Farmmi, Inc. — FY2020 Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2020. This is an annual report, not a standalone 2020 fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP. Unless noted, amounts are U.S. dollars.
Business context
Farmmi processes and sells dried Shiitake, Mu Er and other edible fungi, primarily in China. It sources dried mushrooms from family farms and cooperatives rather than growing them. Approximately 94.38% of FY2020 revenue came from China and 5.62% from international markets. The company operates e-commerce through a VIE structure in China.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $30.17 million | $30.84 million | Down 2.19% |
| Gross profit / margin | $4.96 million / 16.46% | $5.42 million / 17.58% | Profit down 8.44%; margin down 1.12 percentage points |
| Operating income / margin | $2.10 million / approximately 6.96% | $3.04 million / approximately 9.84% | Down 30.79% |
| Net income (loss) | $813,455 | $(311,004) | Turned profitable |
| Net income attributable to Farmmi, Inc. | $823,606 | $(307,437) | Basic and diluted EPS: $0.05 vs. $(0.03) |
| Operating cash flow | $(1.62) million | $(10.77) million | Cash use narrowed |
| Investing / financing cash flow | $(247,240) / $3.20 million | $(94,905) / $6.06 million | — |
Shiitake revenue declined 6.77% to $16.68 million, reflecting lower volume and selling prices; Mu Er revenue rose 5.51% to $12.30 million on higher volume, partly offset by lower prices. Other fungi and agricultural products generated $1.18 million, down 8.21%. Management attributed weaker revenue and margins to COVID-19 disruption, price reductions to support orders, and reduced higher-margin international sales.
Net income improved despite lower operating income, in part because the 2018 convertible notes were fully repaid in June 2020, reducing interest expense and debt-issuance-cost amortization. FY2020 also included $112,515 of other income, including a local-government grant for international business expansion.
Liquidity, debt and balance sheet
- At September 30, 2020, current assets were $37.02 million and current liabilities $8.37 million; working capital was $28.65 million and the current ratio was approximately 4.4x.
- Cash was $548,151 and restricted cash was $1.617 million. Restricted cash secures bank acceptance notes and may be applied to their June 2021 maturity.
- Net accounts receivable was $10.76 million; net supplier advances were $23.37 million. The filing reports substantial subsequent collections and utilization, while also recording allowances for receivables, advances and inventory.
- Short-term bank loans were $2.058 million. Bank acceptance notes payable were reported as $3.234 million in the financial statements and contractual-obligations table; another narrative passage gives $3.243 million, a discrepancy to verify. The $7.5 million convertible notes were fully repaid through June 2020, including share-settled principal and interest.
- Total assets were $38.19 million and total liabilities $9.04 million. Total equity was $29.16 million, including $869,981 of noncontrolling interest; Farmmi, Inc. stockholders’ equity was $28.29 million.
Operating cash flow remained negative, mainly because supplier advances increased by $9.09 million, despite a reduction in receivables. Management stated that available cash, operating cash flows and loan access should cover working-capital needs for at least 12 months, but the filing also notes negative operating cash flow in FY2018–FY2020 and dependence on refinancing and related-party support.
Material changes and unusual items
- Ordinary shares outstanding rose from 12,589,857 to 20,517,703, largely reflecting issuance of 7,927,846 shares to repay convertible-note principal and interest.
- FY2020 share-based note repayment reduced reported interest expense and debt-cost amortization. Investor and placement-agent warrants remain outstanding; warrant terms were adjusted, including a $2 exercise price and an increase in placement-agent warrant shares to 812,694.
- Online sales were $4.56 million, down 26.29% year over year and 15.11% of total sales. Farmmi Liangpin Market was closed on December 31, 2020; Farmmi Jicai remained active.
- Farmmi moved production into its 888 Tianning Street location during 2020. Capital expenditures were approximately $0.25 million.
- COVID-19 restrictions suspended production and sales during late January and February 2020; activities resumed by the end of March. Management reported slower collections and supplier-advance utilization and recognized credit and inventory allowances.
Outlook, risks and contingencies
- Management expects FY2021 average purchase prices of approximately $8,969 per ton for Shiitake and $9,017 per ton for Mu Er, and anticipates raw-material costs will decline 1%–5% versus FY2020. It expects gross margin to be slightly lower than FY2020. Management said it did not expect a continuing long-term sales decline based on existing orders, while emphasizing COVID-19 uncertainty.
- Customer concentration is high: China Forest accounted for 62.83% of FY2020 revenue and China Tree Seed 14.14%. One customer represented approximately 94% of year-end accounts receivable.
- Two suppliers represented approximately 80% of FY2020 purchases; they also accounted for approximately 89% of supplier advances at year-end. Crop, weather, disease, price and supplier performance could affect supply and margins.
- Farmmi disclosed ineffective disclosure controls and a material weakness in internal control over financial reporting as of September 30, 2020, citing insufficient U.S. GAAP expertise, weak review of unusual transactions, and inadequate internal audit and risk-assessment processes. Management described remediation plans but cautioned it could not assure timely remediation. The auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- The company relies on contractual VIE arrangements for e-commerce operations; enforceability and PRC regulatory interpretation are uncertain. Other material risks include China legal and regulatory exposure, currency controls, restricted movement of PRC subsidiary funds, food safety compliance, tax-incentive changes, and limited insurance.
- Related parties provide loan guarantees and collateral, and the CEO owed the company $1.715 million at year-end as an interest-free, payable-on-demand balance. The filing reports no material legal proceedings and no expected dividends in the foreseeable future.
- Farmmi regained Nasdaq minimum-bid-price compliance on January 11, 2021, but disclosed the possibility of future noncompliance.
Most important facts for investors to verify
- Reconcile the bank acceptance notes payable amount ($3.234 million in the audited statements versus $3.243 million in one narrative disclosure) and confirm subsequent repayment or refinancing.
- Verify collection of remaining receivables and utilization or recovery of supplier advances, including the associated allowances and concentration by customer and supplier.
- Assess whether operating cash flow can turn positive without continued financing, supplier advances, or related-party support, and whether restricted cash is available for general liquidity.
- Track share dilution and the potential impact of outstanding warrants after the convertible notes were repaid in shares.
- Monitor progress remediating the disclosed material weakness and the continued validity and operation of the VIE and its required permits.