FGI Industries Ltd 10-K for FY2022
FGI Industries Ltd. (FGI)
About this 10-K
FGI Industries Ltd filed this 10-K on April 17, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $161.72M
- down 11.1% from $181.94M a year earlier
- Net income
- $3.68M
- down 53.5% from net income of $7.91M a year earlier
- Diluted EPS
- $0.39
- down 65.5% from $1.13 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended
For the transition period fromto
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
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Incorporation or Organization) | Identification No.) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | Smaller Reporting Company | ||
| | | | | | Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements.☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of June 30, 2022, the aggregate value of the registrant’s common stock held by non-affiliates was approximately $
As of March 31, 2023, the registrant had
Documents incorporated by reference:
The information called for by Part III will be incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be filed pursuant to Regulation 14A or will be included in an amendment to this Form 10-K.
TABLE OF CONTENTS
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 35 | |
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| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 77 | |
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| DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | 80 | |
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| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS | 81 | |
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| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 81 | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. All statements contained in this Annual Report on Form 10-K other than statements of historical facts, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. In addition, statements that “we believe” or similar statements reflect our beliefs and opinions on the relevant subject. We have based these forward- looking statements on our current expectations about future events. While we believe these expectations are reasonable, such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Risks and uncertainties that could cause our actual results to differ from those expressed in, or implied by, our forward- looking statements include, but are not limited to:
| ● | the levels of residential R&R activity, and to a lesser extent, new home construction; |
| ● | our ability to maintain our strong brands and reputation and to develop innovative products; |
| ● | our ability to maintain our competitive position in our industries; |
| ● | our reliance on key suppliers and customers; |
| ● | the length and severity of the ongoing COVID-19 pandemic, including its impact on domestic and international economic activity, consumer confidence, our production capabilities, our employees and our supply chain; |
| ● | the cost and availability of materials and the imposition of tariffs; |
| ● | risks associated with our international operations and global strategies; |
| ● | our ability to achieve the anticipated benefits of our strategic initiatives; |
| ● | our ability to successfully execute our acquisition strategy and integrate businesses that we may acquire; |
| ● | risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology; |
| ● | our ability to attract, develop and retain talented and diverse personnel; |
| ● | our ability to obtain additional capital to finance our planned operations; |
| ● | regulatory developments in the United States and internationally; |
| ● | our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others; and |
| ● | other risks and uncertainties, including those listed under the caption “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K, as well as subsequent reports we file from time to time with the U.S. Securities and Exchange Commission (available at www.sec.gov). |
These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements may not be achieved or occur at all. You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits to this Annual
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Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
GENERAL
Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company,” “FGI,” “we,” “us” or “our” refer to FGI Industries Ltd.
SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to numerous risks, as more fully described in the section titled “Risk Factors” in this Annual Report on Form 10-K. You should read these risks before you invest in our securities. In particular, risks associated with our business include, but are not limited to, the following:
Strategic Risks
| ● | Our BPC organic growth strategy is focused on capturing higher incremental gross margins by increasing our share of branded products, expanding into new product categories and creating new sales channels, all of which are impacted by a number of economic factors and other factors. |
| ● | Prolonged economic downturns may adversely impact our sales, earnings 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. |
| ● | We may not achieve all of the anticipated benefits of our strategic initiatives. |
| ● | We may not be able to successfully execute our acquisition strategy or integrate businesses that we acquire. |
| ● | 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. |
Business and Operational Risks
| ● | We recently began as a stand-alone business and have a limited operating history as a stand-alone business. |
| ● | 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. |
| ● | 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. |
| ● | We are dependent on third-party suppliers and manufacturers, the loss of which could materially impact our business. |
| ● | There are risks associated with our international operations and global strategies. |
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 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. |
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| ● | Changes in Cayman Islands or U.S. tax law could adversely affect our financial condition and results of operations. |
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 may not be able to adequately protect or prevent the unauthorized use of our intellectual property. |
| ● | We have been and may continue to be subject to cybersecurity attacks, which could adversely affect 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. |
| ● | Compliance with laws, government regulation and industry standards are costly, and our failure to comply could adversely affect our results of operations and financial position. |
| ● | 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. |
Risks Related to Doing Business in China
| ● | We have operations in, and the majority of our suppliers are located in, China. Our or our suppliers’ ability 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. |
| ● | We could be subject to regulation by various political and regulatory entities, including local and municipal agencies and other governmental subdivisions. |
| ● | In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign exchange, 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. |
| ● | 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. |
Risks Related to Our Securities
| ● | Foremost Groups Ltd. holds a significant majority of the voting power of our ordinary shares, approximately 72%, and will be able to exert significant control over us. |
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PART I
ITEM 1. BUSINESS
Our Company
FGI is a global, diversified and reputable supplier of quality bath and kitchen products. With over thirty years of experience, FGI has become a leading business to business supplier of bath and kitchen products to large retail, wholesale, commercial and specialty channel customers around the globe specializing in the home improvement and R&R (Repair & Remodel) markets. Some of our largest customers include The Home Depot, Menards, Ferguson and Lowe’s. Throughout our history, we have achieved consistent and above-industry sales growth each year by executing on our strategic objectives which include offering well-designed, high-quality products, providing service that surpasses our competition and exceeds our customers’ expectations, and managing an efficient and resilient global supply chain.
Our products are typically designed in-house or are created in conjunction with our customer and supplier partners. The majority of our products are sold under our customers’ private label brands, although we expect to continue increasing the share of our own brands over time. Below is an outline of our general business model:
Both private label and FGI’s brands require significant marketing expenditures which we typically incur or share with our customers. We offer industry-leading brands including Foremost®, avenue, contrac®, Jetcoat®™, rosenberg and Covered Bridge Cabinetry®. These brands have continued to grow and represent an increasing share of our total sales in recent years, while the majority of our products are sold under key customers’ private label brands, such as The Home Depot’s “Glacier Bay” brand and Ferguson’s “ProFlo” brand.
Major Developments in our Business
Initial Public Offering
On January 27, 2022, FGI closed an underwritten public offering of 2.5 million units (the “Units”) (consisting of (i) one ordinary share, par value $0.0001 (the “Ordinary Shares”) and, (ii) one warrant to purchase one Ordinary Share (the “Warrants”)) at a public offering price of $6.00 per unit and received net proceeds, after commissions and expenses, of approximately $12.4 million.
Reorganization
Prior to our initial public offering, we completed the reorganization (the “Reorganization”) of our parent company, Foremost, and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc., FGI Europe and FGI International, each a wholly-owned subsidiary of Foremost, to the newly
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formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. Our business now operates separately from the rest of Foremost’s business units, and we and Foremost believe that operating as a standalone company will allow FGI to more effectively execute its long-term “BPC” growth strategy while focusing more efficiently on its own capital allocation priorities.
Prior to the Reorganization, FGI Industries, Inc., FGI Europe and FGI International operated as business units within Foremost for over thirty years. Foremost continues to be a significant holder of our ordinary shares and supports FGI via global sourcing and manufacturing arrangements. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost Groups, Ltd. before the completion of Reorganization and are presented as if we had been in existence and the Reorganization had been in effect during the years ended December 31, 2022 and 2021.
Our Products
As a result of the increased significance of shower systems in our product portfolio in 2022, the Company has
created a standalone “Shower Systems” product category, as detailed below. The “Other” category continues to comprise our kitchen cabinetry and other smaller offerings. The updates were applied retroactively to impacted product categories. Such changes had no impact on the Company's historical consolidated financial position, results of operations or cash flows.
We offer a wide variety of products that fall into four categories: Sanitaryware, Bath Furniture, Shower Systems and Other. Our brand and category makeup of our net sales is as follows:
Sanitaryware. Our Sanitaryware category includes a range of bath products, such as toilets, sinks, pedestals and toilet seats. The majority of these products are sourced from third-party suppliers in China and are sold throughout the United States, Canada and Europe. Our main owned brands in this category include Foremost®, which is retail-focused, and contrac®, which is wholesale-focused.
Bath Furniture. Our Bath Furniture category primarily includes wood and wood-substitute furniture for bathrooms, including vanities, mirrors, laundry and medicine cabinets and other storage systems. The majority of these products are sourced from Southeast Asia and China and are sold principally in the United States and Canada. We typically sell our bath furniture products under the Foremost brand.
Shower Systems. Our Shower Systems category includes a range of shower-related products such as shower walls, shower doors and shower basins. The majority of these products are sourced from third-party suppliers in China and are
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sold throughout the United States and Canada. These products are typically sold as private label or under our Craft + Main and Jetcoat brands.
Other. Our Other category includes several smaller categories, most prominently custom kitchen cabinetry brand under our “Covered Bridge Cabinetry” and “Craft + Main Cabinetry” (formerly “Kitchens by Foremost”) lines of products. Our custom kitchen lines represent some of the highest margin, highest quality products that we sell, and are sold primarily through local kitchen and bath dealerships while involving a heavy marketing element with contractors and designers. While custom kitchen cabinetry currently represents less than 3% of our total sales, it is an area where we see significant long term organic growth, gross margin expansion and consolidation possibilities. The majority of our custom kitchen cabinetry and shower products are sourced from Southeast Asia.
In each category, we sell branded and private label products at various price points to attract a wide base of customers and ultimate consumers. We position our products in a “good, better, best” market position, with a variety of price points to address the varying needs of our customer base. However, we typically eschew selling low, or “opening” price point items, and focus primarily on the mid-to-upper price point product categories. We continue to see opportunities to introduce new product categories. Some of our recent product introductions that we expect to drive material sales growth include our Jetcoat-branded shower systems and intelligent (electronic) toilets.
Our Industry
The core bath and kitchen product markets in which we operate principally cater to the R&R markets, consisting of fragmented suppliers and a diffuse network of retailers, wholesalers and independent dealer networks on both national and regional levels. While our sales are principally impacted by the growth of the R&R markets, we are selectively focusing on newbuild markets as well.
According to the National Kitchen and Bath Association, the projected consumer spend for the U.S. bath and kitchen markets is estimated to be approximately $162.4 billion in 2023, of which approximately half is in product categories that we currently operate within. Outside of extreme recession years in the United States, such as 2007-2009, the R&R markets have experienced consistent 3% to 5% annual growth rates for more than 25 years, providing a predictable and recurring revenue model for the majority of our product lines. The primary drivers of such consistent and above-GDP growth rates are the pace of household formation, home price appreciation, strong housing turnover and the continued aging of the U.S. housing stock in our primary geographic markets.
Our Growth Strategy
Combining our well-developed global business platform with our relatively small revenue base, our aim is to achieve mid-to-high single-digit organic revenue growth rates over the long term. In order to achieve these growth objectives, we pursue a “BPC” growth strategy, focused on Brands, Products and Channels:
| ● | Brands: Branded products typically come with higher gross margins and significantly reinforce our long-term competitive positioning within our product markets. We plan to continue to focus on building our branded-product footprint over the long term while increasing the share of brands as a percentage of our total sales. |
| ● | Products: We have significant “whitespace” opportunities in several product categories within our core kitchen and bath markets. As an example, we believe we are currently significantly under- penetrated in categories such as bath and kitchen fixtures, “behind the wall” plumbing, and acrylic products such as bathtubs. With significant investment opportunities in new materials, sourcing, leading product design and superior customer service, we have vast product expansion opportunities in relation to our relatively small share of the overall market. |
| ● | Channels: We feel that we have strong growth potential in key sales channels, including our existing customers, new e-commerce retailers (such as Wayfair) and commercial sales channels (local kitchen and bath product distributors). We believe we have untapped potential in markets outside of the United States, and while we have made significant headway in Canada and Germany in recent years, we believe we have many more growth and expansion opportunities in those two countries as well as other international markets. |
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In addition, we continue to evaluate opportunities to pursue selective “bolt-on” acquisitions of smaller companies that complement our core competencies in an effort to increase our scale and profitability, as well as to broaden our product offerings, capabilities and resources. We are also seeking strategic partnerships within the United States and internationally with the goal of strengthening the sources of our product supply. Our key criteria for potential acquisitions include looking for well-run organizations (not turnarounds), opportunities that offer tangible synergies within our core kitchen and bath markets, and investments that meet our stringent return on capital criteria.
Our Customers
We serve a large and global customer base that covers five main categories of businesses: mass retailers, wholesalers, commercial, e-commerce channels and independent distributors. As we grow our own brands, we will increasingly focus our investments on creating end-consumer mindshare and awareness, helping to grow sales through our main customer categories.
Mass Retailers
Our products are primarily used by do-it-yourself homeowners, contractors, builders and remodelers for R&R projects. In North America, products for such projects are predominantly purchased through mass retail home centers such as The Home Depot, Lowe’s and Menard’s. Due to the market presence, store network and customer reach of these large home centers, we have developed decades-long relationships with our key retailer partners to distribute our products. Approximately 38% of our net sales in 2022 were to large retailers.
Wholesalers
Our products are sold through some of the largest bath and kitchen product wholesalers in North America including Ferguson, HD Supply (owned by The Home Depot) and Orgill. The large wholesalers are similar in scale to many of our large retail partners, catering to national and local networks of professional contractors, plumbers, property developers and other significant “influencers” within the residential and non- residential construction markets.
In 2022, approximately 35% of our net sales were to our wholesale partners.
Commercial
Our products are sold through numerous smaller-scale local distribution companies which in turn cater to professional plumbers, contractors and property developers. In Canada, we are a leading supplier to market leaders such as Yorkwest Plumbing, and have developed a strong presence in other commercial sales channels as well. Our numerous relationships tend to be quite stable and strong, built on years of mutual trust and understanding among tightly-knit groups of local professionals. We see an enormous market potential in the Commercial channel and are continuously evaluating additional opportunities for market penetration.
In 2022, approximately 9% of our net sales were to our commercial partners.
E-Commerce
We sell a growing number of our products through the e-commerce channels of our retail partners as well as “e-commerce only” retailers such as Build.com and Wayfair.com, both of which are rapidly increasing market penetration in the home R&R space. Our sales through e-commerce channels and retailers represented about 13% of our net sales in 2022 up from less than 2% in 2010.
Independent Dealers & Distributors
We have historically sold our products through independent (or “mom and pop”) bath and kitchen product specialists. Independent dealers and distributors represented 4% of our net sales in 2022.
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Raw Materials, Suppliers and Manufacturing
Many of our sanitaryware products contain ceramics, the major components of which are clay and enamel. Other primary raw materials used in our bath furniture, kitchen cabinetry and shower products include hard maple, oak, cherry and beech lumber and plywood as well as paint, particleboard, medium density fiberboard, high density fiberboard, glass, aluminum, manufactured components and hardware. We have more than one source for these and other raw materials and generally believe them to be readily available. For many of our products, our third-party suppliers have standardized raw material inputs and a number of production processes, which reduces the logistical manufacturing specifications and allows for greater economies of scale in sourcing these inputs.
The majority of our products are outsourced from Foremost-owned manufacturing facilities and several third-party manufacturers, all primarily based in China and parts of Southeast Asia. We own one facility in Southeast Asia to support our custom kitchen cabinetry programs. We have entered into long-term sourcing agreements with Foremost to secure continued use of their facilities. We generally utilize six to seven factories located in China and parts of Southeast Asia. We have long-term agreements in place with the suppliers of our sanitaryware products for terms ranging from one year, renewable, to perpetuity. The geographic distances involved in these arrangements, together with the differences in business practices, shipping and delivery requirements, and laws and regulations add complexity to our supply chain logistics and increase the potential for interruptions in our production scheduling. In addition, prices and availability of these components may be affected by world market conditions and government policies and tariffs.
Tangshan Huida Ceramic Group Co., Ltd (“Huida”) supplies the majority of our sanitaryware products. Huida accounted for approximately 85.5% of the total balance of our accounts payable as of December 31, 2022. [We intend to work with Huida to negotiate a new supply arrangement after an arbitration proceeding terminated our previous Agreement for Co-operations (the “Huida Agreement”), dated October 20, 2020, by and between Huida and FGI Industries, our wholly owned subsidiary (“FGI USA”). See Item 3. “Huida Arbitration” for more details.] No other supplier accounts for more than 10% of our accounts payable as of December 31, 2022.
We regularly evaluate our organizational productivity and supply chains and seek opportunities to reduce costs and enhance quality. We strive to improve quality, speed and flexibility to meet changing and uncertain market conditions, as well as manage cost inflation, including wages and employee medical costs.
FGI and its subsidiaries are party to two shared services agreements with Foremost Groups Ltd., our largest shareholder, or its subsidiaries, pursuant to which the parties provide certain general and administrative services to one another in certain geographies.
Competition
We operate in a highly fragmented industry that is composed of numerous local, regional and national manufacturers. Most of our competitors compete on a local or regional basis, but others, like us, compete on a national basis as well. Our competitors include large national and international brands such as American Standard, Kohler, Masco (Delta), Mansfield, Gerber, Niagara, Ove Decors and Woodcrafters, as well as numerous OEM suppliers and other smaller brands. Due to the highly-differentiated nature of our product categories and the scarcity of industry data, there is little reliable information on precise market shares for our product categories.
We believe that brand reputation is an important factor in consumer selection, and that competition in this industry is also based largely on product features and innovation, product quality, customer service, breadth of product offerings and price. Our principal means for competition are our breadth and variety of product offerings, expanded service capabilities, geographic reach, competitive price points for our products and affordable quality.
In general, our Sanitaryware product categories tend to be more consolidated and we compete primarily with a small group of large suppliers with a global footprint in any specific product line, including American Standard, Kohler, Toto, Masco (Delta), Mansfield, Gerger and Niagara, and on occasion with numerous regional suppliers. For our Bath Furniture and Other product categories, we compete with dozens of regional suppliers in any given product line,
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although we believe that relatively few can compete with us on a truly national scale, particularly with regards to our mass retail channels.
Our Competitive Strengths
Trusted by Customers Around the World
The core markets in which we operate tend to be conservative, with an emphasis on stable and durable relationships. FGI is a top-tier supplier of many key North American bath- and kitchen-related product categories. With support from Foremost, we are one of a select number of large market participants with national and international manufacturing and distribution capabilities. Our supply chain network, operating footprint and long-standing customer relationships provide us an ability to service our retail, wholesale and commercial channel customers worldwide and offer a broad set of products to serve our customers across a variety of price points. We believe the scale and breadth of our operations differentiate us and result in a competitive advantage that allows us to provide well-designed, high-quality products with price points and service that exceed our competitors’ offerings and our customers’ expectations.
Deep Relationships with Leading Suppliers
In the markets in which we operate, production and supply chain quality and stability are crucial to success. Our industry is fundamentally stable and conservative, with high barriers for potential new entrants. We have built strong and stable relationships with a base of long-standing suppliers across the globe, all of whom maintain stringent manufacturing standards. We believe our customers value our decades-long experience in the industry and international footprint, which allows us to meet demanding logistics and performance criteria. At the same time, our third-party manufacturing suppliers are reliant on our stable and growing platform in order to effectively utilize their own fixed-asset investments. The importance of these strengths has been highlighted during the outbreak and ongoing spread of the novel coronavirus (“COVID-19”) pandemic, as we believe that we have remained among the most consistent and reliable suppliers in our industry despite the unprecedented challenges which were presented.
Stable Technological and Industry Dynamics
Our core bath and kitchen product markets are generally less prone to fast-paced technological innovation or “fast fashion” consumer trends. We believe this is largely due to the core functionalities of the products we offer, which have tended to evolve gradually over decades, rather than in a few years (or even months, as with certain industries). As a result, we have confidence in our ability to execute our long-term growth plans, while allocating our capital in a patient and thoughtful manner, with relatively high and predictable rates of return.
Commercial and Regulatory Barriers to Entry
The kitchen and bath markets operate under a myriad of international, national, federal, provincial and local codes. This is particularly the case as much of the product markets on which we focus are ultimately related to water and the prevention of water leakage and damage. On a fundamental level, our kitchen and bath products need to pass heavy quality control and regulatory standards, making it difficult for potential new entrants.
Experienced Management Team
We have assembled an executive team with a deep base of management experience within industrial manufacturing companies. David Bruce, our Chief Executive Officer, Bob Kermelewicz, our Executive Vice President, United States, Jennifer Earl, our Executive Vice President, Canada and Norman Kroenke, our Executive Vice President, Europe each have over twenty years of industry experience. Our Executive Chairman John Chen has more than twelve years of investment management and financial experience. Our team has identified and begun to execute on opportunities for operational improvement, growth and business expansion as a standalone company.
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Significant ownership and support from Foremost
Foremost is a family-controlled and privately held holding company. As an approximate 72% owner of FGI’s ordinary shares, Foremost remains committed to supporting FGI’s strategic development and growth plans. For over 30 years, Foremost has built an industry-leading reputation as a reliable manufacturer and supply source for numerous wood and ceramic-based products which form the foundation of many FGI product categories. As a standalone company, FGI continues to benefit from Foremost’s long-standing experience in global manufacturing and sourcing, providing a solid foundation from which to pursue alternate sources of supply for our key product categories as we see fit.
Intellectual Property
We sell many of our products under a number of registered and unregistered trademarks, which we believe are widely recognized in our industry. FGI maintains a significant portfolio of trademarks and copyrights, most notably under our avenue, contrac®, rosenberg and Covered Bridge Cabinetry® brands. We have also acquired rights to the Foremost® brand from Foremost with regards to any Foremost branded products that we continue to sell. We rely on trade secrets and confidentiality agreements to develop and maintain our competitive position.
Environmental Matters and Regulatory Matters
Our operations are subject to national, state and local environmental laws and regulations relating to, among other things, the generation, storage, handling, emission, transportation and discharge of regulated materials into the environment. Permits are required for certain of our operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both. We may also incur liability for investigation and clean-up of soil or groundwater contamination on or emanating from current or formerly owned and operated properties, or at offsite locations at which regulated materials are located where we are identified as a responsible party. Discovery of currently unknown conditions could require responses that could result in significant costs. We monitor applicable laws and regulations and incur ongoing expense relating to compliance, however we do not expect that compliance with federal, state, local and foreign regulations, will result in material capital expenditures or have a material adverse effect on our results of operations and financial position.
We believe that responsibility does not stop at national borders, which is why FGI is working to protect and sustain our global environment. By designing products that meet Environmental Protection Agency (“EPA”) standards, like our Water Sense qualifying toilets that provide high efficiency waste removal while using 20% less water with every flush, FGI is using innovative engineering to make the most of our resources.
Our bath furniture use California Air Resource Board (“CARB”) Phase II compliant wood products which limit urea-formaldehyde emissions into the environment. We only use wood products from managed forest resources to discourage clear-cut logging and the depletion of global rainforests. We encourage customers to order products using material that is Forest Stewardship Council (“FSC”) certified, ensuring the responsible use of our forest resources and equitable treatment of indigenous people of producing regions.
Environmental responsibility is everyone’s task at FGI, to ensure that we as a company protect our employees, our customers and our planet for this generation and the ones that follow.
Seasonality
Our business has been subject to seasonal influences, with higher sales typically realized during the second and third calendar quarters, corresponding with the peak season for R&R activity. We saw decreased sales in first quarter of 2020 due to the COVID-19 pandemic, however, these decreases normalized over the remainder of the year. The costs of our products are subject to inflationary pressures and commodity price fluctuations. We have generally been able over time to recover the effects of inflation, commodity price and currency fluctuations through sales price increases.
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Human Capital
As of December 31, 2022, we employed approximately 145 employees, all of which are full-time, with no employees covered by collective bargaining agreements. We believe that our employee relations are good.
We believe that the performance of our company is impacted by our human capital management, and as a result we consistently work to attract, select, develop, engage and retain strong, diverse talent. We are focused on three key strategic talent priorities: leadership, diversity, equity and inclusion, and our future workforce. Our Human Resources Department is responsible for developing and executing our human capital strategy and provides regular updates to our Board of Directors’ Organization and Compensation Committee on our progress toward the achievement of our strategic initiatives. We believe that all of our human capital initiatives work together to assure we have an environment where our employees are engaged, feel a sense of belonging, and can reach their full potential.
The safety of our employees is integral to our company. In support of our safety efforts, we identify, assess and investigate incidents and injury data, and each year set goals to improve key safety performance indicators. We train, promote, consult and communicate with our workforce in this process. In 2020, the COVID-19 pandemic highlighted the importance of employee welfare. We reacted quickly to keep our employees safe through the implementation of policies and safety measures that adhered to best practices from the World Health Organization and the Centers for Disease Control. Despite the ongoing COVID-19 pandemic, we did not experience a material change to our daily operations as we quickly adjusted employee work schedules in alignment with the exigencies of both the pandemic and our business requirements.
Corporate History and Information
We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization (the “Reorganization”) of our parent company, Foremost, and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc. (“FGI USA”), FGI Europe Investment Limited, a British Virgin Islands entity (“FGI Europe”), and FGI International Limited, a Hong Kong entity (“FGI International”), each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. As Foremost has grown, our business has come to operate separately from the rest of Foremost’s business units.
Prior to the Reorganization, FGI Industries, Inc., FGI Europe and FGI International operated as business units within Foremost for over thirty years. Foremost continues to be a significant holder of our ordinary shares and supports FGI via global sourcing and manufacturing arrangements. By leveraging Foremost’s long-standing experience in manufacturing and sourcing for certain of our product categories, we believe that FGI maintains a competitive advantage in supplying products that are of good design and high quality. As a standalone business, FGI is a top-tier company in many key product categories within the North American kitchen and bath products markets, with many additional expansion opportunities via existing and adjacent product, sales and geographic channels.
Our principal executive offices are located at 906 Murray Road, East Hanover, NJ 07869, and our telephone number is (973) 428-0400. Our website address is www.fgi-industries.com. The information contained on, or accessible through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider any information contained in, or that can be accessed through, our website as part of this Annual Report on Form 10-K.
We are a Cayman Islands exempted company. Exempted companies are Cayman Islands companies conducting business mainly outside the Cayman Islands and, as such, are exempted from complying with certain provisions of the Companies Act (2021 Revision) of the Cayman Islands (the “Companies Act”) as the same may be amended from time to time. As an exempted company, we may apply for a tax exemption undertaking from the Cayman Islands government that, in accordance with Section 6 of the Tax Concessions Act (2018 Revision) of the Cayman Islands, for a period of 30 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations will apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax will be payable (i) on or
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in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us to our shareholders or a payment of principal or interest or other sums due under a debenture or other obligation of us.
Because Foremost holds approximately 72% of the voting power of our ordinary shares, we are considered a “controlled company” under the corporate governance rules of Nasdaq. However, we do not currently rely upon the “controlled company” exemptions.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the United States Securities and Exchange Commission, or the SEC, and all amendments to these filings, are available, free of charge, on our website at www.fgi-industries.com as soon as reasonably practicable following our filing of any of these reports with the SEC. You can also obtain copies free of charge by contacting our Investor Relations department at our office address listed above. The SEC also maintains a website that contains all the materials we file with, or furnish to, the SEC. Its website is www.sec.gov.
The contents of our website are not incorporated by reference into this Annual Report on Form 10-K or any other document we file with the SEC, and any reference to our website is intended to be an inactive textual reference only.
ITEM 1A.RISK FACTORS
Our business is subject to numerous risks. You should carefully consider the following risks and all other information contained in this Annual Report, as well as general economic and business risks, together with any other documents we file with the SEC. If any of the following events actually occur or risks actually materialize, it could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our ordinary shares to decline.
INDEX TO RISK FACTORS
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4 | |
22 | |
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25 | |
27 | |
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Strategic Risks
Our BPC organic growth strategy is focused on capturing higher incremental gross margins by increasing our share of branded products, expanding into new product categories and creating new sales channels, all of which are impacted by a number of economic factors and other factors.
Our business relies on residential repair and remodel (“R&R”) activity and, to a lesser extent, on new home and commercial construction activity. A number of factors impact consumers’ spending on home improvement projects as well as new home construction activity, including:
| ● | consumer confidence levels; |
| ● | fluctuations in home prices; |
| ● | existing home sales; |
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| ● | inflationary pressures and interest rates; |
| ● | unemployment and underemployment levels; |
| ● | consumer income and debt levels; |
| ● | household formation; |
| ● | the availability of skilled tradespeople for R&R work; |
| ● | the availability of home equity loans and mortgages and the interest rates for and tax deductibility of such loans; |
| ● | trends in lifestyle and housing design; and |
| ● | natural disasters, terrorist acts, pandemics, wars or conflicts or other catastrophic events. |
The fundamentals driving our business are impacted by economic cycles, and we have been negatively impacted by recent supply chain disruptions, rising interest rates and inflationary pressures. Adverse changes or uncertainty involving the factors listed above or an economic contraction in the United States and worldwide could result in a decline in spending on residential R&R activity and a decline in demand for new home construction and could adversely impact our businesses by: causing consumers to delay or decrease homeownership; making consumers more price conscious resulting in a shift in demand to smaller, less expensive homes; making consumers more reluctant to make investments in their existing homes, including large kitchen and bath R&R projects; or making it more difficult or expensive to secure loans for major renovations, which could have a material adverse effect on our results of operations and financial position.
Prolonged economic downturns may adversely impact our sales, earnings and liquidity.
Our industry can fluctuate with economic cycles. During economic downturns, our industry could experience longer periods of recession and greater declines than the general economy. We believe that our industry, particularly North American home improvement, R&R and new home construction activity, is significantly influenced particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics, credit availability, inflation and interest rates and other business conditions. These factors may 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 $9.8 million as of December 31, 2022, 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
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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 “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
We recently began as a stand-alone business and have a limited operating history as a stand-alone business.
The historical financial information we have included does not reflect, and the pro forma financial information included 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.
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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. 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 76% and 77% of our consolidated net sales for 2022 and 2021, respectively, and this concentration may continue to increase. In particular, The Home Depot represented approximately 22% and 24% of our consolidated net sales in 2022 and 2021, respectively. 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 results of operations and financial position. 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 86% and 66% of the total balance of our accounts payable as of December 31, 2022 and 2021, respectively, 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.
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We had been involved in arbitration with Huida regarding the scope and duration of the Huida Agreement. On
September 28, 2022, the Company received notice that the arbitrator ruled that the Huida Agreement was not unlimited
in duration and was being terminated. Huida remains a supplier of the Company’s sanitaryware products and the
Company intends to work towards a new agreement with Huida that complies with the arbitrator’s findings. However,
there is no guarantee that an agreement can be reached on mutually agreeable terms.
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 are reliant upon Foremost, our former parent company, and other third-party manufacturers to supply the majority of our 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. 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 each of 2022 and 2021, approximately 36% and 38%, respectively of our sales 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
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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.
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.
Failure to effectively monitor and respond to environmental, social and governance (“ESG”) matters, including our ability to set and meet reasonable goals related to climate change and sustainability efforts, may negatively affect our business and operations.
Regulatory developments and stakeholder expectations relating to ESG matters are rapidly changing. Concern over climate change has increased focus on the sustainability of practices and products in the markets we serve, and changes to laws and regulations regarding climate change mitigation may result in increased costs and disruption to operations. Moreover, the standards by which ESG matters are measured are developing and evolving, and certain areas are subject
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to assumptions that could change over time. If we are unable to recognize and respond to such developments, or if our existing practices and procedures are not adequate to meet new regulatory requirements, we may miss corporate opportunities, become subject to regulatory scrutiny or third-party claims, or incur costs to revise operations to meet new standards.
The ongoing COVID-19 pandemic is disrupting our business, and has and may continue to impact our results of operations and financial condition.
We operate facilities in the United States and around the world which have been adversely affected by the COVID-19 pandemic, including decreased employee availability and reduced capacity at certain facilities, supply chain disruptions and increases in costs of materials, which has resulted and may continue to result in delays in our ability to produce and distribute our products. While many of the market factors from the COVID-19 pandemic are trending towards a “new normal”, current macroeconomic conditions remain very dynamic, including impacts from rising inflation and interest rates, volatile changes in currency exchange rates, political unrest, and legislative and regulatory changes. Any future or 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 Annual Report on Form 10-K, such as those relating to our international operations and global strategies and our dependence on third-party suppliers.
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 report, approximately 17 of our 145 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, our 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. We or our 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
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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, 2021 and 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.
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, we are not required to obtain any permission from the China Securities Regulatory Commission, CAC or similar entity in China to issue our ordinary shares. No such permission or business license required for our subsidiaries’ operations has been denied. 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 our 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 our company or our suppliers to make changes to our or their operations.
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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, we may receive requests from certain U.S. agencies to investigate or inspect our operations or to otherwise provide information. While we 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 our company and our affiliates, are subject to the unpredictability of the Chinese enforcement and other government agencies and may therefore be impossible to facilitate.
