SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

(Amendment No. 1) 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the six months ended March 31, 2019

 

Commission File Number: 001-38397

 

Farmmi, Inc.

(Registrant’s name)

 

No. 307, Tianning Industrial Area
Lishui, Zhejiang Province
People’s Republic of China 323000

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.:

 

Form 20-F  x Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K on paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K on paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

 

 

 

Explanatory Note:

 

This Amendment No. 1 to the Report on Form 6-K for the six months ended March 31, 2019, originally filed with the Securities and Exchange Commission on September 24, 2019 (the “Original 6-K”), is being filed solely for the purposes of furnishing (1) Management’s Discussion and Analysis of Financial Condition and Results of Operations, (2) the unaudited condensed interim consolidated financial statements and related notes, and (3) Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T. Except the financial statements, those documents were not previously disclosed.

 

Other than as expressly set forth above, this Form 6-K/A does not, and does not purport to, amend, update or restate the information in any other item of the Original 6-K, or reflect any events that have occurred after the Original 6-K was filed.

 

This Report is hereby incorporated by reference into the registration statement on Form F-1 (registration No. 333-228677) filed with the U.S. Securities and Exchange Commission on December 4, 2018, as amended.

 

Exhibit Index: 

 

Exhibit 99.1 Unaudited Consolidated Financial Statements and Related Notes for the Six Months Ended March 31, 2019 and 2018.

 

Exhibit 99.2Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FARMMI, INC.
     

Date: November 25, 2019

By: /s/ Yefang Zhang
  Name: Yefang Zhang
  Title: Chief Executive Officer

 

 

 

 

Exhibit 99.1 

 

FARMMI, INC.

 

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018

 

1

 

 

FARMMI, INC.

 

TABLE OF CONTENTS

 

   Page 
Consolidated Financial Statements     
      
Condensed Consolidated Balance Sheets (Unaudited)   3 
      
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)   4 
      
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)   5 
      
Condensed Consolidated Statements of Cash Flows (Unaudited)   6 
      
Notes to Condensed Consolidated Financial Statements (Unaudited)   7-28 

 

2

 

  

 Farmmi, Inc. 

 Condensed Consolidated Balance Sheets 

 (Unaudited) 

 

    March 31,     September 30,  
    2019     2018  
Assets                
Current Assets                
Cash   $ 5,338,219     $ 4,925,165  
Restricted cash     500,000       -  
Accounts receivable, net - trade     13,974,824       8,601,269  
Accounts receivable, net - related party     19,126       1,257  
Inventory, net     1,860,567       1,808,143  
Advances to suppliers     8,488,640       5,868,486  
Other current assets     227,489       135,314  
Total current assets     30,408,865       21,339,634  
                 
Property, plant and equipment, net     122,667       136,363  
Intangible assets     99,513       -  
Restricted cash - long term     600,000       600,000  
Total Assets   $ 31,231,045     $ 22,075,997  
                 
Liabilities and Equity                
Current Liabilities                
Short-term bank loans   $ 1,490,070     $ 1,455,580  
Long-term bank loans -current portion     655,631       -  
Accounts payable - trade     423,231       343,141  
Due to related parties     47,381       122,800  
Advances from customers     54,959       -  
Convertible notes payable     5,251,075       -  
Other current liabilities     606,710       300,379  
Total current liabilities     8,529,057       2,221,900  
                 
Long-term bank loans     -       640,455  
Total Liabilities     8,529,057       2,862,355  
                 
Equity                
                 
Common stock, $0.001 par value, 20,000,000 shares authorized, 12,063,223 and 11,932,000 shares issued and outstanding at March 31, 2019 and September 30, 2018     12,063       11,932  
Additional paid-in capital     14,298,511       11,322,819  
Statutory reserve     229,512       229,512  
Retained earnings     6,826,761       6,996,837  
Accumulated other comprehensive income (loss)     440,061       (222,830 )
Total Stockholders' Equity     21,806,908       18,338,270  
                 
Non-controlling Interest     895,080       875,372  
Total Equity     22,701,988       19,213,642  
                 
Total Liabilities and Equity   $ 31,231,045     $ 22,075,997  

 

 

3

 

 

 Farmmi, Inc. 

 Condensed Consolidated Statements of Operations and Comprehensive Income 

 (Unaudited) 

 

    For the Six Months Ended
March 31,
 
    2019     2018  
 Revenues                
 Sales to third parties   $ 14,386,404     $ 12,865,585  
 Sales to related party     1,783       154,452  
 Total revenues     14,388,187       13,020,037  
                 
 Cost of revenues     11,845,025       10,920,758  
                 
 Gross Profit     2,543,162       2,099,279  
                 
 Operating expenses                
 Selling and distribution expenses     281,213       90,684  
 General and administrative expenses     876,746       731,008  
 Total operating expenses     1,157,959       821,692  
                 
 Income from operations     1,385,203       1,277,587  
                 
 Other income (expenses)                
 Interest income     451       376  
 Interest expense     (1,527,302 )     (86,138 )
 Other (expenses) income, net     (1,583 )     7,452  
 Total other expenses     (1,528,434 )     (78,310 )
                 
 (Loss) income before income taxes     (143,231 )     1,199,277  
                 
 Provision for income taxes     27,860       1,591  
                 
 Net (loss) income     (171,091 )     1,197,686  
                 
 Less: net loss attributable to non-controlling interest     (1,015 )     (1,667 )
                 
 Net (loss) income attributable to Farmmi, Inc.   $ (170,076 )   $ 1,199,353  
                 
Comprehensive income                
 Net (loss) income   $ (171,091 )   $ 1,197,686  
 Other comprehensive income: foreign currency translation gain     683,614       700,595  
 Total comprehensive income     512,523       1,898,281  
 Comprehensive income attributable to non-controlling interest     19,708       51,697  
                 
Comprehensive income attributable to Farmmi, Inc.   $ 492,815     $ 1,846,584  
                 
 Weighted average number of shares, basic and diluted     11,427,753       10,411,231  
                 
 Basic and diluted (loss) earnings per common share   $ (0.01 )   $ 0.12  

 

 

4

 

 

 Farmmi, Inc. 

 Condensed Consolidated Statements of Changes in Stockholders' Equity 

 For the Six Months Ended March 31, 2019 and 2018 

 (Unaudited) 

  

    Common Stock     Additional Paid in     Accumulated Other Comprehensive     Statutory     Retained     Total Stockholders'     Non-controlling        
    Shares     Amount     Capital     Income (loss)     Reserve     earnings     Equity     Interest     Total Equity  
 Balance at September 30, 2017     10,000,000     $ 10,000     $ 5,023,080     $ 718,941     $ 229,512     $ 3,774,805     $ 9,756,338     $ 896,576     $ 10,652,914  
                                                                         
 Share issuance – IPO, net     1,932,000       1,932       6,299,739       -       -       -       6,301,671       -       6,301,671  
 Foreign currency translation gain     -       -       -       647,231       -       -       647,231       53,364       700,595  
 Net income (loss) for the period     -       -       -       -       -       1,199,353       1,199,353       (1,667 )     1,197,686  
                                                                         
 Balance at March 31, 2018     11,932,000     $ 11,932     $ 11,322,819     $ 1,366,172     $ 229,512     $ 4,974,158     $ 17,904,593     $ 948,273     $ 18,852,866  
                                                                         
 Balance at September 30, 2018     11,932,000     $ 11,932     $ 11,322,819     $ (222,830 )   $ 229,512     $ 6,996,837     $ 18,338,270     $ 875,372     $ 19,213,642  
                                                                         
 Issuance of common shares for convertible notes redemption     131,223       131       485,077       -       -       -       485,208       -       485,208  
 Beneficial conversion feature associated with convertible notes                     670,618       -       -       -       670,618       -       670,618  
 Issuance of warrants associated with convertible notes                     1,819,997       -       -       -       1,819,997       -       1,819,997  
 Foreign currency translation gain     -       -       -       662,891       -       -       662,891       20,723       683,614  
 Net loss for the period     -       -       -       -       -       (170,076 )     (170,076 )     (1,015 )     (171,091 )
                                                                         
 Balance at March 31, 2019     12,063,223     $ 12,063     $ 14,298,511     $ 440,061     $ 229,512     $ 6,826,761     $ 21,806,908     $ 895,080     $ 22,701,988  

 

 

5

 

 

 Farmmi, Inc. 

