​

​

Free cash flow conversion

​

​

​

​

11%

​

​

​

​

​

—

​

​

​

​

​

121%

​

​

​

​

​

67%

​

​

​

​

​

As of June 30, 2021

​

​

As of December 31, 2020

​

Balance Sheet Data:

​

​

​

​

​

​

​

​

​

​

​

​

​

Cash and cash equivalents

​

​

​

$

3,800,610

​

​

​

​

​

4,018,558

​

​

Working capital (deficit)

​

​

​

​

(6,658,982)

​

​

​

​

​

(1,691,240)

​

​

Total assets

​

​

​

​

50,391,679

​

​

​

​

​

45,147,461

​

​

Total liabilities

​

​

​

​

50,495,948

​

​

​

​

​

43,615,765

​

​

Total parent’s net investment

​

​

​

​

(104,269)

​

​

​

​

​

1,531,696

​

​

​

​

13

 

 

affect not only the ultimate consumer of our products, but also may impact home centers, builders and our other primary customers. As a result, a worsening of economic conditions, including due to the COVID-19 pandemic, could have a material adverse effect on our sales and earnings as well as our cash flow and liquidity.

Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us.

The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. Furthermore, our existing indebtedness, which was approximately $15.8 million as of June 30, 2021, may adversely affect our financial flexibility and our competitive position in the future. We cannot assure you that our cash flow from operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms to implement our “BPC” growth strategy. We may need additional cash resources in the future if we experience changed business conditions or other developments 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. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our results of operations and financial position.

We may not achieve all of the anticipated benefits of our strategic initiatives.

We continue to pursue our strategic initiatives of investing in our branded products, developing new product categories, and utilizing sales channels positioned for long term growth through the “BPC” strategy, our methodology to drive growth and productivity. These initiatives are designed to grow shareholder value over the long term. Our results of operations and financial position could be materially and adversely affected if we are unable to successfully execute these initiatives or if we are unable to execute these initiatives in a timely and efficient manner. We could also be adversely affected if we have not appropriately prioritized and balanced our initiatives or if we are unable to effectively manage change throughout our organization.

We may not be able to successfully execute our acquisition strategy or integrate businesses that we acquire.

Pursuing the acquisition of businesses complementary to our portfolio is a component of our strategy for future growth. If we are not able to identify suitable acquisition candidates or consummate potential acquisitions within a desired time frame or with acceptable terms and prices, our long-term competitive positioning may be affected. Even if we are successful in acquiring and/or merging with businesses, the businesses we acquire or merge with may not be able to achieve the revenue, profitability or growth we anticipate, or we may experience challenges and risks in integrating these businesses into our existing business. Such risks include:

•

difficulties realizing expected synergies and economies of scale;

​

•

diversion of management attention and our resources;

​

•

unforeseen liabilities;

​

•

issues or conflicts with our new or existing customers or suppliers; and

​

•

difficulties in retaining critical employees of the acquired businesses.

​

Future foreign acquisitions may also increase our exposure to foreign currency risks and risks associated with interpretation and enforcement of foreign regulations. Our failure to address these risks could cause us to incur additional costs and fail to realize the anticipated benefits of our acquisitions and could have a material adverse effect on our results of operations and financial position.

We could continue to pursue growth opportunities through either acquisitions, mergers or internally developed projects, which may be unsuccessful or may adversely affect our future financial condition and operating results.

Although we are not currently considering any specific business combinations, we could pursue opportunities for growth through either acquisitions, mergers or internally developed projects as part of our

 

15

 

“BPC” growth strategy. We cannot assure you that we will be successful in integrating an acquired business or that an internally developed project will perform at the levels we anticipate. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share. In addition, we may fail to identify significant liabilities or risks associated with a given acquisition that could adversely affect our future financial condition and operating results or result in us paying more for the acquired business or assets than they are worth.

Business and Operational Risks

In connection with this offering, we were created as a stand-alone business and have no operating history as a stand-alone business.

The historical financial information we have included in this prospectus does not reflect, and the pro forma financial information included in this prospectus may not reflect, what our financial condition, results of operations or cash flows would have been had we been a stand-alone entity during the historical periods presented, or what our financial condition, results of operations or cash flows will be in the future as an independent entity.

In addition, we have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company.

Variability in the cost and availability of our raw materials, component parts and finished goods, including the imposition of tariffs, could affect our results of operations and financial position.

We purchase substantial amounts of raw materials, component parts and finished goods from outside sources, including international sources, and our products are manufactured outside of the United States. Increases in the cost of the materials we purchase have in the past and may in the future increase the prices for our products, including as a result of new tariffs. For example, the continuing trade dispute between the United States and China has resulted in tariffs which raised the cost of certain of our materials. There is a risk that additional tariffs on imports from China or new tariffs could be imposed, which could further increase the cost of the materials we purchase or import or the products we manufacture internationally. Further, our production could be affected if we or our suppliers are unable to procure our requirements for various commodities, including, among others, brass, porcelain, wood and engineered wood, or if a shortage of these commodities results in significantly increased costs. Rising energy costs could also increase our production and transportation costs. These factors could have a material adverse effect on our results of operations and financial position.

It can be difficult for us to pass on to customers our cost increases. Our existing arrangements with customers, competitive considerations and customer resistance to price increases may delay or make us unable to adjust selling prices. If we are not able to sufficiently increase the prices of our products or achieve cost savings to offset increased material and production costs, including the impact of increasing tariffs, our results of operations and financial position could be adversely affected. When our material costs decline, we may in the future receive pressure from our customers to reduce our prices. Such reductions could have a material adverse effect on our results of operations and financial position.

We have entered into long-term agreements with certain significant suppliers to help ensure continued availability of our manufactured product supply and to establish firm pricing, but at times these contractual commitments may result in our paying above market prices for manufactured products during the term of the contract.

Our top ten customers represent a large portion of our sales. A significant adverse change in such relationships could adversely impact our results of operations and financial condition.

Our sales are concentrated with ten significant customers who collectively represented over 79% of our consolidated net sales from continuing operations for the six months ended June 30, 2021 and 85% of our

 

16

 

consolidated net sales from continuing operations for the fiscal year ended December 31, 2020, and this concentration may continue to increase. In particular, The Home Depot represented approximately 28% of our consolidated net sales from continuing operations in the six months ended June 30, 2021 and approximately 31% of our consolidated net sales from continuing operations in fiscal year 2020. The Home Depot and other home center retailers can significantly affect the prices we receive for our products and the terms and conditions on which we do business with them. Additionally, these home center retailers may reduce the number of vendors from which they purchase and could make significant changes in their volume of purchases from us. The loss of one or more key customers, a material reduction in products purchased by them, or our inability to maintain our competitive position in our industries could cause us to experience a decline in net sales, which could adversely affect our financial results. In addition, there can be no assurance that such customers will not experience financial difficulties or other adverse conditions which could delay such customers in paying for products on a timely basis or at all. Although other retailers, dealers, distributors and homebuilders represent other channels of distribution for our products and services, we might not be able to quickly replace, if at all, the loss of all or a substantial portion of our sales, and any such loss would have a material adverse effect on our business, results of operations and financial position.

We are dependent on third-party suppliers.