Our auditor, Marcum LLP, is a Registered Public Accounting Firm with the PCAOB and is based in New York, New York. Under the Holding Foreign Companies Accountable Act (the “HFCAA”), the PCAOB is permitted to inspect our independent public accounting firm. If the PCAOB later determined that it cannot inspect or fully investigate our auditor for three consecutive years, trading in our securities may be prohibited under the HFCAA, and, as a result, Nasdaq may determine to delist our securities. Moreover, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA and require the U.S. Securities and Exchange Commission to prohibit an issuer’s securities from trading on U.S. exchanges if its auditor is not subject to PCAOB inspection for two consecutive years instead of three, thus reducing the time period before such securities would be delisted.
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 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.
We may be subject to risks that the Chinese government may intervene or influence our operations at any time.
Because we have employees located in China, and source products from Chinese manufacturers, we are subject to the risk that the Chinese government may intervene or influence our operations at any time.
However, because we conduct only limited operations in China with only 17 employees focused on these matters, we do not expect that such intervention or influence would result in a material change in our operations and/or the value of our securities, although in such circumstance, we might experience a disruption in our ability to develop and source product manufacturing within China, which could have a material adverse effect on our results of operations. We also understand that the Chinese government has recently made statements indicating an intent to exert more oversight and control over offerings that are conducted by foreign investment China based issuers. While we are not a China based
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issuer, in such instance, we may still be unable to offer securities in China, which could limit the number of buyers of our securities and cause our securities to trade at a lower price than they would in the absence of the exercise of such oversight and control. If we inadvertently conclude that such approvals are not required, or applicable laws, regulations or interpretations change and we do not receive or maintain such approvals in the future, we may be subject to an investigation by regulators, fines or penalties or an order preventing us from offering securities in China in the future.
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 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
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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 securities. 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 securities.
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 have been and may continue to be subject to cybersecurity attacks, which could adversely affect our results of operations and financial position.
Global cybersecurity vulnerabilities, threats and more frequent, sophisticated and targeted attacks pose a risk to our information technology systems and to critical third-party information technology platforms we utilize. We have implemented security policies, processes and layers of defense designed to help identify and protect against misappropriation or corruption of our systems and information and disruption of our operations. Despite these efforts, systems we utilize have been and may in the future be damaged, disrupted, ransomed 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 attacks have led and could in the future lead to business interruption, production or operational downtime, product shipment delays, exposure or loss of proprietary confidential or financial information or the personal information of our employees, suppliers, customers or consumers, 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 employees, suppliers, customers and consumers, exposure to litigation, and increased costs associated with the remediation and mitigation of such attacks. In addition, we could be adversely
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affected if any of our significant customers, suppliers or service providers experiences any similar events that disrupt their business operations or damage their reputation. Such events could adversely affect our results of operations and financial position.
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 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 Annual Report on Form 10-K 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.
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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 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 Annual Report on Form 10-K 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:
| ● | securities matters; |
| ● | taxation; |
| ● | anti-bribery/anti-corruption; |
| ● | employment matters; |
| ● | minimum wage requirements; |
| ● | environment, health and safety matters; |
| ● | the protection of employees and consumers; |
| ● | product compliance; |
| ● | competition practices; |
| ● | trade, including duties and tariffs; |
| ● | 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. |
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.
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
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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 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 Securities
Foremost Groups Ltd. holds a significant majority of the voting power of our ordinary shares, approximately 72%, and will be able to exert significant control over us.
Foremost holds ordinary shares that represent approximately 72% of all outstanding voting power, 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. 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 our company and/or our shareholders, and Foremost may not always act in the best interest of our company. This significant concentration of share ownership and reliance for support may adversely affect the trading price for our securities because investors may perceive disadvantages in owning shares in companies with controlling shareholders.
The price of our ordinary shares may be volatile.
The market price of our ordinary shares is likely to be highly volatile and may fluctuate substantially due to many factors, including:
| ● | our ability to maintain our strong brands and reputation and to develop innovative products; |
| ● | our ability to maintain our competitive position in our industries; |
| ● | risks associated with our reliance on information systems and technology; |
| ● | product liability claims or other litigation; |
| ● | quarterly variations in our results of operations or those of others in our industry; |
| ● | changes in governmental regulations; |
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| ● | changes in earnings estimates or recommendations by securities analysts; and |
| ● | general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. |
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. Due to these risks and the other risks described in this report, investors could lose their entire investment in our company.
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 share 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.
Provisions of the currently outstanding warrants could discourage an acquisition of us by a third party.
In addition to the provisions of our amended and restated memorandum and articles of association discussed below, certain provisions of the currently outstanding warrants could make it more difficult or expensive for a third party to acquire us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants.
We do not intend to pay dividends on 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 shares, if any.
If we sell ordinary or preference shares in future financings, shareholders may experience immediate dilution and, as a result, our share 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 share price may decline.
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
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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, 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 are governed by our amended and restated memorandum and articles of association, the Companies Act (as the same may be supplemented or amended from time to time) and the common law of the Cayman Islands. We are also 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.
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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.
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
Management’s determination that a material weakness exists in our internal controls over financial reporting could have a material adverse impact on our ability to produce timely and accurate financial statements and could negatively impact our business and the market for our ordinary shares.
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. Based upon an evaluation conducted in connection with the preparation of FGI’s audited consolidated financial statements as of December 31, 2022, management concluded that our internal controls over financial reporting were not effective due to the material weaknesses in our internal controls over financial reporting. Material weaknesses that have been identified are summarized as the following: (1) weaknesses in IT security environment, controls and procedures including lack of formal IT policies and procedures, and (2) lack of sufficient documentation of our existing financial processes, risk assessment and internal controls activities and assessment of effectiveness of internal controls; and inadequate segregation of duties for certain functions due to limited staffs and resources. We believe that the material weaknesses set forth above did not have an effect on our financial results.
.
We are evaluating and beginning to implement certain practices and procedures to address the foregoing material weaknesses with plans to complete the remediation of the foregoing deficiencies in the future. We continue to identify and implement actions to improve the effectiveness of our internal controls over financial reporting and disclosure controls and procedures, but there can be no assurance that such remediation efforts will be successful. We also expect to continue to incur or expend, substantial accounting and other expenses and significant management time and resources.
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Our future assessment, or the future assessment by our independent registered public accounting firm, may reveal additional material weaknesses in our internal controls. Failure to remediate a material weakness or the discovery of any future potential material weaknesses, could result in future misstatements in our financial statements or in documents we file with the SEC and could have a negative impact on our business and the market for our ordinary shares. For more information on our material weaknesses and the status of our remediation efforts, see Item 9A - Controls and Procedures, which includes Management’s Report on Internal Controls Over Financial Reporting.
We expect to incur significant additional costs as a result of being a public company.
We expect to incur costs associated with corporate governance requirements that are now 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.
We are 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 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 share price and trading volume could decline.
If a trading market for our ordinary shares or warrants 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 or warrants 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 ordinary share price, our ordinary share 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 share 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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ITEM 1B.UNRESOLVED STAFF COMMENTS
We are a smaller reporting company as defined in Regulation S-K and are not required to provide the information under this item.
ITEM 2.PROPERTIES
Our headquarters and a warehouse facility are located in East Hanover, New Jersey. We also operate production and warehouse facilities in Hobart, Indiana, Sacramento, California and Toronto, Canada. We also conduct our European operations from a facility in Dusseldorf, Germany and our Asian operations from a purchase center in Tangshan, China and a global support center in Taipei, Taiwan. Moreover, we own a manufacturing facility just outside of Sihanoukville, Cambodia. All properties, except for the Sihanoukville facility, are leased. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion, which we intend to evaluate on an ongoing basis in tandem with our “BPC” growth strategy.
ITEM 3.LEGAL PROCEEDINGS
We may be subject to legal proceedings and claims in the ordinary course of business. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
Ayers Bath Litigation
FGI Industries (formerly known as Foremost Groups, Inc.) (“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”). In 2011, FGI USA filed a complaint against Ayers Bath (USA) Corporation (“Ayers Bath”) in the United States District Court for the Central District of California (the “District Court”) and succeeded in obtaining an injunction barring Ayers Bath from selling, distributing or offering for sale Huida parts and products in the United States and Canada. As a result, Ayers Bath ceased all business activity.
Ayers Bath filed a voluntary chapter 7 petition in the United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) on March 22, 2013. FGI USA filed a proof of claim in the Ayers Bath bankruptcy case for an amount not less than $5,265,000, which was deemed allowed, but due to Ayers Bath’s lack of assets, FGI USA only received a distribution of $7,757.24. On January 9, 2014, FGI USA filed a complaint in the District Court against Tangshan Ayers, as Ayers Bath’s alter ego, to recover the balance of its damages. The District Court ultimately referred the litigation to the Bankruptcy Court, whereby FGI USA filed a motion in Bankruptcy Court to add Tangshan Ayers as judgment debtor, thereby allowing FGI USA to recover its proof of claim. A hearing for the motion to add Tangshan Ayers as judgment debtor was held on June 7, 2021. On September 22, 2021, the Bankruptcy Court issued a report and recommendation to the District Court recommending that it deny FGI USA’s motion to amend the judgment. We filed an objection to the report in October 2021, which was overruled by the Bankruptcy Court in September 2022, but the District Court has allowed FGI USA to propose an amendment to its complaint, which is in process.
Huida Arbitration
As previously disclosed, FGI Industries Ltd. (the “Company”), had been involved in arbitration with Tangshan Huida Ceramic Group Co., Ltd (“Huida”), one of the Company’s largest suppliers. The arbitration, held in the Shenzhen Court of International Arbitration, related to that certain Agreement for Co-operations (the “Co-Operation Agreement”), dated October 20, 2000, by and between Huida and FGI Industries, Inc., our wholly owned subsidiary. Huida was seeking a determination that the terms of the Co-Operation Agreement were not unlimited in duration and should be amended or else terminable.
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On September 28, 2022, the Company received notice that the arbitrator ruled that the Co-Operation Agreement was not unlimited in duration and is being terminated. There are no termination fees or penalties payable by the Company as a result of this termination, although the Company did pay certain arbitration fees of Huida.
Under the Co-Operation Agreement, so long as the Company met certain annual product placement volume requirements, (i) the Company had 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 retained all intellectual property rights, and (ii) Huida was not permitted to manufacture or sell any products the Company designed or created, for which we retained all intellectual property rights, without the Company’s prior consent.
Huida remains a supplier of the Company’s sanitaryware products. The Company intends to work towards a new agreement with Huida that complies with the arbitrator’s findings, primarily a more limited duration to the length of the contract. However, there is no guarantee that an agreement can be reached on mutually agreeable terms.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Public market for our ordinary shares
Our ordinary shares have been traded on the Nasdaq Capital Market under the symbol “FGI” since January 27, 2022. Our warrant agent is Continental Stock and Transfer and Trust Company.
Holders; Shares Outstanding
We had a total of 9,500,000 shares of our ordinary shares outstanding on March 31, 2023, held by approximately 2 shareholders of record. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in “street name” by brokers and other nominees.
Dividend Policy
We have never paid any cash dividends on our ordinary shares and do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements. Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon financial condition, results of operations, capital requirements and such other factors as our Board deems relevant. Further, in the event that we issue any shares of a class or series of our preference shares, the designation of such class or series could limit our ability to pay dividends on our ordinary shares.
Securities Authorized for Issuance Under Equity Compensation Plan
Reference is made to the information in Item 12 of this report under the caption “Equity Compensation Plans,” which is incorporated herein by this reference.
Share Repurchases
During the twelve months ended December 31, 2022, we did not repurchase any ordinary shares.
ITEM 6.[RESERVED]
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. You should carefully read the “Risk Factors” section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
FGI is a global supplier of kitchen and bath products. Over the course of 30 years, we have built an industry-wide reputation for product innovation, quality, and excellent customer service. We are currently focused on the following product categories: sanitaryware (primarily toilets, sinks, pedestals and toilet seats), bath furniture (vanities, mirrors and cabinets), shower systems, customer kitchen cabinetry and other accessory items. These products are sold primarily for R&R activity and, to a lesser extent, new home or commercial construction. We sell our products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and specialty stores.
Consistent with our long-term strategic plan, we intend to drive value creation for our shareholders through a balanced focus on product innovation, organic growth, and efficient capital deployment. The following initiatives represent key strategic priorities for us, entering 2023:
| ● | Commitment to product innovation. We have a history of being an innovator in the kitchen and bath markets and developing “on-trend” products and bringing them to market ahead of the competition. We have developed deep marketing skills, leading design capabilities, and product development expertise. A recent example of our innovative product development includes the Jetcoat Shower wall systems, which offer a stylized design option without the fuss of messy grout. We expect to continue to invest in research and development to drive product innovation in 2023. |
| ● | “BPC” (Brands, Products, Channels) strategy to drive above-market organic growth. We are focused on increasing the mix of Branded products as a percentage of sales, which is expected to result in larger available markets and gross margin expansion. Our owned brands grew to nearly 34% of sales as of year-end 2022, up from less than 1% at the end of 2010. We are focused on expanding our position in channels such as e-commerce, providing for additional growth opportunities with existing brick and mortar customers, as well as expanding with e-commerce customers. The e-commerce channel accounted for 13% of sales in 2022, up from only 2% at the end of 2010. |
| ● | Drive margin expansion. Margin expansion remains a key pillar of our value creation focus. We believe our BPC strategy will support enhanced margins through growth in branded products, new product categories, and new channels. Headwinds from supply chain disruptions and inflationary pressures impacted operating margins since 2021; however, we have adopted measures to offset these challenges, and resumed margin expansion in the back half of 2022 as these initiatives took hold. |
| ● | Efficient capital deployment. We benefit from a capital-light business model allowing us to generate strong free cash flow conversion. We expect to utilize our strong free cash flow to re-invest in the core business and drive growth through existing brand development and new product category expansion. We will also look for selective bolt-on acquisition opportunities, over time, focused within the core kitchen and bath end markets. We plan to maintain a disciplined approach to capital deployment, with most material internal investments currently subject to a company-wide 20%+ expected return on capital hurdle rate. |
| ● | Deep manufacturing partners and customer relationships. We have developed strong manufacturing and sourcing partners over the last 30+ years, which we believe will continue to give us a competitive advantage in |
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| the markets we serve. We also have deep relationships with an established global customer base, offering end-to-end solutions to support category growth. While recent supply chain and inflation pressures have been a headwind, our durable partnerships with manufacturing and sourcing partners have helped to mitigate these challenges. |
We were incorporated in the Cayman Islands on May 26, 2021 in connection with a reorganization (the “Reorganization”) of our parent company, Foremost Groups Ltd. (“Foremost”), and its affiliates, pursuant to which, among other actions, Foremost contributed all of its equity interests in FGI Industries, Inc., FGI Europe Investment Limited, an entity formed in the British Virgin Islands (“FGI Europe”), and FGI International, Limited, an entity formed under the laws of Hong Kong (“FGI International”), each a wholly-owned subsidiary of Foremost, to the newly formed FGI Industries Ltd. Foremost was established in 1987 and has become a global leader in kitchen and bath design, indoor and outdoor furniture, food service equipment, and manufacturing. This discussion, and any financial information and results of operations discussed herein, refers to the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the kitchen and bath business of Foremost Groups, Ltd. before the completion of Reorganization and are presented as if we had been in existence and the Reorganization had been in effect during the years ended December 31, 2022 and 2021.
Recent Trends
Due to changing market conditions, we are experiencing, and may continue to experience, lower market demand for certain of our products, particularly in our bath furniture category, as weak demand as customer destock and inventory corrections have had a negative impact on our net sales. As previously noted, we also began experiencing supply chain disruptions and inflationary pressures, which affected operating margins beginning in late 2021. However, we adopted several productivity and pricing measures to offset these headwinds and began to see resumed margin expansion in the second half of 2022. While demand for our bath furniture products remains lower than historical levels thus far in 2023, based on discussions with our existing customers and other market factors, we expect demand to pick up in the second half of 2023.
Results of Operations
For the Years Ended December 31, 2022 and 2021
The following table summarizes the results of our operations for the years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (decrease) during such periods.
| | For the year ended | | | | | | ||||
| | December 31, | | Change | |||||||
| | 2022 | | 2021 | | Amount | | Percentage | |||
|
| USD |
| USD |
| USD |
| % | |||
Revenues | | $ | 161,718,543 |
| $ | 181,943,027 |
| $ | (20,224,484) |
| (11.1) |
Cost of revenues | |
| 130,209,538 | |
| 149,740,619 | |
| (19,531,081) |
| (13.0) |
Gross profit | |
| 31,509,005 | |
| 32,202,408 | |
| (693,403) |
| (2.2) |
Selling and distribution expenses | |
| 17,533,028 | |
| 17,636,820 | |
| (103,792) |
| (0.6) |
General and administrative expenses | |
| 7,830,023 | |
| 6,194,789 | |
| 1,635,234 |
| 26.4 |
Research and development expenses | |
| 1,053,976 | |
| 646,069 | |
| 407,907 |
| 63.1 |
Income from operations | |
| 5,091,978 | |
| 7,724,730 | |
| (2,632,752) |
| (34.1) |
Operating margins | |
| 3.1 | % |
| 4.2 | % |
| (110) | bps |
|
Total other (expenses) income, net | |
| (551,428) | |
| 1,142,820 | |
| (1,694,248) |
| (148.3) |
Provision for income taxes | |
| 860,630 | |
| 961,634 | |
| (101,004) |
| (10.5) |
Net income | | $ | 3,679,920 | | $ | 7,905,916 | | $ | (4,225,996) |
| (53.5) |
Adjusted income from operations(1) | | $ | 5,693,972 | | $ | 7,840,630 | | $ | (2,146,658) |
| (27.4) |
Adjusted operating margins(1) | |
| 3.5 | % |
| 4.3 | % |
| (80) | bps | — |
Adjusted net income(1) | | $ | 4,173,555 | | $ | 6,284,572 | | $ | (2,111,017) |
| (33.6) |
(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.
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Revenues
Our revenues decreased by $20.2 million, or 11.1%, to $161.7 million for the year ended December 31, 2022, from $181.9 million for the year ended December 31, 2021. The decrease in our revenues was primarily by declines in bath furniture sales partially offset by continued growth in Shower System and Other categories. Revenue categories by product are summarized as follows:
|
| For the year ended December 31, |
| Change | ||||||||
|
| 2022 | | Percentage | | 2021 | | Percentage | | Percentage | ||
|
| USD |
| % |
| USD |
| % |
| % | ||
Sanitaryware | | $ | 104,806,342 |
| 64.8 |
| $ | 104,477,568 |
| 57.4 |
| 0.3 |
Bath Furniture | |
| 29,519,728 |
| 18.3 |
| | 55,136,664 |
| 30.3 |
| (46.5) |
Shower System | | | 21,586,888 | | 13.3 | | | 19,116,188 | | 10.5 | | 12.9 |
Other | |
| 5,805,585 |
| 3.6 |
| | 3,212,607 |
| 1.8 |
| 80.7 |
Total | | $ | 161,718,543 |
| 100.0 | | $ | 181,943,027 |
| 100.0 |
| (11.1) |
We derive the majority of our revenues from sales of sanitaryware, which accounted for 64.8% and 57.4% of our total revenues for the years ended December 31, 2022 and 2021, respectively. Revenues generated from the sales of sanitaryware increased by 0.3% to $104.8 million for the year ended December 31, 2022, from $104.5 million for the year ended December 31, 2021, which resulted from the growth in the United States, partially offset by pricing pressure in Canada.
Our revenues from bath furniture sales decreased significantly by 46.5% to $29.5 million for the year ended December 31, 2022 from $55.1 million for the year ended December 31, 2021. Bath furniture sales accounted for 18.3% and 30.3% of our total revenue for 2022 and 2021, respectively. The revenue pressure was a result of a more significant inventory correction in the channel combined with some more pronounced end market softness.
Revenues from sales of Shower Systems increased by 12.9% to $21.6 million for the year ended December 31, 2022 from $19.1 million for the year ended December 31, 2021. Shower systems make up approximately 13.3% and 10.5% of our total revenue for 2022 and 2021, respectively. This increase was due to this increase was due to strong sales of shower walls and shower doors with certain of our large customers.
We also generate revenues from sales of Other products (custom kitchen cabinetry and others), which, in the aggregate, accounted for 3.6% and 1.8% of our total revenues for the years ended December 31 ,2022 and 2021. The increase in Other was primarily driven by strong volume growth of custom kitchen cabinetry sales to our expanding network of kitchen cabinetry dealers in the United States.
We derive our revenues primarily from the United States, Canada and Europe. Revenue categories by geographic location are summarized as follows:
| | For the year ended December 31, | | Change | ||||||||
| | 2022 | | Percentage | | 2021 | | Percentage | | Percentage | ||
|
| USD |
| % |
| USD |
| % |
| % | ||
United States |
| $ | 103,255,662 |
| 63.9 |
| $ | 112,725,240 |
| 62.0 |
| (8.4) |
Canada | |
| 41,025,288 |
| 25.4 |
| | 50,391,183 |
| 27.7 |
| (18.6) |
Europe | | | 16,844,015 | | 10.4 | | | 18,826,604 | | 10.3 | | (10.5) |
Rest of World | |
| 593,578 |
| 0.3 |
| | — |
| — |
| — |
Total | | $ | 161,718,543 |
| 100.0 | | $ | 181,943,027 |
| 100.0 |
| (11.1) |
We generated the majority of our revenues in the United States market, which amounted to $103.3 million for the year ended December 31, 2022, and $112.7 million for the year ended December 31, 2021, representing an 8.4%
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decrease. These revenues accounted for 63.9% and 62.0% of our total revenues for 2022 and 2021, respectively. The decreased in the U.S. market was primarily driven by volume weakness in the bath furniture as customers' de-stocking to adjust inventory level.
Our second largest market is Canada. Our revenues generated in the Canadian market were $41.0 million and $50.4 million for the years ended December 31, 2022 and 2021, respectively, representing a 18.6% decrease. The decrease was primarily driven by volume weakness in both retail and wholesale markets.
We also derive a small portion of our revenue from Europe, which consists primarily of sales in Germany. This amounted to $16.8 million and $18.8 million for the years ended December 31, 2022 and 2021, respectively, representing a 10.5% decrease. The decrease was attributable to decreased demand that was impacted by global supply chain interruptions and inflation issues.
Gross Profit
Gross profit was $31.5 million during year 2022, a decrease of 2.2% compared to the prior-year period, as volume weakness was offset by pricing gains, a more favorable mix, and lower freight costs. Gross profit margin percentage improved to 19.5% during year 2022, up 180 basis points from 17.7% in the prior-year period, as measures put in place to mitigate the recent margin headwinds benefitted results. The improvement in the Company’s gross margin percentage is primarily attributable to solid growth in higher margin products, such as shower systems and kitchen cabinetry, continued pricing gains, and a reduction in freight costs versus the elevated levels experienced last year. The Company expects the positive factors that drove the strong margin performance to remain in place, which combined with an expected rebound in the Bath Furniture segment in the second half of 2023, should enable the Company to drive additional gross margin gains over time.
Operating Expenses
Selling and distribution expenses primarily consisted of personnel costs, marketing and promotion costs, commission, and freight and leasing charges. Our selling and distribution expenses decreased by $0.1 million, or 0.6%, to $17.5 million for the year ended December 31, 2022, from $17.6 million for the year ended December 31, 2021. The decrease was a result of the lower sales in the year 2022 compared to the prior year, which caused the decrease in sales co-op and shipping freight costs, partially offset by higher marketing and travel expenses.
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 $1.6 million, or 26.4%, to $7.8 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was primarily attributable to incremental public company costs and a one-time bonus expense related to our IPO.
Research and development expenses mainly consisted of personnel costs and product development costs. Our research and development activities remained stable and are relatively immaterial to our consolidated statements of income.
Other Income (Expenses)
Other income (expenses) decreased by $1.7 million, or (148.3)%, to $(0.6) million for the year ended December 31, 2022, from $1.1 million for the year ended December 31, 2021. This decrease was the result of one-time income recognized in 2021 upon the forgiveness of the PPP loan.
Provision for Income Taxes
We recorded income tax expense of $0.9 million for the year ended December 31, 2022, and $1.0 million for the year ended December 31, 2021. The decrease resulted from the decrease in our reported income before taxes of $4.3 million, or 48.8%.
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Net Income
Our net income decreased by $4.2 million, or 53.5%, to $3.7 million for the year ended December 31, 2022, from $7.9 million for the year ended December 31, 2021. This decrease was a result of the combination of the changes discussed above.
Liquidity and Capital Resources
Our principal sources of liquidity are cash generated from operating activities and cash borrowed under credit facilities, which we believe provides sufficient liquidity to support our financing needs. As of December 31, 2022 and 2021, we had cash and cash equivalents of $10.1 million and $3.9 million, respectively. We had working capital of $16.1 million as of December 31, 2022 compared to a working capital of $1.4 million as of December 31, 2021. On January 27, 2022, we closed an underwritten public offering of 2.5 million units consisting of Ordinary Shares and warrants and received net proceeds, after commissions and expenses, of approximately $12.4 million.
We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations well into the foreseeable future. However, we may need additional cash resources in the future if we experience changes in business conditions or other developments, such as rising interest rates, inflation and increased costs, and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. For example, from time to time we may provide loans or other operational support to Foremost to assist Foremost in capital expenditures or other efforts related to the manufacturing services that Foremost provides to us, which could limit the assets available for other corporate purposes or require additional resources. If it is determined that the cash requirements exceed our amount of cash on hand, we may seek to issue debt or equity securities, and there can be no assurances that additional financing will be available on acceptable term, if at all.
As of December 31, 2022, FGI’s total outstanding debt is represented by a credit facility with East West Bank.
East West Bank Credit Facility
Our wholly owned subsidiary, FGI Industries (formerly named Foremost Groups, Inc.), has a line of credit with East West Bank pursuant to a Business Loan Agreement (the “Credit Agreement”) with East West Bank, which is collateralized by all of the assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately 49.75% of the voting control of Foremost. On November 25, 2022, the Credit Agreement was amended and restated with a maximum borrowing amount of $18,000,000 and a maturity date of December 21, 2024.
Pursuant to the Credit Agreement, FGI Industries is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1, tested at the end of each fiscal quarter; (b) an effective tangible net worth (defined as total book net worth plus minority interest, less amounts due from officers, shareholders and affiliates, minus intangible assets and accumulated amortization, plus debt subordinated to East West Bank) of not less than $10,000,000 for the quarter ended March 31, 2021 and thereafter, on consolidated basis; and (c) a total debt to tangible net worth ratio (defined as total liabilities divided by tangible net worth, which is defined as total book net worth plus minority interest, less loans to officers, shareholders, and affiliates minus intangible assets and accumulated amortization) not to exceed 4.0 to 1, tested at the end of each fiscal quarter, on consolidated basis. As of December 31, 2021, FGI Industries was not in compliance with this financial covenant; however, East West Bank provided a waiver for such non-compliance. As of December 31, 2022, FGI Industries was in compliance with this financial covenant.
The loan bears interest rate equal to, at the Company’s option, either (i) 0.25 percentage points less than the Prime Rate quoted by the Wall Street Journal or (ii) the SOFR Rate (as administered by CME Group Benchmark Administration Limited and displayed by Bloomberg LP) plus 2.20% per annum (in either case, subject to a minimum rate of 4.500% per annum). The interest rate as of December 31, 2022 and December 31, 2021 was 7.25% and 3.50%, respectively.
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Each sum of borrowings under the Credit Agreement is deemed due on demand and is classified as a short-term loan. The outstanding balance of such loan was $9,795,052 and $14,657,280 as of December 31, 2022 and 2021, respectively.
HSBC Canada Bank Loan
FGI Canada Ltd. has a line of credit agreement with HSBC Canada (the “Canadian Revolver”). The revolving line of credit with HSBC Canada allows for borrowing up to CAD $7,500,000 (US $5,538,734 as of the December 31, 2022 exchange rate). Pursuant to the Canadian Revolver, FGI Canada Ltd. is required to maintain (a) a debt to tangible net worth ratio of no more than 3.00 to 1.00; and (b) a ratio of current assets to current liabilities of at least 1.25 to 1.00. The loan bears interest at a rate of Prime rate plus 0.50%. As of December 31, 2022 and 2021, FGI Canada Ltd. was in compliance with this financial covenant.
Borrowings under this line of credit amounts to $0 as of December 31, 2022 and 2021. The facility matures at the discretion of HSBC Canada upon 60 days notice.
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 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 our consolidated statements of income and comprehensive income.
Cash Flows
The following table summarizes the key components of our cash flows for the years ended December 31, 2022, and 2021.
| | For the Year Ended December 31, | ||||
| | 2022 | | 2021 | ||
|
| USD |
| USD | ||
Net cash provided by (used in) operating activities | | $ | 980,265 | | $ | (3,217,321) |
Net cash used in investing activities | |
| (1,063,823) | |
| (51,890) |
Net cash provided by financing activities | |
| 7,010,568 | |
| 3,316,826 |
Effect of exchange rate fluctuation on cash | |
| (743,478) | |
| (182,277) |
Net changes in cash | |
| 6,183,532 | |
| (134,662) |
Cash, beginning of period | |
| 3,883,896 | |
| 4,018,558 |
Cash, end of period | | $ | 10,067,428 | | $ | 3,883,896 |
Operating Activities
Net cash provided by operating activities was approximately $1.0 million for the year ended December 31, 2022 compared to cash used in operating activities of $3.2 million for the year ended December 31, 2021. The increase was primarily attributable to a decrease in accounts receivable of approximately $13.5 million, a decrease in inventories of approximately $8.0 million, and net income for the year of approximately $3.7 million, , a decrease in other noncurrent
40
assets of approximately $0.9 million, a decrease in right-of-used assets of approximately $0.9 million, an increase in accounts payable-related parties of approximately $0.1 million. These drivers were partially offset by a decrease in accounts payable of approximately $17.3 million, plus an increase in prepayments and other receivables - related parties of approximately $2.5 million, a decrease in accrued expenses and other current liabilities of approximately $1.9 million, a decrease in operating lease liabilities of approximately $1.4 million, a decrease in income taxes payable of approximately $1.2 million and an increase in prepayments and other current assets of approximately $1.0 million, non-cash items of approximately $0.6 million,.
Net cash used in operating activities was approximately $3.2 million for the year ended December 31, 2021 and was primarily attributable to an increase in accounts receivable of approximately $11.1 million, an increase in inventories of approximately $13.0 million, an increase in other noncurrent assets of approximately $2.8 million, which were partially offset by net income for the year of approximately $7.9 million, plus various non-cash items of approximately $0.7 million, an increase in accounts payable of approximately $12.5 million, and an increase in accrued expenses and other current liabilities of approximately $2.5 million.
Investing Activities
Net cash used in investing activities was approximately $1.1 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively. The increase in cash used was primarily attributable to increases in the purchase of property and equipment.
Financing Activities
Net cash provided financing activities was approximately $7.0 million for the year ended December 31, 2022, which primarily represents the net proceeds from issuance of units in the IPO of $12.4 million and partially offset by repayment of bank loans of $4.9 million and a decrease of $0.5 million excess payment over carrying value resulted from long-lived assets acquisition from affiliate.
Net cash provided financing activities was approximately $3.3 million for the year ended December 31, 2021, which represents the net proceeds from bank loans of $5.3 million and net decrease in parent company investment of $1.9 million.
Commitments and Contingencies
Capital Expenditures
Our capital expenditures were incurred primarily in connection with the acquisition of property and equipment. Our capital expenditures amounted to approximately $1.1 million and $0.1 million for the years ended December 31, 2022, and 2021, respectively. We do not expect to incur significant capital expenditures in the immediate future.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Critical Accounting Policies
The consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting policies that are significant to the preparation of the consolidated financial statements. These accounting
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policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to consolidated financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this registration statement, we believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Use of estimates and assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment, allowance for doubtful accounts, inventory reserve, accrued defective return, provision for contingent liabilities, revenue recognition, deferred taxes and uncertain tax position. Actual results could differ from these estimates.
Foreign currency translation and transaction
The functional currencies of our company and our subsidiaries are the local currency of the country in which the subsidiaries operate, except for FGI International which is incorporated in Hong Kong while adopting the United States Dollar (“U.S. Dollar” or “USD”) as its functional currency. The reporting currency of our company is the U.S. Dollar. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the time of capital contributions. The results of operations and the cash flows denominated in foreign currencies are translated at the average rates of exchange during the reporting period. Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in the consolidated statements of changes in parent’s net investment. Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency in the consolidated statements of income and comprehensive income.
For the purpose of presenting the financial statements of subsidiaries using the Renminbi (“RMB”) as functional currency, our assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 6.9653 and 6.3762 as of December 31, 2022 and 2021, respectively; parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 6.7164 and 6.4543 the years ended December 31, 2022 and 2021, respectively.
