Farmmi(FAMI) - 2023 Q4 - Annual Report

Regulatory and Compliance Risks in China - Significant legal and operational risks associated with conducting operations in mainland China, including potential adverse effects from changes in PRC government regulations and US-China relations[7] - PRC government's substantial influence over business operations in China, requiring permissions and approvals for operations, data transfer, and securities issuance[8] - No current requirement for permissions from the China Securities Regulatory Commission (CSRC) or cybersecurity review by the Cyberspace Administration of China (CAC) for previous securities issuance to foreign investors[9] - Potential future changes in PRC regulations could require additional licenses, permits, or approvals, impacting the company's ability to operate or list securities[8] - PRC entities have obtained necessary business licenses and permits, but future regulatory changes could necessitate additional compliance efforts[8] - Recent PRC government actions, including the Cybersecurity Review Measures and Overseas Listing Rules, may impose significant compliance costs and affect the company's ability to accept foreign investments[7] - Uncertainty regarding the interpretation and implementation of PRC laws and regulations, which could lead to investigations, fines, or operational suspensions[8] - PRC government's intent to increase control over overseas securities offerings and foreign investments in China-based issuers[9] - Potential for PRC regulations to limit or hinder the company's ability to offer securities to investors, possibly rendering such securities worthless[7] - Compliance with PRC Food Safety Law and telecommunications regulations required for certain subsidiaries, with all necessary permissions currently in place[8] - The company may face fines between RMB 1,000,000 and RMB 10,000,000 if it fails to comply with the Trial Measures for Overseas Listing[10] - The company's PRC subsidiaries are required to set aside a portion of net income for a statutory surplus reserve until it reaches 50% of registered capital, limiting dividend distributions[10] - The company's dividends to overseas shareholders may be subject to a 10% PRC withholding tax, potentially reduced to 5% under the Double Tax Avoidance Arrangement[11] - The company's PRC subsidiaries can only use loans for purposes set forth in PRC laws and regulations, requiring SAFE filings for foreign currency loans[11] - The company has not applied for a tax resident certificate from the Hong Kong tax authority as of the report date, which is necessary to claim the 5% withholding tax rate[11] - The company faces risks related to the VIE structure, including potential regulatory changes and restrictions on dividend payments from PRC subsidiaries[22] - The company may be subject to increased regulatory oversight and intervention by the Chinese government, which could impact operations and share value[51] - The company is required to file with the CSRC for future equity securities offerings, and uncertainties in Chinese regulations could delay or hinder these processes[51] - The company's Chinese subsidiaries must obtain and maintain business licenses from local counterparts of the SAMR to operate in mainland China[52] - The company faces potential risks if its corporate structure is deemed non-compliant with Chinese regulations, which could lead to a decline in share value[52] - The company consolidates VIEs' operating results in its financial statements under U.S. GAAP, but uncertainties exist regarding PRC laws and regulations[53] - The Final Foreign Investment Law, effective January 1, 2020, does not explicitly address variable interest entities (VIEs), leaving regulatory risks unresolved[54] - Potential violations of PRC laws or regulations could lead to fines, confiscation of income, or revocation of business licenses, severely impacting operations[54] - The PRC legal system's evolving nature creates uncertainties in interpreting and enforcing laws, affecting the company's legal protections[55] - The Holding Foreign Companies Accountable Act (HFCAA) could prohibit trading of the company's securities on U.S. exchanges if its auditor is not subject to PCAOB inspections for two consecutive years[56] - The PCAOB signed a Statement of Protocol (SOP) with PRC authorities in August 2022, allowing inspections of audit firms in mainland China and Hong Kong[56] - The company's auditor, YCM CPA Inc., is headquartered in the U.S. and subject to PCAOB inspections, reducing immediate HFCAA risks[56] - PRC labor laws, including the Labor Contract Law and Social Insurance Law, may increase labor costs and compliance risks[58] - Non-compliance with PRC labor regulations