Farmmi(FAMI) - 2021 Q2 - Quarterly Report

Unaudited Condensed Consolidated Financial Statements Unaudited Condensed Consolidated Balance Sheets As of March 31, 2021, Farmmi, Inc. reported total assets of $47.7 million, an increase from $38.2 million as of September 30, 2020, primarily driven by a significant increase in cash from $0.55 million to $14.37 million Condensed Consolidated Balance Sheet Summary (as of March 31, 2021 vs. September 30, 2020) | Balance Sheet Item | March 31, 2021 (Unaudited) | September 30, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash | $14,365,889 | $548,151 | | Total current assets | $46,640,892 | $37,022,171 | | Total Assets | $47,705,195 | $38,191,746 | | Liabilities & Equity | | | | Total current liabilities | $7,909,336 | $8,367,387 | | Total Liabilities | $8,486,354 | $9,036,589 | | Total Equity | $39,218,841 | $29,155,157 | | Total Liabilities and Equity | $47,705,195 | $38,191,746 | - The number of authorized common shares increased from 20,000,000 to 200,000,000, with issued and outstanding shares rising from 20.5 million to 27.6 million between September 30, 2020, and March 31, 2021[11] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income For the six months ended March 31, 2021, the company reported a significant turnaround in profitability, with total revenues increasing by 31% to $17.8 million, gross profit growing by 41.5% to $3.0 million, and achieving a net income of $1.36 million Condensed Consolidated Statements of Operations (For the Six Months Ended March 31) | Metric | 2021 (Unaudited) | 2020 (Unaudited) | | :--- | :--- | :--- | | Total revenues | $17,787,728 | $13,580,782 | | Gross Profit | $2,987,915 | $2,110,065 | | Income from operations | $1,442,454 | $1,139,269 | | Net income (loss) | $1,361,939 | $(63,807) | | Net income (loss) attributable to Farmmi, Inc. | $1,362,616 | $(57,052) | | Basic earnings (loss) per common share | $0.07 | $(0.00) | | Diluted earnings (loss) per common share | $0.07 | $(0.00) | - Total comprehensive income attributable to Farmmi, Inc. surged to $2.52 million for the six months ended March 31, 2021, up from $141,614 in the prior-year period, largely driven by higher net income and a significant foreign currency translation gain of $1.19 million[14] Unaudited Condensed Consolidated Statements of Changes in Equity Total equity increased from $29.2 million at September 30, 2020, to $39.2 million at March 31, 2021, primarily driven by $6.7 million from common stock issuance, $1.36 million in net income, $0.81 million in share-based compensation, and a $1.19 million foreign currency translation gain Key Changes in Equity (Six Months Ended March 31, 2021) | Change Driver | Amount | | :--- | :--- | | Balance at September 30, 2020 | $29,155,157 | | Issuance of common shares, net | $6,709,040 | | Net income | $1,361,939 | | Share-based compensation | $805,410 | | Foreign currency translation gain | $1,187,295 | | Balance at March 31, 2021 | $39,218,841 | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended March 31, 2021, net cash provided by operating activities was strong at $9.7 million, investing activities used $2.8 million, and financing activities provided $6.8 million, leading to a substantial increase in cash and restricted cash to $16.0 million Condensed Consolidated Statements of Cash Flows (For the Six Months Ended March 31) | Cash Flow Activity | 2021 (Unaudited) | 2020 (Unaudited) | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,725,259 | $5,686,467 | | Net cash used in investing activities | $(2,767,971) | $(246,726) | | Net cash provided by (used in) financing activities | $6,843,663 | $(453,757) | | Net increase in cash and restricted cash | $13,800,951 | $4,946,318 | | Cash and restricted cash, end of period | $16,044,817 | $5,700,133 | - The primary source of financing cash flow in the first half of 2021 was $6.7 million in net proceeds from a stock issuance, a stark contrast to the prior year which saw no stock issuance and a net cash outflow from financing activities[20] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements, covering the company's organization, accounting policies, breakdowns of key financial statement line