For the purpose of presenting the financial statements of the subsidiary using the Canadian Dollar (“CAD”) as functional currency, our assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 1.3541 and 1.2697 as of December 31, 2022 and 2021, respectively; parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 1.2945 and 1.2549 for the years ended December 31, 2022 and 2021, respectively.
For the purpose of presenting the financial statements of the subsidiary using the Euro (“EUR”) as functional currency, our assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was 0.9338 and 0.8815 as of December 31, 2022 and 2021, respectively; parent’s net investment accounts are translated at historical rates, and income and expense items are translated at the average exchange rate during the period, which was 0.9474 and 0.8406 for the years ended December 31, 2022 and 2021, respectively.
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Accounts receivable
Bills and trade receivables include trade accounts due from customers. In establishing the required allowance for doubtful accounts, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate and adjusts the allowance when necessary. Delinquent account balances are written off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average cost method, based on individual products. The methods of determining inventory costs are used consistently from year to year. A provision for slow-moving items is calculated based on historical experience. Management reviews the provision annually to assess whether, based on economic conditions, it is adequate.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and impairment. Depreciation is provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows:
|
| Useful Life |
Building | | 20 years |
Leasehold Improvements |
| Lesser of lease term or expected useful life |
Machinery and equipment |
| 3 – 5 years |
Furniture and fixtures. |
| 3 – 5 years |
Vehicles |
| 5 years |
Molds |
| 3 – 5 years |
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use assets (“ROU assets”), accrued expenses and operating lease liabilities — noncurrent on the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the duration of the lease term while lease liabilities represent our obligation to make lease payments in exchange for the right to use an underlying asset. ROU assets and lease liabilities are measured based on the present value of fixed lease payments over the lease term at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and initial direct costs incurred and is reduced by any lease incentives received. We review our ROU assets as events occur or circumstances change that would indicate the carrying amount of the ROU assets are not recoverable and exceed their fair values. If the carrying amount of the ROU asset is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value.
As most of our leases do not provide an implicit rate, we generally uses our incremental borrowing rate on the commencement date of the lease as the discount rate in determining the present value of future lease payments. We determine the incremental borrowing rate for each lease by using the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Our lease terms may include options to extend or terminate the lease when there are relevant economic incentives present that make it reasonably certain that we will exercise that option. We account for any non- lease components separately from lease components.
Lease expense for lease payments is recognized on a straight-line basis over the lease term.
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Fair Value Measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Revenue recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
We generate revenues from sales of kitchen and bath products and recognizes revenue as control of its products is transferred to its customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. Our customers’ payment terms generally range from 15 to 60 days of fulfilling its performance obligations and recognizing revenue.
We provide customer programs and incentive offerings, including co-operative marketing arrangements and volume-based incentives. These customer programs and incentives are considered variable considerations. We include in revenue variable considerations only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale and expected sales volume forecasts as it relates to our volume- based incentives. This determination is updated on a monthly basis.
Certain product sales include a right of return. We estimate future product returns at the time of sale based on historical experience and record a corresponding reduction in accounts receivable.
We record receivables related to revenue when it has an unconditional right to invoice and receive payment.
Share-based compensation
We account for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). In accordance with ASC 718, we determine whether an award should be classified and accounted for as a liability award or an equity award. All of our share-based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.
We have elected to recognize share-based compensation using the straight-line method for all share- based awards granted over the requisite service period, which is the vesting period. We account for forfeitures as they occur in
44
accordance with ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting. Our company, with the assistance of an independent third-party valuation firm, determines the fair value of the stock options granted to employees. The Black Scholes Model is applied in determining the estimated fair value of the options granted to employees and non-employees. The Company recognized share-based compensation $383,572 and $0 in 2022 and 2021, respectively.
Income Taxes
Deferred taxes are recognized based on the future tax consequences of differences between the carrying value of assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.
The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. The Company believes that there is an increased potential for volatility in its effective tax rate because this threshold allows for changes in the income tax environment and, to a greater extent, the inherent complexities of income tax law in a substantial number of jurisdictions, which may affect the computation of its liability for uncertain tax positions.
We record interest and penalties on our uncertain tax positions in income tax expense.
We record the tax effects of Foreign Derived Intangible Income (FDII) and Global Intangible Low- Taxed Income (GILTI) related to our foreign operations as a component of income tax expense in the period the tax arises.
Recently issued accounting pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance became effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. In November 2019, the FASB issued ASU 2019-10 which finalized the delay of such effective date to fiscal years beginning after December 15, 2022 for private and all other companies including emerging growth companies. As an emerging growth company, the Company adopted this guidance from January 1, 2023, and the adoption of the standard will not have an impact on our financial position or results of operation.
Non-GAAP Measures
In addition to the measures presented in our consolidated financial statements, we use the following non-GAAP measures to evaluate our business, measure our performance, identify trends affecting our business and assist us in
45
making strategic decisions. Our non-GAAP measures are: Adjusted Income from Operations, Adjusted Operating Margins and Adjusted Net Income. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). They are supplemental financial measures of our performance only, and should not be considered substitutes for net income, income from operations or any other measure derived in accordance with GAAP and may not be comparable to similarly titled measures reported by other entities.
We define Adjusted Income from Operations as GAAP income from operations excluding the impact of certain non-recurring expenses, including expenses related to COVID-19 protocols. We define Adjusted Net Income as GAAP net income excluding the tax-effected impact of certain non-recurring expenses and income such as expenses related to COVID-19 protocols, unusual litigation fees and non-recurring compensation expenses related to our IPO. We define Adjusted Operating Margins as adjusted income from operations divided by revenue.
We use these non-GAAP measures, along with U.S. GAAP measures, to evaluate our business, measure our financial performance and profitability and our ability to manage expenses, after adjusting for certain one-time expenses, identify trends affecting our business and assist us in making strategic decisions. We believe these non-GAAP measures, when reviewed in conjunction with U.S. GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under U.S. GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance over time on a consistent basis.
The following table reconciles Income from Operations to Adjusted Income from Operations and Adjusted Operating Margins, as well as Net income to Adjusted Net Income for the periods presented.
| | For the year ended |
| ||||
| | December 31, |
| ||||
| | 2022 |
| 2021 |
| ||
Income from operations | | $ | 5,091,978 |
| $ | 7,724,730 | |
Adjustments: | | |
|
| |
| |
Non-recurring IPO-related compensation | | | 255,871 | | | — | |
Arbitration legal fee | | | 221,258 | | | — | |
Anti-dumping penalty(1) | | | 124,865 | | | — | |
COVID one-time expenses | | | — |
| | 115,900 | |
Adjusted income from operations | | | 5,693,972 |
| | 7,840,630 | |
Revenue | | $ | 161,718,543 |
| $ | 181,943,027 | |
Adjusted operating margins | | | 3.5 | % | | 4.3 | % |
(1) Represents an additional charge related to one-time anti-dumping/countervailing duty legal fee, as shown in prior periods.
| | For the year ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Net Income | | $ | 3,679,920 |
| $ | 7,905,916 |
Adjustments: | | | | | | |
Non-recurring IPO-related compensation | | | 255,871 | | | — |
Arbitration legal fee | | | 221,258 | | | — |
Anti-dumping penalty(1) | | | 124,865 | | | — |
COVID one-time expenses | | | — |
| | 115,900 |
Other income (PPP Loan) | | | — |
| | (1,680,900) |
Total | | | 4,281,914 |
| | 6,340,916 |
Tax impact of adjustment at 18% effective rate | | | (108,359) |
| | 281,700 |
GILTI high tax re-selection | | | |
| | (338,044) |
Adjusted net income | | $ | 4,173,555 |
| $ | 6,284,572 |
| (1) | Represents an additional charge related to one-time anti-dumping/countervailing duty legal fee, as shown in prior periods. |
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined in Regulation S-K and are not required to provide the information under this item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FGI INDUSTRIES LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
FGI Industries Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FGI Industries Ltd. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, changes in shareholders’ equity (parent’s net investment) and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
We have served as the Company’s auditor since 2020.
April 17, 2023
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FGI INDUSTRIES LTD.
CONSOLIDATED BALANCE SHEETS
| | As of | | As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
|
| USD |
| USD | ||
ASSETS | | | | | | |
| | | | | | |
CURRENT ASSETS |
| |
|
| |
|
Cash | | $ | | | $ | |
Accounts receivable, net | |
| | |
| |
Inventories, net | |
| | |
| |
Prepayments and other current assets | |
| | |
| |
Prepayments and other receivables – related parties | |
| | |
| |
Total current assets | |
| | |
| |
| | | | | | |
PROPERTY AND EQUIPMENT, NET | |
| | |
| |
| | | | | | |
OTHER ASSETS | |
|
| |
|
|
Intangible assets | |
| — | |
| |
Operating lease right-of-use assets, net | |
| | |
| |
Deferred tax assets, net | |
| | |
| |
Other noncurrent assets | |
| | |
| |
Total other assets | |
| | |
| |
Total assets | | $ | | | $ | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
|
| |
|
|
| | | | | | |
CURRENT LIABILITIES | |
|
| |
|
|
Short-term loans | | $ | | | $ | |
Accounts payable | |
| | |
| |
Accounts payable – related parties | | | | | | — |
Income tax payable | |
| | |
| |
Operating lease liabilities – current | |
| | |
| |
Accrued expenses and other current liabilities | |
| | |
| |
Total current liabilities | |
| | |
| |
| | | | | | |
OTHER LIABILITIES | |
|
| |
|
|
Operating lease liabilities – noncurrent | |
| | |
| |
Total liabilities | |
| | |
| |
| | | | | | |
COMMITMENTS AND CONTINGENCIES | |
|
| |
|
|
| | | | | | |
SHAREHOLDERS’ EQUITY | |
|
| |
|
|
Preference Shares ($ | |
| |
| ||
Ordinary shares ($ | |
| | |
| |
Additional paid-in capital | | | | | | — |
Parent’s net investment | |
| — | |
| |
Retained earnings | | | | | | — |
Accumulated other comprehensive loss | | | ( | | | — |
Total shareholders’ equity | |
| | |
| |
Total liabilities and shareholders’ equity | | $ | | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
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FGI INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| | For the Years Ended | ||||
| | December 31, | ||||
|
| | 2022 |
| | 2021 |
| | | USD |
| | USD |
REVENUES | | $ | | | $ | |
| | | | | | |
COST OF REVENUES | |
| | |
| |
| | | | | | |
GROSS PROFIT | |
| | |
| |
| | | | | | |
OPERATING EXPENSES | |
| | |
| |
Selling and distribution | | | | | | |
General and administrative | |
| | |
| |
Research and development | |
| | |
| |
Total operating expenses | |
| | |
| |
| | | | | | |
INCOME FROM OPERATIONS | |
| | |
| |
| | | | | | |
OTHER (EXPENSES) INCOME | |
| | |
| |
Interest income | | | | | | |
Interest expense | |
| ( | |
| ( |
Other income, net | |
| | |
| |
Total other (expenses) income, net | |
| ( | |
| |
| | | | | | |
INCOME BEFORE INCOME TAXES | |
| | |
| |
| | | | | | |
PROVISION FOR INCOME TAXES | |
| | |
| |
Current | | | | | | |
Deferred | |
| | |
| ( |
Total provision for income taxes | |
| | |
| |
| | | | | | |
NET INCOME | |
| | |
| |
| | | | | | |
OTHER COMPREHENSIVE (LOSS) INCOME | |
| | |
| |
Foreign currency translation adjustment | | | ( | | | |
| | | | | | |
COMPREHENSIVE INCOME | | $ | | | $ | |
| | | | | | |
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES | |
| | |
| |
Basic | | | | | | |
Diluted | | | | | | |
| | | | | | |
EARNINGS PER SHARE | | | | | | |
Basic | | $ | | | $ | |
Diluted | | $ | | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
51
FGI INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY (PARENT’S NET INVESTMENT)
| | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | Additional | | Parent’s | | | | Other | | |
| | Preference shares | | Ordinary shares | | Paid-in | | net | | Retained | | Comprehensive | | | ||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Investment |
| Earnings |
| Loss |
| Total |
Balance at January 1, 2021 | | — | | — | | | $ | | | — | $ | | | — | | — | $ | |
Net income | | — | | — | | — | | — | | — | | | | — | | — | | |
Net distribution to Parent | | — | | — | | — | | — | | — | | ( | | — | | — | | ( |
Foreign currency translation adjustments | | — | | — | | — | | — | | — | | | | — | | — | | |
Balance at December 31, 2021 | | — | | — | | | | | | — | | | | — | | — | | |
Consummation of separation transaction upon completion of reorganization | | — | | — | | — | | — | $ | | | ( | | — | $ | ( | | — |
Share-Based compensation | | — | | — | | — | | — | | | | | | — | | — | | |
Issuance of ordinary shares upon Initial Public Offering (“IPO”), net | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | $ | | | | | |
Long-lived assets acquisition from affiliate | | | | | | | | | | ( | | | | | | | | ( |
Foreign currency translation adjustments | | — | | — | | — | | — | | — | | | | — | | ( | | ( |
Balance at December 31, 2022 | | — | | — | | | $ | | $ | | $ | — | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
52
FGI INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | For the Years Ended December 31, | ||||
| | 2022 | | 2021 | ||
|
| USD |
| USD | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income | | $ | | | $ | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | | |
Depreciation and amortization | | | | | | |
Share-based compensation | |
| | |
| — |
Provision for doubtful accounts | |
| | |
| |
(Reversal of) provision of defective return | | | ( | | | |
Foreign exchange transaction loss | |
| | |
| |
Gain on Forgiveness of PPP loan | |
| — | |
| ( |
Deferred income taxes | |
| | |
| ( |
Loss on disposal of property and equipment | |
| — | |
| |
Changes in operating assets and liabilities | |
| | |
| |
Accounts receivable | | | | | | ( |
Inventories | |
| | |
| ( |
Prepayments and other current assets | |
| ( | |
| ( |
Prepayments and other receivables – related parties | |
| ( | |
| |
Other noncurrent assets | |
| | |
| ( |
Income taxes | |
| ( | |
| |
Right-of-use assets | |
| | |
| |
Accounts payable | |
| ( | |
| |
Accounts payable-related parties | |
| | |
| — |
Operating lease liabilities | |
| ( | |
| ( |
Accrued expenses and other current liabilities | |
| ( | |
| |
Net cash provided by (used in) operating activities | |
| | |
| ( |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
|
| |
|
|
Proceeds from disposal of property and equipment | |
| | |
| |
Purchase of property and equipment | |
| ( | |
| ( |
Net cash used in investing activities | |
| ( | |
| ( |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Net (repayments of) proceeds from revolving credit facility | |
| ( | |
| |
Net proceeds from issuance of ordinary shares in IPO | |
| | |
| — |
Excess payment over carrying value on long-lived assets acquisition from common-control affiliate | | | ( | | | — |
Net changes in parent company investment | | | — | | | ( |
Net cash provided by financing activities | |
| | |
| |
| | | | | | |
EFFECT OF EXCHANGE RATE FLUCTUATION ON CASH | |
| ( | |
| ( |
| | | | | | |
NET CHANGES IN CASH | |
| | |
| ( |
CASH, BEGINNING OF YEAR | |
| | |
| |
CASH, END OF YEAR | | $ | | | $ | |
| | | — | | | — |
SUPPLEMENTAL CASH FLOW INFORMATION | |
| | |
| |
Cash paid during the period for interest | | | ( | | | ( |
Cash paid during the period for income taxes | |
| ( | |
| ( |
| | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | |
|
| |
|
|
Net changes in parent company investment | |
| — | |
| ( |
New addition on Right-of-use assets | | | ( | | | — |
The accompanying notes are an integral part of these consolidated financial statements.
53
FGI INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of business and organization
FGI Industries Ltd. (“FGI” or the “Company”) is a holding company organized on May 26, 2021, under the laws of the Cayman Islands. The Company has no substantive operations other than holding all of the outstanding equity of its operating subsidiaries as described below. The Company is a supplier of global kitchen and bath products and currently focuses on the following categories: sanitaryware (primarily toilets, sinks, pedestals and toilet seats), bath furniture (vanities, mirrors and cabinets), shower systems, customer kitchen cabinetry and other accessory items. These products are sold primarily for repair and remodeling (“R&R”) activity and, to a lesser extent, new home or commercial construction. The Company sells its products through numerous partners, including mass retail centers, wholesale and commercial distributors, online retailers and independent dealers and distributors.
The accompanying consolidated financial statements reflect the activities of FGI and each of the following entities, in each case, as contemplated after the Reorganization, as described below:
Name |
| Background |
| Ownership |
FGI Industries, Inc. |
| ● A New Jersey corporation |
| |
(formerly named Foremost Groups, Inc.) | | ● Incorporated on January 5, 1988 | | |
| | ● Sales and distribution in the United States | | |
FGI Europe Investment Limited | | ● A British Virgin Islands holding company | | |
| | ● Incorporated on January 1, 2007 | | |
FGI International, Limited | | ● A Hong Kong company | | |
| | ● Incorporated on June 2, 2021 | | |
| | ● Sales, sourcing and product development | | |
FGI Canada Ltd. | | ● A Canada company | | |
| | ● Incorporated on October 17, 1997 | | Industries, Inc. |
| | ● Sales and distribution in Canada | | |
FGI Germany GmbH & Co. KG | | ● A German company | | |
| | ● Incorporated on January 24, 2013 | | Investment Limited |
| | ● Sales and distribution in Germany | | |
FGI China, Ltd. | | ● A PRC limited liability company | | |
| | ● Incorporated on August 19, 2021 | | International, Limited |
| | ● Sourcing and product development | | |
FGI United Kingdom Ltd | | ● An UK company | | |
| | ● Incorporated on December 10, 2021 | | Investment Limited |
| | ● Sales and distribution in UK | | |
FGI Austrlasia Pty Ltd | | ● An Australia company | | |
| | ● Incorporated on September 8, 2022 | | |
| | ● Sales and distribution in Australia | | |
Covered Bridge Cabinetry Manufacturing Co., Ltd | | ● A Cambodia company | | |
| | ● Incorporated on April 21, 2022 | | |
| | ● Manufacturing in Cambodia | | |
54
Reorganization
On January 27, 2022, the following reorganization steps were collectively completed: (i) the incorporation of FGI International, Limited (“FGI International”) and FGI China, Ltd., (ii) FGI Industries, Inc. (formerly Foremost Groups, Inc.) (“FGI Industries”), which operates the kitchen and bath (“K&B”) sales and distribution business in the United States and, through its wholly-owned Canadian subsidiary, Foremost International Limited, in Canada, distributed
Immediately before and as contemplated by the proposed Reorganization, each of the Companies, FGI Industries, FGI Europe and FGI International, and each of their respective subsidiaries was and is ultimately controlled by Foremost. As such, the accompanying consolidated financial statements include the assets, liabilities, revenue, expenses and cash flows that are directly attributable to the K&B Business (excluded otherwise) before the Reorganization. The consolidated financial statements are presented as if the Company had been in existence and the Reorganization had been in effect during the years ended December 31, 2022 and 2021. However, such presentation may not necessarily reflect the results of operations, financial position and cash flows if the K&B Business had actually existed on a stand- alone basis during the years presented before the completion of the Reorganization.
On January 14, 2022 FGI Industries, a wholly-owned subsidiary of the Company, entered into a shared services agreement (the “FHI Shared Services Agreement”) with Foremost Home Industries, Inc., a newly-formed wholly-owned subsidiary of Foremost (“FHI”). Pursuant to the FHI Shared Services Agreement, FGI Industries provides FHI with general and administrative services, information technology systems services and human resources services, as well as warehouse space services and supply chain services in the United States. Under the FHI Shared Services Agreement, FHI will reimburse any reasonable and documented out-of-pocket fees incurred by FGI Industries as well as pay a service fee for each service. For warehouse services, FHI will pay FGI Industries a $
On January 14, 2022 the Company entered into a shared services agreement (the “Worldwide Shared Services Agreement”) with Foremost Worldwide Co., Ltd. (“Foremost Worldwide”) pursuant to which Foremost Worldwide will provide FGI Industries with general and administrative services, information technology system services and human resources services, in Taiwan. The terms of the Worldwide Services Agreement as between the service provider and recipient are substantially identical to those of the FHI Shared Services Agreement, including calculation of service fees and termination provisions, with Foremost Worldwide providing services and FGI Industries paying Foremost Worldwide for such services.
The assets and liabilities have been stated at historical carrying amounts. Only those assets and liabilities that are specifically identifiable to the K&B Business are included in the Company’s consolidated balance sheets. The Company’s statements of income and comprehensive income consists all the revenues, costs and expenses of the K&B Business, including allocations to the selling and distribution expenses, general and administrative expenses, and
55
research and development expenses, and which were incurred by FGI but related to the K&B Business prior to the Reorganization.
All revenues and cost of revenues attributable to selling of kitchen and bath products were allocated to the Company. Operating expenses were allocated to the Company based on employees and activities that are involved in the K&B Business. Any expenses that were not directly attributable to any specific business were allocated to the Company based on the proportion of the number of employees of the K&B Business to the total number of employees of both the K&B Business and FHI.
The following table sets forth the revenues, cost of revenues and operating expenses that were irrelevant to the K&B Business allocated from FGI Industries to Foremost Home, Inc. for years ended December 31, 2022 and 2021, respectively.
| | For the Years Ended | |||
| | December 31, | |||
| | 2022 | 2021 | ||
|
| USD | USD | ||
Revenues | | $ | | $ | |
Cost of revenues | |
| ( |
| ( |
Gross profit | |
| |
| |
Selling and distribution expenses | |
| ( |
| ( |
General and administrative expenses | |
| ( |
| ( |
Research and development expenses | |
| ( |
| ( |
Income from operations | | $ | | $ | |
The following table sets forth the revenues, cost of revenues and operating expenses that were directly related to the K&B Business allocated from Foremost Worldwide Co., Ltd., a wholly-owned subsidiary of Foremost, to FGI International for years ended December 31, 2022 and 2021, respectively.
| | For the Years Ended | |||
| | December 31, | |||
| | 2022 | 2021 | ||
|
| USD | USD | ||
Revenues | | $ | | $ | |
Cost of revenues | |
| ( |
| ( |
Gross profit | |
| |
| |
Selling and distribution expenses | |
| ( |
| ( |
General and administrative expenses | |
| ( |
| ( |
Research and development expenses | |
| ( |
| ( |
Income from operations | | $ | | $ | |
Income tax liability is calculated based on a separate return basis as if the K&B Business had filed separate tax returns before the completion of the Reorganization. Immediately following the Reorganization, the K&B Business began to file separate tax returns and report taxation based on the actual tax return of each legal entity.
Management believes the basis and amounts of these allocations are reasonable. While the expenses allocated to the Company for these items are not necessarily indicative of the expenses that would have been incurred if the Company had been a separate, stand-alone entity, the Company does not believe that there is any significant difference between the nature and amounts of these allocated expenses and the expenses that would have been incurred if the Company had been a separate, stand-alone entity.
Note 2 — Summary of significant accounting policies
Liquidity
56
Historically, the Company finances its operations through internally generated cash, short-term loans and payables. As of December 31, 2022, the Company had approximately $
If the Company is unable to realize its assets within the normal operating cycle of a twelve (12) month period, the Company may have to consider supplementing its available sources of funds through the following sources:
· other available sources of financing from other banks and financial institutions;
· sales of additional securities to the public or other investors ; and
· financial support from the Company’s shareholders.
Based on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet the Company’s working capital requirements and debt obligations as they become due over the next twelve (12) months.
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commissions (the “SEC”), regarding financial reporting, and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operation results.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at a meeting of directors.
Use of estimates and assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include the useful lives of property and equipment, allowance for doubtful accounts, inventory reserve, accrued defective return, provision for contingent liabilities, revenue recognition, deferred taxes and uncertain tax position. Actual results could differ from these estimates.
Foreign currency translation and transaction
The functional currencies of the Company and its subsidiaries are the local currency of the country in which the subsidiaries operate, except for FGI International which is incorporated in Hong Kong while adopting the United States Dollar (“U.S. Dollar” or “USD”) as its functional currency. The reporting currency of the Company is the U.S. Dollar. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the time of capital contributions. The results of operations and the cash flows denominated in foreign currencies are translated at the average rates of exchange during the reporting period. Because cash flows are translated
57
based on the average translation rates, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in the consolidated statements of changes in shareholders’ equity. Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency in the consolidated statements of income and comprehensive income.
For the purpose of presenting the financial statements of subsidiaries using the Renminbi (“RMB”) as functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was
For the purpose of presenting the financial statements of the subsidiary using the Canadian Dollar (“CAD”) as functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was
For the purpose of presenting the financial statements of the subsidiary using the Euro (“EUR”) as functional currency, the Company’s assets and liabilities are expressed in U.S. Dollars at the exchange rate on the balance sheet date, which was
Reclassification
Certain prior year amounts have been reclassified to conform with the current year presentation, specifically the interest expenses and accrued expenses and other current liabilities in consolidated statements of cash flow. These reclassifications have no effect on the consolidated balance sheets and results of operations previously reported.
Cash
Cash consists of cash on hand, demand deposits and time deposits placed with banks or other financial institutions that have original maturities of three months or less. The Company did
Accounts receivable, net
Accounts receivables include trade accounts due from customers. In establishing the required allowance for doubtful accounts, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories, net
Inventories are stated at the lower of cost and net realizable value. Cost consists of purchase price and related shipping and handling expenses, and is determined using the weighted average cost method, based on individual products. The methods of determining inventory costs are used consistently from year to year. A provision for slow-moving items is calculated based on historical experience. Management reviews this provision annually to assess whether, based on economic conditions, it is adequate.
58
Prepayments
Prepayments are cash deposited or advanced to suppliers for the purchase of goods or services that have not been received or provided. This amount is refundable and bears no interest. Prepayments and deposits are classified as either current or non-current based on the terms of the respective agreements. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
Property and equipment, net
Property and equipment are stated at cost net of accumulated depreciation and impairment. Depreciation is provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows:
|
| Useful Life |
Building | | |
Leasehold Improvements | |
|
Machinery and equipment |
| |
Furniture and fixtures |
| |
Vehicles |
| |
Molds |
|
Intangible assets, net
The Company’s intangible assets with definite useful lives primarily consist of software acquired for internal use. The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company typically amortizes its intangible assets with definite useful lives on a straight-line basis over the estimated useful lives of
Impairment for long-lived assets
Long-lived assets, including property and equipment and intangible assets with definite useful lives, are reviewed for impairment whenever material events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of an asset based on the undiscounted future cash flows the asset is expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of December 31, 2022 and 2021,
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in right- of-use assets (“ROU assets”), operating lease liabilities — current and operating lease liabilities — noncurrent on the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the duration of the lease term while lease liabilities represent the Company’s obligation to make lease payments in exchange for the right to use an underlying asset. ROU assets and lease liabilities are measured based on the present value of fixed lease payments over the lease term at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and initial direct costs incurred, and is reduced by any lease incentives received. The Company reviews its ROU assets as material events occur or circumstances change that would indicate the carrying amount of the ROU assets are not recoverable and exceed their fair values. If the carrying amount of an ROU asset is not recoverable from its undiscounted cash flows,
59
then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.
As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate on the commencement date of the lease as the discount rate in determining the present value of future lease payments. The Company determines the incremental borrowing rate for each lease by using the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The Company’s lease terms may include options to extend or terminate the lease when there are relevant economic incentives present that make it reasonably certain that the Company will exercise that option. The Company accounts for any non- lease components separately from lease components.
Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Fair Value Measurement
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Revenue recognition
The Company recognized revenue in accordance with Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customer. Revenues are recognized when control of the promised goods or performance obligations for services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services.
The Company generates revenues from sales of kitchen and bath products, and recognizes revenue as control of its products is transferred to its customers, which is generally at the time of shipment or upon delivery based on the contractual terms with the Company’s customers. The Company’s customers’ payment terms generally range from
The Company provides customer programs and incentive offerings, including co-operative marketing arrangements and volume-based incentives. These customer programs and incentives are considered variable consideration. The Company includes in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to the Company’s volume- based incentives. This determination is updated on a monthly basis.
60
Certain product sales include a right of return. The Company estimates future product returns at the time of sale based on historical experience and records a corresponding reduction in accounts receivable.
The Company records receivables related to revenue when it has an unconditional right to invoice and receive payment.
The Company’s disaggregated revenues are summarized as follows:
| | For the Years Ended | ||||
| | December 31, | ||||
| | 2022 | | 2021 | ||
|
| USD |
| USD | ||
Revenues by product line | | |
|
| |
|
Sanitaryware | | $ | | | $ | |
Bath Furniture | |
| | |
| |
Shower System | | | | | | |
Others | |
| | |
| |
Total | | $ | | | $ | |
| | Revenues | | Total assets | ||||||||
| | For the Years Ended | | As of | ||||||||
| | December 31, | | December 31, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
|
| USD |
| USD | | USD |
| USD | ||||
Revenues/ total asset by geographic location | | | | | | | | | | | | |
United States | | $ | | | $ | | | $ | | | $ | |
Canada | |
| | |
| | |
| | |
| |
Europe | | | | | | | | | | | | |
Rest of World | |
| | |
| - | |
| | |
| ( |
Total | | $ | | | $ | | | $ | | | $ | |
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in selling and distribution expenses on the accompanying statement of operations. For the years ended December 31 2022 and 2021, shipping and handling expense was $
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). In accordance with ASC 718, the Company determines whether an award should be classified and accounted for as a liability award or an equity award. All the Company’s share- based awards were classified as equity awards and are recognized in the consolidated financial statements based on their grant date fair values.
The Company has elected to recognize share-based compensation using the straight-line method for all share-based awards granted over the requisite service period, which is the vesting period. The Company accounts for forfeitures as they occur in accordance with ASC 718. The Company, with the assistance of an independent third-party valuation firm, determines the fair value of the stock options granted to employees. The Black Scholes Model is applied in determining
61
the estimated fair value of the options granted to employees and non-employees. The Company recognized share-based compensation $
Income Taxes
Deferred taxes are recognized based on the future tax consequences of the differences between the carrying value of assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not (i.e., more than 50 percent likely) that such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three- year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.
The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. The Company believes that there is an increased potential for volatility in its effective tax rate because this threshold allows for changes in the income tax environment and, to a greater extent, the inherent complexities of income tax law in a substantial number of jurisdictions, which may affect the computation of its liability for uncertain tax positions.
The Company records interest and penalties on our uncertain tax positions in income tax expense.
As of December 31, 2022, the tax years ended December 31,
We record the tax effects of Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) related to our foreign operations as a component of income tax expense in the period in which the tax arises.
Comprehensive income
Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under US GAAP are recorded as an element of equity but are excluded from net income. Other comprehensive income consists of a foreign currency translation adjustment resulting from the Company not using the U.S. Dollar as its functional currencies.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC 260 – Earnings per Share (“ASC 260”). ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential ordinary shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
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The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31, 2022 and 2021:
| | For the Year Ended | | For the Year Ended | ||
| | December 31, | | December 31, | ||
| | | 2022 | | | 2021 |
|
| USD |
| USD | ||
Numerator: | | | | | | |
Net income attributable to FGI Industries Ltd | | $ | | | $ | |
| | | | | | |
Denominator: | |
| | |
| |
Weighted-average number of ordinary shares outstanding — basic | | | | | | |
Potentially dilutive shares from outstanding options/warrants | | | | | | — |
Weighted-average number of ordinary shares outstanding — diluted | | | | | | |
| | | | | | |
Earnings per share — basic | | $ | | | $ | |
Earnings per share — diluted | | $ | | | $ | |
Potential ordinary shares that have an anti-dilutive effect are excluded from the calculation of diluted EPS.
Segment reporting
ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for detailing the Company’s business segments.