We are dependent on third-party suppliers for many of our products and components, and are largely dependent on one large supplier, Tangshan Huida Ceramic Group Co., Ltd, an entity formed and located in China (“Huida”), who accounted for and approximately 53% of the total balance of our accounts payable as of June 30, 2021 and approximately 60% of the total balance of our accounts payable as of December 31, 2020, for the majority of our sanitaryware products, and our ability to offer a wide variety of products depends on our ability to obtain an adequate and timely supply of these products and components. Pursuant to a certain Agreement for Co-operations (the “Huida Agreement”), dated October 20, 2020, by and between Huida and FGI Industries, our wholly owned subsidiary, so long as we meet certain annual product placement volume requirements, (i) we have an exclusive right to distribute and resell in the United States and Canadian markets any products designed and created by Huida and for which Huida retains all intellectual property rights, and (ii) Huida may not manufacture or sell any products we design or create, for which we retain all intellectual property rights, without our prior consent. Failure of our suppliers and, particularly, of Huida, to timely provide us quality products on commercially reasonable terms, or to comply with applicable legal and regulatory requirements, or our policies regarding our supplier business practices, could have a material adverse effect on our results of operations and financial position or could damage our reputation. Sourcing these products and components from alternate suppliers, including suppliers from new geographic regions, is time-consuming and costly and could result in inefficiencies or delays in our business operations. Accordingly, the loss of Huida or other critical suppliers, or a substantial decrease in the availability of products or components from our suppliers, could disrupt our business and have a material adverse effect on our results of operations and financial position.

Many of the suppliers we rely upon are located in foreign countries, primarily China. The differences in business practices, shipping and delivery requirements, changes in economic conditions and trade policies and laws and regulations, together with the limited number of suppliers, have increased the complexity of our supply chain logistics and the potential for interruptions in our production scheduling. If we are unable to effectively manage our supply chain or if we experience constraints to or disruption in transporting the products or components or we have to pay higher transportation costs for timely delivery of our products or components, our results of operations and financial position could be materially and adversely affected. See “— Risks Related to Doing Business In China” below.

We are dependent on third-party manufacturers.

We do not own any of our manufacturing facilities, and are reliant upon Foremost, our former parent company, and other third-party manufacturers for our entire supply of products. Failure of our manufacturers to timely deliver quality products on commercially reasonable terms, or to comply with applicable legal and regulatory requirements, or our policies regarding our manufacturer business practices, could have a material adverse effect on our results of operations and financial position or could damage our reputation.

 

17

 

In addition, we may experience delays, disruptions or quality control problems in our manufacturing operations, over which we have little to no control.

Natural disasters or other disruptions could have a material adverse effect on our business, financial condition or results of operations.

Our manufacturers and suppliers are located in regions that are vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, tropical storms, hurricanes and snow and ice, which at times have disrupted the local economy and posed risks to our supply chain. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries. Our redundant, multiple site capacity may not be sufficient in the event of a natural disaster, terrorist act or other catastrophic event. Such disruptions could, among other things, disrupt our manufacturing or distribution facilities or those of our suppliers and result in delays or cancellations of customer orders for our products, which in turn could have a material adverse effect on our business, financial condition and results of operations. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, end-user customers in that region may delay or forego purchases of our products, which may materially and adversely impact our operating results for a particular period.

There are risks associated with our international operations and global strategies.

In the six months ended June 30, 2021, approximately 35% of our sales from continuing operations were made outside of the United States (principally in Canada and Europe) and transacted in currencies other than the U.S. dollar. In addition to our Canadian and European operations, we manufacture products and source products and components from China and parts of Southeast Asia. Risks associated with our international operations include:

•

differences in culture, economic and labor conditions and practices;

​

•

the policies of the U.S. and foreign governments;

​

•

disruptions in trade relations and economic instability;

​

•

differences in enforcement of contract and intellectual property rights;

​

•

social and political unrest; and

​

•

natural disasters, terrorist attacks, pandemics or other catastrophic events.

​

We are also affected by domestic and international laws and regulations applicable to companies doing business abroad or importing and exporting goods and materials. These include tax laws, laws regulating competition, anti-bribery/anti-corruption and other business practices, and trade regulations, including duties and tariffs. Compliance with these laws is costly, and future changes to these laws may require significant management attention and disrupt our operations. Additionally, while it is difficult to assess what changes may occur and the relative effect on our international tax structure, significant changes in how U.S. and foreign jurisdictions tax cross-border transactions could materially and adversely affect our results of operations and financial position.

Our results of operations and financial position are also impacted by changes in currency exchange rates. Unfavorable currency exchange rates between the US Dollar and foreign currencies, particularly the Euro, the Chinese Renminbi and the Canadian dollar, have in the past adversely affected us, and could adversely affect us in the future. Fluctuations in currency exchange rates may present challenges in comparing operating performance from period to period.

Additionally, following the United Kingdom’s exit from the European Union, we could experience volatility in the currency exchange rates or a change in the demand for our products and services, particularly in our European markets, or there could be disruption of our operations and our customers’ and suppliers’ businesses.

 

18

 

For specific risks associated with operations in China, see “— Risks Related to Doing Business in China” below.

The long-term performance of our businesses relies on our ability to attract, develop and retain talented and diverse personnel.

To be successful, we must invest significant resources to attract, develop and retain highly qualified, talented and diverse employees at all levels, who have the experience, knowledge and expertise to implement our strategic initiatives. We compete for employees with a broad range of employers in many different industries, including large multinational firms, and we may fail in recruiting, developing, motivating and retaining them, particularly when there are low unemployment levels. From time to time, we have been affected by a shortage of qualified personnel in certain geographic areas. Our growth, competitive position and results of operations and financial position could be materially and adversely affected by our failure to attract, develop and retain key employees and diverse talent, to build strong leadership teams, or to develop effective succession planning to assure smooth transitions of those employees and the knowledge and expertise they possess, or by a shortage of qualified employees.

The ongoing COVID-19 pandemic is disrupting our business, and has and may continue to impact our results of operations and financial condition.

The spread of COVID-19 has created a global health crisis that has resulted in widespread disruption to economic activity, both in the U.S. and globally.

We operate facilities in the United States and around the world which are being adversely affected by this pandemic. The U.S. federal government and numerous state, local and foreign governments implemented certain measures to attempt to slow and limit the spread of COVID-19, including shelter-in-place and social distancing orders, which are subject to change and the respective governmental authorities may tighten such restrictions at any time. As a result of such measures, we have experienced, and may continue to experience, the closure of certain of our facilities, delays or disruptions in the supply of raw materials, component parts and services and decreased employee availability, which has resulted and may continue to result in delays in our ability to produce and distribute our products.

In addition, COVID-19 has adversely affected and may continue to adversely affect domestic and international economic activity, including reduced consumer confidence, instability and volatility in the credit and financial markets and reduced business and consumer spending, which may materially and adversely affect our results of operations. Economic uncertainty as a result of COVID-19 may also make it difficult for us and our customers and suppliers to accurately forecast and plan future business activities and may weaken the financial position of some of our suppliers and customers.

Due to the uncertain nature and potential duration of the COVID-19 pandemic and variants thereof, we are unable to fully estimate the extent of the impact it may have on the markets in which we operate or our business at this time. The extent of such impact will depend on a number of factors, including the duration and severity of the COVID-19 pandemic, its effect on our customers, suppliers and employees, its effect on domestic and international economies and markets, including consumer discretionary spending, the response of governmental authorities and the efficiency of distribution and effectiveness of the vaccines. We are continuing to take action to mitigate the impact of the COVID-19 pandemic on our business and operations, including through cost reduction measures and other initiatives, however the effectiveness of our mitigation efforts remains uncertain. A continued disruption of our operations and an on-going slowdown in domestic and international economic activity could materially and adversely affect our results of operations and financial condition.