 Condensed Consolidated Statements of Cash Flows 

 (Unaudited)

 

   For the Six Months Ended
March 31,
 
   2019   2018 
Cash flows from operating activities          
 Net (loss) income  $(171,091)  $1,197,686 
 Adjustments to reconcile net (loss) income to net cash used in operating activities:          
 Changes in allowances - accounts receivable   -    12,909 
 Depreciation expense   22,976    6,464 
 Loss from disposal of property and equipment   -    833 
 Accrued interest expense for convertible notes   500,000    - 
 Amortization of deferred financing costs   943,215    - 
 Changes in operating assets and liabilities:          
 Accounts receivable, net   (5,096,374)   (3,629,315)
 Inventory, net   (9,412)   (648,303)
 Advances to suppliers   (2,437,474)   (104,714)
 Other current assets   (87,404)   (144,724)
 Long-term prepaid expenses   -    4,370 
 Accounts payable   70,694    (144,282)
 Advances from customers   53,993    67,241 
 Other current liabilities   294,839    29,810 
Net cash used in operating activities   (5,916,038)   (3,352,025)
           
Cash flows from investing activities          
 Purchase of property, plant and equipment   (6,346)   (2,782)
 Purchase of intangible assets   (97,764)   - 
Net cash used in investing activities   (104,110)   (2,782)
           
Cash flows from financing activities          
 Payments of deferred financing costs   (716,318)   - 
 Gross proceeds from issuance of convertible notes   7,500,000    - 
 Net proceeds from Initial Public Offering - stock issuance   -    7,728,000 
 Direct costs disbursed from Initial Public Offering proceeds   -    (1,147,549)
 Borrowings from bank loans   1,463,870    - 
 Repayments of bank loans   (1,463,870)   - 
 Repayments of loans from related parties   (76,253)   (426,316)
Net cash provided by financing activities   6,707,429    6,154,135 
           
Effect of exchange rate changes on cash, cash equivalents and restricted cash   225,773    77,547 
           
Net increase in cash, cash equivalents and restricted cash   913,054    2,876,875 
           
Cash, cash equivalents and restricted cash, beginning of period   5,525,165    2,590,539 
           
Cash, cash equivalents and restricted cash, end of period  $6,438,219   $5,467,414 
           
Supplemental disclosure information:          
 Income taxes paid  $11,254   $4,312 
 Interest paid  $71,670   $82,987 
           
Non-cash financing activities          
Conversion of notes to 131,223 shares of common stock  $485,208   $- 
Accrued interest for convertible notes  $500,000   $- 

 

6

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Organization and nature of business

 

Farmmi, Inc. (“FMI”) is a holding company incorporated under the laws of the Cayman Islands on July 28, 2015. FMI’s Chief Executive Officer (“CEO”) Ms. Yefang Zhang, as the sole shareholder of FarmNet Limited which is the sole shareholder of FMI, and her husband Mr. Zhengyu Wang, a director of the Company, are the ultimate shareholders of the Company (“Controlling Shareholders”).

 

Reorganization

 

The Reorganization of the legal structure involved the incorporation of FMI, a Cayman Islands holding company; the incorporation of Farmmi International Limited (“Farmmi International”), a Hong Kong company; the incorporation of Hangzhou Suyuan Agriculture Technology Co., Ltd. (“Suyuan Agriculture”), a PRC company; the incorporation of Farmmi (Hangzhou) Enterprise Management Co., Ltd. (“Farmmi Enterprise”) and Lishui Farmmi Technology Co., Ltd. (“Farmmi Technology”), two new wholly foreign-owned entities (“WFOE”) formed by Farmmi International under the laws of China; and the equity transfer of Suyuan Agriculture, Zhejiang Forest Food Co., Ltd. (“Forest Food”) and Zhejiang FLS Mushroom Co., Ltd. (“FLS Mushroom”) (collectively, the “Transferred Entities”) from the Controlling Shareholders.

 

On July 5, 2016 and August 10, 2016, Zhengyu Wang transferred all of his equity interests in Suyuan Agriculture to Farmmi Enterprise and Farmmi Technology with each owning 50% of Suyuan Agriculture. On November 24, 2016, Zhengyu Wang, the controlling shareholder of Forest Food, transferred 96.15% of his interest in Forest Food to Suyuan Agriculture. On October 24, 2016, Zhengyu Wang, the controlling shareholder of FLS Mushroom, transferred 100% of his interest in FLS Mushroom to Suyuan Agriculture. After the Reorganization, FMI, the ultimate holding company, owns 100% equity interest of Suyuan Agriculture and FLS Mushroom, and 96.15% equity interest of Forest Food. The remaining 3.85% equity interest of Forest Food is owned by a minority interest shareholder.

 

On September 18, 2016, Suyuan Agriculture entered into a series of contractual agreements with Zhengyu Wang, the owner of Hangzhou Nongyuan Network Technology Co., Ltd. (“Nongyuan Network”) and Nongyuan Network. Nongyuan Network is a company incorporated on December 8, 2015 that focuses on the development of network marketing and provides a network platform for sales of agriculture products. These agreements include Exclusive Management Consulting and Technology Service Agreement, Proxy Agreement, Equity Pledge Agreement and Executive Call Option Agreement. Pursuant to these agreements, Suyuan Agriculture has the exclusive rights to provide to Nongyuan Network consulting services related to business operation and management. All the above contractual agreements obligate Suyuan Agriculture to absorb all of the loss from Nongyuan Network’s activities and entitle Suyuan Agriculture to receive all of its residual returns. In essence, Suyuan Agriculture has gained effective control over Nongyuan Network. Therefore, the Company believes that Nongyuan Network should be considered as Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts of this entity are consolidated with those of Suyuan Agriculture.

 

Since FMI and its subsidiaries are effectively controlled by the same Controlling Shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

7

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Organization and nature of business (Continued)

 

Reorganization (Continued)

 

On December 26, 2017, Zhejiang Farmmi Food Co., Ltd. (“Farmmi Food”) was established under the laws of the PRC. Initially Farmmi Food was wholly owned by Farmmi Technology. In January 2018, the share ownership was transferred to Suyuan Agriculture. In May 2018, Farmmi Food received its food production permit and began operation.

 

On March 22, 2019, Lishui Farmmi E-Commerce Co., Ltd. (“Farmmi E-Commerce”) was established under the laws of the PRC. Nongyuan Network and Suyuan Agriculture owns 98% and 2% of interests in Farmmi E-Commerce, respectively.

 

Upon the reorganization, Farmmi has subsidiaries in countries and jurisdictions including PRC, Hong Kong and Cayman Islands. Details of the subsidiaries of Farmmi are set out below:

 

Name of Entity  Date of
Incorporation
  Place of
Incorporation
  % of
Ownership
   Principal Activities
FMI  July 28, 2015  Cayman   Parent   Holding Company
Farmmi International  August 20, 2015  Hong Kong   100   Holding Company
Farmmi Enterprise  May 23, 2016  Zhejiang, China   100   Holding Company
Farmmi Technology  June 6, 2016  Zhejiang, China   100   Holding Company
Suyuan Agriculture  December 8, 2015  Zhejiang, China   100   Holding Company
Forest Food  May 8, 2003  Zhejiang, China   96.15   Drying, further processing and distribution of edible fungus
FLS Mushroom  March 25, 2011  Zhejiang, China   100   Light processing and distribution of dried mushrooms
Farmmi Food  December 26, 2017  Zhejiang, China   100   Drying, further processing and distribution of edible fungus
Nongyuan Network  July 7, 2016  Zhejiang, China   0 (VIE)   Trading
Farmmi E-Commerce  March 22, 2019  Zhejiang, China   Subsidiary of the VIE   Technology development, technical services and technical consultation related to agricultural products

 

Initial Public Offering

 

On February 21, 2018, the Company announced the closing of its initial public offering (“IPO”) of 1,680,000 ordinary shares at a price to the public of $4.00 per share for a total of $6,720,000 in gross proceeds. The Company raised total net proceeds of $5,374,341 after deducting underwriting discounts and commissions and offering expenses. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 252,000 ordinary shares at the public offering price. This offering was conducted on a firm commitment basis. The Company’s shares began trading on The NASDAQ Capital Market on February 16, 2018 under the ticker symbol “FAMI.”

