Farmmi, Inc. — Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2018. Although the request identifies 2018 Q4, this annual filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement or cash-flow comparison. Amounts below are U.S. dollars unless otherwise noted. Financial statements were prepared under U.S. GAAP and audited by Friedman LLP, which gave an unqualified opinion on the financial statements.
Business context
Farmmi processes and sells dried edible mushrooms, principally Shiitake and Mu Er, and sells other agricultural products. It sources mushrooms from third-party farms and suppliers, with most sales in China. Its online sales channels expanded during the year, including the August 2018 restructuring into Farmmi Jicai and Farmmi Liangpin Market.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $29.82 million | $26.67 million | +11.83% |
| Gross profit / margin | $5.07 million / 16.99% | $4.52 million / 16.97% | +12.00% gross profit |
| Operating income / margin | $3.08 million / 10.32% | $3.47 million / 13.01% | −11.28% |
| Net income | $3.23 million | $3.27 million | −1.26% |
| Net income attributable to Farmmi | $3.22 million | $3.27 million | — |
| Operating cash flow | −$2.73 million | $2.00 million | Changed to cash use |
| Cash and cash equivalents | $4.93 million | $2.59 million | +$2.33 million |
| Current assets / current liabilities | $21.34 million / $2.22 million | $13.74 million / $2.53 million | Working capital rose to $19.12 million |
| Total liabilities | $2.86 million | $3.19 million | −$0.33 million |
| Bank loans | $2.10 million | $2.31 million | Short-term $1.46 million; long-term $0.64 million |
Revenue growth was led by Mu Er, up 31.93% to $12.19 million, while Shiitake revenue rose 3.10% to $16.75 million. Mu Er volume increased 42% to 967 tons; Shiitake volume increased slightly to 1,299 tons. Operating expenses rose 88.5% to $1.99 million, including higher selling, marketing, payroll and IPO-related costs. Other income included a local-government grant of approximately $306,000 for the Nasdaq listing. The effective tax rate was very low, reflecting tax incentives; estimated tax savings for FY2018 were approximately $971,000.
Operating cash use reflected a $3.80 million increase in receivables and a $1.98 million increase in supplier advances. Investing activities used $65,000; financing activities provided $5.53 million, primarily reflecting IPO proceeds and bank borrowing. Cash increased despite the operating outflow, aided by the IPO. Current assets include $8.60 million of trade receivables and $5.87 million of supplier advances. The filing reports approximately $4.84 million, or 56% of year-end receivables, collected by January 18, 2019.
Material changes and outlook
- Gross margin was nearly flat year over year, while operating margin declined as operating expenses grew faster than revenue.
- Online sales rose 74.4% to $3.37 million and represented 11.32% of total sales, versus 7.84% in FY2017. Management attributed the acceleration from April 2018 to platform development and promotion.
- Management expected FY2019 raw-material costs to remain relatively stable, with purchased Shiitake and Mu Er averaging approximately $9,400 and $9,900 per ton, respectively, and forecast gross margin slightly above FY2018’s 16.99%. These are expectations, not guaranteed results.
- Management said current cash, operating cash flows and access to loans should cover working-capital needs for at least 12 months, while noting the importance of collecting receivables and refinancing short-term loans.
- On November 1, 2018, after year-end, Farmmi completed a $7.5 million private placement of 10% senior convertible notes due April 1, 2020, initially convertible at $6.26 per share, plus warrants. This adds interest and potential dilution; the filing reports approximately $6.8 million net proceeds.
Risks, contingencies and unusual items
- Concentration: China Forest accounted for 67.72% of FY2018 revenue; China Tree Seed accounted for 9.42% in the risk-factor disclosure. Two suppliers provided 81.35% of purchases. One customer represented approximately 96% of year-end receivables.
- Working capital and collection: Receivables and supplier prepayments were substantial and drove the reversal to negative operating cash flow. Supplier advances were concentrated, with two suppliers representing approximately 96% of the balance.
- Financing: Short-term bank loans and the post-year-end convertible notes create refinancing, interest and potential dilution risks. Bank loans have guarantees and collateral support, including from related parties and third parties.
- Supply, pricing and seasonality: Crop conditions, weather, disease and market prices can affect availability and margins. Sales fluctuate seasonally and depend heavily on major customers.
- Regulatory and structure risks: The e-commerce business is operated through a PRC variable-interest entity under contractual arrangements, which may be challenged or prove less effective than direct ownership. PRC rules on food safety, e-commerce, foreign exchange, taxation and remittances may affect operations or cash transfers.
- Tax incentives: The filing describes temporary local tax breaks and anticipates continued preferential treatment, but the benefits are subject to policy and authority decisions. The stated temporary preferential period ended December 31, 2018.
- Controls: Management concluded disclosure controls were ineffective at September 30, 2018 and disclosed material weaknesses, including insufficient personnel with U.S. GAAP expertise. The filing did not include management’s ICFR assessment or an auditor attestation under the new-issuer transition period.
- Other: The company reported no material legal proceedings and no material defaults. It does not expect to pay dividends in the foreseeable future. The filing also notes that bank deposits in China are uninsured and that the company has limited insurance coverage.
Important facts for investors to verify
- Collection of the remaining year-end receivables, their aging and customer concentration, and the recoverability and utilization of supplier advances.
- FY2019 operating cash flow and whether customer receipts and supplier prepayments normalize after the FY2018 cash outflow.
- Terms, repayment or conversion status, and dilution effects of the $7.5 million convertible notes and related warrants.
- Renewal or repayment of short-term bank loans, and any changes in guarantees, collateral or lending covenants.
- Continuation and financial impact of agricultural tax exemptions after December 31, 2018.
- Progress in remediating disclosed disclosure-control and financial-reporting weaknesses, and any subsequent audit or control findings.
- Whether Farmmi can reduce dependence on its largest customer and suppliers, and demonstrate sustainable profitability from its e-commerce expansion.