To the extent COVID-19 continues to impact our business, financial position and results of operations, it may also have the effect of heightening certain of the other risks described in this prospectus, such as those relating to our international operations and global strategies and our dependence on third-party suppliers.

 

19

 

Risks Related to Doing Business in China

We have limited operations in China, but many of our products are sourced from China. Our ability or the ability of our suppliers to operate in China may be impaired by changes in Chinese laws and regulations, including those relating to taxation, environmental regulation, restrictions on foreign investment, and other matters.

While we are a Cayman Islands exempted company headquartered in the United States and derive no revenue from China, we do have limited sourcing and product development operations in China. As of the date of this prospectus, approximately 16 of our 130 employees are based in China. Moreover, suppliers of a majority of our product materials are based in China.

The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. The central Chinese government or local governments having jurisdiction within China may impose new, stricter regulations, or interpretations of existing regulations, that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. As such, the Company’s subsidiaries or our third-party suppliers in the People's Republic of China (PRC) maybe subject to governmental and regulatory interference in the provinces in which they operate. Our subsidiaries or our third-party suppliers could also be subject to regulation by various political and regulatory entities, including local and municipal agencies and other governmental subdivisions. Our ability, and the ability of our suppliers, to operate in China may be impaired by any such laws or regulations, or any changes in laws and regulations in the PRC. The Company or its third-party suppliers may incur increased costs necessary to comply with existing and future laws and regulations or penalties for any failure to comply. If our suppliers incur increased costs, they may attempt to pass such costs on to us. Any such increased costs or disruptions to our operations or the operations of our suppliers could adversely impact our results of operations.

In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, we could become subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have an adverse effect on our business operations in China.

We are subject to various risks and costs associated with the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. This data is wide ranging and relates to our investors, employees, contractors and other counterparties and third parties. Our compliance obligations include those relating to the Data Protection Act (As Revised) of the Cayman Islands and the relevant PRC laws in this regard. These PRC laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and other parties with which we have commercial relations. We do not believe the PRC laws have a material impact on our current operations, but these laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.

Pursuant to the PRC Cybersecurity Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the CAC. Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear. On July 10, 2021, the CAC publicly issued the Measures for Cybersecurity Censorship (Revised Draft for Comments) aiming to, upon its enactment, replace the existing Measures for Cybersecurity Censorship. The draft measures extend the scope of cybersecurity reviews to data processing operators engaging in data processing activities that affect or may affect national security, including listing in a foreign country. PRC Data Security Law, which was promulgated by the Standing Committee of the National People’s Congress on June 10, 2021and took effect on September 1, 2021, requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security.

 

20

 

We believe we are compliant with these regulations, to the extent they are applicable to us, and we do not believe our business would be materially affected by these recent measures. However, if we were selected for review, or one of our suppliers was selected for review, we or such supplier may be required to suspend operations in China during such review. Cybersecurity review could also result in negative publicity with respect to our company or our suppliers and could divert managerial attention and financial resources. Furthermore, if we or one of our suppliers were found to be in violation of applicable laws and regulations in China during such review, we or such supplier could be subject to administrative penalties, such as warnings, fines, or service suspension.

We could be subject to regulation by various political and regulatory entities, including local and municipal agencies and other governmental subdivisions.

We may incur increased costs necessary to comply with existing and future laws and regulations or penalties for any failure to comply. Outside of general business licenses in the ordinary course, FGI China and FGI International are not required to obtain permission from any Chinese authorities to operate and, as a Cayman Islands entity based in the United States, the Company is not required to obtain any permission from the China Securities Regulatory Commission, CAC or similar entity in China to issue our ordinary shares. Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law” ​(the “Opinions”), which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen administration over illegal securities activities and the need to strengthen supervision with respect to overseas listings of Chinese companies.

We believe the Opinions are inapplicable to us, as we are a Cayman Islands entity and our operations in China are limited. However, some of our major suppliers could be affected, and the Company’s operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry. Additionally, future laws or regulations that adversely affect our suppliers or their ability to source and provide materials to us could have an adverse impact on our operations. Accordingly, the Chinese government’s actions in the future, including any decision to intervene in or influence our operations or the operations of our suppliers at any time may cause the Company or its suppliers to make changes to our or their operations.

Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.

From time to time, the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations or to otherwise provide information. While the Company will comply with requests from these regulators, there is no guarantee that such requests will be honored by those entities that provide services to us or with which we associate, especially for any such entities that are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the unpredictability of the Chinese enforcement and other government agencies and may therefore be impossible to facilitate.

The Company’s auditor, Marcum LLP, is PCAOB registered and based in New York, New York. Under the Holding Foreign Companies Accountable Act (the “HFCAA”), the PCAOB is permitted to inspect the Company’s independent public accounting firm. If the PCAOB later determined that it cannot inspect or fully investigate our auditor, trading in our securities may be prohibited under the HFCAA, and, as a result, Nasdaq may determine to delist our securities.

Changes in China’s economic, political or social conditions or legal system or government policies could have a material adverse effect on our business and operations.

While we have limited sourcing and product development operations located in China through FGI China and FGI International, many of our products are sourced or manufactured in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by the significant discretion of Chinese governmental authorities. The Chinese government continues to play a significant role in regulating industry

 

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development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies. The increased global focus on environmental and social issues and China’s potential adoption of more stringent standards in these areas may adversely impact us or our suppliers.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we or our suppliers may not be aware of our violation of any of these policies and rules until sometime after the alleged violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Further, such evolving laws and regulations and the inconsistent enforcement thereof could also lead to failure to obtain or maintain licenses and permits to do business in China, which would adversely affect us or our suppliers in China. Any such disruption, or if one or more of our Chinese suppliers was prevented from operating, could have an adverse impact on our results of operations and financial condition.

Competitive Risks

We could lose market share if we do not maintain our strong brands, develop innovative products or respond to changing purchasing practices and consumer preferences or if our reputation is damaged.

Our competitive advantage is due, in part, to our ability to maintain our strong brands and to develop and introduce innovative new and improved products. Our initiatives to invest in brand building, brand awareness and product innovation may not be successful. The uncertainties associated with developing and introducing innovative and improved products, such as gauging changing consumer demands and preferences and successfully developing, manufacturing, marketing and selling these products, may impact the success of our product introductions. If the products we introduce do not gain widespread acceptance or if our competitors improve their products more rapidly or effectively than we do, we could lose market share or be required to reduce our prices, which could have a material adverse effect on our results of operations and financial position.

In recent years, consumer purchasing practices and preferences have shifted and our customers’ business models and strategies have changed. As our customers execute their strategies to reach end consumers through multiple channels, they rely on us to support their efforts with our infrastructure, including maintaining robust and user-friendly websites with sufficient content for consumer research and providing comprehensive supply chain solutions and differentiated product development. If we are unable to successfully provide this support to our customers or if our customers are unable to successfully execute their strategies, our brands may lose market share.

If we do not timely and effectively identify and respond to changing consumer preferences, including a continued shift in consumer purchasing practices toward e-commerce, our relationships with our customers and with consumers could be harmed, the demand for our brands and products could be reduced and our results of operations and financial position could be materially and adversely affected.

We face significant competition and operate in an evolving competitive landscape.

Our products face significant competition. We believe that brand reputation is an important factor affecting product selection and that we compete on the basis of product features, innovation, quality, customer service, warranty and price. We sell many of our products through home center retailers, online retailers, distributors and independent dealers and rely on these customers to market and promote our products to consumers. Our success with our customers is dependent on our ability to provide quality products and timely delivery. In addition, home center retailers, which have historically concentrated their sales efforts on retail consumers and remodelers, are selling directly to professional contractors and installers, which may adversely affect our margins on our products that contractors and installers would otherwise buy through our dealers and wholesalers.