 

On February 23, 2018, the Company announced that ViewTrade Securities, Inc., who acted as the sole underwriter and book-runner of the Company’s IPO, exercised the full over-allotment option to purchase an additional 252,000 ordinary shares at the IPO price of $4.00 per share for a total of gross proceeds of approximately $1,008,000 from the exercise of this over-allotment option. The Company raised total net proceeds of $927,330 after deducting underwriting discounts and commissions and offering expenses.

 

8

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies

 

FMI, Farmmi International, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, Forest Food, FLS Mushroom, Farmmi Food, Nongyuan Network and Farmmi E-Commerce (herein collectively referred to as the “Company”) are engaged in processing and distributing dried Shiitake mushrooms and Mu Er mushrooms. Approximately 90% of the Company’s products are sold in China and the remaining 10% internationally, including USA, Japan, Canada, Europe and the Middle East.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

The accompanying unaudited condensed consolidated financial statements have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal years ended September 30, 2018 and 2017.

 

The unaudited condensed consolidated financial statements of the Company reflect the principal activities of FMI, Farmmi international, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, and Suyuan Agriculture’s main operation subsidiaries, Forest Food, Farmmi Food and FLS Mushroom, and the VIE Nongyuan Network and its subsidiary Farmmi E-Commerce. All intercompany transactions and balances have been eliminated upon consolidation.

 

Consolidation of Variable Interest Entities

 

In accordance with accounting standards regarding consolidation of variable interest entities (“VIEs”), VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

The Company determined that Nongyuan Network is a VIE because the Company is the primary beneficiary of risks and rewards of this VIE. The carrying amount of this VIE’s assets and liabilities are as follows:

 

  

March 31,

2019

  

September 30,

 2018

 
Current assets  $616,242   $481,228 
Non-current assets   170,396    71,239 
Total assets   786,638    552,467 
Total liabilities   (580,633)   (272,715)
Net assets  $206,005   $279,752 

 

The financial performance of the VIE reported in the unaudited condensed consolidated statement of income and comprehensive income for the six months ended March 31, 2019 includes sales of  $3,097,876, operating expenses of  $3,176,450, and net loss of  $78,962.

 

9

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Use of Estimates

 

In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowance for doubtful accounts and advance to suppliers; the valuation of inventories; the valuation of beneficial conversion feature of the convertible notes; and the valuation of deferred tax assets.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. All cash balances are in bank accounts in PRC and are not insured by the Federal Deposit Insurance Corporation or other programs.

 

Restricted Cash

 

The Company adopted Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash” on October 1, 2018. This ASU applies to all entities that have restricted cash or restricted cash equivalents to be presented in the statement of cash flows under Topic 230. As of March 31, 2019 and September 30, 2018, the Company had restricted cash of $1,100,000 and $600,000, respectively. $600,000 of the restricted cash were the proceeds from the Initial Public Offering and will be released in February 2021, the rest $500,000 were the proceeds from the private placement (Note 9) and is designated to pay for professional service fees at any time.

 

Accounts Receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after efforts at collection prove unsuccessful.

 

Inventory

 

The Company values its inventories at the lower of cost, determined on a weighted average basis, or net realizable value. The Company reviews its inventories periodically to determine if any reserves are necessary for potential obsolescence or if the carrying value exceeds net realizable value.

 

Advances to Suppliers

 

Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for premium quality. The Company is required from time to time to make cash advances when placing its purchase orders. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance.

 

10

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.

 

Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and equipment are as follows:

 

Machinery and equipment  5 – 10 years
Transportation equipment  4 years
Office equipment   3 – 5 years
Leasehold improvement  Shorter of lease term or useful life

 

Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized.

 

Intangible assets

 

Intangible assets consist primarily of purchased software. Intangible assets are stated at cost less accumulated amortization, which are amortized using the straight-line method with the estimated useful lives of 10 years.

 

Revenue Recognition

 

On October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“ASC Topic 606”) using the modified retrospective method for contracts that were not completed as of October 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements, and no adjustments to opening retained earnings were made as the Company’s revenue was recognized based on the amount of consideration expected to be received in exchange for satisfying the performance obligations.

 

ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per ton. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of March 31, 2019 and September 30, 2018. For the six months ended March 31, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

 

Refer to Note 15 — Segment reporting for details of revenue segregation.

 

11

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Cost of Revenues

 

Cost of revenues includes cost of raw materials purchased, inbound freight cost, cost of direct labor, depreciation expense and other overhead. Write-down of inventory for lower of cost or net realizable value adjustments is also recorded in cost of revenues.

 

Fair Value of Financial Instruments

 

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, defines fair value, establishes a three-level valuation hierarchy for fair value measurements and enhances disclosure requirements.

 

The three levels are defined as follows:

 

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.

 

Level 3 — Inputs to the valuation methodology are unobservable.

 

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, restricted cash, accounts receivable, advances to suppliers, other current assets, accounts payable, due to related parties, advances from customers, other current liabilities and short-term bank loans approximate their recorded values due to their short-term maturities.

 

Beneficial conversion features

 

The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.

 

Debt Issuance Costs and Debt Discounts

 

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed. 

 

12

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Concentrations of credit risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts receivable and advances to suppliers. As of March 31, 2019 and September 30, 2018, $5,320,357 and $4,918,183 of the Company’s cash is maintained in banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay are dependent upon the industry economics prevailing in these areas. The Company also makes cash advances to certain suppliers to ensure the stable supply of key raw materials. The Company performs ongoing credit evaluations of its customers and key suppliers to help further reduce credit risk.

 

Comprehensive Income

 

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholder’s equity but are excluded from net income. Other comprehensive income consists of foreign currency translation adjustment from the Company not using the U.S. dollar as its functional currency.

 

Foreign Currency Translation

 

The Company’s financial information is presented in U.S. dollars (“USD”). The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”), the currency of PRC. Any transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The unaudited condensed consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

The exchange rates in effect as of March 31, 2019 and September 30, 2018 were RMB1 for $0.1490 and $0.1456, respectively. The average exchange rates for the six months ended March 31, 2019 and 2018 were RMB1 for $0.1464 and $0.1542, respectively.

 

Shipping and Handling

 

All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $114,669 and $77,910 for the six months ended March 31, 2019 and 2018, respectively.

 

13

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Value Added Tax

 

The Company is generally subject to the value added tax (“VAT”) for selling merchandise, except for FLS Mushroom. Before May 1, 2018, the applicable VAT rate was 13% or 17% (depending on the type of goods involved) for products sold in PRC. After May 1, 2018, the Company is subject to a tax rate of 12% or 16%, and after April 1, 2019, the tax rate was further reduced to 9% or 13% based on the new Chinese tax law. Pursuant to approval issued by the State Administration of Taxation, FLS Mushroom’s major operation can be classified as agriculture products and its revenue is exempt from VAT. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax authorities has the right to assess a penalty based on the amount of taxes which is determined to be late or deficient, with any penalty being expensed in the period when a determination is made by the tax authorities that a penalty is due. During the reporting periods, the Company had no dispute with PRC tax authorities and there was no tax penalty incurred.

 

Income Taxes

 

The Company is subject to the income tax laws of the PRC. No taxable income was generated outside the PRC for the six months ended March 31, 2019 and 2018The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or not be deductible in the future.

 

ASC 740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of March 31, 2019 and September 30, 2018As of March 31, 2019, the tax years ended December 31, 2014 through December 31, 2018 for the Company’s PRC subsidiary remain open for statutory examination by PRC tax authorities.

 

Statement of Cash Flows

 

In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

14

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Risks and Uncertainties

 

The operations of the Company are located in PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in PRC, in addition to the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.

 

The Company does not carry any business interruption insurance, product liability insurance or any other insurance policy except for a limited property insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment in the Company.

  

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its financial statements and related disclosures. The Company has estimated that the adoption of this AUS will not have material impact on the results of the operations and cash flows, however, it may have a material impact on the consolidated balance sheets. As required by this ASU, the Company will record the right of use assets and operating lease liabilities on the consolidated balance sheets.

