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Farmmi(FAMI) - 2024 Q4 - Annual Report
FAMIFarmmi(FAMI)2025-01-24 21:05

Regulatory and Compliance Risks - The company's operations are primarily conducted in mainland China, with expansions in the U.S. and Canada, and it faces significant legal and operational risks due to PRC government policies and regulations[15][16] - The company previously operated online and e-commerce sales in China through consolidated affiliated entities under contractual arrangements to comply with PRC foreign investment restrictions[17] - The company's PRC subsidiaries have obtained all necessary permits, approvals, and certificates to conduct business operations in China, but future regulatory changes could require additional compliance efforts[20] - The company is not subject to cybersecurity review by the CAC as it possesses personal information of significantly less than one million users and its data processing does not affect national security[23] - The company may be required to conduct an annual data security review and comply with reporting obligations if the Draft Regulations on Network Data Security Management are enacted[25] - The company is subject to filing procedures with the CSRC for overseas securities offerings and listings under the Trial Measures, but no prohibitive circumstances currently apply to it[27] - The company is deemed an "Existing Issuer" and must undertake filing procedures for subsequent events such as follow-on offerings, dual listings, and material changes[28] - The company must comply with confidentiality and archives administration requirements under the Confidentiality Provisions for overseas securities offerings and listings[29] - The company's ability to offer shares on Nasdaq may be significantly limited or hindered by non-compliance with PRC regulations[30] - The company is required to file with the CSRC and may need approvals from Chinese regulatory authorities for securities offerings, with uncertainties in obtaining such approvals[130][131] - The Draft Rules, if enacted, may require the company to submit filings to the CSRC within three working days following future equity securities offerings[134] - The company's Chinese subsidiaries and consolidated entities must obtain business licenses from local counterparts of the SAMR, with all licenses currently valid[137] - The company may face sanctions or delays if it fails to obtain or complete required approvals or filings for issuing securities to foreign investors[138] - The Chinese government's new guidance on capital raising outside mainland China, including VIEs, may impact the company's corporate structure and share value[139] - The company is subject to the U.S. Foreign Corrupt Practices Act (FCPA) and Chinese anti-corruption laws, with potential liabilities if employees or third parties engage in unauthorized payments or corruption[154] - The company faces additional regulatory compliance costs and uncertainties due to recent regulatory developments, which could impact future capital raise activities and share price[196] - The company has material weaknesses in internal control over financial reporting, including insufficient personnel with appropriate accounting knowledge and experience, and inadequate risk assessment[199] - The company expects to incur annual expenses between 500,000and500,000 and 1 million for compliance with public company reporting requirements[201] Financial Performance and Metrics - Revenue for the fiscal year ended September 30, 2024 was 64,131,332,adecreasefrom64,131,332, a decrease from 110,364,887 in 2023 and 99,213,379in2022[47]−NetlossforthefiscalyearendedSeptember30,2024was99,213,379 in 2022[47] - Net loss for the fiscal year ended September 30, 2024 was 4,627,772, compared to a net income of 2,543,813in2023and2,543,813 in 2023 and 2,223,979 in 2022[47] - Total assets as of September 30, 2024 were 186,733,719,upfrom186,733,719, up from 174,800,086 in 2023 and 163,782,853in2022[49]−TotalliabilitiesasofSeptember30,2024were163,782,853 in 2022[49] - Total liabilities as of September 30, 2024 were 16,717,482, compared to 12,824,160in2023and12,824,160 in 2023 and 9,098,762 in 2022[49] - Consolidated revenues for the year ended September 30, 2024 were 64,131,332,withPRCsubsidiariescontributing64,131,332, with PRC subsidiaries contributing 64,121,932 and non-PRC subsidiaries contributing 9,400[52]−NetlossfortheyearendedSeptember30,2024was9,400[52] - Net loss for the year ended September 30, 2024 was (4,627,772), compared to a net income of 2,543,813in2023and2,543,813 in 2023 and 2,223,979 in 2022[52][53] - Gross profit for 2024 was 3,873,714,adecreasefrom3,873,714, a decrease from 4,286,755 in 2023 and 5,438,086in2022[52][53]−Operatingexpensesfor2024were5,438,086 in 2022[52][53] - Operating expenses for 2024 were (3,078,029), higher than (2,245,380)in2023and(2,245,380) in 2023 and (4,495,718) in 2022[52][53] - Total assets as of September 30, 2024 were 186,733,719,withcurrentassetsat186,733,719, with current assets at 161,925,796 and non-current assets at 24,807,923[56]−TotalliabilitiesasofSeptember30,2024were24,807,923[56] - Total liabilities as of September 30, 2024 were 16,717,482, with current liabilities at 10,060,240andnon−currentliabilitiesat10,060,240 and non-current liabilities at 6,657,242[56] - Total shareholders' equity (net assets) as of September 30, 2024 was 170,016,237,comparedto170,016,237, compared to 161,975,926 in 