Certain of our customers are selling products sourced from low-cost foreign manufacturers under their own private label brands, which directly compete with our brands. As this trend continues, we may experience

 

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lower demand for our products or a shift in the mix of some products we sell toward more value-priced or opening price point products, which may affect our profitability.

In addition, we face competitive pricing pressure in the marketplace, including sales promotion programs, that could affect our market share or result in price reductions, which could materially and adversely impact our results of operations and financial position.

Further, the growing e-commerce channel brings an increased number of competitors and greater pricing transparency for consumers, as well as conflicts between our existing distribution channels and a need for different distribution methods. These factors could affect our results of operations and financial position. In addition, our relationships with our customers, including our home center customers, may be affected if we increase the amount of business we transact in the e-commerce channel.

Our failure to develop new products or respond to changing consumer preferences and purchasing practices could have a material adverse effect on our business, financial condition or results of operations.

We operate in an industry that is subject to changing consumer trends, demands and preferences. The uncertainties associated with developing and introducing new products, such as gauging changing consumer preferences and successfully developing, manufacturing, marketing and selling new products, could lead to, among other things, rejection of a new product line, reduced demand and price reductions for our products. If our products do not keep up with consumer trends, demands and preference, we could lose market share, which could have a material adverse effect on our business, financial condition or results of operations.

Changes in Cayman Islands or U.S. tax law could adversely affect our financial condition and results of operations.

The rules dealing with Cayman Islands and U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, as well as the regulators in the Cayman Islands. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our ordinary shares. In recent years, many such changes have been made and changes are likely to continue to occur in the future. Future changes in Cayman Islands or U.S. tax laws could have a material adverse effect on our business, cash flow, financial condition or results of operations. We urge investors to consult with their legal and tax advisors regarding the implications of potential changes in Cayman Islands or U.S. tax laws on an investment in our ordinary shares.

The loss of certain members of our management may have an adverse effect on our operating results.

Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills and know-how that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our financial condition and results of operations may be negatively affected. Moreover, the pool of qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.

Technology and Intellectual Property Risks

We rely on information systems and technologies, and a breakdown of these systems could adversely affect our results of operations and financial position.

We rely on many information systems and technologies to process, transmit, store and manage information to support our business activities. We may be adversely affected if our information systems breakdown, fail, or are no longer supported. In addition to the consequences that may occur from

 

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interruptions in our systems, global cybersecurity vulnerabilities, threats and more sophisticated and targeted attacks pose a risk to our information technology systems.

We have implemented security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Despite these efforts, our systems may in the future be damaged, disrupted, or shut down due to cybersecurity attacks by unauthorized access, malware, ransomware, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate. These breaches or intrusions could in the future lead to business interruption, production or operational downtime, product shipment delays, exposure or loss of proprietary, confidential, personal or financial information, data corruption, an inability to report our financial results in a timely manner, damage to the reputation of our brands, damage to our relationships with our customers and suppliers, exposure to litigation, and increased costs associated with the remediation and mitigation of such attacks. Such events could adversely affect our results of operations and financial position. In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.

We may not be able to adequately protect or prevent the unauthorized use of our intellectual property.

Protecting our intellectual property is important to our growth and innovation efforts. We own a number of patents, trade names, brand names and other forms of intellectual property in our products and manufacturing processes throughout the world. There can be no assurance that our efforts to protect our intellectual property rights will prevent violations. Our intellectual property may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected. In addition, the global nature of our business increases the risk that we may be unable to obtain or maintain our intellectual property rights on reasonable terms. Furthermore, others may assert intellectual property infringement claims against us. Current and former employees, contractors, customers or suppliers have or may have had access to proprietary or confidential information regarding our business operations that could harm us if used by them, or disclosed to others, including our competitors. Protecting and defending our intellectual property could be costly, time consuming and require significant resources. If we are not able to protect our existing intellectual property rights, or prevent unauthorized use of our intellectual property, sales of our products may be affected and we may experience reputational damage to our brand names, increased litigation costs and adverse impact to our competitive position, which could have a material adverse effect on our results of operations and financial position.

The recent completion of the Reorganization may impact our brand recognition.

We rely on the reputation of our brands to distinguish our products from the products of our competitors. The recent completion of the Reorganization, as described in the section of this prospectus entitled “Business,” and, specifically, the separation of the K&B Business from Foremost, could result in loss of brand recognition due to a reduced breadth of product offerings for customers that have traditionally sought products in both business segments, and could require us to devote additional resources to marketing our brands in connection with FGI. Also, the transition from the “Foremost” company name to “FGI” could lead to some confusion by its customers. In addition, a loss of brand recognition may have an adverse impact to our competitive position, which could have a material adverse effect on our results of operations and financial position.

Litigation and Regulatory Risks

We are currently involved in legal proceedings and may in the future be a party to additional claims and litigation, which could be costly and divert significant resources.

FGI USA, our wholly-owned subsidiary, is currently involved in litigation arising from its efforts to protect an exclusivity agreement with sanitaryware manufacturer Tangshan Huida Ceramic Group Co., Ltd (“Huida”), with whom we have had an exclusive relationship for over twenty years. Proceedings against Huida have been pending for over ten years. We may, from time to time, be involved in various other claims and litigation, including class actions, mass torts and regulatory proceedings, that arise in the ordinary

 

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course of our business and that could have a material adverse effect on us. The types of matters may include, among others: competition, product liability, employment, warranty, advertising, contract, personal injury, environmental, intellectual property, product compliance and insurance coverage. The outcome and effect of these matters are inherently unpredictable, and defending and resolving them can be costly and can divert management’s attention. We have and may continue to incur significant costs as a result of claims and litigation.

We are also subject to product safety regulations, product recalls and direct claims for product liability that can result in significant costs and, regardless of the ultimate outcome, create adverse publicity and damage the reputation of our brands and business. Also, we rely on other manufacturers to provide products or components for products that we sell. Due to the difficulty of controlling the quality of products and components we source from other manufacturers, we are exposed to risks relating to the quality of such products and to limitations on our recourse against such suppliers.

We maintain insurance against some, but not all, of the risks of loss resulting from claims and litigation. The levels of insurance we maintain may not be adequate to fully cover our losses or liabilities. If any significant accident, judgment, claim or other event is not fully insured or indemnified against, it could have a material adverse effect on our results of operations and financial position.

For more information about the Huida proceeding, refer to the section of this prospectus entitled “Legal Proceedings.”

Compliance with laws, government regulation and industry standards is costly, and our failure to comply could adversely affect our results of operations and financial position.

We are subject to a wide variety of federal, state, local and foreign laws and regulations pertaining to:

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securities matters;

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taxation;

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anti-bribery/anti-corruption;

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employment matters;

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•

minimum wage requirements;

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•

environment, health and safety matters;

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•

the protection of employees and consumers;

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•

product compliance;

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•

competition practices;

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•

trade, including duties and tariffs;

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•

data privacy and the collection and storage of information, including regulation on data protection and oversight by the CAC in China; and

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•

climate change and protection of the environment.

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The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New data protection laws, including recent California legislation and regulation which affords California consumers an array of new rights, including the right to be informed about what kinds of personal data companies have collected and why it was collected, or increased oversight by the CAC in China, pose increasingly complex compliance challenges and potentially elevate our costs. Complying with varying jurisdictional requirements could increase the costs and complexity of compliance, and violations of applicable data protection laws could result in significant penalties. Any failure, or perceived failure, by us to comply with applicable data protection laws could result in proceedings or actions brought against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business.