 

15

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In November 2017, the FASB issued ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the new revenue recognition standard. This standard will be effective for fiscal years beginning after December 15, 2018. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company expects that the adoption of this ASU would not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

16

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 — Summary of significant accounting policies (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

 

17

 

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3 — Accounts receivable

 

Accounts receivable consisted of the following:

 

   March 31,
2019
   September 30,
2018
 
Accounts receivable - trade  $13,974,824   $8,601,269 
Accounts receivable - related party   19,126    1,257 
Accounts receivable, net  $13,993,950   $8,602,526 

 

No allowance for doubtful accounts was deemed necessary for the six months ended March 31, 2019 and 2018.

 

Note 4 — Inventory

 

Inventory consisted of the following:

 

   March 31,
2019
   September 30,
2018
 
Raw materials  $1,777,672   $1,742,005 
Packaging materials   28,903    65,966 
Finished goods   53,992    172 
Total  $1,860,567   $1,808,143 

 

Inventory includes raw materials, packaging materials, work in process and finished goods. Finished goods include direct material costs, direct labor costs and manufacturing overhead. As of March 31, 2019 and September 30, 2018, no inventory reserve was deemed necessary.

 

Note 5 — Property, plant and equipment, net

 

Property, plant and equipment, stated at cost less accumulated depreciation, consisted of the following:

 

   March 31,
2019
   September 30,
2018
 
Office equipment  $47,157   $39,755 
Vehicles   69,926    68,307 
Machinery and equipment   100,746    98,414 
Leasehold improvements   120,432    117,645 
Subtotal   338,261    324,121 
Accumulated depreciation and amortization   (215,594)   (187,758)
Total  $122,667   $136,363 

 

Depreciation expense was $22,976 and $6,464 for the six months ended March 31, 2019 and 2018, respectively.

 

18

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 — Advance to suppliers

 

Movement of advance to suppliers is as follows:

 

   March 31,
2019
   September 30,
2018
 
Beginning balance  $5,868,486   $4,112,915 
Increased during the period/year   12,898,056    32,093,609 
Less: utilized during the period/year   (10,416,956)   (30,209,196)
Exchange rate difference   139,054    (128,842)
Ending balance  $8,488,640   $5,868,486 

 

Advances to suppliers represent prepayments made to ensure continuous high-quality supply and favorable purchase prices for premium quality. These advances are closely and directly related to the acquisition of inventory used to fulfill sales orders. These advances are settled upon suppliers delivering dried mushrooms to the Company when the transfer of ownership of the products occurs.

 

On April 1, 2016, the Company entered into two separate framework supply agreements (“Framework Agreements”) with two co-operatives, Jingning Liannong Trading Co., Ltd (“JLT”) and Qingyuan Nongbang Mushroom Industry Co., Ltd (“QNMI”). Jingning County and Qingyuan County where JLT and QNMI are located produce premium Shiitake and Mu Er. Many competitors of the Company and other large buyers go there to source their supplies. Family farms and co-operatives traditionally request advance payments to be made to secure supplies. By making advance payments to these suppliers, the Company is also able to lock in a more favorable price for premium quality than would be available in the open market.

 

The Framework Agreements only provide general guidelines. Actual prices are negotiated and agreed upon in individual purchase orders, and are typically set at market prices based on the quality grade and quantities determined and agreed with the suppliers. Prices may vary based on market demand and crop condition etc. The Company can generally secure the premium quality raw material supplies at prices slightly higher than the typical market prices for average quality raw materials. The quality of supplies must meet standardized specifications of both the mushroom industry and standards set by the Company.

 

The Company advances certain initial payments based on its estimated purchase plan from these two suppliers and additional advances based on individual purchase orders placed. The Company pays advances for no other reason than to secure an adequate supply of dried mushrooms to meet its sales demands. The Company’s purchase orders require that the advances shall be refunded by suppliers if they fail to produce any dried mushrooms or fail to deliver supplies to the Company timely.

 

19

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 — Advance to suppliers (Continued)

 

Advances to suppliers are carried at cost and evaluated for recoverability. The realizability evaluation process is similar to that of the lower of cost or net realizable value evaluation process for inventories. The Company periodically evaluates its advances for recoverability by monitoring suppliers’ ability to deliver a sufficient supply of mushrooms as well as current crop and market condition. This includes analyzing historical quantity and quality of production with monitoring of crop information provided by the Company’s field personnel related to weather or disaster or any other reason. If for any reason the Company believes that it will not receive supplies of the contracted volumes, the Company will assess its advances for any likelihood of recoverability and adjust advances on its financial statements at the lower of cost or estimated recoverable amounts. The advances are made primarily to JLT and QNMI, which are co-operatives formed by many family farms, with which the Company has had long-term relationships over the years. If any of these family farms fail to deliver supplies, the Company would expect to receive a refund of the advances through JLT/QNMI. The Company accrues for any allowance for possible loss on advances when there is doubt as to the collectability of the refund.

 

As of March 31, 2019, total advances made to these two suppliers amounted to $8,412,607, of which 100% has been utilized as of September 30, 2019. The Company continuously makes advances to its suppliers on a rolling basis, which typically represent 30% of the total amount of each purchase order. The Company may maintain its outstanding advance payments at a relatively high level going forward because the Company anticipates continuous large orders from its largest customer, China Forestry Group Corporation.

 

Note 7 — Short-term bank loans

 

Short-term bank loans consist of the following:

 

   March 31,
2019
   September 30,
2018
 
Bank of China (Lishui Branch)  $1,490,070   $1,455,580 
Total  $1,490,070   $1,455,580 

 

On July 11, 2018, Forest Food, a subsidiary of the Company, entered into a loan agreement with the Bank of China (Lishui Branch) to borrow RMB 10 million (equivalent of $1,455,580) as working capital for six months, with a due date on January 10, 2019 at an annual effective interest rate of 6.09%. The loan is secured by the real property and land use right owned by Forasen Group Co., a related party. The loan is also guaranteed by Zhejiang Lishui Xinyite Automation Technology Co., Ltd., Lishui Kaige Bearing Co., Ltd., and Zhejiang MeiFeng Tea Industry co., Ltd, three unrelated parties, as well as two principal officers of the Company. The loan was repaid upon maturity.

 

On January 15, 2019, Forest Food, entered into a new loan agreement with the Bank of China (Lishui Branch) to borrow RMB 10 million (equivalent of $1,490,070) as working capital for one year, with a due date on January 14, 2020 at an annual effective interest rate of 4.86%. The loan is secured by the real property and land use right owned by Forasen Group Co., a related party. The loan is also guaranteed by Zhejiang Lishui Xinyite Automation Technology Co., Ltd., Lishui Kaige Bearing Co., Ltd., and Zhejiang MeiFeng Tea Industry co., Ltd, three unrelated parties, as well as two principal officers of the Company.

 

20

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8 — Long-term bank loan

 

On July 4, 2017, the Company entered into a loan agreement with Jianxin Bank of Lishui to borrow RMB 4.4 million (equivalent of $655,631) for working capital needs. The loan matures on May 15, 2019 with an annual effective interest rate of 9.6%. The principle is due in full on the maturity date. The loan is guaranteed by Lishui Jiuanju Trade Co., Ltd., and Wangfeng Yan, two unrelated parties, as well as two principal officers of the Company. The loan was repaid upon maturity.

 

Note 9 — Convertible notes payable and warrants

 

On November 1, 2018, the Company completed a $7.5 million private placement with an institutional investor (the “Buyer”). Pursuant to the Securities Purchase Agreement, dated as of November 1, 2018 (the “Securities Purchase Agreement”), the Company issued and sold an aggregate of $7.5 million of senior convertible notes due April 1, 2020 (the “Notes”) and warrants (the “Investor Warrants”) to purchase an aggregate of 800,000 of the Company’s Ordinary Shares. The Notes were initially convertible into 1,198,084 Ordinary Shares at the rate of $6.26 per Ordinary Share, which rate is subject to adjustment as referenced in the form of Notes. The Notes bear interest at 10% per year. The Investor Warrants are exercisable by the holder thereof at any time on or after November 1, 2018 and before November 1, 2022. One year from the date of issuance of the Investor Warrants, the Exercise Price of the Investor Warrants will be lowered to the then-current Market Price (as such term is defined in the Notes) of an Ordinary Share, if such Market Price is less than the initial Exercise Price of $6.53 per Ordinary Share.

