Farmmi, Inc. — Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2022. This is an annual report, not a standalone 2022 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Farmmi is a Cayman Islands holding company whose operations are principally in China. It processes and sells dried Shiitake and Mu Er mushrooms and trades agricultural commodities, including cotton and corn. The company reported one operating segment. Its e-commerce operations were conducted through a VIE structure; Farmmi Jicai closed in January 2023, following the closure of Farmmi Liangpin Market in December 2020.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $99.2 million | $39.3 million |
| Gross profit | $5.44 million | $5.11 million |
| Gross margin | 5.5% | 13.0% |
| Income from operations | $0.94 million | $2.85 million |
| Net income | $2.22 million | $2.36 million |
| Basic EPS, continuing operations | $0.10 | $0.59 |
| Net cash from operating activities | $20.64 million | $(53.23) million |
Revenue grew 152.5% year over year, largely due to the expansion of bulk commodity trading: cotton generated $48.0 million and corn $10.8 million. These activities contributed little margin; cotton gross margin was about 0.5% and corn about 1.0%. Mushroom revenue was mixed: Shiitake declined 3.1% to $19.9 million, while Mu Er increased 15.7% to $19.1 million. Gross profit rose only 6.4% as cost of revenue increased faster than sales. Operating expenses rose to $4.50 million, including higher share-based compensation and other administrative costs. Net income declined 5.6%.
Operating cash flow turned positive, principally as supplier advances declined by $12.8 million and receivables fell by $6.5 million. Investing activities used $42.0 million, including $35.3 million placed in short-term deposits. Financing provided $11.6 million, including $6.0 million of equity proceeds and $6.0 million of net convertible-note proceeds. Cash was $41.2 million and short-term deposits were $35.1 million at year-end.
Balance sheet, debt and liquidity
- Total assets were $163.8 million; total liabilities were $9.1 million and shareholders’ equity was $154.7 million. Current assets were $153.3 million versus current liabilities of $8.3 million.
- Current assets included $48.6 million of advances to suppliers and $16.4 million of accounts receivable. By February 7, 2023, 35.5% of year-end advances had been utilized and 24.3% of receivables had been collected; management expected the remaining receivables to be collected by March 2023 and advances to be utilized by September 2023.
- Bank loans totaled approximately $1.8 million at year-end. The September 2022 convertible note had $6.44 million original principal, generated $6.0 million gross proceeds, and was due September 25, 2023. The balance sheet reported $2.18 million of notes, net of discount, and a $3.45 million derivative liability.
- Management stated that cash, operating cash flow and access to loans would be sufficient for working-capital needs for at least 12 months. Cash is held in PRC banks and is not fully insured; PRC currency and dividend-transfer restrictions may constrain access to funds offshore.
Material changes, outlook and risks
- Portfolio changes: Farmmi sold Forest Food in October 2021 and divested FLS Mushroom effective October 1, 2022 for RMB24.1 million. The latter was signed at fiscal year-end and completed after it. Farmmi withdrew from a proposed Jiaoda Onlly investment; the RMB50 million deposit was returned on October 12, 2022, with interest receivable reported at year-end.
- Capital and shares: The company completed a 1-for-25 share consolidation on May 31, 2022. It issued 30 million pre-consolidation shares for $6.0 million in February 2022. A September 2022 convertible note is convertible at a discount to market price; after year-end, management said it would repay in cash if conversion would produce an effective price below $0.12.
- Management outlook: No formal revenue or earnings guidance is provided. Management expected fiscal 2023 raw-material costs to rise 1%–5% from fiscal 2022, projected average purchase prices of about $11,106 per ton for Shiitake and $11,639 for Mu Er, and anticipated a slightly higher gross margin. It also cited expected growth in edible-fungi demand and plans to develop exports and supply channels.
- Concentration and execution: Two customers represented approximately 31% and 16% of fiscal 2022 sales; two customers accounted for about 99% of year-end receivables. Two suppliers represented 23% and 21% of purchases. Commodity trading drove most of the sales increase but had thin margins.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2022, citing insufficient U.S. GAAP expertise, inadequate internal audit controls and insufficient risk assessment. Management described remediation plans but gave no assurance of timely completion. The auditor issued an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness.
- China and listing risks: The company depends on PRC subsidiaries and contractual VIE arrangements, which investors do not own directly and which may be difficult to enforce. Regulatory, data-security, currency-transfer and overseas-listing rules remain risks. Nasdaq notified the company in October 2022 that its share price had been below the $1 minimum; the stated compliance deadline was April 10, 2023. The report says the U.S.-based auditor is PCAOB-registered and inspected. The company has not paid dividends and does not expect to do so in the foreseeable future.
- Other risks and unusual items: COVID-19 disruptions, crop and weather conditions, food-safety compliance, commodity-price movements and reliance on agricultural tax benefits may affect results. A $0.42 million gain from the change in fair value of the note’s derivative and $0.4 million of foreign-exchange gain supported reported other income. A one-time $1.5 million sale of art collections was included in other-product revenue.
Important facts for investors to verify
- Whether the remaining receivables and supplier advances were collected or utilized as management expected, and the recoverability and terms of the RMB50 million Jiaoda Onlly deposit return.
- The note’s current principal, conversion mechanics, floor-price treatment, repayment status and potential dilution; reconcile the $6.44 million face amount with the $2.18 million net carrying amount and derivative liability.
- Nasdaq listing compliance after the April 10, 2023 deadline and the company’s subsequent share count and financing activity.
- Whether internal-control material weaknesses have been remediated and whether subsequent filings resolve the report’s inconsistent descriptions of control deficiencies.
- Post-divestiture revenue, margins and cash generation, particularly the sustainability and profitability of cotton and corn trading and the effect of losing FLS Mushroom.
- Customer and supplier concentration, related-party guarantees and leases, and the legal and operational enforceability of the PRC VIE structure.