items, related party transactions, equity changes, tax information, customer and supplier concentrations, lease obligations, and significant subsequent events Note 1 — Organization and nature of business Farmmi, Inc. is a Cayman Islands holding company operating through subsidiaries and a VIE structure in the PRC, primarily engaged in processing and distributing dried edible fungi, with 95% of products sold in China, and recently expanded into biotechnology, ecology, and supply chain management - The company operates through a complex structure involving a Cayman parent (FMI), a Hong Kong subsidiary, two Chinese WFOEs, and several PRC operating subsidiaries, including a VIE named Nongyuan Network[22][23][25] - The core business is processing and distributing dried Shiitake and Mu Er mushrooms, with 95% of sales in China and 5% internationally[30] - In April and May 2021, the company established three new subsidiaries in the PRC: Farmmi Biotech, Farmmi Ecology, and Farmmi Supply Chain, indicating expansion into related agricultural areas[26][27] Note 2 — Summary of significant accounting policies The financial statements are prepared under U.S. GAAP, consolidating its VIE, Nongyuan Network, with revenue recognized under ASC 606, and acknowledging risks from PRC operations, lack of business interruption insurance, and the adverse impact of the COVID-19 pandemic - The company consolidates the financial results of its Variable Interest Entity (VIE), Nongyuan Network, determining it is the primary beneficiary[32][34] - Revenue is recognized based on ASC Topic 606, typically at a point in time when control of goods transfers to the customer[49][50] - The COVID-19 outbreak adversely impacted the company by temporarily suspending production and sales in late January and February 2020, though operations resumed in March 2020[78][79] Note 3 – Accounts receivable, net Net accounts receivable increased to $13.8 million as of March 31, 2021, from $10.8 million at September 30, 2020, with the allowance for doubtful accounts rising to $445,485, and $7.4 million or 53% of the March 31, 2021 balance subsequently collected Accounts Receivable, Net | Item | March 31, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Accounts receivable – total | $14,248,073 | $10,952,237 | | Less: allowance for doubtful accounts | $(445,485) | $(194,118) | | Accounts receivable, net | $13,802,588 | $10,758,119 | Note 4 – Advances to suppliers, net Net advances to suppliers decreased to $13.1 million as of March 31, 2021, from $23.4 million at September 30, 2020, made under framework agreements with two key co-operatives to secure continuous supply and favorable prices, with the remaining balance expected to be utilized by September 2021 - The company makes advance payments to suppliers, primarily two co-operatives (JLT and QNMI), to secure supplies of premium Shiitake and Mu Er mushrooms and lock in favorable prices[89][92] - As of the report date, approximately $7.4 million (68%) of the advances outstanding at March 31, 2021 had been utilized, with the remainder expected to be utilized by September 2021[94] Note 5 — Inventories, net Net inventories increased to $845,002 as of March 31, 2021, from $583,639 at September 30, 2020, primarily due to a rise in raw materials to $766,569, while the allowance for inventory reserve significantly decreased Inventories, Net | Item | March 31, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Raw materials | $766,569 | $563,772 | | Packaging materials | $53,426 | $39,628 | | Finished goods | $26,377 | $0 | | Less: allowance for inventory reserve | $(1,370) | $(19,761) | | Inventories, net | $845,002 | $583,639 | Note 6 — Property, plant and equipment, net Net property, plant, and equipment remained stable at $265,247 as of March 31, 2021, with plant, machinery, equipment, and leasehold improvements as the largest components, and depreciation expense for the six-month period totaling $25,594 Property, Plant and Equipment, Net | Category | March 31, 2021 (Unaudited) | September 30, 2020 | | :--- | :--- | :--- | | Office equipment | $36,070 | $34,320 | | Transportation equipment | $71,626 | $68,984 | | Plant, machinery and equipment | $193,446 | $114,551 | | Leasehold improvements | $175,345 | $226,879 | | Accumulated depreciation | $(211,240) | $(178,839) | | Total | $265,247 | $265,895 | Note 7 — Short-term bank loans As of March 31, 2021, the company had $1.97 million in short-term bank loans, slightly down from $2.06 million at September 30, 2020, used for working capital and secured by property and related party guarantees - The company held two short-term bank loans totaling $1.97 million as of March 31, 2021, with interest rates of 3.95% and 6.09%[99][101] - The loans are secured by real property and land use rights owned by related parties, including Forasen Group Co., Ltd. and Zhejiang Tantech Bamboo Technology Co., Ltd., and are also guaranteed by related parties and principal officers[100][102] Note 8 – Bank acceptance notes payable In June 2020, the company issued RMB 22 million (approx. $3.23 million) in bank acceptance notes to its suppliers, which were due and fully paid on June 15, 2021, secured by RMB 11 million in restricted cash and related party real property - The company issued RMB 22 million in bank acceptance notes in June 2020, which were fully paid at maturity on June 15, 2021[104] - The notes were secured by restricted cash of RMB 11 million (approx. $1.62 million) and real property owned by Xinyang Wang, the shareholder of the company's VIE[104] Note 9 - Share-based compensation Under its 2018 Share Incentive Plan, the company granted 596,600 restricted share units to employees on March 11, 2021, resulting in a share-based compensation expense of $805,410 for the six months ended March 31, 2021 - On March 11, 2021, the company granted 596,600 restricted share units to employees[105] - A share-based compensation expense of $805,410 was recognized for the six months ended March 31, 2021, related to this grant[105] Note 10 — Related party transactions The company engages in numerous transactions with related parties, including guarantees for bank loans, property leases, and working capital advances, resulting in a balance of $2.0 million due to related parties as of March 31, 2021 - Related parties, including Forasen Group and Zhejiang Tantech Bamboo Technology, provide guarantees and collateral for the company's bank loans and bank acceptance notes[109][115] - The company leases factory buildings from related parties and subleases office space to a related party[113][114] Due to Related Parties | Related Party | March 31, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Yefang Zhang | $1,999,870 | $1,714,811 | | Other | $19,218 | $1,459 | | Total | $2,019,088 | $1,716,270 | Note 11 — Equity Key equity events include a ten-fold increase in authorized ordinary shares to 200 million in September 2020, the issuance of 6.47 million ordinary shares in March 2021 raising $6.7 million in net proceeds, and a statutory reserve balance of $975,309 - On September 12, 2020, the authorized share capital was increased from 20 million to 200 million ordinary shares[118] - On March 24, 2021, the company sold 6,469,467 ordinary shares at $1.15 per share, generating net proceeds of $6.7 million[119] - The company is required to make appropriations to a statutory surplus reserve based on PRC GAAP, with a balance of $975,309 as of March 31, 2021[120] Note 12 — Taxes The company's PRC subsidiaries are generally subject to a 25% corporate income tax rate, but several entities benefit from preferential tax treatment, including tax exemptions for agricultural entities and reduced rates of 5% or 10% for small-scale minimal profit enterprises, resulting in an estimated tax saving of $587,864 - While the statutory PRC income tax rate is 25%, several subsidiaries benefit from preferential tax policies[125] - FLS Mushroom and Farmmi Food are tax-exempt due to their engagement in the agricultural industry. Other entities like Nongyuan Network and Farmmi E-Commerce benefit from reduced rates for being 'small-scaled minimal profit enterprises'[126][129] - The estimated tax savings from these exemptions and reduced rates amounted to $587,864 for the six months ended March 31, 2021[126] Note 13 — Concentration of major customers and suppliers The company faces significant concentration risk, with