 

On November 1, 2018, the Company issued warrants to purchase 10% of the shares placed under the Notes (initially 119,808) to the placement agent, at an exercise price of $7.183 per share (the “Placement Agent Warrants”). The Investor and Placement Agent Warrants have a term of four years and are subject to adjustment under certain events.

 

At the time of issuance, the Company allocated the proceeds to the Notes and Investor Warrants based on their relative fair values, and evaluated the intrinsic value of the beneficial conversion feature (“BCF”) associated with the conversion feature of the Notes. The Investor Warrants and BCF were recorded into additional paid-in capital.

 

The Investor Warrants were treated as a discount on the Notes and were valued at $1,496,153. Additionally, the Notes were considered to have an embedded BCF because the effective conversion price was less than the fair value of the Company’s common stock on November 1, 2018. The value of the BCF was $670,618 and was also recorded as a discount on the Notes. Hence, in connection with the issuance of the Notes and the Investor Warrants, together with other issuance costs, the Company recorded a total debt discount of $3,206,932 that will be amortized over the term of the Notes. For the six months ended March 31, 2019, a total of $943,215 in amortization of the debt discounts was recorded and charged to the interest expense. As of March 31, 2019, ordinary shares totaling 131,223 were issued by the Company to the Buyer equaling principal and interests amounted to $485,208, and the Notes balance was $5,251,075, with a carrying value of $7,514,792, net of unamortized debt discounts of $2,263,717.

 

The fair value of the Investor Warrants and Placement Agent Warrants was computed using the Black-Scholes option-pricing model. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (2.94%), (2) expected warrant life of 4 years, (3) expected volatility of 72.57%, and (4) expected dividend yield of 0.

 

21

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10 — Related party transactions

 

The relationship and the nature of related party transactions are summarized as follow:

 

Name of Related Party   Relationship to the Company   Nature of Transactions
Forasen Group Co., Ltd. (‘‘Forasen Group’’)   Owned by the Chairman of Board of Directors   Provides guarantee for the Company’s bank loans; purchases from the Company; leases factory building to the Company
FarmNet Limited   Parent company of FMI   Provides working capital loan
Yefang Zhang   Chief Executive Officer (‘‘CEO’’)   Provides working capital loan; provides guarantee for the Company’s bank loans
Zhengyu Wang   Chairman of Board of Directors   Provides guarantee for the Company’s bank loans

 

Due to related parties consisted of the following:

 

   March 31,
2019
   September 30,
2018
 
Zhengyu Wang  $47,232   $- 
Forasen Group   149    - 
FarmNet Limited   -    122,800 
Total  $47,381   $122,800 

 

Sales to related party

 

The Company periodically sells merchandise to its affiliates during the ordinary course of business. Forasen Group was the seventh largest customer of the Company for the six months ended March 31, 2018. For the six months ended March 31, 2019 and 2018, the Company recorded sales to Forasen Group of $1,783 and $154,452, respectively. Sales to Forasen Group accounted for 0.01% and 1.19% of the total sales for the six months ended March 31, 2019 and 2018, respectively.

 

Operating lease from related party

 

In October 2009, the Company entered into a lease agreement with Forasen Group for leasing the factory building. The lease term is 10 years with monthly rent of RMB 22,400 (equivalent of $3,279).

 

Guarantees provided by related parties

 

The Company’s related parties provide guarantees for the Company’s short-term and long-term bank loans (see Note 7 and Note 8).

 

22

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 11 — Stockholder’s Equity

 

Capital contribution

 

On January 22, 2016, the Board of Directors of the Company entered into a resolution to increase the registered capital of Forest Food from RMB 5,000,000 ($603,500) to RMB 17,600,000 ($2,124,320).

 

On February 29, 2016, the Board of Directors of the Company approved a new investment from National Trust Co., Ltd. (the “Investor”), pursuant to which, the Investor agreed to invest RMB 5,999,784 ($915,414) into the Company, of which RMB 704,200 ($107,461) was counted toward the registered capital. After these equity changes, National Trust Co., Ltd. owned a minority interest of 3.85% in Forest Food.

 

On February 21, 2018, the Company announced the closing of its IPO of 1,680,000 ordinary shares at a price to the public of $4.00 per share for a total of $6,720,000 in gross proceeds.

 

On February 23, 2018, the Company announced that ViewTrade Securities, Inc., who acted as the sole underwriter and book-runner of the Company’s IPO, exercised the full over-allotment option to purchase an additional 252,000 ordinary shares at the IPO price of $4.00 per share for a total of gross proceeds of approximately $1,008,000 from the exercise of this over-allotment option.

 

Noncontrolling interest

 

The Company’s noncontrolling interest consists of the following:

 

   March 31,
2019
   September 30,
2018
 
Original paid-in capital  $107,461   $107,461 
Additional paid-in capital   807,953    807,953 
Foreign currency translation loss attributed to noncontrolling interest   (21,517)   (42,240)
Net gain attributed to noncontrolling interest   1,183    2,198 
Total noncontrolling interest  $895,080   $875,372 

 

Statutory Reserve

 

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).

 

Appropriations to the statutory surplus reserve are required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. As of March 31, 2019 and September 30, 2018, the balance of the required statutory reserves was $229,512 and $229,512, respectively.

 

23

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 11 — Stockholder’s Equity (Continued)

 

Conversion of convertible notes

 

As disclosed in Note 9, in March 2019, the Company issued total of 131,223 ordinary shares to the Buyer equaling principal and interests amounted to $485,208 of the convertible notes.

 

Additional paid-in capital

 

As disclosed in Note 9, on November 1, 2018, the Company issued and sold an aggregate of $7.5 million of senior convertible notes due April 1, 2020 and warrants to purchase an aggregate of 800,000 of its Ordinary Shares. In addition, the Company also issued warrants to purchase 10% of the shares placed under the Notes (initially 119,808) to the placement agent.

 

The Company evaluated the intrinsic value of the BCF, the relative fair value of the Investor Warrants and Placement Agent Warrants on their date of grant, which was determined to be $670,618, $1,496,153 and $323,843, respectively, and they were recorded as additional paid-in capital.

 

Note 12 — Taxes

 

Corporation Income Tax (‘‘CIT’’)

 

The Company is subject to income taxes on an entity basis on income derived from the location in which each entity is domiciled.

 

FMI is incorporated in the Cayman Islands as an offshore holding company and is not subject to tax on income or capital gain under the laws of the Cayman Islands.

 

Farmmi International is incorporated in Hong Kong as a holding company with no activities. Under the Hong Kong tax laws, an entity is not subject to income tax if no revenue is generated in Hong Kong.

 

In China the Corporate Income Tax Law generally applies an income tax rate of 25% to all enterprises. FLS Mushroom, Nongyuan Network, Farmmi Enterprise and Farmmi Technology are registered in PRC and are all subject to corporate income tax at a statutory rate of 25% on net income reported after certain tax adjustments. Forest Food, Farmmi Food, Nongyuan Network and Farmmi E-Commerce are approved by local government as small-scaled minimal profit enterprises. Once an enterprise meets certain requirements and is identified as a small-scale minimal profit enterprise, the part of its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the part between RMB1 million and 3 million is subject to a reduced rate of 10%. Forest Food, Farmmi Food, FLS Mushroom and Nongyuan Network are entities with primary operating activities. Suyuan Agriculture, Farmmi Enterprise and Farmmi Technology are holding companies with no activities.

 

24

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 — Taxes (Continued)

 

Corporation Income Tax (‘‘CIT’’) (Continued)

 

Under the Enterprise Income Tax (“EIT”) Law of PRC, domestic enterprises and foreign investment enterprises are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis. EIT is typically governed by the local tax authority in China. Each local tax authority at times may grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. In April 2016, and January 2019, FLS Mushroom and Farmmi Food received a temporary income tax break from the local tax authority of Lishui City. Net income of $1.50 million and $1.69 million was exempt from income tax for the six months ended March 31, 2019 and 2018, respectively. The estimated tax savings as the result of the tax break for the six months ended March 31, 2019 and 2018 amounted to $373,043 and $421,437, respectively. Per share effect of the tax exemption were $0.03 and $0.04 for the six months ended March 31, 2019 and 2018, respectively.

