Farmmi, Inc. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2019. This is an annual report, not a standalone fourth-quarter filing; the supplied filing does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and audited by Friedman LLP, which gave an unqualified opinion on the financial statements.
Business context and key financial metrics
Farmmi processes and distributes dried Shiitake, Mu Er and other edible fungi, primarily in China. It also sells agricultural products through its e-commerce platforms. The company sources mushrooms from third-party farms and supplier cooperatives; it does not grow the fungi itself.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $30.84 million | $29.82 million |
| Gross profit / margin | $5.42 million / 17.58% | $5.07 million / 16.99% |
| Operating expenses | $2.39 million | $1.99 million |
| Operating income | $3.04 million | $3.08 million |
| Net income (loss) | $(0.31) million | $3.23 million |
| Operating cash flow | $(10.77) million | $(2.73) million |
| Cash, cash equivalents and restricted cash, year-end | $0.75 million | $5.53 million |
| Current assets / current liabilities | $29.71 million / $8.15 million | $21.34 million / $2.22 million |
| Total liabilities | $8.15 million | $2.86 million |
| Working capital | $21.56 million | $19.12 million |
FY2019 revenue was approximately 93% domestic and 7% international. Shiitake generated $17.89 million, Mu Er $11.66 million, and other edible fungi and agricultural products $1.29 million. Online sales were $6.19 million, or 20.05% of total sales.
Changes versus FY2018
- Revenue increased 3.43%; gross profit rose 7.00% and gross margin improved by 0.59 percentage points, which management attributed in part to higher-margin online sales.
- Operating income declined 1.37% as operating expenses grew 19.95%, including higher payroll and directors’ and officers’ insurance costs.
- The company moved from net income to a net loss. Interest expense rose to $1.20 million, and $2.11 million of debt issuance cost amortization was recorded, largely related to the November 2018 convertible-note financing. FY2018 also included a $306,016 local-government IPO grant that was not repeated.
- Operating cash outflow widened substantially, mainly reflecting increases in accounts receivable and supplier advances. Cash, cash equivalents and restricted cash fell by $4.77 million during FY2019.
- Online sales increased 83.3% year over year. Shiitake sales volume rose to 1,420 tons from 1,299; Mu Er volume declined to 945 tons from 967.
Debt, liquidity and unusual items
- At September 30, 2019, the balance sheet showed $1.40 million of short-term bank loans and $2.93 million of current convertible notes payable. The company also had $2.65 million due to CEO Yefang Zhang, interest-free and payable on demand. Total current liabilities were $8.15 million.
- The November 2018 financing issued $7.5 million of senior convertible notes bearing 10% annual interest and due April 1, 2020, plus warrants. The filing reports that 657,857 shares were issued for $1.95 million of note principal and interest during FY2019. Note disclosures separately describe a $4.02 million carrying value before $1.09 million of unamortized discounts; investors should reconcile these amounts with the balance-sheet presentation.
- Cash and cash equivalents were only $135,125 at year-end; total cash including restricted amounts was $753,815. Accounts receivable was $13.82 million and supplier advances were $14.03 million. By December 19, 2019, management reported collecting about 98% of year-end receivables and using about 44% of supplier advances; it expected the remaining advances to be utilized by March 2020.
- Management stated that cash, operating cash flows and loan access would meet working-capital needs for at least 12 months, while also acknowledging negative operating cash flow in FY2018 and FY2019 and reliance on refinancing and potential related-party support.
Outlook, risks and controls
- Management expects sales of edible fungi to grow, citing market demand, brand development, online expansion and exports, but provides no formal revenue or earnings guidance. It estimated FY2020 raw-material costs would fluctuate about 5%–6% versus FY2019 and projected average purchase prices of approximately $9,400 per ton for Shiitake and $9,500 for Mu Er.
- Customer concentration is significant: China Forest accounted for 64.30% of FY2019 revenue and about 82% of year-end receivables. The two largest suppliers accounted for about 90% of purchases; two suppliers also represented approximately 99% of supplier advances.
- Key risks include dependence on major customers and suppliers, mushroom price and crop volatility, food-safety and regulatory requirements, PRC foreign-exchange and dividend restrictions, and uncertainty over the enforceability and regulatory treatment of the e-commerce VIE structure.
- Tax incentives materially reduced taxes: management reported approximately $898,597 of FY2019 tax savings and expects certain preferential treatment to continue, subject to policy and eligibility. Loss of benefits could affect profitability.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective as of September 30, 2019, citing insufficient experienced U.S. GAAP personnel and inadequate documented close procedures. Management described remediation efforts; the auditor did not express an opinion on internal-control effectiveness.
- The filing reports no material legal or administrative proceedings and no material defaults. It also says the company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Subsequent collection of the large receivable balance and actual utilization or refundability of supplier advances.
- Convertible-note terms, conversions, remaining principal and interest, maturity repayment or refinancing, and potential dilution from conversion and warrants.
- Whether operating cash flow improves and whether reported liquidity is accessible to the Cayman parent given PRC dividend and currency-transfer restrictions.
- Customer and supplier concentration, including continued orders from China Forest and the collectability of its receivables.
- Progress in remediating ineffective disclosure controls and material weaknesses in internal control over financial reporting.
- Continued eligibility for agricultural tax benefits and compliance with employee housing-fund and other PRC requirements.