a single major customer accounting for 79% of total sales and 97% of accounts receivable, while three major suppliers accounted for 94% of total purchases - A single customer accounted for 79% of total sales for the six months ended March 31, 2021, up from 45% in the prior-year period[134] - As of March 31, 2021, one customer represented 97% of the total accounts receivable balance[134] - For the six months ended March 31, 2021, three suppliers accounted for 94% of total purchases (53%, 26%, and 15%)[134] Note 14 — Leases The company's operating leases for office and factory space resulted in total lease costs of $78,927 for the six months ended March 31, 2021, with net operating lease right-of-use assets of $737,222 and total operating lease liabilities of $722,665 Lease Liabilities and Assets (as of March 31, 2021) | Item | Amount | | :--- | :--- | | Operating lease right-of-use assets, net | $737,222 | | Operating lease liabilities, current | $145,647 | | Operating lease liabilities, non-current | $577,018 | | Total operating lease liabilities | $722,665 | Maturities of Operating Lease Liabilities (as of March 31, 2021) | Period | Amount | | :--- | :--- | | Twelve months ending March 31, 2022 | $186,923 | | 2023 | $176,168 | | 2024 | $64,323 | | 2025 | $64,323 | | 2026 | $64,323 | | Thereafter | $275,621 | | Total future minimum lease payments | $831,681 | Note 15 — Segment reporting The company operates as a single reportable segment, with revenue primarily generated from Shiitake and Mu Er mushrooms, and the vast majority (95%) of revenue coming from China - The company operates as a single operating and reportable segment based on the 'management approach' under ASC 280[144] Revenue by Major Product (Six Months Ended March 31) | Product Category | 2021 (Unaudited) | 2020 (Unaudited) | | :--- | :--- | :--- | | Shiitake | $10,104,540 | $7,346,174 | | Mu Er | $7,340,137 | $5,762,752 | | Other edible fungi and agricultural products | $343,051 | $471,856 | | Total | $17,787,728 | $13,580,782 | Revenue by Geography (Six Months Ended March 31) | Geography | 2021 (Unaudited) | 2020 (Unaudited) | | :--- | :--- | :--- | | China | $16,973,392 | $13,086,183 | | Other countries | $814,336 | $494,599 | | Total | $17,787,728 | $13,580,782 | Note 16 – Subsequent events After the reporting period, the company established three new PRC subsidiaries, conducted two share issuances raising approximately $44.9 million in net proceeds, and further increased its authorized share capital from 200 million to 600 million shares - Three new subsidiaries were established in April and May 2021: Zhejiang Farmmi Biotechnology, Zhejiang Farmmi (Hangzhou) Ecology Agriculture Development, and Zhejiang Farmmi Agricultural Supply Chain[149] - The company raised approximately $44.9 million in net proceeds through two ordinary share sales in April and May 2021[149][150] - On July 22, 2021, the company's authorized share capital was increased from 200 million to 600 million ordinary shares[150] Note 17 — Condensed financial information of the parent company Condensed financial information for the parent company (Farmmi, Inc.) is presented due to PRC restrictions on transferring net assets from subsidiaries, with parent company assets primarily consisting of its investment in subsidiaries valued at $40.6 million, and a net income of $1.36 million for the six months ended March 31, 2021 - Condensed parent company financial statements are provided because restricted net assets of consolidated PRC subsidiaries exceed 25% of consolidated net assets[151] Parent Company Balance Sheet (Condensed) | Item | As of March 31, 2021 | As of September 30, 2020 | | :--- | :--- | :--- | | Total assets | $41,221,049 | $30,219,987 | | Total liabilities | $2,002,208 | $1,934,811 | | Total shareholders' equity | $39,218,841 | $28,285,176 | Parent Company Statement of Operations (Condensed) | Item | For the Six Months Ended March 31, 2021 | For the Six Months Ended March 31, 2020 | | :--- | :--- | :--- | | Loss from operations | $(1,267,914) | $(1,463,254) | | Equity in income of subsidiaries and VIE | $2,630,530 | $1,406,202 | | Net income (loss) attributable to Farmmi, Inc. | $1,362,616 | $(57,052) |