Recently issued accounting pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance became effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. In November 2019, the FASB issued ASU 2019-10 which finalized the delay of such effective date to fiscal years beginning after December 15, 2022 for private and all other companies including emerging growth companies. As an emerging growth company, the Company
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Note 3 — Accounts receivable, net
Accounts receivable, net consisted of the following:
| | As of | | As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
|
| USD |
| USD | ||
Accounts receivable | | $ | | | $ | |
Allowance for doubtful accounts | |
| ( | |
| ( |
Accrued defective return and discount | |
| ( | |
| ( |
Accounts receivable, net | | $ | | | $ | |
Movements of allowance for doubtful accounts are as follows:
| | For the Year Ended | | For the Years Ended | ||
| | December 31, | | December 31, | ||
| | | 2022 | | | 2021 |
|
| USD |
| USD | ||
Beginning balance | | $ | | | $ | |
Addition | |
| | |
| |
Ending balance | | $ | | | $ | |
Movements of accrued defective return and discount accounts are as follows:
| | For the Year Ended | | For the Years Ended | ||
| | December 31, | | December 31, | ||
| | | 2022 | | | 2021 |
|
| USD |
| USD | ||
Beginning balance | | $ | | | $ | |
(Provision) Addition, net | |
| ( | |
| |
Ending balance | | $ | | | $ | |
Note 4 — Inventories, net
Inventories, net consisted of the following:
| | As of | | As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
|
| | USD |
| | USD |
Finished product | | $ | | | $ | |
Reserves for slow-moving inventories | |
| ( | |
| ( |
Inventories, net | | $ | | | $ | |
Movements of inventory reserves are as follows:
| | For the Year Ended | | For the Years Ended | ||
| | December 31, | | December 31, | ||
| | | 2022 | | | 2021 |
|
| USD |
| USD | ||
Beginning balance | | $ | | | $ | |
Addition (Reversal) |
| | |
| | ( |
Ending balance | | $ | | | $ | |
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Note 5 — Prepayments and other assets
Prepayments and other assets consisted of the following:
| | As of | | As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
|
| | USD |
| | USD |
Prepayments | | $ | | | $ | |
Others | |
| | |
| |
Total prepayments and other assets | | $ | | | $ | |
Note 6 — Property and equipment, net
Property and equipment, net consist of the following:
| | As of | | As of | ||
|
| December 31, 2022 |
| December 31, 2021 | ||
|
| | USD | | | USD |
Building* | | $ | | | $ | — |
Leasehold Improvements | | | | | | |
Machinery and equipment | |
| | |
| |
Furniture and fixtures | |
| | |
| |
Vehicles | |
| | |
| |
Molds | |
| | |
| |
Subtotal | |
| | |
| |
Less: accumulated depreciation | |
| ( | |
| ( |
Total | | $ | | | $ | |
*The building is not yet in service.
Depreciation expenses for the years ended December 31, 2022 and 2021 amounted to $
Note 7 — Leases
The Company has operating leases primarily for corporate offices, warehouses and showrooms. As of December 31, 2022, the Company’s leases have remaining lease terms up to
The company also purchased an operating lease land from a common control affiliate for manufacturing purpose, which has remaining lease term up to
For the years ended December 31, 2022, and 2021, the total lease expenses booked and paid was $
The table below presents the operating lease related assets and liabilities recorded on the Company’s consolidated balance sheets:
| | As of | | As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
|
| USD |
| USD | ||
Operating lease right-of-use assets | | $ | | | $ | |
Operating lease liabilities – current | | $ | | | $ | |
Operating lease liabilities – noncurrent | |
| | |
| |
Total operating lease liabilities | | $ | | | $ | |
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Information relating to the lease term and discount rate are as follows:
|
| As of |
| As of |
|
|
| December 31, 2022 |
| December 31, 2021 |
|
Weighted-average remaining lease term |
|
|
|
| |
Operating leases |
|
| | ||
Weighted-average discount rate |
|
|
|
| |
Operating leases |
| | % | | % |
As of December 31, 2022, the maturities of operating lease liabilities were as follows:
For the 12 months ending December 31, |
| | |
2023 | | $ | |
2024 | |
| |
2025 | |
| |
2026 | |
| |
2027 | |
| |
Thereafter | |
| |
Total lease payments | |
| |
Less: imputed interest | |
| ( |
Present value of lease liabilities | | $ | |
Note 8 — Short-term loans
East West Bank loan
FGI Industries, Inc. (formerly named Foremost Groups, Inc.) (“FGI Industries”) has a line of credit agreement (the “Credit Agreement”) with East West Bank, which is collateralized by all assets of FGI Industries and personally guaranteed by Liang Chou Chen, who holds approximately
Pursuant to the Credit Agreement, FGI Industries is required to maintain (a) a debt coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current portion of long-term debt plus interest expense) of not less than
The loan bears interest at rate equal to, at the Company’s option, either (i)
66
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 $
HSBC Canada Bank Loan / Foreign Exchange Facility
FGI Canada Ltd. has a line of credit agreement with HSBC Canada (the “Canadian Revolver”). The revolving line of credit with HSBC Canada allows for borrowing up to CAD $
Borrowings under this line of credit amounts to $
FGI Canada Ltd. also has a revolving foreign exchange facility up to a permitted maximum of US $
PPP Loan
On April 9, 2020, Foremost Groups, Inc. entered into a loan agreement in connection with the Paycheck Protection Program (“PPP”) and received proceeds of approximately $
Note 9 — Shareholders’ Equity
FGI was incorporated in the Cayman Islands on May 26, 2021 in connection with the planned Reorganization, as described in Note 1. The Company was authorized to issue
On January 27, 2022, the Company completed the Reorganization upon the consummation of the initial public offering (“IPO”). After the Reorganization and the IPO, the Company’s authorized share capital is $
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Initial Public Offering
On
For the purposes of covering any over-allotments in connection with the distribution and sale of the Units, the Company granted a
The aggregated fair value of these Warrants on January 27, 2022 was $
The gross proceeds from the IPO were approximately $
Public Offering Warrants
In connection with and upon the closing of the IPO on January 27, 2022, the Company issued warrants equal to
The aggregated fair value of these IPO warrants on January 27, 2022 was $
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Note 10 — Share-based compensation
2021 Equity Plan and Employee Stock Purchase Plan
On October 7, 2021, the Board of directors adopted 2021 Equity Plan (the “2021 Equity Plan”). The 2021 Equity Plan permits the grant of equity and equity-based incentive awards, including non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. The purpose of the 2021 Equity Plan is to attract and retain the best available personnel for positions of responsibility within the Company, to provide additional incentives to them to align their interests with those of the Company’s shareholders and to thereby promote the Company’s long-term business success.
On October 7, 2021, the Board approved the adoption of the FGI Industries Ltd. Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s stockholders on October 7, 2021, and became effective on the effective date of the Company’s consummation of the initial public offering of its ordinary shares. The ESPP offers eligible employees the opportunity to acquire a stock ownership interest in the Company through periodic payroll deductions that will be applied towards the purchase of ordinary shares at a discount from the then-current market price.
The board set the maximum aggregate number of ordinary shares reserved and available pursuant to the 2021 Equity Plan at
The maximum number of shares that may be sold by the Company under the ESPP will be
The Company believes the options or awards granted contain an explicit service condition and/or performance condition. Under ASC 718-10-55-76, if the vesting (or exercisability) of an award is based on the satisfaction of both a service and performance condition, the entity must initially determine which outcomes are probable and recognize the compensation cost over the longer of the explicit or implicit service period. Because an initial public offering generally is not considered to be probable until the initial public offering is effective,
Restricted shares units (“RSU”)
On January 27, 2022, the board of directors approved the issuance of
On April 13, 2022, the board of directors approved the issuance of
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additional month of service, commencing on the grant date. As of December 31, 2022,
On May 11, 2022, the board of directors approved the issuance of
On May 17, 2022, the board of directors approved the issuance of
The following is a summary of the restricted share granted:
Restricted shares grants | | Shares |
Non-vested as of December 31, 2021 | | |
Granted | | |
Vested | | — |
Non-vested as of December 31, 2022 | | |
The following is a summary of the status of restricted share at December 31,2022:
| Outstanding Restricted Share | ||||
| | | | | Average Remaining |
| Fair Value per share | | Number | | Amortization Period (Years) |
$ | | | | ||
$ | | | | ||
$ | | | | ||
$ | | | | ||
| | | | | |
Share options (“Options”)
On March 24, 2022, the board of directors approved the issuance of
On April 13, 2022, the board of directors approved the issuance of
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options will vest as to -third of the shares on the
On May 11, 2022, the board of directors approved the issuance of
The options granted to employees are measured based on the grant date fair value of the equity instrument. They are accounted for as equity awards and contain service or performance vesting conditions. The following table summarizes the Company’s employee share option activities:
|
| |
| |
| Weighted |
| Weighted |
| |
| | | | Weighted | | Average | | Average | | |
| | | | Average | | Grant date | | Remaining | | Average |
| | Number of | | Exercise | | Fair | | Contractual | | Intrinsic |
| | Options | | Price | | Value | | Term | | value |
| | | | USD | | USD | | Years | | USD |
Share options outstanding at December 31, 2021 |
| |
| |
| |
| — |
| |
Granted |
| |
| |
| |
|
| — | |
Forfeited | | — | | — | | — | | — | | — |
Exercised | | — | | — | | — | | — | | — |
Expired | | — | | — | | — | | — | | — |
Share options outstanding at December 31, 2022 |
| |
| |
| |
|
| | |
Vested and exercisable at December 31, 2022 |
| — |
| — |
| — |
| — |
| — |
For the years ended December 31, 2022 and 2021, the total fair value of options awarded was $
The aggregate intrinsic value in the table above represents the difference between the exercise price of the awards and the fair value of the underlying Ordinary Shares at each reporting date, for those awards that had exercise price below the estimated fair value of the relevant Ordinary Shares.
Fair value of options
The Company used the Black-Scholes simplified method for the year ended December 31, 2022. The assumptions used to value the options granted to employees were as follows:
|
| For the years ended | |||
| | December 31, | |||
| | 2022 | | 2021 | |
Risk-free interest rate |
| | % | — | |
Expected volatility range |
| | % | — | |
Fair market value per ordinary share as at grant dates | | $ |
| — | |
The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected volatility is estimated based on the volatility of ordinary shares or common stock of several comparable companies in the same
71
industry. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the future.
The Company has elected to recognize share-based compensation expense using a straight-line method for all the employee equity awards granted with graded vesting based on service conditions, provided that the amount of compensation cost recognized at any date is at least equal to the portion of the grant date fair value of the equity awards that are vested at that date.
The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:
| | For the years ended | ||
| | December 31, | ||
|
| 2022 |
| 2021 |
| | USD | | USD |
Selling and distribution expenses | | | | — |
General and administrative expenses |
| |
| — |
Total share-based compensation expenses |
| |
| — |
As of December 31, 2022, there was $
Note 11 — Income taxes
The source of pre-tax income and the components of income tax expense are as follows:
| | For the Years Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
| | USD | | USD | ||
Income components | | | | | | |
United States | | $ | | | $ | ( |
Outside United States | |
| | |
| |
Total pre-tax income | | $ | | | $ | |
Provision for income taxes | |
|
| |
|
|
Current | |
|
| |
|
|
Federal | | $ | | | $ | — |
State | |
| | |
| ( |
Foreign | |
| | |
| |
| |
| | |
| |
Deferred | |
|
| |
|
|
Federal | |
| | |
| ( |
State | |
| | |
| ( |
Foreign | |
| | |
| — |
| |
| | |
| ( |
Total provision for income taxes | | $ | | | $ | |
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Reconciliations between taxes at the U.S. federal income tax rate and taxes at the Company’s effective income tax rate on earnings before income taxes are as follows:
| | For the Years Ended |
| ||
| | December 31, |
| ||
| | 2022 |
| 2021 |
|
Federal statutory rate | | | % | | % |
(Decrease) increase in tax rate resulting from: | |
|
|
| |
State and local income taxes, net of federal benefit | | |
| ( | |
Foreign operations | | ( |
| ( | |
Permanent items | | |
| ( | |
Foreign dividends and earnings taxable in the United States | | — |
| ( | |
Others | | |
| | |
Effective tax rate | | | % | | % |
The following is a summary of the components of the net deferred tax assets and liabilities recognized in the consolidated balance sheets:
|
| As of |
| As of | ||
| | December 31, 2022 | | December 31, 2021 | ||
| | USD | | USD | ||
Deferred tax assets |
| |
|
| |
|
Allowance for doubtful accounts | | $ | | | $ | |
Other reserve | |
| | |
| |
Accrued expenses | |
| | |
| |
Lease liability | |
| | |
| |
Charitable contributions | |
| | |
| |
Business interest limitation | |
| | |
| |
Net operating loss – federal | |
| | |
| |
Net operating loss – state | |
| | |
| |
Other | |
| | |
| |
Total deferred tax assets | |
| | |
| |
Less: valuation allowance | |
| — | |
| — |
Net deferred tax assets | |
| | |
| |
Deferred tax liabilities | |
|
| |
|
|
Fixed assets | |
| | |
| |
Intangibles | |
| — | |
| |
Total deferred tax liabilities | |
| | |
| |
Deferred tax assets, net of deferred tax liabilities | | $ | | | $ | |
The deferred tax assets related to the Company’s net operating losses of $
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares
73
repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
74
Note 12 — Related party transactions and balances
Sales/ Purchase from a related party – consisted of the following:
|
| |
| Nature of |
| For the year ended December 31, | ||||
Name of Related Party | | Relationship | | transactions | | 2022 | | 2021 | ||
| | | | | | USD | | USD | ||
Rizhao Foremost Woodwork Manufacturing Co., Ltd. |
| An entity under common control |
| Purchase | | $ | — | | $ | |
Focal Capital Holding Limited | | An entity under common control | | Purchase | | | | | | |
Foremost Worldwide Co., Ltd |
| An entity under common control |
| Purchase | | | | | | — |
| | | | | | $ | | | $ | |
|
| |
| Nature of |
| For the year ended December 31, | ||||
Name of Related Party | | Relationship | | transactions | | 2022 | | 2021 | ||
| | | | | | USD | | USD | ||
Foremost Worldwide Co., Ltd |
| An entity under common control |
| Sales | | $ | | | $ | — |
| | | | | | $ | | | $ | — |
The ending balance of such transactions as of December 31, 2022 and December 31, 2021, are listed of the following:
Prepayments — related parties
|
| December 31, |
| December 31, | ||
Name of Related Party | | 2022 | | 2021 | ||
| | USD | | USD | ||
Rizhao Foremost Woodwork Manufacturing Co., Ltd. |
| $ | — | | $ | |
Focal Capital Holding Limited | | | | | | |
| | $ | | | $ | |
Accounts Payables — related parties
|
| December 31, |
| December 31, | ||
Name of Related Party | | 2022 | | 2021 | ||
| | USD | | USD | ||
Foremost Worldwide Co., Ltd |
| $ | | | $ | — |
| | $ | | | $ | — |
Shared Service and Miscellaneous expenses – related party
On January 14, 2022, FGI Industries, Inc. entered into a Shared Services Agreement with FHI, total amounts provided to FHI under the FHI Share Services Agreement in 2022 were $
On January 14, 2022, FGI entered into a Worldwide Shared Services Agreement with Foremost Worldwide, total amounts provided from Foremost Worldwide under the Worldwide Shared Services Agreement in 2022 were $
75
The ending balance as of December 31, 2022 and December 31, 2021, are listed of the following:
|
| |
| Nature of |
| December 31, |
| December 31, | ||
Name of Related Party | | Relationship | | transactions | | 2022 | | 2021 | ||
| | | | | | USD | | USD | ||
Foremost Xingye Business Consultancy (Shenzhen) Co., Ltd. |
| An entity under common control |
| Miscellaneous | | $ | — | | $ | |
Foremost Home Inc. (“FHI”) | | An entity under common control | | Shared services and Miscellaneous | | | | | | — |
Foremost Worldwide Co.,Ltd | | An entity under common control | | Shared services and Miscellaneous | | | ( | | | — |
| | | | | | $ | | | $ | |
Property purchase — related party
In July 2022, FGI entered into a property purchase agreement with a common control related party to purchase a building and sub-lease the land use right with an initial term of
Loan guarantee by a related party
Liang Chou Chen holds approximately
Note 13 — Concentrations of risks
Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. The Canadian Deposit Insurance Corporation pays compensation up to a limit of CAD
The Company is also exposed to risk from its accounts receivable and other receivables. These assets are subjected to credit evaluations. An allowance has been made for estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.
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Customer concentration risk
For the year ended December 31, 2022, two customers accounted for
As of December 31, 2022, two customers accounted for
Vendor concentration risk
For the year ended December 31, 2022, Tangshan Huida Ceramic Group Co., Ltd (“Huida”) accounted for
As of December 31, 2022, Huida accounted for
Note 14 — Commitments and contingencies
Litigation
From time to time, the Company is involved in legal and regulatory proceedings that are incidental to the operation of its businesses. These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management assessment of the merits of the particular claims, the Company does not believe it is reasonably possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition.
Note 15 — Segment information
The Company follows ASC 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decisions about allocating resources to each segment and evaluating their performances. The Company has
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with Marcum LLP.
77
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2022, our disclosure controls and procedures were ineffective and listed in below.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Rule 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with policies or procedures.
As of December 31, 2022, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 and SEC guidance on conducting such assessments. Based on such evaluation, the Company’s management concluded that, during the period covered by this Report, internal controls and procedures over financial reporting were not effective. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
78
Identified Material Weakness
A material weakness in internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Management identified the following material weaknesses during its assessment of internal controls over financial reporting as of December 31, 2022:
| ● | weaknesses in IT security environment, controls and procedures including lack of formal IT policies and procedures; |
| ● | lack of sufficient documentation of our existing financial processes, risk assessment and internal controls activities and assessment of effectiveness of internal controls; and inadequate segregation of duties for certain functions due to limited staffs and resources. |
Accordingly, the Company concluded that these material weaknesses resulted as there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control—Integrated Framework issued by COSO.
Management’s Remediation Initiatives
We are determining the initiatives to undertake in order to remediate the identified material weaknesses and other deficiencies and enhance our internal controls.
We anticipate that these initiatives will be at least partially, if not fully, implemented by the end of fiscal year 2023.
Changes in internal controls over financial reporting
There were no significant changes in our internal controls over financial reporting that occurred during the period covered by this Report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting:
This annual report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the 2022 Proxy Statement, which will be filed no later than 120 days after December 31, 2022.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the 2022 Proxy Statement, which will be filed no later than 120 days after December 31, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to the 2022 Proxy Statement, which will be filed no later than 120 days after December 31, 2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the 2022 Proxy Statement, which will be filed no later than 120 days after December 31, 2022.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the 2022 Proxy Statement, which will be filed no later than 120 days after December 31, 2022
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | DOCUMENTS FILED AS PART OF THIS REPORT |
The following is a list of our financial statements filed in this Annual Report on Form 10-K under Item 8 of Part II hereof:
| 1. | All financial statements. See Index to Consolidated Financial Statements. |
| 2. | Financial Schedules. |
Schedules are omitted because the required information is included in the footnotes, immaterial or not applicable.
| 3. | Exhibits. See Index to Exhibits below. |
(b) | EXHIBITS |
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† | Indicates management contract or compensatory plan or arrangement. |
# | Portions of this exhibit (indicated by asterisks) have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv). |
* | Filed herewith. |
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ITEM 16. FORM 10-K SUMMARY
Omitted at the Company’s option.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: April 17, 2023 | | |
| FGI Industries Ltd. | |
| | |
| By: | /s/ David Bruce |
| | David Bruce |
| | Chief Executive Officer and President |
| | (Principal Executive Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Bruce and John Chen, and each of them severally, acting alone and without the other, as his true and lawful attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
| | | | |
/s/ David Bruce | | Chief Executive Officer and Director | | April 17, 2023 |
David Bruce | | (Principal Executive Officer) | | |
| | | | |
/s/ Perry Lin | | Chief Financial Officer | | April 17, 2023 |
Perry Lin | | (Principal Financial and Accounting Officer) | | |
| | | | |
/s/ John Chen | | Executive Chairman and Director | | April 17, 2023 |
John Chen | | | | |
| | | | |
/s/ Todd Heysse | | Director | | April 17, 2023 |
Todd Heysse | | | | |
| | | | |
/s/ Kellie Zesch Weir | | Director | | April 17, 2023 |
Kellie Zesch Weir | | | | |
| | | | |
/s/ Jae Chung | | Director | | April 17, 2023 |
Jae Chung | | | | |
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Exhibit 4.3
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), is made as of January 27, 2022, by and among (i) FGI Industries Ltd. (the “Company”), and (iii) Foremost Groups Ltd. (a “Holder” and collectively with other subsequent parties to the Agreement, “Holders”).
Recitals
WHEREAS, the Holder owns Registrable Securities;
WHEREAS, as of the date hereof, payment has been made by certain underwriters for the initial public offering of Ordinary Shares (“IPO”); and
WHEREAS, in connection with the IPO, the parties desire to set forth certain registration rights applicable to the Registrable Securities.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and obligations hereinafter set forth, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1.Certain Definitions. As used herein, the following terms shall have the following meanings:
“Affiliate” means with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, where “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. For the avoidance of doubt, neither the Company nor any Person controlled by the Company shall be deemed to be an Affiliate of any Holder.
“Agreement” means this Registration Rights Agreement, as this agreement may be amended, modified, supplemented or restated from time to time after the date hereof.
“Beneficial Ownership” shall mean, with respect to a specified Person, the ownership of securities as determined in accordance with Rule 13d-3 of the Exchange Act, as such Rule is in effect from time to time. The terms “Beneficially Own” and “Beneficial Owner” shall have a correlative meaning.
“Block Trade” means an offering and/or sale of Registrable Securities by one or more of the Holders on a block trade or underwritten basis (whether firm commitment or otherwise) without substantial marketing efforts prior to pricing, including, without limitation, a same day trade, overnight trade or similar transaction.
“Business Day” shall mean a day other than a Saturday, Sunday, or federal holiday or other day on which commercial banks in the City of New York are authorized or required by law or other governmental action to close.
“Claims” has the meaning ascribed to such term in Section 2.7(a).
“Demand Exercise Notice” has the meaning ascribed to such term in Section 2.1(a).
“Demand Registration” has the meaning ascribed to such term in Section 2.1(a).
“Demand Registration Request” has the meaning ascribed to such term in Section 2.1(a).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC issued under such Act, as they may from time to time be in effect.
“Expenses” means any and all fees and expenses incident to the Company’s performance of or compliance with Article 2, including, without limitation: (i) SEC, stock exchange or FINRA, and all other registration and filing fees and all listing fees and fees with respect to the inclusion of securities on the Nasdaq Stock Market, New York Stock Exchange or on any other securities market on which the Ordinary Shares are listed or quoted, (ii) fees and expenses of compliance with state securities or “blue sky” laws of any state or jurisdiction of the United States or compliance with the securities laws of foreign jurisdictions and in connection with the preparation of a “blue sky” survey, including, without limitation, reasonable
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fees and expenses of outside “blue sky” counsel and securities counsel in foreign jurisdictions, (iii) word processing, printing and copying expenses, (iv) messenger and delivery expenses, (v) expenses incurred in connection with any road show, (vi) fees and disbursements of counsel for the Company, (vii) with respect to each registration or underwritten offering, the reasonable fees and disbursements of one counsel for the Participating Holder(s) (selected by the Majority Participating Holders), (viii) fees and disbursements of all independent public accountants (including the expenses of any audit and/or comfort letter and updates thereof) and fees and expenses of other Persons, including special experts, retained by the Company, (ix) fees and expenses payable to any Qualified Independent Underwriter, (x) any other fees and disbursements of underwriters, if any, customarily paid by issuers or sellers of securities, including reasonable fees and expenses of counsel for the underwriters in connection with any filing with or review by FINRA (excluding, for the avoidance of doubt, any underwriting discount, commissions, or spread), (xi) fees and expenses of any transfer agent or custodian and (xii) expenses for securities law liability insurance and any rating agency fees.
“Family Member” means, with respect to any Person who is an individual, any spouse, parent, siblings or lineal descendants of such Person (including adoptive relationships) and any trust or other estate planning vehicle over which such Person has Control established for the benefit of such Person and/or such Person’s spouse and/or such Person’s descendants (by birth or adoption), parents, siblings or dependents.
“FINRA” means the Financial Industry Regulatory Authority, Inc.
“Holder(s)” means (1) any Person who is a signatory to this Agreement, or (2) any Permitted Transferee to whom any Person who is a signatory to this Agreement shall assign or transfer any rights hereunder; provided that in the case of clause (2), such Person or such transferee, as applicable, has executed and delivered to the Company a joinder agreement in the form of Exhibit A hereto, and has thereby agreed in writing to be bound by this Agreement in respect of such Registrable Securities.
“Incidental Registration Notice” has the meaning ascribed to such term in Section 2.2(a).
“Initiating Holder(s)” has the meaning ascribed to such term in Section 2.1(a).
“IPO” has the meaning ascribed to such term in the Preamble.
“Law” means any law (including common law), statute, code, ordinance rule or regulation of any governmental entity.
“Litigation” means any action, proceeding or investigation in any court or before any governmental authority.
“Lock-Up Agreement” means any agreement entered into by a Holder that provides for restrictions on the transfer of Registrable Securities held by such Holder.
“Long Form Registrations” has the meaning ascribed to such term in Section 2.1(a).
“Majority Participating Holders” means Participating Holders holding more than 50% of the Registrable Securities proposed to be included in any offering of Registrable Securities by such Participating Holders pursuant to Section 2.1 or Section 2.2.
“Market Standoff Period” has the meaning ascribed to such term in Section 2.3.
“Opt-Out Request” has the meaning ascribed to such term in Section 3.13(c).
“Ordinary Shares” shall mean the ordinary shares of the Company, and any and all securities of any kind whatsoever which may be issued after the date hereof in respect of, or in exchange for, such ordinary shares of the Company pursuant to a merger, consolidation, stock split, stock dividend or recapitalization of the Company or otherwise.
“Ordinary Share Equivalents” means all options, warrants and other securities convertible into, or exchangeable or exercisable for (at any time or upon the occurrence of any event or contingency and without regard to any vesting or other conditions to which such securities may be subject) shares of capital stock or other equity securities of such Person (including, without limitation, any note or debt security convertible into or exchangeable for shares of capital stock or other equity securities of such Person).
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“Participating Holders” means all Holders of Registrable Securities which are proposed to be included in any offering of Registrable Securities pursuant to Section 2.1 or Section 2.2.
“Permitted Transferee” (a) in the case of a Holder who is an individual, (i) any executor, administrator or testamentary trustee of such Holder’s estate if such Holder dies, (ii) any Person receiving Registerable Securities of such Holder by will, intestacy laws or the laws of descent or survivorship, or (iii) any trustee of a trust (including an inter vivos trust) of which there are no principal beneficiaries other than such Holder or one or more Family Members of such Limited Partner over which such Limited Partner has Control and (b) in the case of a Holder that is not an individual, its Affiliates, its shareholders, its limited partners, its other equity owners and its limited liability company members.
“Person” means any individual, corporation (including not for profit), general or limited partnership, limited liability company, joint venture, estate, trust, association, joint-stock company, unincorporated organization, governmental entity or agency or other entity of any kind or nature.
“Piggyback Registration” has the meaning ascribed to such term in Section 2.2(a).
“Policies” has the meaning ascribed to such term in Section 3.13(b).
“Qualified Independent Underwriter” means a “qualified independent underwriter” within the meaning of FINRA Rule 5121.
“Registrable Securities” means (a) any Ordinary Shares held by the Holders at any time (including those held as a result of, or issuable upon, the conversion or exercise of Ordinary Share Equivalents), whether now owned or acquired by the Holders at a later time, (b) any Ordinary Shares issued or issuable, directly or indirectly, in exchange for or with respect to the Ordinary Shares referenced in clause (a) above by way of stock dividend, stock split or combination of shares in connection with a reclassification, recapitalization, merger, share exchange, consolidation or other reorganization and (c) any securities issued in replacement of or exchange for any securities described in clause (a) or (b) above. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (A) a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (B) such securities are able to be immediately sold pursuant to Rule 144 without restrictions as to volume limitations and (C) such securities are otherwise transferred or sold, the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a legend and such securities may be resold without subsequent registration under the Securities Act.
“Rule 144” and “Rule 144A” have the meaning ascribed to such term in Section 3.1.
“SEC” means the Securities and Exchange Commission or such other federal agency which at such time administers the Securities Act.
“Section 3.13 Representatives” has the meaning ascribed to such term in Section 3.13(b).
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC issued under such Act, as they may from time to time be in effect.
“Shelf Offering” has the meaning ascribed to such term in Section 2.1(c)(ii).
“Shelf Registration Statement” means a shelf registration statement filed under Rule 415 of the Securities Act.
“Short Form Registrations” has the meaning ascribed to such term in Section 2.1(a).
“Sponsor Shareholders” means the entities set forth on Schedule I hereto and any of their respective Affiliates or employees and any of their respective Permitted Transferees (in each case, who own, from time to time, Ordinary Shares).
“Subsidiary” means any direct or indirect subsidiary of the Company on the date hereof and any direct or indirect subsidiary of the Company organized or acquired after the date hereof.
“Take-Down Notice” has the meaning ascribed to such term in Section 2.1(c)(ii).
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Section 2.Registration Rights.
2.1.Demand Registrations.
(a)Demand Registrations Generally. This Section 2.1 sets forth the terms pursuant to which a Sponsor Shareholder may request registration under the Securities Act of all or any portion of the Registrable Securities held by such Sponsor Shareholder on Form S-1 or any similar long form registration (“Long Form Registration”), and on Form S-3 or any similar short form registration (“Short Form Registration”), if available. All registrations requested pursuant to this Section 2.1 are referred to herein as “Demand Registrations.” If the Company shall receive from (i) a Sponsor Shareholder at any time after the closing of the IPO or (ii) any other Holder or group of Holders holding Registrable Securities at any time beginning on the six month anniversary of the closing of the IPO, a written request that the Company file a registration statement with respect to all or a portion of the Registrable Securities (a “Demand Registration Request,”) and the sender(s) of such request pursuant to this Agreement shall be known as the “Initiating Holder(s)”), then the Company shall, within ten Business Days of the receipt thereof, give written notice (the “Demand Exercise Notice”) of such request to all other Holders, and, subject to the limitations of this Section 2.1, use its reasonable best efforts to effect, as soon as practicable, the registration under the Securities Act (including, without limitation, by means of a Shelf Registration Statement thereunder if so requested and if the Company is then eligible to use such a registration) of all Registrable Securities that the Holders request to be registered. Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered.
(b)Long Form Registrations. At any time that the Company is not legally eligible to file a registration statement with the SEC on Form S-3 or any similar short form registration statement, each Sponsor Shareholder or a group of Sponsor Shareholders shall be entitled to request an unlimited amount of Long Form Registrations subject to Section 2.1(e), the Company shall effect such Long Form Registrations pursuant to Section 2.4 and the Company shall pay all Expenses in connection with such Long Form Registrations.
(c)Short Form Registrations.
(i)In addition to the Long Form Registrations provided pursuant to Section 2.1(b), each Sponsor Shareholder or a group of Sponsor Shareholders shall be entitled to request an unlimited number of Short Form Registrations, the Company shall effect such Short Form Registrations pursuant to Section 2.4 and the Company shall pay all Expenses in connection with any such Short Form Registration that covers Registrable Securities with a value of at least $3,000,000. The Company shall use its best efforts to make Short Form Registrations on Form S-3 available for the sale of Registrable Securities and if Short Form Registrations on Form S-3 are available for the sale of Registerable Securities, each Sponsor Shareholder may only request registration on Form S-3.
(ii)At any time that any Short Form Registration is effective, if any Holder or group of Holders holding Registrable Securities delivers a notice to the Company (a “Take-Down Notice”) stating that it intends to effect an underwritten offering or distribution of all or part of its Registrable Securities included by it on any Short Form Registration (a “Shelf Offering”) and stating the number of the Registrable Securities to be included in the Shelf Offering, then the Company shall amend or supplement the Short Form Registration as may be necessary in order to enable such Registrable Securities to be distributed pursuant to the Shelf Offering (taking into account the inclusion of Registrable Securities by any other Holders thereof pursuant to this Section 2.1(c)(ii)). In connection with any Shelf Offering, the Company shall, promptly after receipt of a Take-Down Notice, deliver such notice to all other Holders of Registrable Securities included in any Short Form Registration and permit each Holder to include its Registrable Securities included on a Short Form Registration in the Shelf Offering if such Holder notifies the proposing Holders and the Company within two Business Days after delivery of the Take-Down Notice to such Holder, and in the event that the managing underwriter advises the Holders of such securities in writing that in its or their view the total number or dollar amount of Registrable Securities proposed to be sold in such offering is such as to adversely affect the success of such offering (including, without limitation, securities proposed to be included by other Holders of securities entitled to include securities in such offering pursuant to piggyback registration rights described in Section 2.2 hereof), the managing underwriter may limit the number of shares which would otherwise be included in such Shelf Offering in the same manner as is described in Section 2.1(d).