 

The following table reconciles PRC statutory rates to the Company’s effective tax rates for the six months ended March 31, 2019 and 2018:

 

  

For the six months ended

March 31,

 
   2019   2018 
Statutory PRC income tax rate   25.00%   25.00%
Effect of income tax exemption on certain income   (25.93)%   (27.25)%
Favorable tax rate impact (a)   1.43%   0.30%
Permanent difference   0.22%   - 
Changes of deferred tax assets valuation allowances   1.22%   2.05%
Non-PRC entities not subject to PRC income tax   (21.39)%   0.03%
Effective tax rate   (19.45)%   0.13%

 

(a)Forest Food, Farmmi Food, Nongyuan Network and Farmmi E-Commerce are subject to corporate income tax at a reduced rate of 5% as approved by local government as small-scaled minimal profit enterprises.

 

The provision for income tax consists of the following:

 

  

For the six months ended

March 31,

 
   2019   2018 
Current  $27,860   $1,591 
Deferred   -    - 
Total  $27,860   $1,591 

 

25

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 — Taxes (Continued)

 

Corporation Income Tax (‘‘CIT’’) (Continued)

 

Components of deferred tax assets are as follows:

 

   March 31,
2019
   September 30, 2018 
Net operating loss carryforwards  $151,459   $150,620 
Valuation allowance   (151,459)   (150,620)
Total  $-   $- 

 

The deferred tax expense (benefit) is the change of deferred tax assets and deferred tax liabilities resulting from the temporary difference between tax and U.S. GAAP. Forest Food had a cumulative net operating loss of approximately $606,000 and $602,000, respectively, as of March 31, 2019 and September 30, 2018, which may be available to reduce future taxable income. Deferred tax assets were primarily the result of these net operating losses.

 

As of each reporting date, management considers evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. On the basis of this evaluation, a full valuation allowance of $151,459 was recorded against the gross deferred tax asset balance at March 31, 2019. The amount of the deferred tax asset is considered unrealizable because it is more likely than not that Forest Food will not generate sufficient future taxable income to utilize the net operating loss.

 

Note 13 — Concentration of major customers and suppliers

 

For the six months ended March 31, 2019 and 2018, one major customer accounted for approximately 66% and 74% of the Company’s total sales, respectively. Any decrease in sales to this major customer may negatively impact the Company’s operations and cash flows if the Company fails to increase its sales to other customers.

 

As of March 31, 2019 and September 30, 2018, one major customer accounted for approximately 95% and 96% of the Company’s accounts receivable balance, respectively.

 

For the six months ended March 31, 2019, three major suppliers accounted for approximately 41%, 28% and 17% of the total purchases, respectively. For the six months ended March 31, 2018, two major suppliers accounted for approximately 45% and 32% of the total purchases, respectively. A loss of either of these suppliers could have a negative effect on the operations of the Company. 

 

26

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 — Commitment and contingency

 

Operating lease commitments

 

The Company leases one main office space through May 9, 2020, and one factory building through October 2019. Rental expense charged to operations under operating leases in the six months ended March 31, 2019 and 2018 amounted to $55,628 and $32,621, respectively.

 

Future minimum lease obligations for operating leases with initial terms in excess of one year at March 31, 2019 are as follows:

 

Twelve months ending March 31:    
2020   79,472 
2021   4,694 
Total  $84,166 

 

Note 15 — Segment reporting

 

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments.

 

The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company currently has three main products from which revenue is earned and expenses are incurred: Shiitake Mushroom, Mu Er Mushroom and other edible fungi and other agricultural products. The operations of these product categories have similar economic characteristics. In particular, the Company uses the same or similar production processes; sells to the same or similar type of customers and uses the same or similar methods to distribute these products. The resources required by these products share high similarity. Switching cost between different products is minimal. Production is primarily determined by sales orders received and market trend. Therefore, management, including the chief operating decision maker, primarily relies on the revenue data of different products in allocating resources and assessing performance. Based on management’s assessment, the Company has determined that it has only one operating segment and therefore one reportable segment as defined by ASC.

 

For other agricultural products, the Company did not generate any revenue until January 2017 and the revenue generated since January 2017 was insignificant so it has not been included in the segment reporting analysis.

 

27

 

 

FARMMI, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 15 — Segment reporting (Continued)

 

The following table presents revenue by major product categories (from third parties and related party) for the six months ended March 31, 2019 and 2018, respectively:

 

   For the six months ended
March 31,
 
   2019   2018 
Shiitake  $8,346,344   $7,972,621 
Mu Er   5,167,414    4,833,461 
Other edible fungi and other agricultural products   874,429    213,955 
Total  $14,388,187   $13,020,037 

 

All of the Company’s long-lived assets are located in PRC. Majority of the Company’s products are sold in China. Geographic information about the revenues, which are classified based on customers, is set out as follows:

 

   For the six months ended
March 31,
 
   2019   2018 
Revenue from China  $12,887,262   $11,827,380 
Revenue from other countries   1,500,925    1,192,657 
Total Revenue  $14,388,187   $13,020,037 

 

Note 16 — Subsequent event

 

These unaudited condensed consolidated financial statements were approved by management and available for issuance on November 25, 2019. The Company evaluated subsequent events through the date these unaudited condensed consolidated financial statements were issued.

 

28

 

 

Exhibit 99.2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.

 

Special Note Regarding Forward-looking Statements

 

This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

  

Business Overview

 

Farmmi, Inc. (“FMI” or the “Company”) is a holding company incorporated under the laws of the Cayman Islands on July 28, 2015. Acting through its subsidiaries, the Company is engaged in processing and distributing dried edible mushrooms, mainly Shiitake and Mu Er mushrooms, and trading other agricultural products such as rice and edible oil.

 

Ms. Yefang Zhang, as the sole shareholder of FarmNet Limited which is the sole shareholder of FMI, and her husband Mr. Zhengyu Wang, a director of FMI, are the ultimate shareholders of FMI (“Controlling Shareholders”). The Company completed a reorganization of its legal structure (“Reorganization”) in preparation for its planned initial public offering.

 

The Reorganization involved the incorporation of FMI, a Cayman Islands holding company; the incorporation of Farmmi International Limited (“Farmmi International”), a Hong Kong company; the incorporation of Hangzhou Suyuan Agriculture Technology Co., Ltd. (“Suyuan Agriculture”), a PRC company; the incorporation of Farmmi (Hangzhou) Enterprise Management Co., Ltd. (“Farmmi Enterprise”) and Lishui Farmmi Technology Co., Ltd. (“Farmmi Technology”), two new wholly foreign-owned entities (“WFOE”) formed by Farmmi International under the laws of China; and the equity transfer of Suyuan Agriculture, Zhejiang Forest Food Co., Ltd. (“Forest Food”) and Zhejiang FLS Mushroom Co., Ltd. (“FLS Mushroom”) (collectively, the “Transferred Entities”) from the controlling shareholders Zhengyu Wang and Yefang Zhang (“Controlling Shareholders”).

 

On July 5, 2016 and August 10, 2016, Zhengyu Wang transferred all of his equity interests in Suyuan Agriculture to Farmmi Enterprise and Farmmi Technology with each owning 50% of Suyuan Agriculture. On November 24, 2016, Zhengyu Wang, the controlling shareholder of Forest Food transferred 96.15% of his interest in Forest Food to Suyuan Agriculture. On October 24, 2016, Zhengyu Wang, the controlling shareholder of FLS Mushroom transferred 100% of his interest in FLS Mushroom to Suyuan Agriculture. After the Reorganization, FMI, the ultimate holding company, owns 100% equity interest of Suyuan Agriculture and FLS Mushroom, and 96.15% equity interest of Forest Food. The remaining 3.85% equity interest of Forest Food is owned by a minority interest shareholder.

 

1

 

 

On September 18, 2016, Suyuan Agriculture entered into a series of contractual agreements with Zhengyu Wang, the owner of Hangzhou Nongyuan Network Technology Co., Ltd. (“Nongyuan Network”) and Nongyuan Network. Nongyuan Network is a company incorporated on December 8, 2015 that focuses on the development of network marketing and provides a network platform for sales of agriculture products. These agreements include Exclusive Management Consulting and Technology Service Agreement, Proxy Agreement, Equity Pledge Agreement and Executive Call Option Agreement. Pursuant to these agreements, Suyuan Agriculture has the exclusive rights to provide to Nongyuan Network consulting services related to business operation and management. All the above contractual agreements obligate Suyuan Agriculture to absorb all of the loss from Nongyuan Network’s activities and entitle Suyuan Agriculture to receive all of its residual returns. In essence, Suyuan Agriculture has gained effective control over Nongyuan Network. Therefore, the Company believes that Nongyuan Network should be considered as Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts of this entity are consolidated with those of Suyuan Agriculture.