could result in penalties or liabilities, adversely affecting the company's operations[58] - The company is implementing an anticorruption program to comply with the U.S. Foreign Corrupt Practices Act (FCPA) and Chinese anti-corruption laws, including clauses in contracts with foreign sales agents and distributors[59] - The PRC government has legalized the VIE structure, but uncertainties remain, including stricter national security and data security requirements for overseas listings[62] - The company's contractual arrangements with its VIE may be subject to scrutiny by PRC tax authorities, potentially leading to increased tax liabilities or penalties[64] - Conflicts of interest may arise between the company and the VIE's shareholder, who is affiliated with the company's CEO and director[65] - The company's ability to enforce contractual arrangements with its VIE is subject to uncertainties in the PRC legal system, which could limit control over its e-commerce websites[64] - The company's e-commerce business may be significantly disrupted due to restrictions on foreign investment in value-added telecommunication services in China, potentially leading to sanctions or unenforceable contractual arrangements[66] - The company must obtain and maintain various licenses and permits to operate its e-commerce websites, with non-compliance potentially resulting in penalties[67] - The implementation of the Cross-Border Electronic Commerce Code and the Electronic Commerce Law of the PRC imposes stricter legal constraints on the company's e-commerce activities, increasing potential legal risks[68] - The company's PRC subsidiary, Nongyuan Network, holds an ICP license and operates websites, but uncertainties in PRC regulations may affect the legality of foreign investments in its e-commerce business[69] - If any of the company's PRC subsidiaries undergo liquidation, third-party creditors may claim assets, adversely affecting business operations[69] - The company may face unfavorable tax consequences if classified as a PRC "resident enterprise," subject to a 25% enterprise income tax on worldwide income[70] - Dividends and gains from share sales may be subject to PRC withholding tax at rates of 10% for non-PRC enterprises or 20% for non-PRC individuals if deemed from PRC sources[71] - Enhanced scrutiny by PRC tax authorities over acquisition transactions may negatively impact the company's future acquisition strategies[72] - The company's PRC subsidiaries face restrictions on paying dividends or making other payments, potentially limiting liquidity[73] - PRC subsidiaries are required to set aside at least 10% of their accumulated profits annually until the total reaches 50% of their registered capital[74] - Dividends payable by Chinese companies to non-PRC-resident enterprises are subject to a withholding tax rate of up to 10% unless exempted or reduced by treaties[74] - Foreign investors face a daily remittance limit of $50,000 and a per-transaction limit of$10,000 when transferring funds out of China[74] - PRC subsidiaries can pay dividends in foreign currencies without prior SAFE approval, subject to compliance with procedural requirements[74] - The M&A Rules require prior notification to the Ministry of Commerce for certain acquisitions involving national economic security or famous trademarks[75] - Mergers and acquisitions by foreign investors raising national security concerns are subject to strict review by the Ministry of Commerce[75] - Future acquisitions in the PRC may be delayed or prohibited if deemed to raise national security concerns[75] - Compliance with PRC regulations on mergers and acquisitions could be time-consuming and complex[75] - The PRC government may restrict access to foreign currencies for current account transactions in the future[74] - PRC subsidiaries' ability to pay dividends may be limited by debt instruments or adjustments to taxable income by PRC tax authorities[74] - The company faces additional regulatory compliance costs and uncertainties due to recent regulatory developments, including the Holding Foreign Companies Accountable Act, which could impact future capital raising activities and share price[77] - The company is subject to the Holding Foreign Companies Accountable Act, which could prohibit trading of its securities on U.S. exchanges if its auditor is not subject to PCAOB inspections for two consecutive years[77] - The company is permitted to rely on exemptions from certain Nasdaq corporate governance standards, such as not requiring a majority of independent directors, which may reduce shareholder protection[77] - The PCAOB has determined it can inspect and investigate registered public accounting firms in mainland China and Hong