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(iii) Notwithstanding the foregoing, if any Sponsor Shareholder wishes to engage in a Block Trade off of a Shelf Registration Statement on Form S-3 (either through filing an automatic shelf registration statement or through a take-down from an already existing Shelf Registration Statement), then notwithstanding the foregoing time periods, the Initiating Holder only needs to notify the Company of the Block Trade on the day such offering is to commence and the Company shall notify the other Holders that did not initiate the Block Trade. The Holders must elect whether or not to participate in such Block Trade on the day such offering is to commence, and the Company shall as expeditiously as possible use its reasonable best efforts (including co-operating with such Holders with respect to the provision of necessary information) to facilitate such Block Trade (which may close as early as two Business Days after the date it commences), provided, that in the case of such Block Trade, only Sponsor Shareholders shall have a right to notice and to participate, and provided, further, that the Sponsor Shareholder requesting such Block Trade shall use commercially reasonable efforts to work with the Company and the underwriters prior to making such request in order to facilitate preparation of offering documents related to the Block Trade. For the avoidance of doubt, Holders other than the Sponsor Shareholders shall not be entitled to receive notice of, or to elect to participate in, a Block Trade or any Shelf Registration Statement or prospectus to be used in connection with such Block Trade.
(d)Demand Registration Priority. The Company shall not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the Majority Participating Holders included in such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that, in their opinion, the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the Majority Participating Holders to be included in such registration therein, without adversely affecting the marketability of the offering, the Company shall include in such registration prior to the inclusion of any securities which are not Registrable Securities (i) first, the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold in an orderly manner within the price range of such offering, pro rata among the respective Holders thereof on the basis of the number of Registrable Securities requested to be included therein by each such Holder, and (ii) second, any other securities with respect to which the Company has granted registration rights in accordance with Section 2.1(g) hereof requested to be included in such registration, pro rata among the respective Holders thereof on the basis of the amount of such securities requested to be included therein by each such Holder. Without the consent of the Company and the Majority Participating Holders included in such registration, any Persons other than Holders of Registrable Securities who participate in Demand Registrations which are not at the Company’s expense must pay their share of the Expenses as provided in Section 2.5 hereof.
(e)Restrictions on Demand Registrations. The Company shall not be obligated to effect any Demand Registration (i) within 30 days after a Demand Registration pursuant to this Section 2.1 that has been declared or ordered effective, (ii) during the period any applicable restrictions are still in effect pursuant to any Lock-Up Agreement that has not been waived (or is not reasonably expected to be waived) by the underwriters party thereto, (iii) if the Company shall furnish to such Holders a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board (after consultation with external legal counsel), any registration of Registrable Securities should not be made or continued (or sales under a Shelf Registration Statement should be suspended) because (i) such registration (or continued sales under a Shelf Registration Statement) would materially and adversely interfere with any existing or potential material financing, acquisition, corporate reorganization or merger or other material transaction or event involving the Company or any of its subsidiaries or (ii) the Company is in possession of material non-public information, the premature disclosure of which has been determined by the Board to not be in the Company’s best interests (in either case, a “Valid Business Reason”) then (x) the Company may postpone filing a registration statement relating to a Demand Registration Request or suspend sales under an existing Shelf Registration Statement until five Business Days after such Valid Business Reason no longer exists, but in no event for more than 60 days after the date the Board determines a Valid Business Reason exists and (y) in the case a registration statement has been filed relating to a Demand Registration Request, if the Valid Business Reason has not resulted from actions taken by the Company, the Company may cause such registration statement to be withdrawn and its effectiveness terminated or may postpone amending or supplementing such registration statement until five Business Days after such Valid Business Reason no longer exists, but in no event for more than 60 days after the date the Board determines a Valid Business Reason exists; and the Company shall give written notice to the Participating Holders of its determination to postpone or withdraw a registration
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statement or suspend sales under a Shelf Registration Statement and of the fact that the Valid Business Reason for such postponement, withdrawal or suspension no longer exists, in each case, promptly after the occurrence thereof; provided, however, that the Company shall not defer its obligation in this manner for more than (A) 60 days in any 90 day period or (B) for periods exceeding, in the aggregate, 90 days in any 12 month period, or (z) in the case of a Demand Registration, consisting of a Long Form Registration, within 180 days after the effective date of a previous Long Form Registration or a previous registration in which the Holders of Registrable Securities were given piggyback rights pursuant to Section 2.2 and in which at least 75% of the number of Registrable Securities requested to be included by the Holders were included in such registration. In the event the Company gives written notice of a Valid Business Reason, the Holders of Registrable Securities initially requesting such Demand Registration shall be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration shall not be treated as one of the permitted Demand Registrations hereunder and the Company shall pay all Expenses in connection with such registration. Notwithstanding the foregoing, the Company may postpone a Demand Registration hereunder only twice in any twelve-month period.
If the Company shall give any notice of postponement, withdrawal or suspension of any registration statement pursuant to clause (iv) of this Section 2.1(e), the Company shall not, during the period of postponement, withdrawal or suspension, register any Ordinary Shares, other than pursuant to a registration statement on Form S-4 or S-8 (or an equivalent registration form then in effect). Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company that the Company has determined to withdraw any registration statement pursuant to clause (iv) of this Section 2.1(e), such Holder will discontinue its disposition of Registrable Securities pursuant to such registration statement and, if so directed by the Company, will deliver to the Company (at the Company’s expense) all copies, other than permanent file copies, then in such Holder’s possession of the prospectus covering such Registrable Securities that was in effect at the time of receipt of such notice. If the Company shall have withdrawn or prematurely terminated a registration statement filed pursuant to a Demand Registration (whether pursuant to clause (iv) of this Section 2.1(e) or as a result of any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court), the Company shall not be considered to have effected an effective registration for the purposes of this Agreement until the Company shall have filed a new registration statement covering the Registrable Securities covered by the withdrawn registration statement and such registration statement shall have been declared effective and shall not have been withdrawn. If the Company shall give any notice of withdrawal or postponement of a registration statement, the Company shall, not later than five Business Days after the Valid Business Reason that caused such withdrawal or postponement no longer exists (but in no event later than 60 days after the date of the postponement or withdrawal), use its reasonable best efforts to effect the registration under the Securities Act of the Registrable Securities covered by the withdrawn or postponed registration statement in accordance with Section 2.1 (unless the Initiating Holders shall have withdrawn such request, in which case the Company shall not be considered to have effected an effective registration for the purposes of this Agreement), and such registration shall not be withdrawn or postponed pursuant to clause (iv) of this Section 2.1(c).
(f)Selection of Underwriters. The Initiating Holder(s) shall have the right to select the investment banker(s), manager(s) and legal counsel to administer the offering.
(g)Other Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of Holders that hold or Beneficially Own more than 50% of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable taken as a whole than the registration rights granted to the Holders hereunder unless the Company shall also give such rights to such Holders.
2.2.Piggyback Registrations.
(a)Piggyback Rights. If the Company at any time proposes to file a registration statement with respect to any offering of its securities for its own account or for the account of any Person who holds its securities (other than (i) a registration on Form S-4 or S-8 or any successor form to such forms, (ii) a registration of securities solely relating to an offering and sale to employees, directors or consultants of the Company pursuant to any employee stock plan or other employee benefit plan arrangement, (iii) a registration of non-convertible debt securities, or (iv) any Demand Registration made pursuant to Section 2.1(a) or Section 2.1(b) herein) (a “Piggyback Registration”) then, as expeditiously as reasonably possible (but in no event less than ten days following the date of filing such registration statement), the Company shall give written notice (the “Incidental Registration Notice”) of
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such proposed filing to all Holders of Registrable Securities, and such notice shall offer the Holder the opportunity to register such number of Registrable Securities as each such Holder may request in writing. Subject to Section 2.2(c) and Section 2.2(d), the Company shall include in such registration statement all such Registrable Securities which are requested to be included therein within 15 days after the Incidental Registration Notice is given to such Holders.
(b)Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include, after including all of the primary securities the Company desires to include in such registration, (i) first, the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold in an orderly manner within the price range of such offering, pro rata among the respective Holders thereof on the basis of the number of Registrable Securities requested to be included therein by each such Holder, and (ii) second, other securities with respect to which the Company has granted registration rights in accordance with Section 2.1(g) hereof requested to be included in such registration, pro rata among the respective Holders thereof on the basis of the amount of such securities requested to be included therein by each such Holder.
(c)Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of Holders of the Company’s securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the consent of the Majority Participating Holders to be included in such registration, the Company shall include in such registration (i) first, the securities requested to be included therein by the Holders requesting such registration and the Registrable Securities requested to be included in such registration, pro rata among the Holders of such securities and such Registrable Securities on the basis of the number of shares requested to be included therein by each such Holder, and (ii) second, other securities with respect to which the Company has granted registration rights in accordance with Section 2.1(g) hereof requested to be included in such registration, pro rata among the respective Holders thereof on the basis of the amount of such securities requested to be included therein by each such Holder.
(d)Selection of Underwriters. If any Piggyback Registration is an underwritten secondary offering on behalf of the Holders of the Company’s securities, the selection of investment banker(s) and manager(s) for the offering must be approved in writing by the Sponsor Shareholders.
(e)Other Registrations. If the Company has previously filed a registration statement with respect to Registrable Securities pursuant to Section 2.1 or pursuant to this Section 2.2, and if such previous registration has not been withdrawn or abandoned or all shares offered thereunder have been sold, the Company shall not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any Holder or Holders of such securities, until a period of at least 180 days has elapsed from the effective date of such previous registration.
2.3.Holdback Agreement. Each Holder agrees not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, enter into a transaction which would have the same effect or would otherwise effect a public sale or distribution (including sales pursuant to Rule 144), or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such securities, whether any such aforementioned transaction is to be settled by delivery of such securities or other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, in each case during the period beginning seven days before and ending 90 days after the effective date of any underwritten public offering of any equity securities of the Company pursuant to which securities are registered pursuant to this Agreement (including Demand and Piggyback Registrations) (the “Market Standoff Period”), except as part of such underwritten registration if otherwise permitted, unless the underwriters managing the underwritten public offering otherwise agree and such agreement permits all Holders of Registrable Securities to sell such securities on a pro rata basis. In addition, each Holder of Registrable Securities agrees to execute any further letters, agreements and/or other documents reasonably requested by the Company or its underwriters which are consistent with the terms of this Section 2.3. The Company
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may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
2.4.Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Agreement, the Company shall use its reasonable best efforts to effect the registration and the widely disseminated sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall, as expeditiously as possible:
(a)prepare and file with the SEC and FINRA all filings required for the consummation of the offering, including preparing and filing with the SEC a registration statement on than appropriate form of the SEC for the disposition of such Registrable Securities in accordance with the intended method of disposition thereof, which registration form (i) shall be selected by the Company and (ii) shall, in the case of a shelf registration, be available for the sale of the Registrable Securities by the selling Holders thereof and such registration statement shall comply as to form in all material respects with the requirements of the applicable registration form and include all financial statements required by the SEC to be filed therewith, and the Company shall use its reasonable best efforts to cause such registration statement to become effective and remain continuously effective from the date such registration statement is declared effective until the earliest to occur (A) the first date as of which all of the Registrable Securities included in the registration statement have been sold or (B) a period of 90 days in the case of an underwritten offering effected pursuant to a registration statement other than a Shelf Registration Statement and a period of three years in the case of a Shelf Registration Statement (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the Majority Participating Holders covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel);
(b)notify each Holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and such free writing prospectuses and Exchange Act reports as may be necessary to keep such registration statement continuously effective for the period set forth in Section 2.4(a) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement (and, in connection with any Shelf Registration Statement, file one or more prospectus supplements pursuant to Rule 424 under the Securities Act covering Registrable Securities upon the request of one or more Holders wishing to offer or sell Registrable Securities whether in an underwritten offering or otherwise);
(c)furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;
(d)use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction);
(e)promptly notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;
(f)promptly notify each Participating Holder and each managing underwriter, if any: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement related
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thereto, any post-effective amendment to the registration statement or any free writing prospectus has been filed and, with respect to the registration statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or state securities authority for amendments or supplements to the registration statement or the prospectus related thereto or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or state “blue sky” laws of any jurisdiction or the initiation of any proceeding for such purpose; (v) of the existence of any fact of which the Company becomes aware which results in the registration statement or any amendment thereto, the prospectus related thereto or any supplement thereto, any document incorporated therein by reference, any free writing prospectus or the information conveyed to any purchaser at the time of sale to such purchaser containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading; and (vi) if at any time the representations and warranties contemplated by any underwriting agreement, securities sale agreement, or other similar agreement, relating to the offering shall cease to be true and correct in all material respects; and, if the notification relates to an event described in clause (v), the Company shall promptly prepare and furnish to each such seller and each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made not misleading;
(g)cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, cause all such Registrable Securities to be listed on a national securities exchange and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with FINRA;
(h)cause its senior management, officers and employees to participate in, and to otherwise facilitate and cooperate with the preparation of the registration statement and prospectus and any amendments or supplements thereto (including participating in meetings, drafting sessions, due diligence sessions and rating agency presentations) taking into account the Company’s reasonable business needs;
(i)provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;
(j)enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Majority Participating Holders being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares);
(k)in any transaction involving the use of an underwriter or underwriters, use its reasonable best efforts (i) to obtain an opinion from the Company’s counsel, including local and/or regulatory counsel, and a comfort letter and updates thereof from the Company’s independent public accountants who have certified the Company’s financial statements included or incorporated by reference in such registration statement, in each case, in customary form and covering such matters as are customarily covered by such opinions and comfort letters (including, in the case of such comfort letter, events subsequent to the date of such financial statements) delivered to underwriters in underwritten public offerings, which opinion and letter shall be dated the dates such opinions and comfort letters are customarily dated and otherwise reasonably satisfactory to the underwriters, if any, and (ii) furnish to each Holder participating in the offering and to each underwriter, if any, a copy of such opinion and letter addressed to such underwriter;
(l)make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;
(m)deliver promptly to counsel for each Participating Holder and to each managing underwriter, if any, copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement, and, upon
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receipt of such confidentiality agreements as the Company may reasonably request, make reasonably available for inspection by counsel for each Participating Holder, by counsel for any underwriter, participating in any disposition to be effected pursuant to such registration statement and by any accountant or other agent retained by any Participating Holder or any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause all of the Company’s officers, directors and employees to supply all information reasonably requested by any such counsel for a Participating Holder, counsel for an underwriter, accountant or agent in connection with such registration statement;
(n)use its reasonable best efforts to obtain the prompt withdrawal of any order suspending the effectiveness of the registration statement, or the prompt lifting of any suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, in each case, as promptly as reasonably practicable;
(o)provide a CUSIP number for all Registrable Securities, not later than the effective date of the registration statement;
(p)use its best efforts to make available its senior management, employees and personnel for participation in “road shows” and other marketing efforts and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company’s businesses and the requirements of the marketing process) in marketing the Registrable Securities in any underwritten offering;
(q)promptly prior to the filing of any document which is to be incorporated by reference into the registration statement or the prospectus (after the initial filing of such registration statement), and prior to the filing of any free writing prospectus, provide copies of such document to counsel for each Participating Holder and to each managing underwriter, if any, and make the Company’s representatives reasonably available for discussion of such document and make such changes in such document concerning the Participating Holders prior to the filing thereof as counsel for the Participating Holders or underwriters may reasonably request;
(r)furnish to counsel for each Participating Holder and to each managing underwriter, without charge, at least one signed copy of the registration statement and any post-effective amendments or supplements thereto, including financial statements and schedules, all documents incorporated therein by reference, the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus), any other prospectus filed under Rule 424 under the Securities Act and all exhibits (including those incorporated by reference) and any free writing prospectus utilized in connection therewith;
(s)cooperate with the Participating Holders and the managing underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement at least two Business Days prior to any sale of Registrable Securities to the underwriters or, if not an underwritten offering, in accordance with the instructions of the Participating Holders at least two Business Days prior to any sale of Registrable Securities and instruct any transfer agent and registrar of Registrable Securities to release any stop transfer orders in respect thereof;
(t)cooperate with any due diligence investigation by any manager, underwriter or Participating Holder and make available such documents and records of
(u)the Company and its Subsidiaries that they reasonably request (which, in the case of the Participating Holder, may be subject to the execution by the Participating Holder of a customary confidentiality agreement in a form which is reasonably satisfactory to the Company);
(v)take no direct or indirect action prohibited by Regulation M under the Exchange Act;
(w)use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security Holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(x)permit any Holder of Registrable Securities which Holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such Holder and its counsel should be included;
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(y)in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any of the Company’s equity securities included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order;
(z)use its best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities;
(aa)obtain a cold comfort letter from the Company’s independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the Majority Participating Holders reasonably request; provided, that such Registrable Securities constitute at least 5% of the securities covered by such registration statement; and
(bb)take all such other commercially reasonable actions as are necessary or advisable in order to expedite or facilitate the disposition of such Registrable Securities;
(cc)take all reasonable action to ensure that any free writing prospectus utilized in connection with any registration covered by Section 2.1 or 2.2 complies in all material respects with the Securities Act, is filed in accordance with the Securities Act to the extent required thereby, is retained in accordance with the Securities Act to the extent required thereby and, when taken together with the related prospectus, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and
(dd)in connection with any underwritten offering, if at any time the information conveyed to a purchaser at the time of sale includes any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, promptly file with the SEC such amendments or supplements to such information as may be necessary so that the statements as so amended or supplemented will not, in light of the circumstances, be misleading.
2.5.Registration Expenses. All Expenses incurred in connection with any registration, filing, qualification or compliance pursuant to Article 2 shall be borne by the Company, whether or not a registration statement becomes effective. All underwriting discounts and all selling commissions relating to securities registered by the Holders shall be borne by the holders of such securities pro rata in accordance with the number of shares sold in the offering by such Participating Holder.
2.6.No Required Sale. Nothing in this Agreement shall be deemed to create an independent obligation on the part of any Holder to sell any Registrable Securities pursuant to any effective registration statement.
2.7.Indemnification.
(a)In the event of any registration and/or offering of any securities of the Company under the Securities Act pursuant to this Article 2, the Company will, and hereby agrees to, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, each Holder, its directors, officers, fiduciaries, trustees, employees, shareholders, members or general and limited partners (and the directors, officers, fiduciaries, employees, shareholders, members, beneficiaries or general and limited partners thereof), any underwriter (as defined in the Securities Act) for such Holder and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or Exchange Act, from and against any and all losses, claims, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened) and expenses (including reasonable fees of counsel and any amounts paid in any settlement effected with the Company’s consent, which consent shall not be unreasonably withheld or delayed) to which each such indemnified party may become subject under the Securities Act or otherwise in respect thereof (collectively, “Claims”), insofar as such Claims arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such securities were registered under the Securities Act or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary or final prospectus or any amendment or supplement thereto, together with the documents incorporated by reference therein, or any free writing prospectus utilized in connection therewith, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (iii) any untrue statement or alleged untrue
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statement of a material fact in the information conveyed by the Company to any purchaser at the time of the sale to such purchaser, or the omission or alleged omission to state therein a material fact required to be stated therein, or (iv) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such indemnified party in any such case to the extent such Claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in such registration statement or amendment thereof or supplement thereto or in any such prospectus or any preliminary or final prospectus or free writing prospectus in reliance upon and in conformity with written information furnished to the Company by or on behalf of such indemnified party specifically for use therein. Such indemnity and reimbursement of expenses shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified party and shall survive the transfer of such securities by such seller.
(b)Each Participating Holder shall, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in paragraph (a) of this Section 2.7) to the extent permitted by law the Company, its officers and directors, each Person controlling the Company within the meaning of the Securities Act, each underwriter (within the meaning of the Securities Act) of the Company’s securities covered by such a registration statement, any Person who controls such underwriter, and any other Holder selling securities in such registration statement and each of its directors, officers, partners or agents or any Person who controls such Holder with respect to any untrue statement or alleged untrue statement of any material fact in, or omission or alleged omission of any material fact from, such registration statement, any preliminary or final prospectus contained therein, or any amendment or supplement thereto, or any free writing prospectus utilized in connection therewith, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such Participating Holder, specifically for use therein and reimburse such indemnified party for any legal or other expenses reasonably incurred in connection with investigating or defending any such Claim as such expenses are incurred; provided, however, that the aggregate amount which any such Participating Holder shall be required to pay pursuant to this Section 2.7(b) and 2.7(d) shall in no case be greater than the amount of the net proceeds actually received by such Participating Holder upon the sale of the Registrable Securities pursuant to the registration statement giving rise to such Claim. The Company and each Participating Holder hereby acknowledge and agree that, unless otherwise expressly agreed to in writing by such Participating Holders to the contrary, for all purposes of this Agreement, the only information furnished or to be furnished to the Company for use in any such registration statement, preliminary or final prospectus or amendment or supplement thereto or any free writing prospectus are statements specifically relating to (a) the Beneficial Ownership of Ordinary Shares by such Participating Holder and its Affiliates and (b) the name and address of such Participating Holder. Such indemnity and reimbursement of expenses shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified party and shall survive the transfer of such securities by such Holder.
(c)Any Person entitled to indemnification under this Agreement shall notify promptly the indemnifying party in writing of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 2.9, but the failure of any indemnified party to provide such notice shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 2.9, except to the extent the indemnifying party is materially and actually prejudiced thereby and shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Article 2. In case any action or proceeding is brought against an indemnified party, the indemnifying party shall be entitled to (x) participate in such action or proceeding and (y) unless, in the reasonable opinion of outside counsel to the indemnified party, a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, assume the defense thereof jointly with any other indemnifying party similarly notified, with counsel reasonably satisfactory to such indemnified party. The indemnifying party shall promptly notify the indemnified party of its decision to assume the defense of such action or proceeding. If, and after, the indemnified party has received such notice from the indemnifying party, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense of such action or proceeding other than reasonable costs of investigation; provided, however, that (i) if the indemnifying party fails to take reasonable steps necessary to defend diligently the action or proceeding within 10 days after receiving notice from such indemnified party that the indemnified party believes it has failed to do so; or
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(ii) if such indemnified party who is a defendant in any action or proceeding which is also brought against the indemnifying party reasonably shall have concluded that there may be one or more legal or equitable defenses available to such indemnified party which are not available to the indemnifying party or which may conflict with those available to another indemnified party with respect to such Claim; or (iii) if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct, then, in any such case, the indemnified party shall have the right to assume or continue its own defense as set forth above (but with no more than one firm of counsel for all indemnified parties in each jurisdiction, except to the extent any indemnified party or parties reasonably shall have made a conclusion described in clause (ii) or (iii) above) and the indemnifying party shall be liable for any expenses therefor. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim), unless such settlement or compromise (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. The indemnity obligations contained in Sections 2.7(a) and 2.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the indemnified party which consent shall not be unreasonably withheld.
(d)If for any reason the foregoing indemnity is held by a court of competent jurisdiction to be unavailable to an indemnified party under Section 2.7(a) or (b), then each applicable indemnifying party shall contribute to the amount paid or payable to such indemnified party as a result of any Claim in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and the indemnified party, on the other hand, with respect to such Claim as well as any other relevant equitable considerations. The relative fault shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. If, however, the allocation provided in the second preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative faults but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if any contribution pursuant to this Section 2.7(d) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this Section 2.7(d). The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything in this Section 2.7(d) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 2.7(d) to contribute any amount greater than the amount of the net proceeds actually received by such indemnifying party upon the sale of the Registrable Securities pursuant to the registration statement giving rise to such Claim, less the amount of any indemnification payment made by such indemnifying party pursuant to Section 2.7(b).
(e)The indemnity and contribution agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract (except as set forth in subsection (f) below) and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of the Registrable Securities by any such party and the completion of any offering of Registrable Securities in a registration statement.
(f)If a customary underwriting agreement shall be entered into in connection with any registration pursuant to Section 2.1 or 2.2 and certain indemnity, contribution and related provisions between the Company and the Participating Holder, the indemnity, contribution and related provisions set forth therein shall supersede the indemnification and contribution provisions set forth in this Section 2.7.
2.8.Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell such Person’s Registrable Securities on the
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basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements; provided, that no Holder of Registrable Securities included in any underwritten registration shall be required to make any representations or warranties to the Company or the underwriters (other than representations and warranties regarding such Holder and such Holder’s intended method of distribution) or to undertake any indemnification obligations, or provide any information, to the Company or the underwriters with respect thereto, except as otherwise provided in Section 2.8 hereof.
2.9.No Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities that is inconsistent with or violates the rights granted to the Holders in this Agreement.
2.10.Adjustments Affecting Registrable Securities. The Company shall not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the Holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares).
Section 3.General
3.1.Rule 144 and Rule 144A. If the Company shall have filed a registration statement pursuant to the requirements of Section 12 of the Exchange Act or a registration statement pursuant to the requirements of the Securities Act in respect of the Ordinary Shares or Ordinary Share Equivalents, the Company covenants that (i) so long as it remains subject to the reporting provisions of the Exchange Act, it will timely file the reports required to be filed by it under the Securities Act or the Exchange Act (including, but not limited to, the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1)(i) of Rule 144 promulgated by the SEC under the Securities Act, as such Rule may be amended (“Rule 144”)) or, if the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales by such Holder under Rule 144, Rule 144A promulgated by the SEC under the Securities Act, as such Rule may be amended (“Rule 144A”), or any similar rules or regulations hereafter adopted by the SEC, and (ii) it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (A) Rule 144, (B) Rule 144A or (C) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements.
3.2.Nominees for Beneficial Owners. If Registrable Securities are held by a nominee for the Beneficial Owner thereof the Beneficial Owner thereof may, at its option, be treated as the Holder of such Registrable Securities for purposes of any request or other action by any Holder or Holders of Registrable Securities pursuant to this Agreement (or any determination of any number or percentage of shares constituting Registrable Securities held by any Holder or Holders of Registrable Securities contemplated by this Agreement), provided that the Company shall have received assurances reasonably satisfactory to it of such Beneficial Ownership.
3.3.Amendments and Waivers. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company or any Holder unless such modification, amendment or waiver is approved in writing by (i) the Company and (ii) the Holders holding or Beneficially Owning more than 50% of the Registrable Securities then held by all Holders; provided that any amendment, modification, supplement or waiver of any of the provisions of this Agreement which disproportionately and materially adversely affects any Holder shall not be effective without the written approval of such Holder. For purposes of the foregoing proviso, each Sponsor Shareholder shall be deemed to be disproportionately materially adversely affected if any material right specifically granted to any such Person herein (even if such right is granted to one or more other Sponsor Shareholder), is amended, modified, supplemented or waived. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No failure or delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof or of any other or future exercise of any such right, power or privilege.
3.4.Notices.
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(a)All notices and other communications under this Agreement shall be in writing and shall be deemed given (i) when delivered personally by hand (with written confirmation of receipt), (ii) when sent by e-mail, (iii) when received or rejected by the addressee if sent by registered or certified mail, postage prepaid, return receipt requested, or (iv) one Business Day following the day sent by reputable overnight courier (with written confirmation of receipt), in each case at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision):
(i) | if to the Company, to: |
FGI Industries Ltd.
906 Murray Road
East Hanover, NJ 07869
Attention: Chief Executive Officer
E-mail: [***]
with a copy, which shall not constitute notice, to:
Faegre Drinker Biddle & Reath LLP
2200 Wells Fargo Center
90 S. 7th Street
Minneapolis, MN 55402-3901
Attention: Jonathan Zimmerman and James Fischer
Email: jon.zimmerman@faegredrinker.com; james.fischer@faegredrinker.com
(ii) | if to the Holders, to the address indicated in the records of the Company. |
(b)Whenever any notice is required to be given by law or this Agreement, a written waiver thereof, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.
3.5.Successors and Assigns. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and the respective successors, permitted assigns, heirs and personal representatives of the parties hereto, whether so expressed or not. This Agreement may not be assigned by the Company without the prior written consent of the Sponsor Shareholders. Each Holder shall have the right to assign all or part of its or his rights and obligations under this Agreement only in accordance with transfers of Registrable Securities to such Holder’s Permitted Transferees. Upon any such assignment, such assignee shall have and be able to exercise and enforce all rights of the assigning Holder which are assigned to it and, to the extent such rights are assigned, any reference to the assigning Holder shall be treated as a reference to the assignee. If any Holder shall acquire additional Registrable Securities, such Registrable Securities shall be subject to all of the terms, and entitled to all the benefits, of this Agreement.
3.6.Entire Agreement. This Agreement and the other documents referred to herein or delivered pursuant hereto which form part hereof constitute the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof.
3.7.Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.
(a)GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS AND JUDICIAL DECISIONS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS EXECUTED AND PERFORMED ENTIRELY WITHIN SUCH STATE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
(b)Jurisdiction. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of (i) the courts of the State of New Jersey and (ii) the United States District Court located in the State of New Jersey for the purposes of any suit, action or other proceeding arising out of or relating to this Agreement or the transactions contemplated by this Agreement. Each of the parties hereto irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated by this Agreement in (I) the courts of the State of New Jersey or (II) the United States District Court located in the State of New Jersey and waives any claim that such suit or proceeding has been brought in an inconvenient forum. Each of the parties hereto agrees that a final and unappealable judgment in any action or
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proceeding so brought shall be conclusive and may be enforced by suit on the judgment in any jurisdiction within or outside the United States or in any other manner provided in law or in equity
(c)WAIVER OF JURY TRIAL. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVER, (III) IT MAKES SUCH WAIVER VOLUNTARILY AND (IV) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVER AND CERTIFICATIONS IN THIS 3.7.
3.8.Interpretation; Construction.
(a)The table of contents and headings in this Agreement are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Where a reference in this Agreement is made to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.”
(b)The parties have participated jointly in negotiating and drafting this Agreement. In the event that an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.
3.9.Counterparts. This Agreement may be executed and delivered in any number of separate counterparts (including by facsimile or electronic mail), each of which shall be an original, but all of which together shall constitute one and the same agreement.
3.10.Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.
3.11.Remedies. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that each party hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, without the posting of any bond, and, if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. All remedies, either under this Agreement, by law, or otherwise afforded to any party, shall be cumulative and not alternative.
3.12.Further Assurances. Each party hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments, and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
3.13.Confidentiality.
(a)Each Holder acknowledges that the provisions of this Agreement that require communications by the Company or other Holders to such Holder may result in such Holder and its Section 3.13
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Representatives acquiring material non-public information (which may include, solely by way of illustration, the fact that an offering of the Company’s securities is pending or the number of Company securities or the identity of the selling Holders).
(b)Each Holder agrees that it will maintain the confidentiality of such material non-public information and, to the extent such Holder is not a natural person, such confidential treatment shall be in accordance with procedures adopted by it in good faith to protect confidential information of third parties delivered to such Holder (“Policies”); provided that a Holder may deliver or disclose material non-public information to (i) its directors, officers, employees, agents, attorneys, affiliates and financial and other advisors, in each case, who reasonably need to know such information (collectively, the “Section 3.13 Representatives”), (ii) any federal or state regulatory authority having jurisdiction over such Holder, (iii) any Person if necessary to effect compliance with any law, rule, regulation or order applicable to such Holder, (iv) in response to any subpoena or other legal process, or (v) in connection with any litigation to which such Holder is a party and such Holder is advised by counsel that such information reasonably needs to be disclosed in connection with such litigation; provided further, that in the case of clause (i), the recipients of such material non-public information are subject to the Policies or are directed to hold confidential the material non-public information in a manner substantially consistent with the terms of this Section 3.13.
(c)Each Holder shall have the right, at any time and from time to time (including after receiving information regarding any potential sale or distribution to the public of Ordinary Shares of the Company pursuant to an offering registered under the Securities Act, whether by the Company, by Holders and/or by any other Holders of the Company’s Ordinary Shares), to elect to not receive any notice that the Company or any other Holders otherwise are required to deliver pursuant to this Agreement by delivering to the Company a written statement signed by such Holder that it does not want to receive any notices hereunder (an “Opt-Out Request”); in which case and notwithstanding anything to the contrary in this Agreement the Company and other Holders shall not be required to, and shall not, deliver any notice or other information required to be provided to Holders hereunder to the extent that the Company or such other Holders reasonably expect would result in a Holder acquiring material non-public information. An Opt-Out Request may state a date on which it expires or, if no such date is specified, shall remain in effect indefinitely. A Holder who previously has given the Company an Opt-Out Request may revoke such request at any time, and there shall be no limit on the ability of a Holder to issue and revoke subsequent Opt-Out Requests; provided that each Holder shall use commercially reasonable efforts to minimize the administrative burden on the Company arising in connection with any such Opt-Out Requests.
3.14.Termination and Effect of Termination. This Agreement shall terminate with respect to each Holder when such Holder no longer holds any Registrable Securities and will terminate in full when no Holder holds any Registrable Securities, except for the provisions of Sections 2.9, which shall survive any such termination. No termination under this Agreement shall relieve any Person of liability for breach or Expenses incurred prior to termination. In the event this Agreement is terminated, each Person entitled to indemnification rights pursuant to Section 2.9 shall retain such indemnification rights with respect to any matter that (i) may be an indemnified liability thereunder and (ii) occurred prior to such termination.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.