 

Since FMI and its subsidiaries are effectively controlled by the same Controlling Shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation of FMI and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

On December 26, 2017, Zhejiang Farmmi Food Co., Ltd. (“Farmmi Food”) was established under the laws of the PRC. Initially Farmmi Food was wholly owned by Farmmi Technology. In January 2018, the share ownership was transferred to Suyuan Agriculture. In May 2018, Farmmi Food received its food production permit and began operation.

 

On March 22, 2019, Lishui Farmmi E-Commerce Co., Ltd. (“Farmmi E-Commerce”) was established under the laws of the PRC. Nongyuan Network and Suyuan Agriculture owns 98% and 2% of interests in Farmmi E-Commerce, respectively.

 

FMI, Farmmi international, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, Forest Food, FLS Mushroom, Nongyuan Network, Farmmi Food, and Farmmi E-Commerce (herein collectively referred to as the “Company”) are engaged in processing and distributing dried Shiitake mushrooms and Mu Er mushrooms, which uses modern food processing technology to develop a series of safe, nutritious and healthy products. In order to provide green, organic, healthy forest food to global customers, the Company cooperates with family farms to promote standardized cultivation and production so it can ensure high quality of edible fungi raw materials. The Company has also established industrial production workshop and fully implemented the Hazard Analysis Critical Control Point (“HACCP”) international food safety and health management system. We have also obtained BRC certification issued by Intertek Certification Ltd to certify we meet the BRC Global Standard for Food Safety, and Food Safety Management System Certificate issued by China Quality Certification Centre to certify we meet the GB/T 22000-2006/ISO 22000:2005 standard.

 

2

 

 

We currently produce and/or sell the following categories of agricultural products: Shiitake mushrooms, Mu Er mushrooms, other edible fungi and other agricultural products. We do not grow fungi, but purchase dried edible fungi from third party suppliers, mainly from family farms, and two co-operatives representing family farms, Jingning Liannong Trading Co. Ltd. (“JLT”) and Qingyuan Nongbang Mushroom Industry Co., Ltd. (“QNMI”). JLT and QNMI are two companies in Lishui area where our facilities are located. They are co-operatives representing family farms which plant and provide edible fungi. JLT and QNMI themselves do not have any facility and do not process any fungi. They are established to share resources such as procurement information and to enjoy the advantage of economy of scale. After we select and filter the dried edible fungi for specific size and better quality, we may further dehydrate them again, as deemed necessary, to ensure the uniform level of dryness of our products. We then package the fungi products for sale. The only products we process and package are edible fungi. We process and package all of our edible fungi products at our own processing facilities. For other agricultural products, such as rice and edible oil, we purchase them from third-party suppliers, and sell these products at our online store Farmmi Liangpin Market (the consumers can download the corresponding mobile application from www.farmmi.com for shopping). Mainly through distributors, we offer gourmet dried mushrooms to domestic and overseas retail supermarkets, produce distributors and foodservice distributors and operators. We have become an enterprise with advanced processing equipment and business management experience, and we pride ourselves on consistently producing quality mushrooms and serving our customers with a high level of commitment.

 

Currently, we estimate that approximately 90% of our products are sold in China to domestic distributors and the remaining 10% are sold internationally, including USA, Japan, Canada and other countries, through distributors. In addition, in order to enhance our e-commerce marketing presence, we developed our own e-commerce websites www.farmmi.com and www.farmmi88.com. We are also testing a few offline stores in Hangzhou to expand our brand presence and revenue growth.

 

Our total revenues for the six months ended March 31, 2019 increased by $1.37 million or 10.51%, compared to the same period in 2018. We expect our sales of edible fungi products will continue to grow in the coming years, as the consumption of fungi products in China has been rising significantly and has become one of the most important parts of planting industry. Meanwhile, although China has the most production of edible fungi, consumption of edible fungi per capita is much lower than other countries such as USA and Japan. Therefore, there is great potential for the sales of edible fungi in the Chinese market as well as the international market. We believe our sales will continue to grow in the future with our increased brand awareness, which will grow along with demand for edible fungi products.

 

3

 

 

Growth Strategy

 

Increasing our market share — the premium quality of our products has been long recognized by our customers. People’s increasing awareness of healthy dietary will likely lead to increased demand of our products. Our development plan mainly focuses on developing high-quality agricultural products market. Through our continued efforts of building e-commerce platform, expansion to international market, and building stable relationship with suppliers, we expect to expand our product lines and improve our brand awareness and customer loyalty, to meet the demands of market and customers, and improve our sales performance.

 

Expansion of our sources of supply, productivity and sales network — to meet the increasing demand, we emphasize cooperation with major suppliers as well as small family farms to ensure the quantity and quality of raw materials. While expanding supply resource, we also plan to increase our processing capability and upgrade production facilities to increase productivity. In addition to our present sales network, we intend to invest more in our online stores, continue to train our employees, upgrade relevant information technology and supply chain system, with the goal of making an integrated sales network with an international approach.

 

Securing high quality raw materials with competitive price — to meet the increasing demand for our products, we have been increasing our cooperation with major suppliers, with whom we have been working together for many years, to secure the quality and quantity of our raw materials. We also have dedicated teams that constantly visit and communicate with the family farm suppliers, to monitor the quality and quantity of raw materials. By working closely with our suppliers throughout the planting seasons, we have been providing such suppliers technical support to secure the stable supply of our raw materials. With our deep understanding of the edible fungi market, we have been able to purchase raw materials of premium quality at favorable prices. Edible fungi can be stored for a long time after simple processing, therefore we have been purchasing edible fungi when we expect their purchase price to increase, and store them to fulfill future sales orders. This strategy has been proven effective and will continue to be used by us as a cost control method.

 

Factors Affecting Our Results of Operations

 

Government Policy May Impact our Business and Operating Results

 

We have not seen any impact of unfavorable government policy upon our business in recent years. However, our business and operating results will be affected by China’s overall economic growth and government policies. Unfavorable changes in government policies could affect the demand for our products and could materially and adversely affect our results of operations. Our edible fungi products are currently eligible for certain favorable government tax incentive and other incentives, any future changes in the government’s policy upon edible fungi industry may have a negative effect on our operations.

 

4

 

 

Price Inelasticity of Raw Materials May Reduce Our Profit

 

As a processor of edible fungi, we rely on a continuous and stable supply of edible fungi raw materials to ensure our operation and expansion. The price of edible fungi may be inelastic when we wish to purchase supplies, resulting in an increase in raw material prices and thus reduce our profit. In addition, although we compete primarily the high-end market which puts more emphasize on the flavor, texture and quality of our products, we risk losing customers by increasing our selling prices.

 

Competition in Edible Fungi Industry

 

Although we have a lot of competitive advantages, such as premium product quality, stable and experienced factory employees, favorable production locations within proximity of significant mushroom planting bases and strong relationships with our significant suppliers, we face a series of challenges.

 

Our products face competition from a number of companies operating in the vicinity. One of the largest competitors has high sales volume, which enables this competitor to purchase and sell edible fungi at a relatively lower price. Another major competitor has much larger plants and warehouses than we have and its main product is Mu Er mushrooms with different sorts and qualities. Competition from these two major competitors may prevent us from increasing our revenue.

 

On the other hand, although we believe we distinguish our Company from competitors on the basis of product quality, the edible fungi industry is fragmented and subject to relatively low barriers of entry. Many of our competitors can provide products at relatively lower prices to increase their supplies which may affect our profit margins as we seek to compete with them.

 

At last, we have devoted significant resources to build and develop one of our online stores, Farmmi Jicai and Farmmi Liangpin Market. We plan to expand these two online stores. While this strategy may offer new opportunities to our Company, it is also a new venture and is impacted by many other factors. Farmmi Jicai and Farmmi Liangpin Market are not well known by consumers yet, and we do not have rich experience in e-commerce operation. As a result, we have no guarantee that we will be successful in this new expansion. If we do not manage our expansion effectively, our business prospects could be impaired.