 

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In addition to complying with current requirements and known future requirements, even more stringent requirements could be imposed on us in the future.

As we sell new types of products or existing products in new geographic areas or channels or for new applications, we are subject to the legal requirements applicable to those products or geographic areas. Additionally, some of our products must be certified by industry organizations. Compliance with new or changed laws, regulations and industry standards may require us to alter our product designs, our manufacturing processes, our packaging or our sourcing. These compliance activities are costly and require significant management attention and resources. If we do not effectively and timely comply with such regulations and industry standards, our results of operations and financial position could be materially and adversely affected.

Our failure to maintain acceptable quality standards could result in significant unexpected costs.

Any failure to maintain acceptable quality standards could require us to recall or redesign such products, or pay substantial damages in litigation, any of which would result in significant unexpected costs. We may also have difficulty controlling the quality of products or components sourced from manufacturers, so we are exposed to risks relating to the quality of such products and to limitations on our recourse against such suppliers. Further, any claim or product recall could result in adverse publicity against us, which could decrease our credibility, harm our reputation, adversely affect our sales, or increase our costs. Defects in our products could also result in decreased orders or sales to our customers, which could have a material adverse effect on our business, financial condition or results of operations.

Unauthorized disclosure of confidential information provided to us by customers, employees or third parties could harm our business.

We rely on the Internet and other electronic methods to transmit confidential information and store confidential information on our networks. Any disclosure of confidential information provided by, or concerning, our employees, customers or other third parties, including through inadvertent disclosure, unapproved dissemination, or unauthorized access, our reputation could be harmed and we could be subject to civil or criminal liability and regulatory actions could require us to comply with various breach notification laws and may expose us to litigation, remediation and investigation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability.

We are subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws, and non-compliance with such laws can subject us to administrative, civil and criminal fines and penalties, collateral consequences, remedial measures and legal expenses, all of which could adversely affect our business, results of operations, financial condition and reputation.

We are subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws and regulations in various jurisdictions in which we conduct or in the future may conduct activities, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations. The FCPA prohibits us and our officers, directors, employees and business partners acting on our behalf, including agents, from corruptly offering, promising, authorizing or providing anything of value to a “foreign official” for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. A violation of these laws or regulations could adversely affect our business, results of operations, financial condition and reputation. Our policies and procedures designed to ensure compliance with these regulations may not be sufficient and our directors, officers, employees, representatives, consultants, agents, and business partners could engage in improper conduct for which we may be held responsible.

Non-compliance with anti-corruption, anti-bribery, anti-money laundering or financial and economic sanctions laws could subject us to whistleblower complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, financial

 

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condition and reputation. In addition, changes in economic sanctions laws in the future could adversely impact our business and investments in our shares.

Our business could be affected by unexpected changes in U.S. and international regulatory standards and laws.

We market and sell our products in the United States, Canada and Europe. We also source and manufacture a majority of our products in Asia. As such, we and our manufacturing partners are subject to the normal risks of doing business abroad. Unexpected changes in government and industry regulatory standards, including labor, environmental and taxation laws, and export and import restrictions could materially and adversely affect our business, results of operations and financial position. Moreover, the failure of our manufacturing partners to comply with such regulations could affect our supply arrangements and materially and adversely affect our business, results of operations and financial position.

Risks Related to Our Ordinary Shares and this Offering

Foremost Groups Ltd. holds a significant majority of the voting power of our ordinary shares, approximately   % following this offering, and will be able to exert significant control over us.

Foremost will hold ordinary shares that represent approximately 97.4% of all outstanding voting power after the Reorganization (approximately   % following this offering) and, as such, may significantly influence the results of matters voted on by our shareholders and could effectively control many other major decisions regarding our operations, capital allocation priorities and corporate governance. In addition, we are reliant upon Foremost for manufacturing and other support. Moreover, as described in “Principal Shareholders” below, Mr. Liang Chou Chen holds approximately 49.75% of the voting control of Foremost. The interests of Foremost, particularly with respect to change-in-control transactions and election of directors, may conflict with those of the Company and/or its shareholders, and Foremost may not always act in the best interest of the Company. This significant concentration of stock ownership and reliance for support may adversely affect the trading price for our ordinary shares because investors may perceive disadvantages in owning stock in companies with controlling shareholders.

There has been no prior public market for our ordinary shares and an active trading market may never develop or be sustained.

Prior to this offering, there has been no public market for our ordinary shares. Although we have applied to list our ordinary shares on the Nasdaq Capital Market, or Nasdaq, an active trading market for our ordinary shares may never develop following completion of this offering or, if developed, may not be sustained. The lack of an active trading market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive trading market may also impair our ability to raise capital by selling our ordinary shares and enter into strategic partnerships or acquire other complementary products or businesses by using our ordinary shares as consideration. Furthermore, even if approved for listing there can be no guarantee that we will continue to satisfy the continued listing standards of Nasdaq. If we fail to satisfy the continued listing standards, we could be de-listed, which would have a material adverse effect on the price and volatility of our ordinary shares.

The price of our ordinary shares may be volatile and you may lose all or part of your investment.

The initial public offering price for our ordinary shares sold in this offering is determined by negotiation between the underwriters and us. This price may not reflect the market price of our ordinary shares following this offering. In addition, the market price of our ordinary shares is likely to be highly volatile and may fluctuate substantially due to many factors, including:

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our ability to maintain our strong brands and reputation and to develop innovative products;

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our ability to maintain our competitive position in our industries;

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risks associated with our reliance on information systems and technology;

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product liability claims or other litigation;

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quarterly variations in our results of operations or those of others in our industry;

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changes in governmental regulations;

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changes in earnings estimates or recommendations by securities analysts; and

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general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

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In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies, including as a result of disruptions and dislocations arising out of the COVID-19 pandemic. Broad market and industry factors may significantly affect the market price of our ordinary shares, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our ordinary shares shortly following this offering. If the market price of our ordinary shares after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would have a material adverse effect on our financial condition and operating results and divert management’s attention and resources from our business.

We do not intend to pay dividends on our ordinary shares, so any returns will be limited to increases, if any, in our stock’s value. Your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our ordinary shares.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Any return to shareholders will therefore be limited to the appreciation in the value of their stock, if any.

A significant portion of our outstanding ordinary shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.

Sales of a substantial number of our ordinary shares in the public market could occur at any time following the termination of any restrictions on resale imposed by contract or by the securities laws. These sales, or the perception in the market that these sales may occur, could result in a decrease in the market price of our ordinary shares. Immediately after this offering, we will have outstanding           ordinary shares, based on the number of ordinary shares that will be outstanding after the Reorganization. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing shareholders who have entered into lock-up agreements. Of the remaining shares,           shares will be restricted as a result of securities laws or 180-day lock-up agreements (which may be waived, with or without notice, by the underwriters) but will be able to be sold beginning 180 days after this offering, unless held by one of our affiliates, in which case the resale of those securities will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended, or the Securities Act. See “Shares Eligible for Future Sale.” If and when we register the resale of these shares, they can be freely sold in the public market, subject to volume limitations applicable to affiliates and the lockup agreements referred to above and described in the section of this prospectus entitled “Underwriting.”

If you purchase our ordinary shares in this offering, you will incur immediate and substantial dilution in the book value of your shares.