COMPANY:
FGI INDUSTRIES LTD.
/s/ David Bruce
David Bruce
Title: Chief Executive Officer
HOLDERS:
FOREMOST GROUPS LTD.
/s/ John Chen
Name: John Chen
Title: Executive Vice President, Corporate Development
[Signature page to registration rights agreement]
Schedule I
SPONSOR SHAREHOLDERS
Foremost Groups Ltd.
EXHIBIT A
FORM OF JOINDER AGREEMENT
THIS JOINDER AGREEMENT (this “Joinder”) is made and entered into as of [●] by the undersigned (the “New Holder”) in accordance with the terms and conditions set forth in that certain Registration Rights Agreement by and among FGI Industries Ltd. (including any successor, the “Company”), and the Holders party thereto, dated as of [●], 2021 (as the same may be amended, restated or otherwise modified from time to time, the “Registration Rights Agreement”), for the benefit of, and for reliance upon by, the Company and the Holders party thereto. Capitalized terms used herein but not otherwise defined shall have the meanings given to them in the Registration Rights Agreement.
WHEREAS, the New Holder desires to exercise certain rights granted to it under the Registration Rights Agreement; and
WHEREAS, the execution and delivery to the Company of this Joinder by the New Holder is a condition precedent to the New Holder’s exercise of any of its rights under the Registration Rights Agreement.
NOW, THEREFORE, in consideration of the premises and covenants herein, and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the New Holder hereby agrees as follows:
1.Joinder. By the execution and delivery of this Joinder, the New Holder hereby agrees to become, and to be deemed to be, and shall become and be deemed to be, for all purposes under the Registration Rights Agreement, a Holder, with the same force and effect as if the New Holder had been an original signatory thereto, and the New Holder agrees to be bound by all of the terms and conditions of, and to assume all of the obligations of, a Holder under, the Registration Rights Agreement. All of the terms, provisions, representations, warranties, covenants and agreements set forth in the Registration Rights Agreement with respect to a Holder are incorporated by reference herein and shall be legally binding upon, and inure to the benefit of, the New Holder.
2Further Assurances. The New Holder agrees to perform any further acts and execute and deliver any additional documents and instruments that may be necessary or reasonably requested by the Company to carry out the provisions of this Joinder or the Registration Rights Agreement.
3Binding Effect. This Joinder and the Registration Rights Agreement shall be binding upon, and shall inure to the benefit of, the New Holder and its successors and permitted assigns, subject to the terms and provisions of the Registration Rights Agreement. It shall not be necessary in connection with the New Holder’s status as a Holder to make reference to this Joinder.
IN WITNESS WHEREOF, the New Holder has executed this Joinder as of the date first above written.
| NEW HOLDER: | |||
| | | ||
| By: | | ||
| Name: | | ||
| Title: | | ||
| | | ||
| | | ||
| Address: | |||
Accepted and agreed:
FGI INDUSTRIES LTD.
By:
Name:
Title:
Exhibit 10.3
AMENDED AND RESTATED
SHARED SERVICES AGREEMENT
January 1, 2023
This AMENDED AND RESTATED SHARED SERVICES AGREEMENT (the “Agreement”) effective as of the date first written above (the “Effective Date”), is by and between Foremost Worldwide Co., Ltd. (“Service Provider”) and FGI Industries, Ltd. (“Service Recipient” and together, the “Parties”).
BACKGROUND
WHEREAS, Service Recipient desires to contract with Service Provider for the provision of the Services, subject to the terms and conditions of this Agreement;
WHEREAS, the parties had previously entered into a Shared Services Agreement, dated January 14th, 2022 (“Prior Agreement);
WHEREAS, both parties desire to amend and restate the Prior Agreement in its entirety to modify certain provisions relating to the services provided thereunder,
NOW, THEREFORE, in consideration of the foregoing and the mutual and dependent covenants hereinafter set forth, the parties agree as follows:
Effective Date AGREEMENT
1. | Definitions. As used herein, the following terms shall have the following definitions: |
“Headcount Ratio” shall mean the total full-time and part-time employees of Service Recipient in the Taipei Office divided by the total full-time and part-time employees of Service Provider in the Taipei Office.
“Service” shall mean the service or services set forth on Exhibit A attached hereto (as such Exhibit may be amended from time to time with the consent of both parties).
“Service Fee” shall mean, unless otherwise specified under Exhibit A, the Total Service Cost multiplied by the Headcount Ratio, payable by the Service Recipient to Service Provider for the provision of such Service, as outlined under Exhibit A (as such Exhibit may be amended from time to time with the consent of both parties).
“Taipei Office” shall mean the principal office of Service Provider located at Int’l Commerce Bldg. 9F-4, Chang An East Road, Sec. 1, Taipei, Taiwan 10441.
“Total Service Cost” shall mean the total financial expenses incurred by the Service Provider for the provision of Services in the Taipei Office both to its own full-time and part-time employees in addition to those of Service Recipient, as accounted for by Service
Provider on a fiscal quarterly basis in accordance with all applicable International Financial Reporting Standards.
2. | Description of the Services. Service Provider will provide to Service Recipient all of the Services set forth on Exhibit A (as such exhibit may be amended or supplemented from time to time) as mutually agreed. Notwithstanding the contents of Exhibit A, Service Provider agrees to respond in good faith to any reasonable request by Service Recipient for access to any additional services that are necessary for the operation of the business of Service Recipient and which are not currently contemplated by Exhibit A, at a price to be agreed upon after good faith negotiations between the parties. Any additional services provided shall be subject to the terms and conditions of this Agreement. Service Provider shall have the right to utilize affiliated or third-party subcontractors to provide all or part of any Service hereunder. |
3. | Obligations of Service Provider; Disclaimer. Service Provider will provide qualified personnel who are experienced in rendering the Services and maintain adequate staffing levels to provide Service Recipient with the continual prompt delivery of the Services. Service Provider will carry out the Services in a professional, competent and timely manner. Service Recipient acknowledges and agrees that this Agreement does not create a fiduciary relationship, partnership, joint venture or relationships of trust or agency between the parties and that all Services are provided by Service Provider as an independent contractor. For such time as any employees or independent contractors of Service Provider are providing the Services to Service Recipient under this Agreement, |
(a)such employees will remain employees of Service Provider and shall not be deemed to be employees or independent contractors of Service Recipient for any purpose, and
(b)Service Provider shall be solely responsible for the payment and provision of all wages, fees, bonuses and commissions, employee benefits, including severance and worker's compensation, and the withholding and payment of applicable taxes relating to such employment or provision of contractor services.
4. | Obligations of Service Recipient; Access. Service Recipient shall provide Service Provider with access to its facilities, books, records and related documents and instructions required by Service Provider to perform the Services. Service Recipient shall pay the Service Fee to Service Provider in accordance with the terms of the Agreement. Service Provider agrees that all of its employees and subcontractors, when on the property of Service Recipient or when given access to any equipment, computer, software, network or files owned or controlled by Service Recipient, shall conform to the policies and procedures of Service Recipient concerning health, safety confidentiality and security which are made known to Service Provider in advance in writing. |
5. | Ownership of Intangible Property. As between the parties, all right, title, and interest in the intangibles used in the provision of the Services shall at all times remain the sole and exclusive property of Service Provider. |
6. | Term and Termination of Agreement. |
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(a) | This Agreement shall have an initial term of one year from the Effective Date and shall be renewed automatically thereafter for successive one-year periods, unless either party elects not to renew this Agreement upon not less than 60 days written notice prior to the end of any such term or otherwise terminates this Agreement pursuant to Section 6(b) of this Agreement. |
(b)Either party may terminate any Service or terminate this Agreement in its entirety at any time for any reason by sending written notice to the other party at least 120 days in advance of the intended date of termination.
7. | Payment Terms. |
(a) | Service Fee: As consideration for provision of the Services, Service Recipient shall pay to Service Provider the Service Fee for each Service as specified on the attached Exhibit |
A. In addition to such amount, in the event that Service Provider incurs reasonable and documented out-of-pocket expenses in the provision of any Service on behalf of Service Recipient, excluding payments made to employees, independent contractors, officers or directors of Service Provider, Service Recipient shall reimburse Service Provider for all such out-of-pocket expenses. Service Fees include but are not limited to: direct labor costs such as salaries and benefits; indirect overhead such as indirect labor, facilities, depreciation, travel, and other costs incurred in regard to the provision of the Services, as mutually agreed by the parties. With respect to any special or unanticipated Service which may demand more work for Service Provider than contemplated under this Agreement, Service Provider and Service Recipient agree to negotiate a separate Service Fee different from that specified in Exhibit A. Service Fees shall exclude income taxes, interest expense and other related financing charges, government subsidies and other similar amounts. Any costs for which Service Provider seeks reimbursement are subject to production of appropriate receipts by Service Provider and/or verification by Service Recipient.
(b) | Timing of payments: Service Provider will invoice Service Recipient the actual Service Fee up to 30 days after the end of each fiscal quarter. Payment is due 60 days after the invoice date. |
(c) | Provider’s records: Service Provider is committed to keeping good records of services or work performed relating to the Services, as well as cost and expenses incurred, and will provide them to Service Recipient upon request. |
(d) | Price adjustment clause: |
If any taxing authority that has jurisdiction makes or proposes to make any assessment or reassessment to one of the parties to the Agreement with respect to income tax or any other tax based on the fact that the intercompany service charge is greater or less than an arm’s length charge, then the intercompany service charge should be augmented retroactively, in respect of the period assessed.
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If the Services performed by Service Provider change significantly in the future, Service Provider and Service Recipient may agree to adjust the Services Fee.
(e) | Taxes: Service Recipient shall be responsible for all sales or use taxes imposed or assessed as a result of the provision of Services by Service Provider. |
(f) | Right of Offset: Service Provider shall have the right to offset any amounts owed (or to become due and owing) to Service Provider by Service Recipient under this Agreement, against any amounts owed (or to become due and owing) by Service Provider to the Service Recipient, whether under this Agreement or otherwise. |
8. | Miscellaneous. |
(a) | Accounting. The budgeted intercompany service charge allocated to Service Recipient based on the pricing set forth on Exhibit A attached hereto will be recorded in the internal books and records of Service Provider and Service Recipient on a monthly basis. The budgeted intercompany service charge will be adjusted to actual within 30 days of each calendar year end. |
(b) | Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the laws of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Delaware. Any action or dispute arising out of, based upon or related to this Agreement may only be instituted in the federal courts of the United States of America located in the State of Delaware or, if such courts lack jurisdiction, in the courts of the State of Delaware located in the City of Wilmington and County of New Castle, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such action or dispute. Service of process, summons, notice or other document by mail to such party’s address set forth herein shall be effective service of process for any action or dispute brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any action or dispute in such courts and irrevocably waive and agree not to plead or claim in any such court that any such action or dispute brought in any such court has been brought in an inconvenient forum. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION OR DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT. |
(c) | Confidentiality. Any information obtained by either party in the course of this Agreement is confidential and proprietary of the disclosing party and shall not be disclosed by the receiving party, except as required by law. No parties to this Agreement shall disclose the terms of this Agreement to any third party without the |
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consent of the other parties, except as required by law or the rules and regulations of the U.S. Securities and Exchange Commission or any stock exchange or national market system upon which a party’s securities are listed.
(d) | Indemnities. Service Recipient shall defend, indemnify and hold Service Provider harmless from and against any damages, liabilities, costs and expenses arising out of the Services provided by Service Provider. |
(e) | Assignability. No party shall assign this Agreement without the prior written consent of the other party. |
(f) | Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties hereto shall use their best efforts to find and employ alternative means to achieve the same or substantially the same result as that contemplated by such term or other provision. |
(g) | Notice. All notices, reports, invoices and other communications between the parties shall be in writing and sent to the respective parties at the address indicated by each such party to the other parties to this Agreement. |
(h) | Amendment. This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each party hereto. |
(i) | Counterparts. This Agreement may be executed by electronic signature and in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. |
(j) | No Third-Party Beneficiaries. The parties agree that the provisions of this Agreement are intended exclusively for the benefit of Service Provider and Service Recipient. Nothing in this Agreement shall be construed as giving any other person or entity any right, remedy or claim under or in respect of this Agreement or any provision hereof. |
[Remainder of page intentionally left blank; signature page follows.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.
[Signature Page to Shared Services Agreement]
EXHIBIT A
| Description of Service | Service Fees | Location |
1. | IT System Services (including, but | See Section 1, Definitions. | Taipei Office |
2. | HR Services (including, but not | See Section 1, Definitions. | Taipei Office |
3. | Office Administration Services | See Section 1, Definitions. | Taipei Office |
4. | Digital Online Services (including, | 50% of the total cost to Service | Taipei Office |
5. | Corporate Development Services | $250,000 USD per annum, to be paid | N/A |
6. | Business Expansion Payments (to | One-time fixed amount of | N/A |
This Exhibit A may be amended from time to time on the mutual agreement of the parties.
1 For purposes of clarity, this amount shall be deemed the “Service Fee” pursuant to 7(a) of the Agreement and no other amounts shall be payable to the Service Provider for these services. The payment timing set forth herein shall supersede the payment timing set forth in Section 7(b) of the Agreement.
2 See Footnote 1 above.
3 See Footnote 1 above
Exhibit 10.4
AMENDED AND RESTATED
GLOBAL SOURCING AND PURCHASE AGREEMENT
January 1, 2023
This AMENDED AND RESTATED GLOBAL SOURCING AND PURCHASE AGREEMENT (the “Agreement”) effective as of the date first written above (“Effective Date”), by and between Foremost Worldwide Co. Ltd. (“FWW”) and FGI Industries, Ltd. (“FGI”).
WHEREAS, FWW is engaged in the manufacture, design, distribution, sourcing and export of home products including, but not limited to, wooden furniture, cabinetry and shower systems for the bath and kitchen markets (hereinafter referred to as “Products”);
WHEREAS, FGI is engaged in the worldwide sales, marketing and distribution of products including, but not limited to, wooden furniture, cabinetry and shower systems for the bath and kitchen markets and would like to engage FWW as a sourcing agent for its Products; and
WHEREAS, FWW agrees to provide various services relating to FGI on the conditions and terms set out in this Agreement;
WHEREAS, FWW and FGI have signed a previous GLOBAL SOURCING AND PURCHASE AGREEMENT effective January 14th, 2022 (“Prior Agreement”);
WHEREAS, both parties desire to amend and restate the Prior Agreement to modify certain provisions of the Prior Agreement;
NOW THEREFORE, in consideration of the promises and releases contained herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:
1. | Services: |
FGI hereby appoints and FWW agrees to act as FGI’s sourcing agent for the Products on a worldwide basis (hereinafter “Territories”). FWW shall provide FGI with the following services:
a) | FWW shall provide manufacturing sourcing and procurement services for FGI’s Products, such Products as described under Exhibit A (as such Exhibit may be amended from time |
to time with the consent of both parties);
b) | FWW shall provide certain sales, marketing and design services related to FGI’s Products, as specified and requested by FGI, such Products as described under Exhibit A (as such Exhibit may be amended from time to time with the consent of both parties); |
c) | FWW shall negotiate and manage, on behalf of FGI, the cost of production, prepayments, shipping and any other elements as necessary for the production and delivery of Products specified by FGI either directly to FGI or to FGI’s customers. For the avoidance of doubt, FWW and FGI agree that the terms negotiated by FWW on behalf of FGI are not binding upon FGI unless and until FGI enters into any binding written agreement with the third party; |
d) | FWW shall inspect the merchandise before it is shipped to FGI or destinations required by FGI to ensure the quality, performance, specifications, and quantity of products meet the requirements and standards of FGI which will not be less than industry standard (hereinafter “Quality Control” or “QC”); and |
e) | FWW shall prepare relevant shipping documentation and shipping information to FGI as it pertains to Products that have been approved and ordered by FGI. |
f) | All pricing associated with any manner of services described in this Section shall be invoiced, ordered, or otherwise in the form of United States Dollars (“USD”). |
2. | Representations: |
FWW represents and warrants to FGI that FWW:
a) | is a corporation duly organized, validly existing and in good standing under the laws of Hong Kong SAR; |
b) | has all requisite corporate power and authority to carry on its business as it is now being conducted; |
c) | has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby, and the execution and consummation of this Agreement shall not violate the charter documents of FWW, or any other commitment or agreement to which FWW is a party; and |
d) | to the best of its knowledge, entry in this Agreement, and its performance hereunder, does not and shall not violate any law, statute or regulation or any contractual obligation of FWW; and (iv) FWW has the requisite skill, competence and resources to carry out its obligations under this Agreement. |
e) | shall not commit any act or do anything which might reasonably be considered: (i) to be immoral, deceptive, scandalous or obscene; or (ii) to injure, tarnish, damage or otherwise |
negatively affect the reputation and goodwill associated with FGI and any of its affiliates.
FGI represents and warrants to FWW that FGI:
a) | has the full right, power and authority to enter into this Agreement; |
b) | has been duly authorized to enter into this Agreement in accordance with its operating agreement and bylaws; and |
c) | to the best of its knowledge, entry in this Agreement, and its performance hereunder, does not and shall not violate any law, statute or regulation or any contractual obligation of FGI. |
3. | Limitation of Liability and Indemnification: |
FWW agrees to indemnify and hold harmless FGI and its directors, officers, employees and representatives from and against all losses, penalties, damages (but not any punitive damages), liabilities, suits, claims and expenses (including without limitation reasonable outside attorneys’ fees) arising out of or in connection with third party claims against FWW for any breach by FWW of any of its representations, warranties or covenants in this Agreement, provided that FGI gives FWW prompt written notice of all claims and/or suits to which this indemnification applies. Upon notice to FGI that FWW is responsible for the entire third party claim or suit, FWW shall have the option to undertake and solely control the defense and/or settlement of any such third party claim or suit at FWW’S cost and expense. FGI shall cooperate with FWW in the defense of any such claims and/or suits, and both parties shall act to mitigate any damage arising out of or related to such claims and/or suits.
4. | Payment and Commissions: |
a)FGI agrees to pay FWW a commission for services rendered under this Agreement. The commission rate shall be set forth in Exhibit B for the Products which FWW services for FGI as specified in the Section 1 of this Agreement. This rate will be reviewed and/or revised by FGI and FWW annually.
b)All commissions shall be computed on the basis of “FOB” sales that FWW provides to FGI (“FOB Sales”) in USD, defined as the quantity sold at the accepted order price, including charges for freight, shipping, taxes, insurance, and minus the application of any prompt payment discounts, other discounts, returns, cost of display, store set up, return freight, and other allowances or bad debts.
c)FGI shall not be liable to FWW for any commission upon FOB sales that are lost or delayed for any cause.
d)It is agreed by the Parties that FWW shall provide the Product pricing and once confirmed by FGI, that price will be fixed and agreed between FGI and FWW unless a price revision is recognized and confirmed by FGI in writing. FGI shall remit payment to FWW for commission earned within fourteen (14) calendar days after FGI receives the Products.
e)FWW shall agree that FGI may deduct payment from its service commission to FWW for any quantity shortage, shipment delay, or incorrect packaging of merchandise until any dispute is resolved.
f)In the event that FGI disputes the amount of any commission owed to FWW, FGI shall remit payment to FWW for the undisputed portion of the commission owed to FWW and provide written notice to FWW that it disputes the amount of the commission owed to FWW and the reason for such dispute (“Commission Dispute Notice”). The Parties agree that upon FWW’s receipt of a Commission Dispute Notice, that both Parties shall negotiate in good faith regarding the disputed commission and that FGI shall not be obligated to pay the disputed portion of any commission, or any interest thereon, unless and until FGI and FWW mutually agree to the proper amount of the commission owed by FGI to FWW subject to any agreed-upon adjustments.
g) | With respect to any special/custom products which may demand more work for FWW in the ordinary course of business (“Specialty Products”) or any special/custom services which may demand more work for FWW in the ordinary course of business (“Specialty Services”), FWW and FGI agree to negotiate a different commission rate which shall be applied to the Specialty Products and Specialty Services without affecting any Products or services specified under this Agreement. For the avoidance of doubt, written approval by FWW and FGI shall be required to effectuate any change in commission for Specialty Products or Specialty Services. |
5. | Term of the Agreement: |
a) | The term of this Agreement shall be for a period of one year commencing on the date of execution of this Agreement (the “Term”). |
b) | Unless terminated within sixty (60) days, this Agreement shall be automatically renewed for an additional Term upon every anniversary day of this Agreement. |
6. | Termination of the Agreement: |
a) | This Agreement may be terminated by either FWW or FGI by giving a written notice to the other party 60 (sixty) days prior to the proposed termination date. |
b) | If FWW enters into a similar Agreement with another party whom FGI deems to be a competitor, FGI retains the right to terminate this Agreement immediately and without notice. |
c) | FGI retains the right to enter into a similar Agreement with another party whom FWW deems to be a competitor. In such an event, FWW maintains the right to the terminate this Agreement in accordance with the provisions of 6a. |
7. | Governing Law: |
This Agreement shall be governed and construed in accordance with the laws of the State of New Jersey, United States of America.
8. | Miscellaneous: |
a) | Exclusive jurisdiction: For the purpose of any action that may be brought in connection with this Agreement, FWW and FGI hereby consent to the exclusive jurisdiction and venue of the United States District Court for the District of New Jersey and waive the right to contest the jurisdiction and venue of said court on the ground of inconvenience or otherwise and, further, waive any right to bring any action or proceeding in connection with this agreement in any court other than the United States District Court for the District of New Jersey. |
b) | Counterparties: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument and facsimile copies shall be deemed originals for all purposes. |
c) | Notices: All notices that are required or may be given pursuant to the terms of this Agreement shall be in writing and delivered by hand or national overnight courier service, sent by facsimile transmission, sent via electronic-mail to a respective Party’s address, or mailed by registered or certified mail, postage prepaid, to the addresses designated by either Party hereto. A notice shall be deemed to have been given (i) upon personal delivery, if delivered by hand or courier, (ii) three business days after the date of deposit in the mails, postage prepaid, if mailed by certified or registered mail, or (iii) the next business day if sent by facsimile transmission or electronic mail (if receipt is electronically confirmed). |
d) | Entirety: This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof. No representation, warranty, promise, inducement or statement of intention has been made by any party that is not embodied in this Agreement or such other documents, and none of the parties shall be bound by, or be liable for, any alleged representation, warranty, promise, inducement or statement of intention not embodied herein or therein. |
e) | Assignments and Successors: This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, express or implied, is intended to confer on any person or entity other than the parties hereto or their respective permitted successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. This Agreement may not be assigned by either party without the prior written consent of the other party. |
f) | Independent Contractor: FWW is and shall be construed as an independent contractor. |
Nothing contained in this Agreement shall be construed as creating a joint venture, partnership, employee/employer relationship, association or formal or informal business organization by and between the parties.
g) | Confidentiality: FWW shall maintain strict confidentiality with respect to any and all information, whether in writing, oral or otherwise, concerning FGI or Products developed specifically for FGI or ordered by FGI, with respect to the nature and extent of the mutual business relationship as well as with respect to the commercial and manufacturing secrets of FGI, and shall not make any such information available to third parties, including this Agreement and any of its terms. FWW shall take measures to ensure that its employees also adhere to this confidentiality obligation. FWW hereby acknowledges that any breach or attempted breach of this Section by FWW or its owners, shareholders, directors, officers, employees, agents or representatives shall result in irreparable harm to FGI for which a remedy at law shall be inadequate. In case of any breach or attempted breach of this Section by FWW or its owners, shareholders, directors, officers, employees, agents or representatives, FGI shall be entitled to, in addition to any other remedies to which FGI may be entitled, specific performance and injunctive and other equitable relief without the necessity of proof of irreparable harm or posting of bond. |
i) | Amendments: This Agreement may only be amended, varied or supplemented by an instrument in writing, signed by the parties hereto. |
[SIGNATURE PAGE BELOW]
IN WITNESS WHEREOF, these presents have been executed by authorized signatories for and on behalf of the parties hereto on the day and year first before written.
Exhibit A
Products covered under this Agreement:
· | Bath Furnishings: this includes, but is not limited to, vanities, mirrors, cabinetry, shelving and storage products typically produced for the bathroom space. |
· | Kitchen Furnishings: this includes, but is not limited to, cabinetry, shelving and storage products typically produced for the kitchen space. |
This Exhibit A may be amended from time to time on the mutual agreement of the parties.
Exhibit B
Product Category | Commission Schedule | ||||
Bath Furnishings | | Total FOB Sales Volume | | Variable Rate | |
| <$10,000,000 | | 4.50% | | |
| | $10,000,000 - $20,000,000 | | 4.00% | |
| | $20,000,000 - $30,000,000 | | 3.50% | |
| | $30,000,000 - $40,000,000 | | 3.00% | |
| | >$40,000,000 | | 2.00% | |
| | ||||
Kitchen Furnishings | 2.5% of FOB Sales | ||||
This Exhibit B may be amended from time to time on the mutual agreement of the parties.
Exhibit 10.19
December 2, 2021
FGI Canada Ltd.
5970 Chedworth Way, Unit B
Mississauga, ON
L5R 4G5
PRIVATE & CONFIDENTIAL
Attention: Cuc Quach
Dear Madam
We refer to the Facility Letter with schedules dated November 16, 2021 between HSBC Bank Canada (“the Bank”) and FGI Canada Ltd (formally know as Foremost International Ltd.), (collectively called the “the Original Facility Letter”). On the basis of the financial information and other information, representations, warranties and documents provided by the Borrower (as defined below) to the Bank, the Bank has agreed, at the request of the Borrower, to provide the Credit Facilities and amend certain terms and conditions of the Original Facility Letter as more particularly set out below. Additional terms and conditions are contained in the Schedule(s) attached to this facility letter (this letter and all attached Schedule(s) constituting collectively, the “Facility Letter”). All capitalized terms not otherwise defined in this letter shall have the meanings ascribed to them in Schedule A. The Original Facility Letter shall, as of the date above, be amended and restated (but without novation of existing credit facilities indebtedness and obligations) by this Facility Letter:
BORROWER
FGI Canada Ltd., (the “Borrower ”).
For purposes of this Facility Letter, the Borrower is sometimes referred to as a “Credit Party”.
CREDIT FACILITIES
The following credit facilities (collectively referred to as the “Credit Facilities”) are authorized subject to the satisfaction of all terms and conditions in this Facility Letter.
1. | Operating Loan Facility |
1.1 | Amount |
Demand operating revolving loan facility (“Operating Loan Facility”) available at the Bank’s discretion by way of any of the types of advances and other credit described in section 1.3 (below) up to but not exceeding in aggregate (for all such types of advances and other credit) CAD 7,500,000, subject to the Margin Requirement, if any.
1.2 | Purpose |
To assist in financing the day-to-day operating requirements of the Borrower.
1.3 | Availability |
Loan advances and other credit under the Operating Loan Facility (“Operating Loans”) are available as follows:
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(a) CAD account overdraft up to an aggregate principal amount not exceeding CAD 7,500,000 (“CAD Overdraft Loans”); and
(b) USD account overdraft up to an aggregate principal amount not exceeding the US Dollar Equivalent of CAD 7,500,000 (“USD Overdraft Loans”).
The Borrower shall ensure that the aggregate Canadian Dollar Equivalent of all amounts advanced and credits outstanding under the Operating Loan Facility shall at no time exceed the amount set out in section 1.1 above.
1.4 | Repayment |
All amounts advanced and outstanding under the Operating Loan Facility shall be repaid on demand by the Bank.
1.5 | Interest |
Interest on the outstanding principal balance of all Loans and other credit advanced under the Operating Loan Facility shall, unless otherwise provided, be calculated and payable as follows:
(a) for CAD Overdraft Loans, the Bank’s Prime Rate plus 0.50% per annum, calculated monthly in arrears on the daily balance on the last day of each month, payable on the first Business Day of the following month; or
(b) for USD Overdraft Loans, the Bank’s U.S. Base Rate plus 0.50% per annum, calculated monthly in arrears on the daily balance on the last day of each month, payable on the first Business Day of the following month.
1.6 | Fees |
The Borrower shall pay to the Bank:
(a) an administration fee of CAD 300 payable on the first Business Day of each quarter with respect to the previous month;
(b) a set up fee of CAD 10,000 payable on acceptance of this Facility Letter; and
(c) an annual review fee of CAD 3,500.
2. | Foreign Exchange Facility |
2.1 | Amount |
Demand revolving foreign exchange facility up to a permitted maximum of USD 3,000,000 (the “Foreign Exchange Facility Limit”).
2.2 | Purpose |
To hedge against currency fluctuations of the Borrower in the normal course of business and not for speculative purposes.
2.3 | Availability |
Advances are available to purchase foreign exchange forward contracts for major currencies identified and approved by the Bank from time to time for periods up to six months, subject to an overall maximum aggregate USD Equivalent outstanding face value not exceeding the Foreign Exchange Facility Limit.
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2.4 | Repayment: |
All liabilities of the Bank under foreign exchange forward contracts shall be paid by the Borrower on demand by the Bank and, unless and until otherwise demanded, such contracts shall be fulfilled by the Borrower as they fall due.
3. | Margin Requirement |
Notwithstanding any other provision of this Facility Letter, the Borrower shall ensure that the sum of the following (in CAD or Canadian Dollar Equivalent thereof), calculated by the Bank:
(a) the amount advanced and liabilities outstanding under the Operating Loan Facility by way of CAD Overdraft Loans and USD Overdraft Loans;
shall at no time exceed the aggregate (in CAD or Canadian Dollar Equivalent thereof, calculated by the Bank) of the following (the “Margin Requirement”):
(i) 75% of Acceptable Receivables; plus
(ii) 80% of under 120 day Acceptable Receivables from major customers of the Borrower approved by the Bank; plus
(iii) 90% of Insured Receivables, subject to maximum amounts specified in any insurance certificate; plus
(iv) 50% of Acceptable Inventory to a maximum of CAD 3,750,000; less
(v) Potential Prior Ranking Claims.
4. | Loan Documents |
4.1 | Loan Documents |
The liability, indebtedness and obligations of the Borrower to the Bank shall be evidenced, governed and secured, as the case may be, by the following documents and any other documents reasonably required by the Bank from time to time, including this Facility Letter, (referred to collectively as the “Loan Documents”) completed in a form and manner satisfactory to the Bank:
(a) general security agreement from the Borrower creating a first ranking Lien on all present and future or after-acquired Collateral of the Borrower (including its intellectual property, if any);
(b) assignment of all risk insurance, including extended coverage, public liability coverage, business interruption coverage and fire insurance coverage, if required by the Bank, in amounts and from an insurer acceptable to the Bank in each case, on all of the Borrower’s Collateral showing the Bank as first loss payee with standard mortgage endorsement for property damage coverage (and as an additional insured for public liability coverage), as acknowledged by the relevant insurer or its authorized representative;
(c) agreement for foreign exchange contracts;
(d) assignment and postponement by shareholders in favour of the Bank of all present and future amounts owing to them by the Borrower;
(e) supporting officer’s certificates, certificates of status (or good standing) and other certificates in connection with each Credit Party as the Bank may reasonably require which shall confirm, among other things, the constitutional documents for each Credit Party, incumbent officers with specimen signatures
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of authorized signatories, and the applicable authorizing resolutions for the Loan Documents, together with legal opinion of the solicitors acting for each Credit Party confirming power and capacity of each Credit Party, existence, due authorization, execution, delivery and enforceability of the Loan Documents to which each is a party and the priority of the Liens granted by each to the Bank; and
(f) such other Loan Documents as the Bank may reasonably request in order to register or otherwise perfect the Liens granted to the Bank or as the Bank may reasonably require.
4.2 | Registration and Priority; Counsel Fees |
The Loan Documents (or notice thereof) will be registered in all jurisdictions and at all registries as the Bank may determine is necessary or beneficial to perfect or protect its Liens. The Bank’s Liens shall rank in priority to all other Liens, subject to only Permitted Encumbrances. The Borrower shall pay all legal fees and disbursements incurred by Bank’s counsel in connection with negotiation, implementation and enforcement of the Credit Facilities, including any expenses incurred to perfect or register Loan Documents.
5. | Conditions Precedent |
In addition to the conditions precedent set out in Schedule A, it shall be a condition precedent to the initial advance and the continued availability of the Credit Facilities that the Bank shall have received in form and content satisfactory to the Bank:
(a) the Loan Documents, duly authorized, executed and delivered, and, as relevant, duly registered;
(b) copies of all Material Agreements (if any) and such other documents as the Bank may reasonably request; and
(c) internally-prepared financial statements for the Foremost Group, Inc for the fisacl year end 2020 or most recent year to date confirming operating results acceptable to the Bank.