2023[56] - The average exchange rate for 2024 was US1=RMB7.2043,comparedtoUS1 = RMB 7.2043, compared to US1 = RMB 7.0533 in 2023 and US1=RMB6.5746in2022[58]−IntercompanyreceivablesasofSeptember30,2024were1 = RMB 6.5746 in 2022[58] - Intercompany receivables as of September 30, 2024 were 151,457,184, with intercompany payables at 962,080[56]−CurrentassetsexcludingintercompanyreceivablesasofSeptember30,2024were962,080[56] - Current assets excluding intercompany receivables as of September 30, 2024 were 161,925,796, compared to 158,171,175in2023[56]−Thecompanyprovidedworkingcapitalloansof158,171,175 in 2023[56] - The company provided working capital loans of 151.8 million to its subsidiaries in fiscal year 2024, similar to 151.7millionin2023and151.7 million in 2023 and 140.4 million in 2022[37][38][40] - As of September 30, 2024, the company had approximately 2.4millioninoutstandingloans,downfrom2.4 million in outstanding loans, down from 4.7 million in 2023, with potential risks of repayment and refinancing challenges[97] - The company's export sales for the year ended September 30, 2024, were distributed as follows: 8.19% to the U.S., 37.87% to Canada, 17.08% to Japan, 10.87% to Europe, and 25.47% to the Middle East, with all transactions settled in USD[107] - The company may require additional financing in the future, which could result in equity dilution or restrictive debt conditions, though no immediate need is anticipated[108] - The company's cash accounts in China are not fully insured, with only accounts holding less than RMB 0.5 million (72,149)perbankcoveredbydepositinsurance[112]−Significantincreaseinadvancestosuppliersandaccountsreceivableinfiscalyear2021,withadvancesmainlyinanticipationofhigherrevenueinfiscal2023[127]−Customers′accountsreceivabletothecompanyincreasedsignificantlyinfiscalyear2021,partiallyduetoslower−payingcustomerscomparedtofiscalyear2020[127]TaxandDividendPolicies−PRCsubsidiariesarerequiredtosetasideaportionofnetincomeeachyeartofundastatutorysurplusreserveuntilitreaches5072,149) per bank covered by deposit insurance[112] - Significant increase in advances to suppliers and accounts receivable in fiscal year 2021, with advances mainly in anticipation of higher revenue in fiscal 2023[127] - Customers' accounts receivable to the company increased significantly in fiscal year 2021, partially due to slower-paying customers compared to fiscal year 2020[127] Tax and Dividend Policies - PRC subsidiaries are required to set aside a portion of net income each year to fund a statutory surplus reserve until it reaches 50% of registered capital, restricting dividend distributions[33] - Dividends paid to overseas shareholders may be subject to PRC withholding tax at a rate of up to 10%, potentially reduced to 5% under certain conditions[34][35] - The company has not declared or paid any cash dividends and currently intends to retain most or all available funds for business operations and expansion[40] - Dividends payable to non-PRC investors may be subject to PRC withholding tax at rates of 10% for enterprises and 20% for individuals, potentially reducing investment returns[172] - PRC tax authorities may impose up to 10% withholding tax on gains from indirect transfers of PRC resident enterprise equity if deemed abusive arrangements[173] - PRC subsidiaries must set aside at least 10% of accumulated profits annually for reserve funds until reaching 50% of registered capital, limiting distributable dividends[176] - Non-PRC resident enterprises may face up to 10% withholding tax on dividends from Chinese companies unless exempted by tax treaties[178] - PRC tax authorities may disregard intermediary holding companies in indirect transfers, subjecting non-PRC investors to PRC corporate taxes[175] - SAT Bulletin 7 reclassifies indirect transfers of PRC taxable properties as direct transfers if lacking reasonable commercial purposes, potentially increasing tax liabilities[174] - The company may be classified as a PRC "resident enterprise" for tax purposes, subjecting it to a 25% enterprise income tax on worldwide income and additional reporting obligations, which could reduce net income[167][170] - The company has not been notified by PRC tax authorities of being deemed a resident enterprise under the PRC Enterprise Income Tax Law as of the report date[171] - PRC subsidiaries' ability to pay dividends may be restricted by debt instruments or adjustments to taxable income by PRC tax authorities[177] - The company does not intend to pay dividends in the foreseeable future, retaining earnings for business operations and expansion[210] Operational and Market Risks - The company's edible fungi products are highly susceptible to risks from diseases, pests, and extreme weather events, which could significantly impact supply and quality[86][88] - The company's lack of product diversification, with a primary focus on edible fungi, makes its revenues and earnings more susceptible to industry-specific risks[75] - The company's dried mushroom wholesale business currently enjoys tax benefits, but changes in tax policies could significantly reduce or eliminate profit margins[78] - The company's suppliers may fail to comply with PRC food safety laws or quality standards, potentially harming the company's reputation and requiring costly supplier replacements[89] - The company's purchase price for dried edible fungi is based on local market prices, which are unpredictable and could reduce profit margins if