Investors purchasing our ordinary shares in this offering will pay a price per share that substantially exceeds the pro forma as adjusted net tangible book value per ordinary share. As a result, investors purchasing

 

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our ordinary shares in this offering will incur immediate dilution of $        per share, representing the difference between our assumed initial public offering price of $       per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and our pro forma as adjusted net tangible book value per share as of June 30, 2021. To the extent outstanding options to purchase our ordinary shares are exercised, new investors may incur further dilution. For more information on the dilution you may experience as a result of investing in this offering, see the section of this prospectus entitled “Dilution.”

If we sell ordinary or preference shares in future financings, shareholders may experience immediate dilution and, as a result, our stock price may decline.

We may from time to time issue additional preference shares or ordinary shares at a discount from the current trading price of our ordinary shares. As a result, our shareholders would experience immediate dilution upon the purchase of any shares sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preference shares or ordinary shares. If we issue ordinary shares or securities convertible into ordinary shares, our ordinary shareholders would experience additional dilution and, as a result, our stock price may decline.

We will have broad discretion in the use of proceeds of this offering designated for working capital and general corporate purposes.

We intend to use the net proceeds from this offering for: potential mergers, acquisitions or other strategic capital allocation priorities and for working capital and general corporate purposes. Our management will have broad discretion over the use and investment of the net proceeds of this offering. Accordingly, investors in this offering have only limited information concerning our management’s specific intentions and will need to rely upon the judgment of our management with respect to the use of proceeds.

We are an emerging growth company and a smaller reporting company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to “emerging growth companies” or “smaller reporting companies,” this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.

We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access to certain information they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates equals or exceeds $700 million as of the last business day of any second fiscal quarter before that time, in which case we would no longer be an emerging growth company as of the end of such fiscal year. We cannot predict whether investors would find our securities less attractive in the event that we rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we,

 

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as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our ordinary shares held by non-affiliates exceeds $250 million as of the last business day of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our ordinary shares held by non-affiliates equals or exceeds $700 million as of the last business day of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.

Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited.

We are an exempted company incorporated under the laws of the Cayman Islands. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or officers, or enforce judgments obtained in the United States courts against our directors or officers.

Our corporate affairs will be governed by our amended and restated memorandum and articles of association (that we will adopt prior to the consummation of this offering), the Companies Act (as the same may be supplemented or amended from time to time) and the common law of the Cayman Islands. We will also be subject to the federal securities laws of the United States. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from what they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws as compared to the United States, and certain states, such as Delaware, may have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholders derivative action in a Federal court of the United States.

We have been advised by Travers Thorp Alberga, our Cayman Islands legal counsel, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

 

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As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a United States company.

Provisions in our amended and restated memorandum and articles of association may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our ordinary shares and could entrench management.

Our amended and restated memorandum and articles of association contain provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. These provisions will include a staggered board of directors, the ability of the board of directors to designate the terms of, and issue, new series of preference shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

General Risk Factors

In connection with the audit of our financial statements, significant deficiencies or material weaknesses in our internal control over financial reporting may be identified.

The process of designing and implementing an effective accounting and financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain an accounting and financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine to take additional actions to address control deficiencies or weaknesses or determine to modify certain of the remediation measures described above. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate any significant deficiencies or material weaknesses we identify or avoid potential future significant deficiencies or material weaknesses.

If we are unable to successfully remediate any future significant deficiencies in our internal control over financial reporting, or if we identify any material weaknesses, the accuracy and timing of our financial reporting may be materially and adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our share price may decline as a result. We also could become subject to investigations by Nasdaq, the SEC, or other regulatory authorities.

We expect to incur significant additional costs as a result of being a public company.

Upon completion of this offering, we expect to incur costs associated with corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as the rules of Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may have a material adverse effect on our business, financial condition and results of operations.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the closing of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no

 

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matter how well those controls and procedures are conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which may have a material adverse effect on our business, financial condition and results of operations.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

If a trading market for our ordinary shares develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our ordinary shares will have had relatively little experience with us or our business and products, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline and result in the loss of all or a part of your investment in us.

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research, as well as from independent market research, industry and general publications and surveys, governmental agencies and publicly available information in addition to research, surveys and studies conducted by third parties. The market and industry data used in this prospectus involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or by us.

 

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The following table shows, as of June 30, 2021, on a pro forma as adjusted basis as described above, the number of ordinary shares purchased from us, the total consideration paid to us and the average price per share paid, or to be paid, by existing shareholders and by new investors purchasing ordinary shares in this offering at the assumed initial public offering price of  $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

Each $1.00 increase (decrease) in the assumed initial public offering price of  $    per share (which is the midpoint of the price range set forth on the cover page of this prospectus), would increase (decrease) the total consideration paid by new investors participating in this offering and total consideration paid by all shareholders by $   million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The above table assumes no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, our existing shareholders before this offering would own   % and our new investors participating in this offering would own   % of the total number of ordinary shares outstanding immediately prior to the completion of this offering. Additionally, the consideration paid to us by new investors participating in this offering would be $    million, or approximately    % of the total consideration.

The foregoing discussion and tables are based on (other than the historical net tangible book value calculation) are based on 7,000,000 ordinary shares that will be outstanding after the Reorganization, which gives effect to the pro forma transactions described above, and excludes:

•

183,750 ordinary shares issuable upon the vesting of restricted stock units that will be issued prior to the consummation of this offering;

​

•

1,316,250 ordinary shares that remain available for issuance under our Equity Plan after the Reorganization; and

​

•

      ordinary shares issuable upon exercise of the representative’s warrant issued in connection with this offering (or       if the underwriters exercise in full their option to purchase up to        additional ordinary shares).

​

To the extent that stock options or warrants are exercised, new stock options are issued under our stock incentive plans, or we issue additional ordinary shares in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

 

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(1)

We define Adjusted Income from Operations as GAAP income from operations adjusted for the impact of certain non-recurring income and expenses such as expenses related to COVID-19 protocols and 2019 one-time antidumping/countervailing duty legal fees. We define Adjusted Net Income as GAAP net income adjusted for the tax-effected impact of certain non-recurring expenses and income. We define Adjusted Operating Margins as GAAP adjusted income from operations divided by net income. We define Free Cash Flow as net cash provided by (used in) operating activities less purchases of property and equipment. We calculate free cash flow conversion as Free Cash Flow divided by net income. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Measures” for more information on our use of these adjusted figures and a reconciliation of these financial measures to their closest GAAP comparators.

​

 

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(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Measures.”

​

We derive the majority of our revenues from sales of sanitaryware, which accounted for 55.2% and 65.3% of our total revenues for the six months ended June 30, 2021, and 2020, respectively. Revenues generated from the sales of sanitaryware increased by 5.1% to $43.5 million for the six months ended June 30, 2021, from $41.4 million for the six months ended June 30, 2020. In the first half of fiscal year 2020, shipments of our sanitaryware products were delayed due to the temporary closure of our suppliers in China due to the COVID-19 pandemic. Upon reopening at the end of the second quarter of 2020, shipments from these suppliers resumed in order to meet customer demand in the second half of the year. Sanitaryware has continued to perform well in fiscal year 2021 to date.

Our revenues from bath furniture sales increased significantly by 53.1% to $27.4 million for the six months ended June 30, 2021, from $17.9 million for the six months ended June 30, 2020. Bath furniture sales accounted for 34.8% and 28.3% of our total revenue for the six months ended June 30, 2021, and 2020, respectively. The increased sales of this product line were primarily driven by the entry into new programs with our major customers and expanding new SKUs with higher selling prices. The R&R market has significantly improved, which has caused our customers to place more orders and to explore the different programs that we are offering for them to attract more business.