6. | Covenants and Conditions |
(a) Without limiting the Bank’s right to demand repayment of any outstanding amounts, the Borrower covenants and agrees with the Bank that it shall not, without the prior written consent of the Bank:
(i) permit the ratio of Debt to TNW of the Borrower to at any time exceed 3.00 to 1.00; or
(ii) permit the ratio of current assets to current liabilities of the Borrower to at any time be less than 1.25 to 1.00. For the purposes hereof, the amount of debt scheduled to be repaid at least one year plus one day from the balance sheet date may be excluded from current liabilities. Current assets shall exclude amounts due from related companies and affiliates.
The Borrower agrees that the foregoing financial tests may be calculated periodically by the Bank using financial statements provided by the Borrower or with such other statements as the Bank may agree to use from time to time. Any amounts not in CAD shall be calculated at the Canadian Dollar Equivalent.
(b) The Borrower agrees to give the Bank written notice of any of the following events as soon as possible and in any event within 5 Business Days of the occurrence thereof:
(i) any litigation, proceeding or dispute which if adversely adjudged, mediated or arbitrated could reasonably be expected to constitute a Material Adverse Change;
(ii) any representation and warranty given by a Credit Party to the Bank being false or misleading;
(iii) the death or insolvency of an individual Guarantor or the dissolution, merger or insolvency of any other Guarantor;
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(iv) any notice from any Governmental Authority with respect to any violation, possible violation, non-compliance or possible non-compliance or claim which constitutes or could reasonably be expected to constitute a Material Adverse Change;
(v) any claim or action made or taken by a creditor of a Credit Party with respect to Debt exceeding CAD 50,000 with respect to an actual or alleged default;
(vi) default by a Credit Party under any of its respective credit facilities with the Bank or any other lender;
(vii) arranging or undertaking to enter into an agreement for the purchase or sale of any property outside the normal course of business; or
(viii) arranging to borrow money, obtain credit or incur additional funded indebtedness (other than pursuant to the Credit Facilities).
The Borrower shall give the Bank at least 5 Business Days prior notice of any proposed change of name by a Credit Party and any proposed change in governing jurisdiction or location of a Credit Party.
7. | Reporting Requirements |
The continued availability of the Credit Facilities is subject to the Borrower delivering to the Bank the following reports in a form and on a frequency acceptable to the Bank as advised by the Bank from time to time:
(a) quarterly, within 30 days of each quarter end:
| (i) | an aged list of accounts receivable of the Borrower; |
| (ii) | an aged list of accounts payable of the Borrower; |
| (iii) | a declaration of inventory; |
| (iv) | signed internally-prepared income statement and balance sheet for the Borrower; |
| (v) | a certificate of margin compliance and a certificate of covenant compliance in the form requested by the Bank; |
(b) annually, within 120 days of the Borrower’s fiscal year end:
(i) audited financial statements for the Borrower;
(ii) pro forma financial statements, cash flow forecast and budget for the following fiscal year (by month) of the Borrower; and
(c) such additional financial statements and information as and when requested by the Bank.
8. | Counterparts and Electronic Communication |
This Facility Letter (and each Loan Document) may be signed by handwritten signature or electronically by using technology acceptable to the Bank. To evidence execution of this Facility Letter (or any Loan Document), the Borrower or Guarantor, as applicable, must deliver and return to the Bank an executed copy of each with the original handwritten signatures of each Credit Party’s duly authorized signatories (or Electronic Signatures of such signatories if so permitted by the Bank) by physical delivery, or if so permitted by the Bank, by facsimile, email or other electronic delivery or transmission and such transmission shall constitute delivery of an executed copy of the Facility Letter or relevant Loan Document. If a Credit Party uses an Electronic Signature to indicate its agreement, it shall ensure that its Electronic Signature is attached to or associated with this Facility Letter (or
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such Loan Document). This Facility Letter and each Loan Document may be executed in one or more counterparts and signed as outlined above, each of which when so executed when taken together shall constitute one and the same agreement. Delivery of a handwritten or electronically-signed counterpart and electronic delivery (including by email transmission or transmission over an electronic signature platform acceptable to the Bank) are each as valid, enforceable, binding and effective.
9. | Notices |
Any notice, request or other communication which the Bank or a Credit Party may be required or may desire to give for purposes of this Facility Letter shall be in writing and may be sent either by electronic transmission (facsimile or email), or hand delivery or first class registered mail postage prepaid to the addresses below. Any such notice, request or other communication shall be deemed to have been effectively given, made and received: (i) when transmitted with receipt confirmed in the case of electronic transmission if such transmission was made on or before 5:00 p.m. (Eastern time) on that Business Day, failing which it shall be deemed to have been effectively given, made and received on the next following Business Day, (ii) when received if sent by hand delivery on or before 5:00 p.m. (Eastern time) on a Business Day, failing which it shall be deemed to have been effectively given, made and received on the next following Business Day, or (iii) five (5) days after deposit in the mail if so mailed, but any notice, request or other communication to be given or made during a strike, lock-out or other labour disturbance at the post office or during an actual or threatened interruption in the mail service shall be hand delivered or sent by electronic transmission and not mailed. Any party hereto may change the address to which all notices, requests and other communications are to be sent to it by giving written notice of such address change to the other parties in conformity with this paragraph, but such change shall not be effective until notice of such change has been received by the other parties. The addresses of the parties for the purposes hereof shall be:
If to the Borrower, addressed as follows:
FGI Canada Ltd.
5970 Chedworth Way, Unit B
Mississauga, ON
L5R 4G5
Attention: Cuc Quach
Fax Number: 905-2472-103
Email: CQuach@foremostgroups.com
If to the Bank, addressed as follows:
HSBC Bank Canada
3601 Highway 7 East, Suite 108
Markham, ON
L3R 0M3
Attention: Sergey Frenkel
Email: sergey.frenkel@hsbc.ca
10. | Lapse and Cancellation |
This Facility Letter shall, at the option of the Bank, expire, and be of no further force and effect if an advance of credit under the Credit Facilities has not been made within sixty (60) days of the date of this Facility Letter.
Credit Facilities under this Facility Letter are uncommitted and, notwithstanding any other provision of this Facility Letter, the Bank may, at any time, in its sole discretion: (i) terminate any right to make requests for credit or advances under the Credit Facilities; (ii) even if the Bank has not terminated such right to request credit or advances under the Credit Facilities, decline any request for credit or advances under the Credit Facilities, including requests for renewals or reissuances of any instruments or advances, and may refuse to honour or
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accept any cheques or other payment items; (iii) demand repayment of all outstanding indebtedness and liability of the Borrower at any time, all upon such notice and otherwise in accordance with applicable law as the Bank may determine.
11. | Schedules |
Each of the following Schedules, as attached here or advised by the Bank from time to time, comprise part of the Facility Letter:
Schedule A-Definitions and Additional Terms and Conditions
12. | Language Choice |
The parties hereto have requested that this Facility Letter and any document relating thereto be drafted in English. Les parties aux présentes ont exigé que cette lettre relative aux facilités et tout document y afférent soient rédigés en anglais.
13. | Acceptance |
The offer of credit upon the terms and conditions contained in this Facility Letter may be accepted by the Borrower signing, dating and delivering a copy of this Facility Letter to the Bank by 5:00 p.m. local time on December 7, 2021. Failing such acceptance and delivery to the Bank, this offer shall be of no further force or effect.
Yours truly,
HSBC BANK CANADA
| | |
|
|
|
| Madeleine Kain (Dec 3, 2021 17:47 EST) | |
Sergey Frenkel | | Madeleine Kain |
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The undersigned hereby acknowledge(s) and agree(s) to the terms and conditions of this Facility Letter as of:
(a) Where signed fully or partly using Electronic Signatures, the date indicated in connection with the Electronic Signature of the last or final signatory;
(b) Where signed solely by manual signatures, the following date: ____________________________
BORROWER:
FGI Canada Ltd.
Per: | Cuc Quach (Dec 4, 2021 08:43 EST) | |
| Authorized Signatory | |
| Title: | SVP Finance & Admin. |
| Name: | Cuc Quach |
Per: | | |
| Authorized Signatory | |
| Title: | |
| Name: | |
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SCHEDULE A
TO FACILITY LETTER
FROM HSBC BANK CANADA
TO FGI CANADA LTD.
DATED DECEMBER 2, 2021
This Schedule shall form part of the Facility Letter and the availability of the Credit Facilities as described in this Facility Letter shall also be subject to the terms and conditions contained in this Schedule.
I. Definitions and Interpretation
The section and Schedule headings are for ease of reference only and shall not affect the meaning or interpretation of this Facility Letter.
For the purpose of this Facility Letter, the following terms shall have the meanings indicated below.
“Acceptable Inventory” means the value, determined by the Bank from its review of the most recent financial statements and certificate of compliance and security margin report provided by the Borrower, based on the lower of cost and fair market value of all materials owned by the Borrower for resale or for production of goods for resale, excluding work in progress, and over which the Bank holds a first ranking security interest, subject only to Potential Prior Ranking Claims and Permitted Encumbrances. Acceptable Inventory excludes inventory amounts financed under post-shipment buyer loan facilities.
“Acceptable Receivables” means the aggregate of accounts receivable of the Borrower, determined by the Bank from the most recent financial statements and aged list of accounts receivable of the Borrower, over which the Bank holds a first ranking security interest, subject only to Potential Prior Ranking Claims and Permitted Encumbrances, from customers approved by the Bank and which are aged from invoice date and which have been outstanding for not more than 90 days, from which shall be excluded: (i) accounts receivable from related or affiliated corporations or other non-arm’s length Persons; (ii) warranty claims receivable; (iii) tax refunds; (iv) rebates; (v) discounts (whether cash discounts, volume discounts, promotional/advertising discounts or otherwise); and (vi) accounts which are disputed by the Borrower’s customers; (vii) contra accounts and trade accounts receivable subject to offset; (viii) such excessive concentration of trade accounts receivable from a single customer and affiliates or from a single region or other category as the Bank may determine and notify to the Borrower; (ix) the amount of Potential Prior Ranking Claims; (x) the insured and uninsured portions of any Insured Receivables; (xi) accounts receivable that are governed by or issued by a customer subject to the laws of a jurisdiction other than Canada or the U.S.; (xii) accounts receivable that are “Purchased Receivables” or “Financed Receivables” (as such terms are defined in any Receivables Purchase Agreement, Trade Invoice Recourse Financing Facility Agreement or other similar agreement between the Borrower and the Bank); and (xiii) such other exclusions and deductions, if any, which have been communicated by the Bank to the Borrower in writing. If any portion of an account receivable has been outstanding for more than 90 days (or such other date as advised by the Bank) from the invoice date , the entire account receivable (including the portion outstanding for 90 days or less) shall be excluded from the calculation of Acceptable Receivables except that if the portion of the account receivable that has been outstanding for more than 90 days is less than 10% of the specific account receivable and is less than CAD 100,000, the portion of the account receivable outstanding for 90 days or less may nonetheless be included in the calculation unless otherwise advised by the Bank.
“Bank Branch” means the branch of the Bank identified under the heading “Notices” in the Facility Letter or as otherwise advised by the Bank from time to time.
“Bank’s CAD Fixed Rate” means the annual fixed rate of interest offered by the Bank and accepted by the Borrower for the requested funds in CAD for a period of 30, 60, 90, or 180 days or 1, 2, 3, 4 or 5 years, subject to confirmation by the Bank, as selected by the Borrower (but in any event not diminishing or prejudicing the rights of the Bank to demand payment of all indebtedness and liabilities under the Credit Facilities at any time),
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but in no event shall such interest rate be less than 0% per annum. A confirmation or certificate from the Bank shall, absent manifest error, be conclusive evidence of the Bank’s CAD Fixed Rate from time to time.
“Bank’s USD Fixed Rate” means the annual fixed rate of interest offered by the Bank and accepted by the Borrower for the requested funds in USD for a period of 30, 60, 90, or 180 days or 1, 2, 3, 4 or 5 years, subject to confirmation by the Bank, as selected by the Borrower (but in any event not diminishing or prejudicing the rights of the Bank to demand payment of all indebtedness and liabilities under the Credit Facilities at any time) but in no event shall such interest rate be less than 0% per annum. A confirmation or certificate from the Bank shall, absent manifest error, be conclusive evidence of the Bank’s USD Fixed Rate from time to time.
“Bank’s Prime Rate” means the variable annual rate of interest per annum established and adjusted by the Bank from time to time as a reference rate for purposes of determining rates of interest it will charge on commercial loans in Canada denominated in Canadian dollars based on a year of 365 days, and which was 2.45% per annum on December 2, 2021 provided that if such interest rate is less than zero, then such rate shall be deemed to be zero. Such rate is available in a Bank Branch or on the Bank’s website. A confirmation or certificate from the Bank shall, absent manifest error, be conclusive evidence of the Bank’s Prime Rate from time to time.
“Bank’s U.S. Base Rate” means the variable annual rate of interest established and adjusted by the Bank from time to time as a reference rate for purposes of determining rates of interest it will charge on commercial loans denominated in United States dollars in Canada based on a year of 360 days, and which was 3.75% per annum on December 2, 2021 provided that if such interest rate is less than zero, then such rate shall be deemed to be zero. Such rate is available in a Bank Branch. A Certificate of a manager or account manager of the Bank shall, absent manifest error, be conclusive evidence of the Bank’s U.S. Base Rate from time to time.
“Business Day” means a day, other than a Saturday, Sunday or statutory (or civic) holiday, upon which the Bank is open for business in the Bank Branch.
“CAD” and “Canadian Dollars” means lawful currency of Canada in same day immediately available funds, or, if such funds are not available, the form of money of Canada that is customarily used in the settlement of international banking transactions on the day in question.
“CAD Fixed Rate Loan” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“CAD Prime Rate Loan” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“Canadian Dollar Equivalent” means at any time on any date in relation to any specified amount in a currency other than Canadian dollars, the amount of Canadian dollars which could be purchased from the Bank by the payment of that specified amount of such other currency at the rate of exchange quoted by the Bank at or about 8:00 a.m. Pacific time on such date, including all premiums and costs of exchange.
“Collateral” means all property of the relevant Credit Party, real and personal, movable and immovable, present and future or after-acquired, subject to the Liens granted to the Bank pursuant to the Loan Documents.
“Compensating Amount” means an amount determined by the Bank to be the net cost, if any, incurred by the Bank as a direct result of the repayment of all or a portion of any advance under any of the Credit Facilities which bears interest at the Bank’s CAD Fixed Rate or Bank’s USD Fixed Rate or based on LIBOR or other rate, on a date other than the expiration of the selected Interest Period or LIBOR Period, including, without limitation, any unwinding costs and other losses or expenses or damages sustained or incurred by the Bank relating to such payment. A confirmation or certificate from the Bank shall, absent manifest error, be conclusive evidence of the Compensating Amount from time to time.
“Compliance Action” has the meaning ascribed to it in Section XVII of this Schedule A.
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“Conditions Precedent” means the conditions precedent to the initial advance and the continued availability of the Credit Facilities set out in the Facility Letter, including this Schedule A and any other Schedules and Addenda hereto.
“Credit Facilities” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“Credit Party” and “Credit Parties” have the meanings ascribed to such terms under the heading “Borrower(s)” or “Guarantor(s)” as applicable, in the Facility Letter.
“DC’s” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“Debt” means all indebtedness and liability of the Borrower including without limitation under the Credit Facilities, and Off Balance Sheet Arrangements and the principal portion of non-realty operating lease obligations, less (i) deferred taxes; (ii) loans to the Borrower that are postponed and subordinated in favour of the Bank, in form and substance satisfactory to the Bank; and (iii) the after tax portion of any management bonus or any amount payable under an employee profit sharing plan (“EPSP”) which has been postponed and subordinated, to the Bank’s satisfaction, to the indebtedness and liability of the Borrower to the Bank.
“Debt Service Coverage” means (A) EBITDA less (i) unfunded capital expenditures, (ii) deferred charges, (iii) dividends, (iv) distributions , (v) advances to related companies and affiliates, (vi) investments in related companies and affiliates, and (vii) cash taxes, including those related to any discretionary management bonus, divided by (B) the total of all payments of principal and interest on debt, capital leases and obligations under the Credit Facilities including payments under leases and Off Balance Sheet Arrangements.
“Drawdown Date” means the date, which must be a Business Day, specified by the Borrower in a Required Notice as being the date on which the Borrower would like to obtain an advance.
“EBITDA” means earnings of the Borrower before interest, taxes, depreciation and amortization plus non-cash expenses approved by the Bank, less (to the extent included in determining net income) non-cash non-recurring items on a trailing twelve month basis.
“Electronic Communication” means any agreement, instruction, document, information, disclosure, notice or other form of communication that is sent or stored by means of any electronic or other digital transmission.
“Electronic Signature” means a signature that consists of one or more letters, characters, numbers or other symbols in digital form incorporated in, attached to or associated with an Electronic Communication and includes a secure electronic signature as may be prescribed by applicable law or otherwise required by us.
“Facility Letter” means the letter from the Bank to the Borrower to which this Schedule is attached, together with this Schedule and all other Schedules and Addenda, and includes all amendments and restatements thereof.
“Financial LG” means any LG which is not a Performance LG and in that regard, determination of whether an LG is a Financial LG or Performance LG shall be at the Bank’s sole discretion.
“Fixed Rate Loan” means any USD Fixed Rate Loan, or CAD Fixed Rate Loan.
“Foreign Currency Obligation” has the meaning ascribed to such term under section V of this Schedule A.
“Foreign Exchange Facility Limit” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“Foremost Group, Inc” is the parent co, based on of the USA. The consolidated company is comprised of Foremost Group, Inc (sales and distribution in USA) and FGI Canada Ltd (Sales and distribution in
Canada).
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“Governmental Authority” means any government, legislature or regulatory authority, agency, commission, law enforcement agency, board or court, tribunal or other law, regulation or rule making entity having or purporting to have jurisdiction on behalf of any nation, province, state, municipality or country or other subdivision thereof or other jurisdiction.
“Governing Jurisdiction” has the meaning ascribed to such term under section XVI of this Schedule A.
“Guarantor” means the party or parties described in the Facility Letter and includes any other party or parties who from time to time execute a guarantee or guarantees of the obligations of the Borrower under or in connection with this Facility Letter and the Loan Documents.
“HSBC Group” has the meaning ascribed to such term under section XVII of this Schedule A.
“Insured Receivables” means those Acceptable Receivables of the Borrower which are insured for payment by Export Development Canada or similar insurer approved by the Bank.
“Interest Period” means such period of time mutually agreed between the Bank and the Borrower.
“Legal Requirement” means any law, statute, code, ordinance, order, award, judgment, decree, injunction, rule, regulation, authorization, directive, guidance note, advisory, consent, approval, order, permit, franchise, licence, direction, deferred prosecution agreement or other requirement of any Governmental Authority.
“LG” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
“Lien” means any mortgage, hypothec, lien, security interest, pledge, charge, prior claim, conditional sale agreement, reservation of ownership, rights of the lessor under a leasing agreement or other encumbrance of any kind in respect of any property of any Credit Party.
“Loan” means (a) any advance to the Borrower in USD on which interest is calculated and payable on the basis of the Bank’s U.S. Base Rate (as a U.S. Base Rate Loan) or as a USD Fixed Rate Loan, and (b) any advance to the Borrower in CAD on which interest is calculated and payable on the basis of the Bank’s CAD Fixed Rate or the Bank’s Prime Rate.
“Loan Documents” has the meaning ascribed to such term under the heading “Loan Documents” in the Facility Letter.
“Margin Requirements” has the meaning ascribed to such term under the heading “Margin Requirement” in the Facility Letter.
“Material Adverse Change” means, with respect to any Credit Party any event, circumstance, act or omission which individually or in the aggregate has had or could reasonably be expected to have, a material adverse effect on: (i) the business, operations, prospects, properties, assets or condition, financial or otherwise, of such Credit Party; (ii) the ability of any Credit Party to perform its obligations and covenants in this Facility Letter or any other Loan Document to which it is a party; or (iii) to the rights and remedies of the Bank under this Facility Letter or any other Loan Document.
“Material Agreements” means agreements material to the conduct of the business of the Borrower including those related to intellectual property, leases, licences and other rights of use of property.
“Off-Balance Sheet Arrangements” means any transaction, agreement or other contractual arrangement between the Borrower and an entity that is not consolidated on the Borrower’s financial statements, under which the Borrower may have: (i) any obligation under a direct or indirect guarantee or similar arrangement; (ii) a retained or contingent interest in assets transferred to an unconsolidated entity, (iii) derivatives, to the extent that the financial statements do not fully reflect fair value thereof as a liability or asset; or (iv) any obligation or liability, including a contingent obligation or liability, to the extent that it is not fully reflected in the Borrower’s financial statements.
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“Performance LG” means an LG which is (a) an LG issued to secure ordinary course performance obligations of the Borrower to a third party (the “Performance Obligations”), including, without limitation, any performance related advance payment, retention or warranty obligations, in each case in connection with project engineering, procurement, construction, power business, maintenance and other similar projects (including projects about to be commenced) or bids for prospective project engineering, procurement, construction, power business, maintenance and other similar projects, or (b) an LG issued to back a bank guarantee, surety bond, performance bond, or other similar obligation in each case issued to support performance obligations and is not a documentary credit issued to finance the import or export of goods.
“Permitted Encumbrances” means liens, encumbrances or other rights permitted by the Bank in writing.
“Person” shall mean and include an individual, a partnership, a corporation, a joint stock company, a trust, an unincorporated association, a joint-venture or other entity or a government or any agency or political subdivision of the above.
“Potential Prior Ranking Claims” means the aggregate of all amounts owing or required to be paid, where the failure to pay any such amount could give rise to a lien or trust or other claim pursuant to any law, statute, regulation or similar enactment, which ranks or is capable of ranking in priority to all or any portion of the Bank’s security or in priority to any claim by the Bank for repayment of amounts owing under the Credit Facilities including, without limitation, amounts due and payable for wages, vacation pay, employee deductions (including income, CPP, EI, workers compensation, social security or other employment tax withholdings), sales tax, excise tax, tax payable pursuant to Part IX of the Excise Tax Act (Canada) (net of HST input credits) and pension fund obligations.
“Premises” has the meaning ascribed to such term under section VI of this Schedule A.
“Required Notice” means a written notice in form and content approved by the Bank, signed by the Borrower, given to the Bank Branch not later than 10:30 a.m. local time (of the Bank Branch) two Business Days immediately preceding the date on which:
(a) | a CAD Prime Rate Loan, a USD Floating Rate Loan, a CAD Fixed Rate Loan, a USD Fixed Rate Loan or other advance (other than by way of account overdrafts) is to be made; |
(b) | a rollover is to be made from one interest option to another, or a rollover of an existing Loan on maturity to the same type of Loan; or |
(c) | an LG or DC is to be issued by the Bank; |
as the case may be, stating the requested date, amount and, if applicable, term to maturity (or Interest Period) of the requested advance or rollover, or particulars of the LG or DC requested.
With respect to the foregoing, a confirmation or certificate from the Bank shall be prima facie evidence of the Bank’s CAD Fixed Rate, USD Fixed Rate, the Bank’s Prime Rate, the Bank’s U.S. Base Rate, from time to time.
“Sanctions” has the meaning ascribed to it in section II(f) of this Schedule A.
“Standard Trade Terms” means the Bank’s “Standard Trade Terms” (as amended from time to time), which can be accessed, read and printed by the Borrower at/from www.gbm.hsbc.com/gtrfstt or, alternatively, upon request from the Borrower’s relationship manager.
“Taxes” means any fee (including without limitation, any documentation, licence or registration fee), any tax (including, without limitation, any gross receipts, sales, use, property (personal and real), tangible or intangible and stamp tax, value added tax, income tax, excise tax), levy, imposts, duty, charge, assessment, deduction or withholding of any nature whatsoever, together with any fine, addition to tax and interest on the fee or tax.
“TNW” means the aggregate of paid in capital, retained earnings and loans (including principal and interest) to the Borrower which have been subordinated and postponed in favour of the Bank, in form and substance satisfactory to the Bank, less any assets deemed by the Bank to be intangible including, without limitation, (i)
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goodwill, (ii) related company and affiliate accounts receivable, (iii) advances to shareholders, (iv) deferred charges and (v) investments in related companies and affiliates.
“US Base Rate Loan” means an advance to the Borrower in USD in respect of which interest accrues and is payable at the Bank’s U.S. Base Rate.
“USD” and “United States Dollars” means lawful currency of the United States of America in same day immediately available funds, or, if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day in question.
“USD Equivalent” or “US Dollar Equivalent” means at any time on any date in relation to any specified amount in a currency other than United States dollars, the amount of USD which could be purchased from the Bank by the payment of that specified amount of such other currency at the rate of exchange quoted by the Bank at or about 8:00 a.m. Pacific time on such date, including all premiums and costs of exchange.
“USD Fixed Rate Loan” has the meaning ascribed to such term under the heading “Credit Facilities” in the Facility Letter.
Whenever the singular or the masculine is used herein the same shall be deemed to include the plural and other Persons, and vice versa.
II. Representations and Warranties
Each Credit Party represents and warrants to the Bank, as of the date of the Facility Letter and as at the time of an advance or other utilization of any of the Credit Facilities from time to time that:
(a) if a corporation, it has been duly incorporated and organized (or if a partnership or other legal entity, has been duly formed, or settled as relevant) and organized and is properly constituted, is in good standing and subsisting and is entitled to conduct its business in all jurisdictions in which it carries on business or has assets;
(b) the execution of this Facility Letter and the other Loan Documents and the incurring of liability and indebtedness to the Bank does not and will not contravene:
(i) any Legal Requirement applicable to such Credit Party; or
(ii) any provision contained in any other loan or credit agreement or borrowing instrument or contract to which it is a party;
(c) this Facility Letter and the other Loan Documents to which it is a party have been duly authorized, executed and delivered by it, and constitute its valid and binding obligations and are enforceable in accordance with their respective terms;
(d) all necessary Legal Requirements have been met and all other authorizations, approvals, consents and orders have been obtained with respect to the execution and delivery of this Facility Letter and the other Loan Documents; and
(e) all financial and other information provided to the Bank in connection with the Credit Facilities is true and accurate, and it acknowledges that the offer of credit by the Bank contained in this Facility Letter is made in reliance on the truth and accuracy of this information and the above representations and warranties.
(f) neither the Borrower nor any of its subsidiaries, directors, officers, employees, agents, or affiliates is an individual or entity (nor does the Borrower nor any such other entity or person operate, possess, own, charter, or use a vessel) that is, or is owned or controlled by any one or more Persons that are: (i) the subject of any sanctions issued, administered or enforced by, or named on any list of specially
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designated or blocked Persons maintained by, the Office of Foreign Assets Control of the US Department of the Treasury, the US Department of State, the United Nations Security Council, the European Union, Her Majesty’s Treasury, the Hong Kong Monetary Authority, or the Department of Global Affairs (Canada), Foreign Affairs, Trade and Development Canada, Canada Border Services Agency, or Justice Canada, including any enabling legislation or executive order related thereto, and any similar sanctions laws as may be enacted from time to time in the future by the United States, Canada, the European Union (and any of its member states), the United Kingdom or the United Nations Security Council, or any other legislative body of the United Nations or other relevant Governmental Authority (collectively, “Sanctions”), or (ii) located, organised or resident in a country or territory that is, or whose government is, the subject of Sanctions other than to the extent that such representation and warranty would result in a violation of an applicable Legal Requirement in which case the applicable Credit Party shall immediately notify the Bank and provide particulars;
(g) with respect to each LG or DC issued by the Bank pursuant to any of the Credit Facilities, all required import or export licenses applicable to the transactions for which such LG or DC is issued have been obtained and the Borrower is in compliance in all material respects with foreign and domestic laws and regulations pertaining to each jurisdiction in which it operates and to each LG and/or DC and the subject matter of such LG and/or DC including, if applicable, the shipment and financing of the goods described in such LG and/or DC; and
(h) no shares in a Credit Party have been issued as, or are held as, or convertible to, bearer shares.
(i) it holds insurance coverage in accordance with the requirements set forth in Section VI of this Schedule A.
III. Interest, Fees
(a) Interest on the daily balance of the principal amount advanced under the Credit Facilities and remaining unpaid from time to time shall accrue and shall be payable by the Borrower as set out in this Facility Letter both before and after demand, default, maturity, or judgment and until indefeasible payment in full, except as otherwise expressly provided for.
(b) If the Borrower repays any portion of the Credit Facilities accruing interest at the Bank’s CAD Fixed Rate or the Bank’s USD Fixed Rate or based on a date other than the expiration of the selected Interest Period, as the case may be, whether as a result of a demand for repayment by the Bank or otherwise, it shall also concurrently pay to the Bank the greater of:
(i) three months’ interest on the portion prepaid at the interest rate applicable to such Credit Facility; and
(ii) the applicable Compensating Amount.
(c) Interest based on the Bank’s U.S. Base Rate shall be computed on the basis of a year of 360 days and for actual days that the amounts are outstanding under the relevant Credit Facilities on this basis. For the purpose of the Interest Act (Canada), (i) the annual rate of interest to which interest computed on the basis of a year of 360 days is equivalent is the rate of interest as provided in this Facility Letter multiplied by the actual number of days in such year (whether 365 or 366) and divided by 360 and (ii) the annual rate of interest to which interest computed on the basis of a year of 365 days is equivalent is the rate of interest as provided in this Facility Letter multiplied by the actual number of days in such year (whether 365 or 366) and divided by 365. The Borrower confirms that it fully understands and is able to calculate the rate of interest applicable to the Credit Facilities based on the methodology for calculating per annum rates provided for in this Facility Letter. The Bank agrees that if requested in writing by the Borrower, it shall calculate the nominal and effective per annum rate of interest on any advance outstanding at any time and provide such information to the Borrower promptly following such request; provided that any error in any such calculation, or any failure to provide such information on request, shall not relieve any Credit Party of any of its obligations under this Facility Letter or any other
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Loan Document, nor result in any liability to the Bank. Each Credit Party hereby irrevocably agrees not to plead or assert, whether by way of defence or otherwise, in any proceeding relating to the Loan documents, that the interest payable under the Loan Documents and the calculation thereof has not been adequately disclosed to the Credit Parties, whether pursuant to section 4 of the Interest Act (Canada) or any other applicable law or legal principle.
(d) Upon expiration of the Interest Period of any CAD Fixed Rate Loan or USD Fixed Rate Loan, unless another interest rate option is selected by the Borrower to refinance such Loan by delivery to the Bank of a Required Notice:
(i) if in CAD, it shall bear interest at the rate applicable to, and payable as described for, CAD Overdraft Loans;
(ii) if in USD, it shall bear interest at the rate applicable to, and payable as described for, USD Overdraft Loans;
provided that if the Facility Letter does not provide for such an Overdraft Loan:
(iii) if in CAD, it shall bear interest at the Bank’s Prime Rate plus 3% per annum, calculated daily and payable monthly; or
(iv) if in USD, it shall bear interest at the Bank’s U.S. Base Rate plus 3% per annum, calculated daily and payable monthly.
(e) The fees paid to and received by the Bank shall be its entitlement as consideration for the time, effort and expense incurred by the Bank in the review of financial statements and its review and administration of documents, and the Borrower acknowledges and agrees that the determination of these costs is not feasible and that the fees set out in this Facility Letter represent a reasonable estimate of such costs.
(f) Whenever any payment shall be due on a day which is not a Business Day including, for greater certainty, if such date is the end of an Interest Period, the date for payment thereof shall be extended to the next succeeding Business Day. Interest shall continue to accrue and be payable thereon as provided herein, until the date on which such payment is received by the Bank.
(g) In the event that interest is not received by the Bank on any date for payment provided for in this Facility Letter or in any other relevant document, interest on such overdue interest shall be compounded on the basis of interest calculated and payable on overdue interest in the same manner and at the same rate per annum as is applicable to such overdue interest until indefeasible payment in full. Any other amounts which become payable to the Bank under this Facility Letter or the other Loan Documents and which are not paid when due shall accrue interest and be payable from the due date at the Bank’s Prime Rate plus 3% per annum, calculated and payable monthly on the last day of each month, both before and after demand, default, maturity or judgment and until indefeasible payment in full (other than for overdrafts exceeding the permitted limit which shall accrue interest at the rate of 21% per annum both before and after demand, default and judgment until indefeasible payment in full).