prices rise unexpectedly[90] - The company faces risks from potential data breaches, which could result in significant costs, legal liabilities, and reputational damage[80] - The company's products have low visibility in China, with no guarantee of significantly increasing market recognition despite plans to participate in more industry events[92] - The company faces potential market share loss due to low technical barriers and price competition, which may require price reductions to maintain or slow market share loss[93] - The company's PRC subsidiaries have not opened Housing Provident Fund accounts for approximately 80% of employees, potentially exposing the company to financial liabilities[84] - The company exports approximately 0.6% of its agricultural products, making it vulnerable to changes in foreign trade policies and potential tariffs[85] - The company's growth strategy includes expanding export customers, increasing agricultural product varieties, and developing e-commerce platforms, which could strain management resources[116] - The company's intellectual property protection in China may be less effective due to ambiguities in laws and enforcement difficulties, potentially leading to costly litigation[119] - The company's stock price has been volatile, with shares closing between 0.1979 and 1.65betweenOctober1,2023,andthereportdate,partlyduetosignificantshareofferings[125]−Thecompany′sOrdinaryShareshaveexperiencedsignificantpricevolatility,withpricesrangingfrom1.65 between October 1, 2023, and the report date, partly due to significant share offerings[125] - The company's Ordinary Shares have experienced significant price volatility, with prices ranging from 0.195 to 1.42betweenJanuary1,2024,andthereportdate,andlasttradedat1.42 between January 1, 2024, and the report date, and last traded at 0.2622 on January 22, 2025[206] - The company received a notice from Nasdaq regarding non-compliance with the Minimum Bid Price Rule and has until April 21, 2025, to regain compliance[208] - The company's share price may be adversely affected by future sales of substantial amounts of Ordinary Shares in the public market[212] - The company's shareholders may face difficulties in protecting their interests due to the less defined nature of Cayman Islands corporate law compared to U.S. law[213] Legal and Governmental Risks - The Chinese government may intervene in or influence the company's operations, potentially impacting the value of its ordinary shares[129] - The company's PRC subsidiaries could face liquidation or bankruptcy under the PRC Enterprise Bankruptcy Law, potentially affecting the company's ability to operate and access assets[159][160] - PRC regulations on foreign exchange registration for overseas investment may limit the company's ability to inject capital into PRC subsidiaries or distribute profits, with potential penalties for non-compliance[162][164][165] - PRC M&A rules require prior notification to the Ministry of Commerce for transactions involving national security or control of domestic enterprises with famous trademarks[181] - The Holding Foreign Companies Accountable Act may prohibit trading of securities if PCAOB cannot inspect auditors for three consecutive years[189] - U.S. regulatory bodies face significant legal obstacles in conducting investigations or inspections of the company's operations in China, particularly under the revised PRC securities law effective March 1, 2020[150] - The company expects labor costs to increase due to PRC labor laws, including the Labor Contract Law and Social Insurance Law, which mandate employee benefits and social insurance contributions[152][153] - Fluctuations in the exchange rate between the Renminbi and the U.S. dollar could negatively impact the company's export sales and financial results, as the company sells products in U.S. dollars and faces limited hedging options in China[155][156][157][158] - Foreign investors face daily remittance limits of 50,000andper−transactionlimitsof50,000 and per-transaction limits of 10,000 under PRC foreign exchange regulations[179] PCAOB and Audit Risks - The PCAOB determined it could inspect and investigate registered public accounting firms in mainland China and Hong Kong as of December 15, 2022, vacating its previous 2021 adverse determinations[43] - The PCAOB determined it could inspect and investigate registered public accounting firms in mainland China and Hong Kong as of December 15, 2022[147] - The HFCAA timeline for trading prohibitions was accelerated to two consecutive years of non-inspection by the PCAOB, effective December 2022[148] - The company's auditor, YCM CPA INC., is subject to PCAOB inspections, but there is a risk that PCAOB may not be able to inspect or investigate the auditor completely due to regulatory changes in China, potentially affecting the assurance of financial statements[149] Corporate Structure and Governance - The company is highly dependent on its CEO, Ms. Yefang Zhang, who has over 20 years of experience in the mushroom industry, making her difficult to replace[114] - The company's key customer, Shanghai Yunmihui Supply Chain Group Co. Ltd, accounted for 55.0%, 40.5%, and 31.2% of total revenue in fiscal years 2024, 2023, and 2022, respectively[69] - The company purchases raw materials from a limited number of suppliers, with Jingning Liannong Trading Co. Ltd accounting for 23.8%, 13.5%, and 20.9% of purchases in 2024, 2023, and 2022, respectively[73]