 

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We also generate revenues from sales of other products (shower systems and custom kitchen cabinetry), which, in the aggregate, accounted for less than 10% of our total revenues for both the six-month periods ended June 30, 2021, and 2020. The increase in other product sales was primarily attributable to shower systems sales, which benefited from new business programs with our existing customers. Although we will continue to focus on sales of sanitaryware and bath furniture products, revenues from other products are expected to continue to grow, despite representing a smaller portion of our total revenues.

We derive our revenues from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:

We generated the majority of our revenues in the United States market, which amounted to $51.3 million for the six months ended June 30, 2021 and $40.3 million for the six-month period ended June 30, 2020, representing an 27.2% increase. These revenues accounted for 65.0% and 63.6% of our total revenues for the six months ended June 30, 2021, and 2020, respectively. The increase in the US market was primarily driven by the entry into new programs for bath furniture products with our major customers, as well as the significant improvement in demand in the R&R market.

Our second largest market is Canada. Our revenues generated in the Canadian market were $18.5 million and $15.9 million for the six-month periods ended June 30, 2021, and 2020, respectively, representing a 16.6% increase. The increase was primarily driven by the addition of new SKUs to our major customers with higher selling prices as well as improved shipments of mixed products as business gradually recovered from the first half of fiscal year 2020.

We also derive a small portion of our revenue from Europe, which consists primarily of sales in Germany. This amounted to $9.1 million and $7.2 million for the six months ended June 30, 2021, and 2020, respectively, representing a 25.1% increase. The increase in sales represented the recovery from the impact of the COVID-19 pandemic. As we continue to recover from the impact of COVID-19, we expect our long-term sales trajectory to grow in line with our BPC strategy in Europe, particularly as we develop new geographic and customer sales channels.

Gross Profit

Our gross profit increased by $2.9 million, or 21.5%, to $16.5 million for the six months ended June 30, 2021, from $13.6 million for the six months ended June 30, 2020. The increase in gross profit was primarily driven by the entry into several new programs to promote the sales of new products with higher profit margin while offsetting cost increase pressure from the mix of products sold.

As we continue to monitor the profitability of each product line and adjust our strategy on an ongoing basis, we expect that our gross profit will continue to increase. Gross profit as a percentage of net sales remained stable across all of our product lines at 20.9% for the six-month period ended June 30, 2021, as compared to 21.4% for the six-month period ended June 30, 2020.

In the first half of 2021 we saw a significant increase in our cost of goods sold due to the impact of both higher raw materials costs and freight charges. This has impacted our gross margin percentages, but we expect to manage this impact going forward through a combination of pricing actions and product mix changes.

Operating Expenses

Selling and distribution expenses primarily consisted of personnel costs, marketing and promotion costs, and freight and leasing charges. Our selling and distribution expenses increased by $0.3 million, or

 

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3.7%, to $8.0 million for the six months ended June 30, 2021, from $7.7 million for the six months ended June 30, 2020. The increase in selling and distribution expenses was primarily resulting from growth in our sales and extra COVID-19 related expenses for medical insurance which was incurred during the first half of fiscal year 2021.

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 $0.2 million, or 5.9%, to $3.0 million for the six-month period ended June 30, 2021, as compared to the same period in 2020. The increase was primarily related to increased legal and audit service fees as a result of the Reorganization and preparation for this offering.

Research and development expenses mainly consisted of personnel costs and product development costs. Our research and development activities remained stable and are not material to our condensed consolidated statements of income.

Other Income (Expense)

Other income (expenses) increased by $1.5 million, or 842.7%, to $1.3 million for the six-month period ended June 30, 2021, from negative $0.2 million for the six-month period ended June 30, 2020. Such increase was a result of the forgiveness of the PPP loan as described under “— Liquidity and Capital Resources” below.

Provision for Income Taxes

We recorded income tax expense of $1.1 million for the six-month period ended June 30, 2021, and $0.4 million for the six-month period ended June 30, 2020. The increase resulted from the increase in our reported income before taxes of $4.1 million, or 166.3%.

Net Income and Adjusted Net Income

Our net income increased by $3.4 million, or 161.3%, to $5.5 million for the six-month period ended June 30, 2021, from $2.1 million for the six-month period ended June 30, 2020. This increase was a result of the combination of the changes discussed above. Over the same periods, we generated adjusted net income of $4.2 million and $2.1 million, respectively.

For the Years Ended December 31, 2020 and 2019

The following table summarizes the results of our operations for the years ended December 31, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase (decrease) during such periods.

 

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(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 GAAP comparators.

​

We derive the majority of our revenues from sales of sanitaryware, which accounted for 65.6% and 72.0% of our total revenues for the years ended December 31, 2020 and 2019, respectively. Revenues generated from the sales of sanitaryware slightly decreased by 2.8% to $88.4 million for the year ended December 31, 2020 from $90.9 million for the year ended December 31, 2019. The decrease was primarily attributable to the decline in sales to our customers in the construction and R&R end markets that were negatively impacted by certain government-imposed shutdowns and regulations in response to the COVID-19 pandemic, particularly during the first and second quarters of 2020. In the second half of 2020, the combination of low interest rates and expansion of at-home activities as a result of the COVID-19 pandemic led to a steady rise in construction and home improvement. Going forward, we expect the revenue generated from sanitaryware products to continue growing in line with our “BPC” strategy as we recover from the temporary impact of COVID-19.

Our revenues from bath furniture sales increased by 33.8% to $38.2 million for the year ended December 31, 2020 from $28.6 million for the year ended December 31, 2019. Bath furniture sales accounted for 28.3% and 22.6% of our total revenue for the years ended December 31, 2020 and 2019, respectively.

 

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The significant increase in sales was aided by the impact of greater R&R spending in our end markets as well as a recovery from weaker sales in 2019 compared to 2018 due to an adverse antidumping case and ruling. In March 2019, the U.S. Department of Commerce initiated an antidumping and countervailing duty case against wooden cabinets and vanities imported from China. This case impacted our former parent organization, Foremost, which had subsidiaries based in China supplying a significant portion of FGI’s bath products. In response to the case, Foremost shifted the vast majority of its bath furniture supply base out of China and simultaneously hired the law firm of Arnold & Porter Kaye Scholer to defend its interests. The U.S. Department of Commerce issued to Foremost significant countervailing duty and antidumping penalties in August and October of 2019, respectively. By the end of 2019, Foremost had replaced the vast majority of its bath furniture suppliers from China with suppliers in other countries in Southeast Asia. During this transition period caused by the antidumping cases, there was a significant decrease in our sales volume and our bath furniture sales in 2019 were negatively impacted compared with 2018. Our bath furniture sales began to recover in early 2020 as our supply base transition was completed, and we expect that our bath furniture sales will continue to increase going forward in line with our “BPC” strategy.

We also generate revenues from sales of other products (shower systems and custom kitchen cabinetry), which, in the aggregate, accounted for less than 10% of our total revenues in 2020. During the year ended December 31, 2020, we increased the sales of our shower systems due to strong product introductions, such as our Marina, Cove and Lagoon shower doors, resulting in the increase in the product category. Although we will continue to focus on sales of sanitaryware and bath furniture products, revenues from other products are expected to continue to grow; however, they continue to represent a smaller portion of our total revenues.

We derive our revenues from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:

We generated the majority of our revenues in the United States market, which amounted to $83.7 million for the year ended December 31, 2020 and $76.8 million for the year ended December 31, 2019, representing an 8.9% increase. These revenues accounted for 62.1% and 60.8% of our total revenues for the years ended December 31, 2020 and 2019, respectively. The increase in 2020 versus 2019 was generally a result of our recovery from the impact of the 2019 antidumping case described above.