Kong, but future obstruction by PRC authorities could lead to new determinations[77] - The company may face increased competition due to public disclosure requirements, as competitors gain access to otherwise confidential information[82] - The company could face investigations by regulatory authorities if it fails to comply with internal control requirements, potentially leading to a loss of investor confidence and a decline in share price[79] - The company may experience higher costs for director and officer liability insurance and face challenges in attracting qualified board members and executives due to public company requirements[81] - The company received a Nasdaq notification on October 12, 2022, for non-compliance with the $1.00 minimum bid price requirement, with an initial 180-day compliance period extended to October 9, 2023[84] - The company regained Nasdaq compliance by effecting a one-for-eight share consolidation in September 2023[85] - The company is a Cayman Islands exempted company, which may make it difficult for shareholders to protect their interests compared to U.S.-incorporated companies[86] - Shareholders of Cayman Islands exempted companies have no general rights to inspect corporate records or obtain shareholder lists[87] - The company's Board of Directors may decline to register transfers of ordinary shares under certain conditions, including unpaid shares or liens[88] - The company was incorporated in the Cayman Islands on July 28, 2015, and conducts operations in China through PRC subsidiaries[89] - The company completed its initial public offering and began trading on Nasdaq under the symbol "FAMI" in February 2018[90] - Company raised approximately$6 million in net proceeds from its initial public offering in February 2018[91] - Company completed a $7.5 million private placement in November 2018, issuing senior convertible notes and warrants[91] - Company received approximately$6.6 million in net proceeds from a public offering in March 2021, with an additional $1.0 million from over-allotment[92] - Company raised approximately$43.9 million in net proceeds from a public offering in April 2021, including over-allotment[92] - Company received approximately $74.2 million in net proceeds from a public offering in September 2021, issuing ordinary shares and pre-funded warrants[94] - Company acquired Jiangxi Xiangbo Agriculture and Forestry Development Co. Ltd. for RMB70 million (approximately$10.9 million) in September 2021[94] - Company signed an Equity Transfer Framework Agreement to purchase 124,590,064 shares of Shanghai Jiaoda Onlly Co., Ltd. for approximately RMB509 million (approximately $71.6 million) in November 2021[94] - Company issued 10,000,000 shares under the 2021 Share Incentive Plan to certain employees in February 2022[96] - Company completed a private placement in February 2022, selling 30,000,000 ordinary shares for$6,000,000[96] - Company divested FLS Mushroom for RMB24.1 million in September 2022[99] - Established a new subsidiary, Ningbo Farmmi Baitong Trading Co., Ltd., in November 2022, focusing on agricultural product production and trade[100] - Increased authorized share capital from $600,000 to$2,500,000 in March 2023, creating 76,000,000 additional ordinary shares[100] - Formed Farmmi USA INC. in April 2023 to expand sales of high-quality agricultural products in North America and Asia[100] - Issued 21,052,632 ordinary shares at $0.38 per share, raising$8,000,000 in July 2023[101] - Consolidated shares at a 1-for-8 ratio in September 2023, reducing authorized shares from 100,000,000 to 12,500,000[101] - Increased authorized share capital to $100,000,000 post-consolidation, creating 487,500,000 additional shares[101] - Sold 99.4$62.99 billion in 2023, projected to grow at an 8% CAGR to $100.31 billion by 2032[107] - China's edible fungi consumption grew from 14.14 million metric tons in 2006 to 40.61 million metric tons in 2020[107] - The company processes and packages all dried edible fungi in-house, while other agricultural products are purchased and sold from external manufacturers or companies[119] - JLT and QNMI contributed 13.5$31.2 million)[130] - The company renewed a 3-year agricultural product supply agreement with Ningbo Caixiang Trading Co., Ltd. in May 2022, with a validity of 3 years[130] - The company signed a 4-year framework cooperation agreement with Lishui Zhelin Trade Co., Ltd. on April 1, 2020[130] - The company signed a cooperation agreement with Suizhou Huayu Ecological Agriculture Co., Ltd. on August 1, 2022, to ensure timely and stable supply of goods[130] - The company made allowance for doubtful accounts of $3,176 and$3,258 for certain advances to suppliers as of September 30, 2023, and 