Farmmi, Inc. — Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2021. Although the request refers to 2021 Q4, this is an annual report, not a standalone quarterly filing. The company is a Cayman Islands holding company operating primarily in China and processing and selling dried Shiitake, Mu Er and other agricultural products. Financial statements are prepared under U.S. GAAP. Amounts below are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue from continuing operations | $39.29 million | $28.36 million |
| Gross profit | $5.11 million | $4.65 million |
| Gross margin | 13.0% | 16.4% |
| Operating income | $2.85 million | $2.27 million |
| Net income from continuing operations | $2.41 million | $1.08 million |
| Net income, including discontinued operations | $2.36 million | $0.81 million |
| Cash used in operating activities, continuing operations | $53.23 million | $1.83 million |
| Cash provided by financing activities, continuing operations | $122.67 million | $3.20 million |
- Revenue increased 38.5%, led by Shiitake sales of $20.49 million and Mu Er sales of $16.52 million. Sales of corn and other products also expanded.
- Gross profit rose 9.8%, slower than revenue growth; gross margin fell 3.4 percentage points. Management attributed the decline partly to low-margin sales to a new customer and corn gross margin of 3.2%.
- General and administrative expense rose 117.1% to $2.84 million, including $1.26 million in share-based compensation. A $875,094 allowance reversal for doubtful accounts benefited operating results, compared with an $818,199 allowance expense in FY2020.
- At September 30, 2021, cash was $59.25 million, short-term deposits $2.79 million, current assets $155.31 million, and current liabilities $4.15 million. Accounts receivable were $24.47 million and advances to suppliers $66.72 million.
- Total bank loans were $2.32 million: approximately $2.17 million short-term at 7.056% and $0.14 million long-term at 10.8%. The company reported no material off-balance-sheet guarantees or commitments to support third parties.
- The company raised approximately $126.0 million net from share and warrant issuances in FY2021. Ordinary shares outstanding increased from 20.5 million at September 30, 2020 to 557.8 million at September 30, 2021. Basic and diluted EPS from continuing operations were each reported as $0.02 for FY2021, versus $0.07 for FY2020.
Material changes and unusual items
- Operating cash outflow increased sharply, principally reflecting a $41.0 million increase in supplier advances and a $13.2 million increase in accounts receivable. Management said the advances were intended to secure supply for expected FY2022 orders.
- As of January 25, 2022, $19.7 million, or 80.5%, of September 2021 receivables had been collected; management expected to collect the remainder by March 2022. About $35.4 million, or 53.1%, of supplier advances had been utilized; the rest was expected to be utilized by September 2022.
- Sales to China Forest represented 63.8% of FY2021 revenue; Hangzhou Guanwei represented 14.2%. Four suppliers accounted for approximately 91% of purchases, with the largest at 36.9%.
- Forest Food was classified as discontinued operations and divested on October 1, 2021 for RMB18.2 million (about $2.82 million); proceeds were received November 5, 2021. FY2021 discontinued operations recorded a $51,352 net loss.
- After year-end, the company completed an acquisition of Jiangxi Xiangbo for RMB70 million (about $10.9 million) on October 27, 2021. On November 5, 2021, a subsidiary completed a purchase of approximately 16% of Shanghai Jiaoda Onlly for RMB509.6 million (about $79.8 million). The filing says the company has no control over that investee’s daily operations.
Outlook, risks and governance
- Management expected FY2022 raw-material costs to increase approximately 1%–5%, anticipated purchase prices of about $10,936 per ton for Shiitake and $11,706 per ton for Mu Er, and expected gross margin to be slightly higher. It also anticipated sales growth, but provided no quantified revenue or earnings guidance; forecasts are uncertain.
- COVID-19 temporarily affected FY2021 operations. Management cited shutdowns, slower receivable collections and slower use of supplier advances; the duration and future impact remained uncertain.
- Key business risks include dependence on a small number of customers and suppliers, commodity and crop variability, low industry barriers to entry, food-safety and regulatory requirements, and foreign-exchange exposure. The business also depends on a PRC variable-interest-entity structure for e-commerce, whose enforceability and regulatory treatment carry uncertainty.
- Management reported ineffective disclosure controls and ineffective internal control over financial reporting as of September 30, 2021, including material weaknesses involving U.S. GAAP expertise, non-routine transactions, internal audit and risk assessment. Remediation was underway, but timely resolution was not assured.
- Nasdaq had notified the company that its share price was below the $1.00 minimum bid requirement. After the company failed to regain compliance by November 30, 2021, Nasdaq granted an extension through May 30, 2022.
- Farmmi Liangpin Market was closed in December 2020 after revenue failed to justify its costs; Farmmi Jicai remained the company’s principal own online store. The company said it did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether the large supplier advances are converted into goods as expected, and the remaining receivables are collected on schedule.
- Whether operating cash generation improves without continued reliance on equity financing, and the effect of the FY2021 share issuance on dilution.
- The funding, terms and investment rationale for the $79.8 million Jiaoda Onlly purchase, including the effect on liquidity and the investment’s subsequent value.
- Whether customer and supplier concentration declines, and whether higher sales can be achieved without further gross-margin erosion.
- Progress in remediating control weaknesses, Nasdaq bid-price compliance, and developments affecting the PRC VIE structure and overseas-listed Chinese companies.