Our second largest market is Canada. Our revenues generated in the Canadian market were $35.0 million and $32.1 million for the years ended December 31, 2020 and 2019, respectively, representing a 9.0% increase. Sales increased in 2020 primarily due to the impact of new product introductions which increased the volume of sanitaryware and bath furniture purchases by our larger customers.

We also derive a small portion of our revenue from Europe, which consists primarily of sales in Germany. This amounted to $16.1 million and $17.3 million for the years ended December 31, 2020 and 2019, respectively, representing a 7.1% decrease. The decrease in sales was due to the impact of the COVID-19 pandemic as Germany and several European countries instituted stringent lockdowns, impacting our retail customers. As we continue to recover from the impact of COVID-19, we expect our long-term sales trajectory to grow in line with our “BPC” strategy in Europe, particularly as we develop new geographic and customer sales channels.

Gross Profit

Our gross profit increased by $3.0 million, or 11.7%, to $28.4 million for the year ended December 31, 2020 from $25.4 million for the year ended December 31, 2019. In 2020, we saw an increase in orders for higher-margin shower systems and bath furniture, and limited our efforts in promoting lower-margin products such as our toilet seats.

 

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As we continue to monitor the profitability of each product line and adjust our strategy accordingly, we expect that our gross profits will continue to increase. Gross profit as a percentage of our sales remained stable across all of our product lines at 21.1% for the year ended December 31, 2020 as compared to 20.1% for the year ended December 31, 2019.

We did not see a material increase in the cost of goods sold in 2020 versus 2019.

Operating Expenses

Selling and distribution expenses primarily consisted of personnel costs, marketing and promotion costs, freight and leasing charges. Our selling and distribution expenses increased by $0.6 million, or 3.8%, to $15.5 million for the year ended December 31, 2020 from $14.9 million for the year ended December 31, 2019. This variance was generally in line with the trend in our revenues. An increase in marketing expenses was partially offset by decreases in freight charges and expenses incurred by our warehouses. The decrease in freight charges was a result of the strategic elimination of certain unprofitable product lines for which we are responsible for shipping and handling costs. In general, we expect our selling and distribution expenses to increase at a slower rate in relation to our sales growth as we benefit from further sales and operational synergies.

General and administrative expenses primarily consisted of personnel costs, professional service fees, depreciation, travelling and office supply expenses. Our general and administrative expenses decreased by $1.6 million, or 20.9%, to $5.8 million for the year ended December 31, 2020 from $7.4 million for the year ended December 31, 2019. The decrease resulted from the additional legal fees in the amount of $1.6 million incurred in connection with the aforementioned antidumping case in 2019.

Research and development expenses mainly consisted of personnel costs and product development costs. In 2020, we incurred additional sampling and testing costs in connection with new vanity programs with some of our customers, as well as certification fees for our sanitaryware products. As a result, our research and development costs increased by $0.1 million, or 15.7%, to $0.8 million for the year ended December 31, 2020 from $0.7 million for the year ended December 31, 2019.

Other Expenses, Net

Other expenses, net increased by $0.3 million, or 59.5%, to $0.8 million for the year ended December 31, 2020 from $0.5 million for the year ended December 31, 2019. Such increase was a result of the variance of foreign exchange loss from our Canada business.

Provision for Income Taxes

We recorded income tax expense of $0.8 million for the year ended December 31, 2020 and $0.4 million for the year ended December 31, 2019. The increase resulted from the increase in our reported income before taxes of $3.5 million, or 178.7%.

Net Income and Adjusted Net Income

Our net income increased by $3.1 million, or 201.1%, to $4.7 million for the year ended December 31, 2020 from $1.6 million for the year ended December 31, 2019. Such change was a result of the combination of the changes discussed above. Over the same periods, we generated adjusted net income of $4.7 million and $2.8 million, respectively, and adjusted operating margins of 4.7% and 3.2%, respectively.

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 the Company’s financing needs. As of June 30, 2021, and December 31, 2020, we had cash and cash equivalents of $3.8 million and $4.0 million, respectively, and working capital deficiency of $6.6 million and $1.7 million, respectively. For the six months ended June 30, 2021, and 2020, we generated cash flows from operating activities in the amount of $2.3 million and $(0.6) million, respectively.

 

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We believe the Company’s revenues and operations will continue to grow and the current working capital is sufficient to support its 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 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, as described under “Certain Relationships and Related Party Transactions”, from time to time after the completion of this offering, FGI 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 FGI, which could limit the assets available for other corporate purposes or require additional resources. If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities.

As of June 30, 2021, FGI’s total debt is comprised of outstanding indebtedness under our credit facility with East West Bank.

East West Bank Credit Facility

Our wholly owned subsidiary, FGI Industries (formerly named Foremost Groups, Inc.) (“FGI USA”), has a line of credit 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, the indirect majority owner of Foremost. For the year ended December 31, 2018, and through September 30, 2019, the Credit Agreement allowed for borrowings up to $25,000,000, which previously included a discretionary loan in the amount of $3,000,000 that could only be drawn upon under certain circumstances as described in the Credit Agreement. The discretionary line expired on September 30, 2019. The non-discretionary line of credit was renewed through September 23, 2020, and maximum borrowings were decreased to $22,000,000. On August 13, 2020, the line of credit was renewed with an extended maturity date of September 23, 2022, and maximum borrowings were further decreased to $18,000,000.

Pursuant to the Credit Agreement, FGI USA is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes depreciation and amortization (“EBITDA”) 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, stockholders and affiliates, minus intangible assets and accumulated amortization, plus debt subordinated to East West Bank) of not less than $9,500,000 for the quarters ended September 30, 2020 and December 31, 2020, and not less than $10,000,000 for the quarter ended March 31, 2021 and thereafter; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth defined as total book net worth plus minority interest, less loan to officers, stockholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter.

Through August 26, 2020, the loan bore interest at a rate per annum equal to 0.1 percentage points below the Prime Rate as quoted by the Wall Street Journal (“Prime Rate”). Effective August 26, 2020, the annual interest rate was amended to 0.25 percentage points above the Prime Rate. Under no circumstances will the interest rate on this loan be less than 3.250% per annum or more than the maximum rate allowed by applicable law. The interest rate as of June 30, 2021 and December 31, 2020 was 3.50%.

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 $15,751,671 and $9,393,481 as of June 30, 2021 and December 31, 2020, respectively.

PPP loan

On April 9, 2020, FGI USA entered into a loan agreement in connection with the Paycheck Protection Program (“PPP”) and received proceeds of approximately $1.68 million (the “PPP loan”) under the CARES Act. Interest on the loan accrued at a fixed interest rate of 1.0%. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the year ended December 31, 2020, FGI USA used all of the PPP

 

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loan proceeds to pay for qualified expenses. 100% of the PPP loan proceeds were used for payroll related expenses. Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit by the SBA to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the PPP rules. FGI USA submitted its application and supporting documentation for forgiveness on December 22, 2020. As of December 31, 2020, the balance of the PPP loan was included in the short-term loan on the consolidated balance sheet. On February 8, 2021, FGI USA received approval of forgiveness of the PPP loan from the SBA. Upon such approval, the entire balance including principal and interest was forgiven and recorded as other income on the Company’s unaudited condensed consolidated statements of income and comprehensive income.

Cash Flows

The following table summarizes the key components of our cash flows for the six months ended June 30, 2021 and 2020 and the years ended December 31, 2020 and 2019.