(h) All payments to the Bank shall be made at the address of the Bank Branch or at such other place as the Bank may specify in writing from time to time. The Borrower shall make payment to the Bank in immediately available funds in the same currency(ies) as the currency in which the original Loan, BA Advance or other credit was advanced or made available by the Bank. Any payment delivered or made to the Bank by 1:00 p.m. local time at the place where such payment is to be made shall be credited as of that day, but if made after such time such payment shall be credited as of the next Business Day.
(i) Notwithstanding anything to the contrary contained in this Facility Letter, the parties acknowledge that:
(i) the applicable rate of interest payable by a Borrower in connection with this Facility Letter shall not be less than zero, and in the event any reference rate is negative it shall be deemed to be zero; and (ii) the Bank may, in its discretion, and is hereby irrevocably authorized by the Borrower to, make an
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advance under the Credit Facilities (or debit or set-off any bank account of a Borrower with the Bank in any currency), to pay any unpaid interest, fees or other amounts which have become due under the terms of this Facility Letter. If any provision of this Facility Letter or any other Loan Document would obligate a Credit Party to make a payment of interest or other amount to the Bank in an amount or calculated at a rate that would be prohibited by law or would result in receipt by the Bank of interest at a criminal rate (as construed under the Criminal Code (Canada)), then notwithstanding that provision, that amount or rate shall be deemed to have been adjusted with retroactive effect to the maximum amount or rate of interest, as the case may be, as would not be so prohibited by law or result in receipt by the Bank of interest at a criminal rate.
(j) The Borrower acknowledges that the actual recording of the amount of any advance or repayment thereof under the Credit Facilities, and interest, fees and other amounts due in connection with the Credit Facilities, in an account of a Borrower maintained by the Bank shall constitute prima facie evidence of the Borrower’s indebtedness and liability from time to time under the Credit Facilities; provided that the obligation of the Borrower to pay or repay any obligations in accordance with the terms and conditions of the Credit Facilities shall not be affected by the failure of the Bank to make such recording. The Borrower also acknowledges being indebted to the Bank for principal amounts shown as outstanding from time to time in the Bank’s account records, including any amounts for which the Borrower is jointly and severally, or solidarily, liable, if any, and all accrued and unpaid interest in respect of such amounts, in accordance with the terms and conditions of this Facility Letter.
(k) The obligation of the Borrower to make all payments under this Facility Letter and the other Loan Documents shall be absolute and unconditional and shall be made without any deduction or withholding of any nature and shall not be limited or affected by any circumstance, including, without limitation:
(i) any set-off, compensation, counterclaim, recoupment, defence or other right which the Borrower may have against the Bank or anyone else for any reason whatsoever; or
(ii) any insolvency, bankruptcy, reorganization or similar proceedings by or against the Borrower.
(l) In addition to and not in limitation of any rights now or hereafter available to the Bank under applicable law or arising under the Loan Documents, the Bank is hereby irrevocably authorized, at any time and from time to time, to set-off and appropriate and to apply any and all deposits (general and special) and any other indebtedness at any time held by or owing by the Bank to or for the credit of the Borrower against and on account of the obligations of the Borrower to the Bank under this Facility Letter, irrespective of currency and irrespective whether such obligations of the Borrower are owing on a joint and several, or solidary, basis. The Bank agrees to provide written notice to the Borrower of the exercise of any of the rights under this section promptly after the exercise of such rights.
(m) The Borrower shall pay to and indemnify and save harmless the Bank for the full amount of all out of pocket costs and expenses (including, but not limited to, any interest payable in order to maintain any Loan hereunder) which the Bank may sustain or incur as a consequence of the failure by the Borrower to pay when due any principal of or any interest on any Loan or any other amount due hereunder.
(n) All payments made on account of principal, interest or otherwise shall be made to the Bank, to the extent permitted by applicable Legal Requirements, free and clear of and exempt from, and without deduction for or on account of, any present or future Taxes or other charges of any nature imposed, levied, collected, withheld or assessed by any Governmental Authority. However, in the event that any payments made under this Facility Letter shall not be made free and clear of and exempt from, and without deduction or withholding for or on account of any Taxes, then the Borrower shall gross up the payments to the Bank so that the Bank receives such additional amounts as may be necessary in order that each such net payment to the Bank, after payment or deduction or withholding for and on account of any such Taxes, will not be less than the amount to be paid and received by the Bank in accordance with this Facility Letter. With respect to each such deduction or withholding, the Borrower shall promptly pay any such Taxes and (but in no event later than 90 days after payment) furnish to the Bank evidence
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of such payment, satisfactory to the Bank and also at the Bank’s request provide such certificates, receipts and other documents required to establish any tax credit to which the Bank may be entitled.
(o) The agreements of the Borrower pursuant to the foregoing subparagraphs (m) and (n) shall survive the repayment of the Loans and the termination of this Facility Letter or the Credit Facilities (or both).
(p) The remedies, rights and powers of the Bank under this Facility Letter, the other Loan Documents and at law and in equity are cumulative and not alternative and are not in substitution for any other remedies, rights or powers of the Bank and no delay or omission in exercise of such remedy, right, or power shall exhaust such remedies, rights or powers or be construed as a waiver of any of them.
IV. Conditions Precedent
In addition to the conditions precedent previously set out in the Facility Letter, it shall also be a condition precedent to the initial advance and continued availability of any credit or advances under any of the Credit Facilities that the Bank shall have received and be satisfied with:
| (a) | Duly completed and executed Loan Documents registered where necessary in form and manner satisfactory to the Bank’s solicitors; |
| (b) | satisfactory banker’s and/or other agency reports on the financial position of each Credit Party and such customers of the Borrower as the Bank may specify from time to time; |
| (c) | the insurance coverage arranged by the Borrower conforming to the requirements set forth in section V1 of this schedule; |
| (d) | confirmation that the Borrower is in compliance with each of the terms and conditions of this Facility Letter; |
| (e) | all identification, business activity, business structure and other “know your customer” documents and information as required by the Bank and any screening conducted in accordance with Sanctions and other applicable legal requirements; and |
| (f) | such other conditions as the Bank may determine, in its discretion. |
V. Borrower’s Covenants and Conditions of Credit
In addition to the conditions previously set out, the following additional conditions shall apply until all indebtedness and liability under the Credit Facilities are indefeasibly repaid in full to the Bank and the Credit Facilities cancelled:
(a) The Borrower shall not, without the prior written consent of the Bank:
| (i) | grant or allow any Lien to be registered against or exist on any of its property and in particular, without limiting the generality of the foregoing, shall not grant a trust deed or other instrument in favour of a trustee; |
| (ii) | become a guarantor or an endorser or otherwise become liable upon any note or other obligation other than in the normal course of business of the Borrower; |
| (iii) | declare any management bonus, declare or pay dividends on any class or kind of its shares or other securities, repurchase or redeem any of its shares or other securities, or reduce its capital in any way whatsoever or repay any shareholders’ advances that would cause a breach of agreed covenants; |
| (iv) | amalgamate with or permit all or substantially all of its assets to be acquired by any other |
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person, firm or corporation or permit any reorganization or change in ownership or corporate structure of the Borrower, or issue bearer shares;
| (v) | permit any property taxes or strata fees to be past due at any time; or |
| (vi) | enter into any agreement for the purchase or sale of any property outside the normal course of business; or |
| (vii) | borrow money, obtain credit or incur additional funded indebtedness (other than pursuant to the Credit Facilities). |
(b) The Borrower agrees to file all tax returns which it is required to file in accordance with any Legal Requirement from time to time; to pay or make provision for the payment of all taxes (including any interest and penalties); to pay any Potential Prior Ranking Claims when due; and to maintain adequate reserves for the payment of any tax which is being contested diligently in good faith.
(c) The Bank shall have the right to waive the delivery of any Loan Documents or the performance of any term or condition of this Facility Letter, and may advance all or any portion of the Loan(s) prior to satisfaction of any of the Conditions Precedent, but waiver by the Bank of any obligation or condition shall not constitute a waiver of performance of such obligation or condition for any future advance.
(d) All financial terms and covenants shall be determined in accordance with generally accepted accounting principles, applied consistently.
(e) If the amount outstanding under any Credit Facility (i) in CAD plus the Canadian Dollar Equivalent of the amount outstanding under any of the Credit Facilities in a currency other than Canadian Dollars, or
(ii) in USD plus the USD Equivalent of the amount outstanding under any of the Credit Facilities in a currency other than USD, at any time exceeds the amount of such Credit Facility specified above (taking into account the Margin Requirement, if any), the Bank may, from time to time, in its sole discretion:
(i) limit the further utilization of that Credit Facility;
(ii) convert all or part of the amount outstanding under that Credit Facility to Canadian Dollars in which event, interest shall accrue and be paid on such converted amounts at the rate set out in this Facility Letter for Canadian dollar advances accruing interest with reference to the Bank’s Prime Rate. If no such rate is set out in this Facility Letter, interest shall accrue on the amount so converted at the Bank’s Prime Rate plus 3% per annum, calculated monthly and payable on the last day of each month, both before and after demand, default, maturity or judgment and until indefeasible payment in full; or
(iii) require the Borrower to pay the excess.
(f) With respect to any monies payable by the Borrower hereunder, or any portion or portions thereof, which are payable in a currency other than CAD (the “Foreign Currency Obligation”), the following provisions shall apply:
(i) payment of the Foreign Currency Obligation made hereunder shall be made in immediately available funds in lawful money of the jurisdiction in the currency of which the Foreign Currency Obligation is payable in such form as shall be customary at the time of payment for settlement of international payments in Vancouver, British Columbia without set-off, compensation, or counterclaim and free and clear of and without deduction for any and all present and future taxes, levies, imposts, deductions, charges and withholdings with respect thereto.
(ii) if the Borrower makes payment to the Bank, or if an amount is applied by the Bank, in CAD in circumstances where the relevant indebtedness and liabilities constitute a Foreign Currency Obligation, such payment or amount shall satisfy the said liability of the Borrower hereunder
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only to the extent that the Bank is able, using the rate of exchange applied by the Bank in accordance with its normal banking procedures, to purchase the full amount of the relevant foreign currency owing with the amount of the CAD received by the Bank on the date of receipt, and the Borrower shall remain liable to and hereby agrees to indemnify the Bank for any deficiency (together with interest accruing thereon calculated and payable pursuant to the terms of the relevant underlying indebtedness and liabilities).
(iii) the Borrower shall indemnify and hold the Bank harmless from any loss incurred by the Bank arising from any change in the value of CAD in relation to the relevant foreign currency between the date the Foreign Currency Obligation becomes due and the date of full, final and indefeasible payment thereof to the Bank.
(iv) if for the purpose of commencing any proceeding against the Borrower to enforce payment of its indebtedness and liability under the Credit Facilities it is necessary to convert a sum due hereunder in a foreign currency into CAD, the rate of exchange used for purposes of commencing such proceeding shall be the rate of exchange at which in accordance with its normal banking procedures the Bank could purchase CAD with such foreign currency amount claimed to be due hereunder on the Business Day preceding that on which proceeding is commenced.
(v) the obligation of the Borrower in respect of any such sum due from it to the Bank hereunder shall, notwithstanding any judgment in CAD, be discharged only to the extent that on the Business Day following receipt by the Bank of any sum adjudged to be so due in CAD the Bank may in accordance with its normal banking procedures purchase the relevant foreign currency in the full amount owing to the Bank with the CAD; if the amount of such foreign currency so purchased is less than the sum actually due to the Bank in such foreign currency the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Bank against such loss and if the foreign currency purchased exceeds the sum actually due to the Bank in the foreign currency, the Bank agrees to remit such excess to the Borrower as the Borrower may be entitled thereto.
(g) The Borrower confirms that it will (i) not, directly or indirectly, use any amounts advanced or seek advances under the Credit Facilities for any illegal purpose or (a) to fund any activity or business with any person or in any country or territory that is the subject or target of Sanctions or (b) in any manner that would result in a violation of Sanctions by any person (including any lender, advisor, or otherwise) and (ii) not repay any amounts owing to the Bank using any funds derived directly or indirectly from any illegal or sanctionable activity, provided that this covenant shall be inapplicable only to the extent of any relevant violation of the Foreign Extra-Territorial Measures Act (Canada) or any similar applicable anti- boycott law or regulation.
VI. Insurance Matters
(a) The Borrower and each Guarantor providing security to the Bank shall insure and keep insured, with good and responsible insurance companies, all of their Collateral against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like property. The Borrower and each Guarantor providing security to the Bank shall also insure such other hazards and risks (including employers’ and public liability risks) as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Borrower and each Guarantor providing security to the Bank shall at all times insure or cause to be insured such property against such risks and hazards as other Persons similarly situated insure against, and including in any event loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as the Bank may determine. The Borrower shall, prior to the first advance hereunder and at any time on demand by the Bank, furnish to the Bank a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. Notwithstanding the foregoing, all insurance required hereby shall be maintained in amounts and under policies and with insurers acceptable to the Bank, and all such policies shall contain a standard mortgage clause and loss payable clauses naming the
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Bank as loss payee and first mortgagee in a form acceptable to the Bank. The Borrower and each Guarantor providing security to the Bank shall pay or cause to be paid all premiums on such insurance. Certificates of insurance evidencing compliance with the foregoing and, at the Bank’s request, copies of the policies of such insurance, shall be delivered by the Borrower to the Bank annually. All insurance required hereby shall provide that any loss shall be payable to the Bank notwithstanding any act or negligence of the insured, shall provide that no cancellation thereof or amendment thereto shall be effective until at least thirty (30) days prior written notice thereof to the Bank, and shall be satisfactory to the Bank in all other respects.
(b) In case of any loss, damage to or destruction of the Collateral or any part thereof, the Borrower shall promptly give written notice thereof to the Bank describing the nature and extent of such damage or destruction. The Borrower and each Guarantor providing security to the Bank hereby authorizes the Bank to adjust, compromise and settle any such losses under any insurance afforded, and does hereby irrevocably constitute the Bank, and each of its nominees, officers, agents, attorneys, and any other Person whom the Bank may designate, as its attorney, with full power and authority to effect such adjustment, compromise or settlement and to endorse any drafts drawn by an insurer of the Collateral or any part thereof and to do everything necessary to carry out such purposes. In the event the Borrower or any Guarantor providing security to the Bank shall receive any proceeds of such insurance regarding such loss, damage or destruction, the Borrower or such Guarantor shall immediately pay over or cause to be paid such proceeds to the Bank. Net insurance proceeds received by the Bank under the provisions hereof or under any policy of insurance covering the Collateral or any part thereof shall be held as collateral security for or applied to the reduction of the obligations secured under the Loan Documents, whether or not then due, as the Bank may determine in its sole discretion. If insurance proceeds are released to the Borrower or a Guarantor, the Borrower or the relevant Guarantor shall at its cost and expense, promptly cause to be repaired or replaced the Collateral so lost, damaged or destroyed (whether or not the insurance proceeds, if any, on account of such damage or destruction shall be sufficient for that purpose). All insurance proceeds shall be subject to the Liens of the Bank under the Loan Documents.
VII. Environmental Matters
(a) To the best of the Borrower’s knowledge after due and diligent inquiry, no regulated, hazardous or toxic substances are being stored on any of the Borrower’s lands, facilities or premises (the “Premises”) or any adjacent property, nor have any such substances been stored or used on the Premises or in the Borrower’s business or any adjacent property prior to the Borrower’s ownership, possession or control of the Premises. The Borrower agrees to provide written notice to the Bank immediately upon the Borrower becoming aware that the Premises or any adjacent property are being or have been contaminated with regulated, hazardous or toxic substances. The Borrower shall not permit any activities on the Premises which directly or indirectly could result in the Premises or any other property being contaminated with regulated, hazardous or toxic substances. For the purposes of this Facility Letter, the term “regulated, hazardous or toxic substances” means any substance, defined or designated as hazardous or toxic wastes, hazardous or toxic material, a hazardous, toxic or radioactive substance or other similar term, by any Legal Requirement now or in the future in effect, or any substance or materials, the use or disposition of which is regulated by any such Legal Requirement.
The Borrower shall promptly comply with all Legal Requirements relating to the use, collection, storage, treatment, control, removal or cleanup of regulated, hazardous or toxic substances in, on, or under the Premises or in, on or under any adjacent property that becomes contaminated with regulated, hazardous or toxic substances as a result of construction, operations or other activities on, or the contamination of, the Premises, or incorporated in any improvements thereon. The Bank may, but shall not be obligated to, enter upon the Premises and take such actions and incur such costs and expenses to effect such compliance as it deems advisable and the Borrower shall reimburse the Bank on demand for the full amount of all costs and expenses incurred by the Bank in connection with such compliance activities.
(c) The property of the Borrower which are now or in the future encumbered by any one or more of the Loan Documents are hereby further mortgaged and charged to the Bank, and the Bank shall have a
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Lien on such assets, as security for the repayment of such costs and expenses and interest thereon, as if such costs and expenses had originally formed part of the Credit Facilities.
VIII. Increased Cost Indemnities.
If any change in the applicable Legal Requirements or in their interpretation or the administration of any of them by any Governmental Authority, or compliance by the Bank with any request (whether or not having the force of law) of any relevant central bank or other comparable agency or Governmental Authority, shall change the basis of taxation of payments to the Bank of the principal of or interest on the Loans or any other amounts payable under this Facility Letter (except for changes in the rate of tax on, or determined by reference to, the net income or profits of the Bank) or shall impose, modify or deem applicable any reserve, special deposits or similar requirement against assets of, deposits with or for the account of, or credit extended by the Bank or shall impose on the Bank or the London interbank market any other conditions directly affecting this Facility Letter or the Loans, and the result of any of the foregoing is to increase the cost to the Bank of making the Loans or maintaining the Loans or to reduce the amount of any sum received or receivable by the Bank under this Facility Letter by an amount deemed by the Bank to be material, then the Borrower shall, upon receiving notice from the Bank, reimburse to the Bank, on demand by the Bank, such amount or amounts as will compensate the Bank for such additional cost or reduction. A certificate of a manager or account manager of the Bank setting forth the additional amounts necessary to compensate the Bank as aforesaid, and the basis for its determination, shall be conclusive as to the determination of such amount in the absence of manifest error.
IX. Bank Visits
Representatives of the Bank shall be entitled to attend at and inspect the Borrower’s place(s) of business and to view all financial records of the Borrower and meet with key officers or employees of the Borrower at any time, on reasonable notice.
X. Legal and Other Expenses
The Borrower shall pay (i) all reasonable legal fees and disbursements (on a solicitor and own client basis) in respect of legal advice and services to or on behalf of the Bank in connection with the Credit Facilities including: the preparation, negotiation and settlement of the Facility Letter, the preparation, issue and registration of the other Loan Documents together with any amendments or restatements thereto from time to time; the enforcement and preservation of the Bank’s rights and remedies; searches from time to time, including in connection with any advance; and (ii) all reasonable fees and expenses relating to appraisals, insurance consultation, environmental investigation, credit reporting and other due diligence and to responding to demands of any Governmental Authority; whether or not the documentation is completed or any funds are advanced under the Credit Facilities.
XI. Non-Merger; Records of Bank; Assignment
The terms and conditions of this Facility Letter shall not be merged by and shall survive the execution and delivery of the Loan Documents.
The taking of judgment on any covenant contained in this Facility Letter and/or the other Loan Documents shall not operate so as to create any merger or discharge of any indebtedness or liability of the Borrower under, nor of any assignment, transfer, guarantee, lien, contract, promissory note, bill of exchange or security of any form held or which may in the future be held by the Bank from the Borrower or from any other Person.
The benefits conferred by this Facility Letter and the other Loan Documents shall enure to the benefit of the Bank and its successors and assigns and shall be binding on each Credit Party and their respective heirs, successors and permitted assigns.
The records of the Bank as to the making or rollover of Loans (and the amounts thereof) hereunder, payment of any money payable hereunder or any part thereof being in default or of any notice or demand for payment having been made shall be prima facie proof of such fact, absent manifest error.
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No Credit Party shall assign all or any of its rights, benefits or obligations under this Facility Letter or the other Loan Documents without the prior written consent of the Bank. The Bank shall be entitled, without the consent of the Credit Parties, to assign, syndicate, sell or transfer all or any portion of its rights, benefits and obligations under this Facility Letter and the other Loan Documents.
XII. Waiver; Amendment
No term or condition of this Facility Letter or any of the other Loan Documents may be waived or varied verbally or deemed to be waived or varied by any cause or course of conduct of any officer, employee or agent of the Bank. All waivers must be in writing and signed by a duly authorized officer of the Bank.
Any amendment to this Facility Letter or the other Loan Documents must be in writing and signed by a duly authorized officer of the Bank. Without limiting the foregoing, the Bank may amend this Facility Letter if such amendment is required in connection with any change in applicable law or its interpretation or in connection with any Legal Requirement; the Bank shall provide 30 days prior written notice of any such amendment.
XIII. Severability
Any provision of this Facility Letter or the other Loan Document which is determined or adjudged to be illegal, invalid, prohibited or unenforceable under applicable law in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such illegality, invalidity, prohibition or unenforceability and shall be severed from the balance of this Facility Letter or such other Loan Document, all without affecting the remaining provisions of this Facility Letter or such other Loan Document or affecting the legality, validity or enforceability in any other jurisdiction.
XIV. Consent to Disclosure
(a) Each Credit Party consents to and acknowledges that it is aware that credit, financial and personal inquiries and information regarding each Credit Party and individuals connected to Credit Parties (including directors, officers, shareholders and individuals acting on behalf of a Credit Party) may be gathered, made, maintained and/or used at any time in connection with: (i) initial and ongoing credit assessment, (ii) any funding of the Credit Facilities by investors or participants or any assignment or sale of the Credit Facilities by the Bank, (iii) the enforcement of any remedies that the Bank may have under the Credit Facilities, and (iv) compliance and risk monitoring purposes. Each Credit Party consents to the making of any such inquiries by or on behalf of the Bank, confirms the consent of any such individuals connected to Credit Parties has been provided, if required, to such collection, use and disclosure, and consents, without restriction and without further notice to or further consent, to disclosure of such information to any service provider, prospective investor, participant, assignee or purchaser of all or any part of the Credit Facilities, to any affiliate or supplier of the Bank, and to any regulator, examiner, monitor, auditor or similar person.
(b) The Bank may collect, use, transfer and disclose information for the following purposes and as follows:
(i) Providing the Credit Facilities (including adjudicating, monitoring, and reviewing availability of the Credit Facilities) and information respecting other services;
(ii) Taking any Compliance Action referred to in this Schedule A (including actions taken to comply with laws, international guidance, internal policies or procedures, requirements from judicial, administrative, law enforcement and regulatory authorities);
(III) Conducting financial crime risk management activity, including verifying the identification of the Credit Party and related individuals, screening, monitoring and investigation activity, and sharing information within HSBC Group, including in other jurisdictions, for these purposes;
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(iv) As requested or required by judicial, administrative, public or regulatory bodies, as well as governments, tax, revenue and monetary authorities, examiners, monitors, securities or futures exchanges, courts, central banks or law enforcement bodies with jurisdiction over any HSBC Group member.
(c) The Bank may collect, transfer and disclose information for these purposes from and to members of the HSBC Group, sub-contractors, agents and service providers within Canada and in other jurisdictions.
(d) Before providing the Bank with personal information respecting any connected individual, the Credit Party will ensure that it has provided all necessary disclosures to, and obtained any necessary consents from, such individuals in connection with the collection, use and disclosure of such information by the Bank.
XV. Time of Essence
Time shall be of the essence of this Facility Letter.
XVI. Indemnity
The Borrower agrees to keep the Bank and its officers, directors, employees, solicitors, agents and affiliates indemnified against any claim for any damages, losses, costs or expenses (including, without limitation, legal costs on a solicitor and his own client basis) incurred or suffered by any of them in relation to this Facility Letter or as a consequence (direct or indirect) of any breach by the Borrower of this Facility Letter, or as a result of an assessment made by any tax authority in respect of any payment made by the Bank to any third party including, without limitation, to the beneficiary of any LG, unless such damage, loss, cost or expense was incurred solely as a direct result of the Bank’s gross negligence or wilful misconduct.
XVII. Governing Law
This Facility Letter and, unless otherwise specified therein, all Loan Documents or instruments delivered in accordance with this Facility Letter shall be governed by and interpreted in accordance with the laws of the Province of Ontario (the “Governing Jurisdiction”) and the federal laws of Canada applicable therein. Each Credit Party irrevocably submits to the non-exclusive jurisdiction of the courts in the Governing Jurisdiction and waives, to the fullest extent permitted by applicable law any defence based on convenient forum.
XVIII. Financial Crimes and Sanctions Laws Acknowledgements and Indemnification
Each Credit Party acknowledges and agrees that:
(a) the Bank, HSBC Holdings plc, its affiliates and subsidiaries (collectively, “HSBC Group”), and HSBC Group’s service providers are required to act in accordance with the laws and regulations of various jurisdictions, including those which relate to Sanctions and the prevention of money laundering, terrorist financing, bribery, corruption and tax evasion;
(b) the Bank may take, and may instruct other members of the HSBC Group to take, to the extent it or such member is legally permitted to do so under the laws of its jurisdiction, any action (a “Compliance Action”) that the Bank or any such other member, in its sole discretion, considers appropriate to act in accordance with Sanctions or domestic and foreign laws and regulations. Such Compliance Action may include but is not limited to the interception and investigation of any payment, communication or instruction or other information; the making of further enquiries as to whether a Person or entity is subject to any Sanctions; and the refusal to issue, pay, renew, extend or transfer any DC or LG or to process any transaction or instruction that, in the Bank’s discretion, may not conform with Sanctions.
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The Bank will use reasonable commercial efforts to notify the Borrower of the existence of such circumstances as soon as is reasonably practicable, to the extent permitted by law;
(c) neither the Bank nor any member of HSBC Group will be liable for any loss, cost, damage, claim, action, suit, liabilities, suffered or incurred by the Borrowers, any Guarantor or other Person, or for any delay or any failure of the Bank to perform its duties under this Facility Letter arising out of or relating to any Compliance Action taken by or on behalf of the Bank, its service providers, or any HSBC Group member in its sole discretion;
(d) the Bank may, in its sole discretion, refuse to issue, pay, renew, extend or transfer any DC or LG in connection with or relating to any countries, governments, entities or other Persons that are subject to Sanctions or limitations imposed by domestic or foreign laws, or by the Bank or any member of the HSBC Group, and that the Bank has the right, without prior notice to any Credit Party, to reject, refuse to pay, any demand, or not process any transaction or instruction that does not conform with any such Sanctions, or limitations; and
(e) The Borrower will indemnify the Bank for all losses, costs, damages, claims, actions, suits, demands and liabilities suffered or incurred by or brought against the Bank arising out of or relating to any Compliance Action, unless such losses, costs, damages, claims, actions, suits, demands and liabilities are determined by a final, non-appealable decision of a court of competent jurisdiction to have been caused solely and directly by the gross negligence or wilful misconduct of the Bank.
XIX. Electronic Communications and Electronic Signatures
(a) The Borrower hereby authorizes the Bank to accept Electronic Communications and Electronic Signatures from the Borrower in relation to this Facility Letter and the other Loan Documents and hereby consents to receiving commercial electronic messages from or on behalf of the Bank and any agreement, instruction, document, information, disclosure, notice or other form of communication from the Bank by Electronic Communication.
(b) The Borrower agrees that any Electronic Communication, including any Electronic Signature associated with such Electronic Communication, which the Bank receives from the Borrower or in the Borrower’s name, or which appears to be from the Borrower or in its name, will be considered to be duly authorized and binding upon the Borrower (whether or not that Electronic Communication was actually from or authorized by the Borrower) and the Bank will be authorized to rely and act upon any such Electronic Communication, including any Electronic Signature associated with the Electronic Communication, even if it differs in any way from any previous Electronic Communication sent to the Bank.
(c) The Borrower acknowledges and agrees that the Bank’s methods of storing, maintaining and retrieving any Electronic Communication, including any Electronic Signatures associated with such Electronic Communication, and the Bank’s data systems, maintain the integrity of the Electronic Communication. If, for any reason, an Electronic Communication stored in the Bank’s data systems differ from the Borrower’s, the Borrower acknowledges and agrees that the version stored on the Bank’s data systems shall prevail over any inconsistency. In this regard, the Borrower acknowledges and agrees that Electronic Communications maintained by the Bank will be admissible in any legal or other proceedings as conclusive evidence as to the contents of those Electronic Communications in the same manner as an original paper document, and that further proof of our records system integrity is not required (the integrity of the Bank’s records system is hereby acknowledged and agreed by the Borrower) and the Borrower hereby waives any right to object to the introduction of any such Electronic Communications into evidence. To the fullest extent permitted by applicable law, the Borrower waives any defence, or waiver of liability, based on the absence of a written document in paper format, signed manually. The Borrower will keep its own records of all Electronic Communications for a period of 7 years (unless otherwise stipulated by local regulation) and will produce them to the Bank upon request.
(d) At the Bank’s discretion, it may require: (i) Electronic Communications be delivered using technology acceptable to the Bank including the use of a secure Electronic Signature, and (ii) any agreement,
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instruction, document, information, disclosure, notice or other form of communication from the Borrower to be manually signed and/or delivered to the Bank in paper format. If the Bank requires that the Borrower acknowledge its agreement to this Facility Letter or any other Loan Document by clicking the appropriate button, the Borrower will follow any instructions that the Bank provides to indicate the Borrower’s agreement (which may include typing the Borrower’s name and/or clicking “I Agree” or similar button).
(e) When the Borrower’s handwritten or Electronic Signature is delivered by facsimile, email or other electronic or digital transmission, such transmission shall constitute delivery of an executed copy of this Facility Letter or other relevant Loan Document. If the Borrower uses an Electronic Signature to indicate its agreement, the Borrower shall ensure that its Electronic Signature is attached to or associated with the relevant Electronic Communication.
XX. Further Assurances
Each Credit Party shall, at its cost and expense, upon request of the Bank, duly execute and deliver, or cause to be duly executed and delivered, to the Bank all such further agreements, instruments, documents and other assurances and do and cause to be done all such further acts and things as may be necessary or desirable in the reasonable opinion of the Bank to carry out more effectually the provisions and purposes of this Facility Letter or any of the other Loan Documents.
XXI. Conflict
In the event of any conflict between the terms of this Schedule and the corresponding terms of this Facility Letter to which this Schedule is attached, the terms of this Facility Letter shall prevail to the extent necessary to resolve such conflict. In the event of a conflict between the terms of this Facility Letter and the corresponding terms of any of the other Loan Documents, the terms of this Facility Letter shall prevail to the extent of such conflict.
XXII. Confidentiality
Each Credit Party acknowledges that the contents of this Facility Letter are confidential and shall not be disclosed by such Credit Party other than to its solicitors (or any other person bound by a duty of confidentiality) except with the prior written consent of the Bank.
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Exhibit 21.1
List of Subsidiaries
Subsidiary | Jurisdiction of Formation |
FGI Industries Inc. | New Jersey |
FGI Europe Investment Limited | British Virgin Islands |
FGI International, Limited | Hong Kong |
FGI Canada Ltd. | Canada |
FGI Germany GmbH & Co. KG | Germany |
FGI China Ltd. | China |
FGI United Kingdom Ltd | United Kingdom |
FGI Australasia Pty Ltd | Australia |
Covered Bridge Cabinetry Manufacturing Co., Ltd | Cambodia |
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of FGI Industries Ltd. on Form S-8, (File No. 333-262353) of our report dated April 17, 2023, with respect to our audits of the consolidated financial statements of FGI Industries Ltd. as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, which report is included in this Annual Report on Form 10-K of FGI Industries Ltd. for the year ended December 31, 2022.
/s/ Marcum LLP
Marcum LLP
Philadelphia, PA
April 17, 2023
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, David Bruce, certify that:
1. | I have reviewed this Annual Report on Form 10-K of FGI Industries Ltd.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 17, 2023 | /s/ David Bruce |
| David Bruce |
| Chief Executive Officer |
| (Principal Executive Officer) |
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Perry Lin, certify that:
1. | I have reviewed this Annual Report on Form 10-K of FGI Industries Ltd..; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 17, 2023 | /s/ Perry Lin |
| Perry Lin |
| Chief Financial Officer |
| (Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report on Form 10-K of FGI Industries Ltd. (the “Company”) for the twelve-month period ended December 31, 2022, to which this certification is being filed as of the date hereof as an exhibit thereto (the “Report”), I, David Bruce, Chief Executive Officer of the Company, and I, Perry Lin, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(a) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and |
(b) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: April 17, 2023
/s/ David Bruce |
|
David Bruce |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
| |
/s/ Perry Lin |
|
Perry Lin |
|
Chief Financial Officer |
|
(Principal Financial Officer and Principal Accounting Officer) |
|