Farmmi, Inc. — FY2023 Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2023, compared primarily with FY2022. This is an annual report, not a standalone 2023 fourth-quarter filing; quarterly results are not provided here. 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 primarily in China. It processes and sells dried edible fungi and trades agricultural commodities. In FY2023, 99.4% of sales were in China and 0.6% outside mainland China. The company closed its Farmmi Jicai online store in January 2023 after online sales failed to justify operating costs. A portion of its e-commerce activities is conducted through a PRC variable interest entity (VIE) controlled by contract rather than equity ownership.
Financial performance
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $110.4 million | $99.2 million | Up 11.2% |
| Gross profit | $4.3 million | $5.4 million | Down 21.2% |
| Gross margin | 3.9% | 5.5% | Lower, reflecting product mix and low-margin commodity trading |
| Operating income | $2.0 million | $0.9 million | Up 116.6%; operating expenses declined |
| Net income | $2.5 million | $2.2 million | Up 14.4% |
| Operating cash flow | $(75.8) million | $20.6 million | Driven mainly by a $71.3 million increase in supplier advances and higher receivables |
| Cash at year-end | $12.8 million | $41.2 million | Down $28.4 million |
| Current assets / current liabilities | $158.2 million / $10.7 million | $153.3 million / $8.3 million | Reported balance-sheet working capital was about $147.5 million |
| Total assets / total liabilities | $174.8 million / $12.8 million | $163.8 million / $9.1 million | Shareholders’ equity was $162.0 million |
Revenue mix shifted markedly: tapioca contributed $40.0 million (36.2% of revenue) and corn $27.4 million (24.9%); cotton fell to $5.5 million from $48.0 million. Shiitake revenue was $19.7 million, down 1.0%, and Mu Er revenue was $16.3 million, down 14.8%. Management attributed the Mu Er decline to lower demand, orders and selling prices. Commodity trading revenue can vary with market opportunities, and margins on several traded products were very low.
Debt, liquidity and cash flows
At September 30, 2023, bank loans totaled $4.7 million: $2.4 million short-term and $2.3 million long-term, including current maturities. The convertible promissory note balance was $5.8 million; operating lease liabilities were $0.5 million. The filing reports bank-loan rates ranging from 3.2% to 16.2%. FY2023 investing cash flow was positive $35.9 million, mainly from collection of a fixed-term deposit and funds related to a withdrawn acquisition. Financing cash flow was positive $11.0 million, including $7.9 million net share proceeds and $4.8 million of bank borrowings, partly offset by loan repayments.
Supplier advances reached $116.3 million, up from $48.6 million, and accounts receivable rose to $24.7 million from $16.4 million. Management expected supplier advances to be used by September 2024 and remaining receivables to be collected by March 2024. It said available cash, operating cash flow and access to loans should cover working-capital needs for at least 12 months. However, FY2023 operating cash flow was substantially negative, and the auditor identified supplier-advance recoverability estimates as a critical audit matter.
Material changes and unusual items
- Gross profit declined despite higher revenue, as sales mix moved toward high-volume, thin-margin commodity trades.
- Lower general and administrative expenses—primarily because FY2022 included $2.0 million of share-based compensation—supported higher operating income.
- Other income included a $1.4 million government grant, a $0.9 million gain from a change in fair value of the convertible note derivative, and $0.7 million of interest income. These items helped offset $1.7 million of debt-issuance-cost amortization and $0.7 million of interest expense.
- The company raised $8.0 million gross through a July 2023 share issuance and completed a one-for-eight share consolidation in September 2023. It had 6,094,078 shares outstanding at fiscal year-end.
- The Streeterville note was amended in November 2023 to extend maturity to September 28, 2024, add a 7% extension fee, require minimum monthly repayments of $250,000 beginning December 2023, and direct 10% of proceeds from public offerings to repayment. In January 2024, the lender agreed to forbear from enforcing remedies relating to a redemption notice; the company agreed to a 10% forbearance fee. The filing also reports 200,000 shares issued in January 2024 for $0.2 million of note redemption.
Outlook, risks and controls
Management expects edible-fungi sales to grow over time, citing demand in China and opportunities to expand export sales, supply sources and product lines. It also acknowledged that industry growth may moderate and that commodity-trading volumes depend on market demand and supply. No quantified revenue or earnings guidance is provided.
- Customer concentration is significant: two customers represented approximately 40.5% and 11.7% of FY2023 sales. Two customers accounted for about 99% of year-end receivables, according to the filing.
- Supplier advances are concentrated: three suppliers represented approximately 46%, 18% and 13% of the year-end balance. The auditor highlighted the judgment involved in assessing whether these advances are recoverable and will be fulfilled with supplies.
- PRC regulatory, VIE enforceability, data-security, overseas-listing filing, currency-conversion and dividend-repatriation risks could affect operations or investors’ ability to access value. The company states that required operating permits had been obtained and that it did not believe it was subject to a CAC cybersecurity review, but notes uncertainty in regulatory interpretation and implementation.
- Farmmi reported ineffective disclosure controls and ineffective internal control over financial reporting as of September 30, 2023, including material weaknesses involving accounting expertise, review of unusual transactions, internal audit and risk assessment. Management described remediation plans but did not assure timely remediation.
- Other stated risks include agricultural supply and weather conditions, food-safety compliance, refinancing and debt covenants, foreign-exchange exposure, and dependence on key management. The filing reports no material legal or administrative proceedings and no material defaults as of the report.
Investor facts to verify
- Confirm collection of the $24.7 million receivables and delivery, application or recovery of the $116.3 million supplier advances, particularly given customer and supplier concentration.
- Reconcile the cash-flow deterioration with subsequent operating cash generation, and confirm the timing and terms of bank-loan renewals and repayments.
- Review the Streeterville note’s amended repayment schedule, extension and forbearance fees, redemption terms, and subsequent share issuances.
- Assess whether thin commodity-trading margins and changes in product mix can support sustainable gross profit and cash conversion.
- Track remediation of the disclosed internal-control material weaknesses and assess the risks of the PRC VIE structure and evolving CSRC and data-security requirements.
- Check share-count and per-share disclosures against the one-for-eight consolidation: the filing reports FY2023 basic and diluted weighted-average shares of 3.63 million and 8.45 million, and basic and diluted EPS of $0.70 and $0.30, respectively.