2022, respectively[130] - The company's sales peak from December to January due to increased spending on food, including edible fungi, for New Year holidays[134] - The company applies national standards (GH/T 1013-2015) to its Shiitake products, issued by the All-China Federation of Supply and Marketing Cooperatives on March 27, 2015[135] - Domestic market accounted for 99.4% of total revenues in 2023, while international markets contributed only 0.6%[142] - Export revenues in 2023 were primarily from Japan (28.8%), Middle East (30.2%), and Canada (27.4%)[142] - Online sales accounted for 0.4% of total sales in 2023, down from 4.6% in 2022 and 13.5% in 2021[148] - Major domestic clients Yunmihui and Hongren International contributed 40.5% and 11.7% of total sales in 2023, respectively[144] - The company has established a traceability system since 2006 for its edible fungi products[139] - Quality control measures include HACCP plan, food safety manual, SSOP, GMP, and food defense plan[136] - The company holds BRC and HCCP certifications for food safety standards, valid until 2024[138] - Distribution channels primarily rely on domestic distributors, with products sold both in China and internationally[140] - The company plans to increase export sales and develop more overseas customers through export fairs and cross-border e-commerce[143] - A new e-commerce platform, Farmmi Enterprise, has been approved for agricultural product sales[146] - Farmmi Liangpin Market was closed on December 31, 2020, after being transferred to a mobile application and mini program on WeChat[149] - The company spent a total of RMB 86,955 on intellectual property and RMB 3,516,698 on software and website development, technical service, and product design over the past three fiscal years[153] - Capital expenditures for equipment renovation and development were approximately $314,$2,946, and $4,686 for the years ended September 30, 2023, 2022, and 2021, respectively[156] - The company received an export subsidy of RMB 1,000,000 in 2022[157] - Farmmi holds over 100 registered trademarks related to "Farmmi", "Farmmi Liangpin", "Forasen", and "Puyangtang" in China[154] - The company's major business development projects include internet technology development, internet product development, and processing technology and product development of edible fungi[153] - Farmmi's competitive advantages include a sophisticated quality control system, established supplier relationships, stable and experienced factory employees, and a favorable location in Lishui, China[150] - The company's competitive disadvantages include a low barrier to entry in the industry and a lack of experience in e-commerce[150] - Farmmi's key competitors in the Lishui area include Zhejiang Jingning Nature Food Co. Ltd. and Zhejiang Tianhe Food Co., Ltd.[151] - The company has been awarded various recognitions, including the "Famous Brand Products in Zhejiang" and "Healthy Products with Premium Quality in China's Longevity Village"[151] - Foreign investments in key sectors such as agriculture, energy, manufacturing, infrastructure, and technology require security review and approval before implementation[162] - Overseas listings by China-based companies must be filed with the CSRC within three business days after initial applications or offerings, with fines up to RMB 10 million for non-compliance[163] - Internet platform operators are prohibited from using data or algorithms to hijack traffic, influence user choices, or engage in unfair competition practices[164] - Fines for illegal business concentration under the amended Anti-Monopoly Law can reach up to 10% of the previous year's sales revenue[165] - Internet content service operators must obtain user consent before collecting or sharing personal information and are required to implement security measures to protect user data[166] - The Personal Information Protection Law mandates that sensitive personal information, such as biometric data, requires explicit user consent and notification of its necessity[166] - Data processors handling important data or planning overseas listings must complete annual data security assessments and file reports with regulators[166] - The Anti-Monopoly Guidelines for the Internet Platform Economy Sector specify filing procedures and penalties for monopolistic acts, including fines up to RMB 500,000[165] - The Civil Code of the PRC protects personal information and prohibits illegal collection, use, or sale of such data without consent[166] - The Measures for Information Reporting on Foreign Investment require foreign investors to submit investment details to the competent commerce department[162] - The company holds an ICP license valid until August 14, 2021, and it