 

Economy and Politics

 

Our ability to be successful in China depends in part on our awareness of trends in politics that may affect our company, including, for example, government initiatives that would either encourage or discourage programs and companies that produce healthy foods or efforts to increase export of agricultural products. In addition, we must be aware of political situations in destination countries of our products, particularly if such countries take action to stifle importation of food products from abroad.

 

5

 

 

Trend Information

 

We have noted the existence of the following trends since October 2018, all of which are likely to affect our business to the extent they continue in the future:

 

China’s edible fungi industry is growing, both in absolute terms and in market share.

 

Through its development of enoki mushroom industrialization technology in the 1960s, Japan became the world leader in mushroom farming. As other countries’ fungi farming technology improved, China began to supplant Japan and now became the largest worldwide edible mushroom producer. China’s growth has outpaced worldwide production growth rates. While China’s growth rates in the past much higher than world growth rates, it appears to be moving from rapid expansion to a more mature industry.

 

As the table below illustrates, our sales volume of Shiitake mushroom for the six months ended March 31, 2019 was approximately 662 tons. This number represents an increase of 61 tons compared with 601 tons sales volume for the same period of fiscal 2018. In the meanwhile, our sales volume of Mu Er for the six months ended March 31, 2019 was approximately 419 tons. This number represents an increase of 68 tons compared with 351 tons sales volume for the same period of fiscal 2018. The increased sales of Shiitake mushroom and Mu Er was primarily due to the increased sales orders we received on our online stores. As China’s mushroom industry is moving from rapid expansion to a more mature stage, we expect the effect of industry growth on promoting our sales volume will decrease.

 

Period  Shiitake (tons)   Mu Er (tons) 
Oct-18   93    69 
Nov-18   122    74 
Dec-18   158    13 
Jan-19   95    139 
Feb-19   33    12 
Mar-19   161    112 
Total sales volume for six month ended March 31, 2019   662    419 

 

6

 

 

Our aggregate employee salaries have been relatively stable.

 

During the period of October 2018 to September 2019, our monthly salary expense was as follows:

 

 

 

The decrease in monthly employee salaries of February was mainly due to the Chinese New Year Holiday, when some employees took extended unpaid leaves during the holiday period. The increase in monthly employee salaries of March was mainly due to the increased over-time salaries as more sales orders were received after the Chinese New Year Holiday, as well as new employees hired in March. Monthly salaries after March remained relatively stable with a slight decrease, fluctuating within roughly 5%. We expect salary expense to stay stable but with slightly increase in the future, due to the expansion of our operations and inflation.

 

Raw material costs have been relatively stable.

 

With our deep understanding of the edible fungi market, constant market research, and communication with our suppliers, we have been able to obtain favorable price for premium raw materials. With increased sales orders we receive, we need to purchase additional raw materials to meet the new demand. We expect the raw material costs in fiscal year 2020 will be relatively stable, fluctuating between 5% and 6% comparing with fiscal year 2019.

 

During the period from October 2018 to September 2019, the average monthly unit price per ton for Shiitake and Mu Er we purchased were as follows:

 

7

 

 

 

 

We anticipate that for fiscal year 2020, the average unit price of Shiitake and Mu Er we purchase will be about $9,400 per ton and $9,500 per ton, respectively. The stable raw material costs contribute to our stable gross margin. We expect our gross margin will be slightly higher in fiscal year 2020 than in fiscal year 2019.

 

We expect the agriculture industry in China will become increasingly reliant on Internet sales.

 

Government initiatives such as the concept of “Internet+” articulated by Premier Li Keqiang beginning in 2015, reflect the government’s push to incorporate Internet and other information technology in conventional industries. One of the specific applications of this concept has been “Internet + Agriculture”, which reflects the increased use of technology both in the growing and sales sides of farming.

 

In addition, we have seen shifts of Chinese consumers to purchase products — including food products like ours — online. We have been building our online store Farmmi Liangpin Market (now called Farmmi Jicai) in response to this trend, and this online store mainly targets on small wholesale clients, such as restaurants and retailers. Since its launch in December 2016, our online sales have been increasing rapidly. In September 2018, we started another Farmmi Liangpin Market online store, which mainly facing individual customers and started to generate revenue since October 2018. Besides selling edible mushrooms, this store also sells other agricultural products, such as rice, edible oil and other local specialty food products from different provinces of China.

    

During the six months ended March 31, 2019, our online sales accounted for 21.53% of our total sales. For the six months ended March 31, 2019, our aggregate online sales were $3,098,425.27, an increase by 415.7% compared with online sales for the same period in 2018, and the average monthly online sales were $516,404. The following chart shows our online sales for each month from October 2018 to March 2019:

 

8

 

 

 

 

The online sales during the six months ended March 31, 2019 increased significantly as compared to the same period of last year. Monthly sales in October 2018 and February 2019 were lower mainly due to system maintenance for our online platform during the China National Day and Chinese New Year holiday. Monthly sales in December 2018 and January 2019 was higher mainly attributable to the increased orders we received, as our customers usually purchase more products in advance to prepare for the Chinese New Year. In addition, monthly sales reached to the peak in March 2019, due to the increased customer orders resulted from an online promotion campaign we carried out during the month. And our monthly online sales remained relatively stable from April onwards.

 

Increased sales to China Forest.

 

China Forest, one of the biggest edible fungi exporters in China, has been one of our major customers since 2016. Our sales to China Forest for the six months ended March 31, 2019 totaled $9,425,737, a decrease of 12.30% from $10,747,891 for the same period in 2018, mainly due to the decreased sales volume of Shiitake mushroom. Our sales of Shiitake mushroom to China Forest for the six months ended March 31, 2019 totaled 448 tons, a decrease of 7.12% from 482 tons for the same period in 2018. However, the sales orders of Shiitake mushroom from China Forest increased in second half of fiscal year 2019, and total sales orders of Shiitake mushroom in fiscal year 2019 were higher than last year. On the other hand, our sales of Mu Er to China Forest for the six months ended March 31, 2019 were 328 tons, an increase of 3.74% from 316 tons for the same period in 2018.

 

9

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

 

Use of Estimates

 

In preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowances pertaining to the allowance for doubtful accounts and advances to suppliers; the valuation of inventories; the valuation of beneficial conversion feature of the convertible notes; and the valuation of deferred tax assets.

 

Revenue Recognition

 

On October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“ASC Topic 606”) using the modified retrospective method for contracts that were not completed as of October 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements, and no adjustments to opening retained earnings were made as the Company’s revenue was recognized based on the amount of consideration expected to be received in exchange for satisfying the performance obligations.

 

10

 

 

ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per ton. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of March 31, 2019 and September 30, 2018. For the six months ended March 31, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

 

Refer to Note 15 — Segment reporting for details of revenue segregation of our Unaudited Condensed Consolidated Financial Statements.

 

Receivables

 

Trade receivables are carried at the original invoiced amount less a provision for any potential uncollectible amounts. Provisions are applied to trade receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

 

Inventory

 

The Company values its inventories at the lower of cost, determined on a weighted average basis, or net realizable value. The Company reviews its inventories periodically to determine if any reserves are necessary for potential obsolescence or if the carrying value exceeds net realizable value.

 

11

 

 

Recent accounting pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its financial statements and related disclosures. The Company has estimated that the adoption of this AUS will not have material impact on the results of the operations and cash flows, however, it may have a material impact on the consolidated balance sheets. As required by this ASU, the Company will record the right of use assets and operating lease liabilities on the consolidated balance sheets.

 

12

 

 

In November 2017, the FASB issued ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the new revenue recognition standard. This standard will be effective for fiscal years beginning after December 15, 2018. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company expects that the adoption of this ASU would not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

13

 

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

 

14

 

 

Results of Operations for the Six Months Ended March 31, 2019 and 2018

 

Overview

 

The following table summarizes our results of operations for the six months ended March 31, 2019 and 2018:

 

   Six Months Ended March 31   Variance 
   2019   2018   Amount   % 
Revenues  $14,388,187   $13,020,037   $1,368,150    10.51%
Cost of revenues   11,845,025    10,920,758    924,267    8.46%
Gross profit   2,543,162    2,099,279    443,883    21.14%
Selling and distribution expenses   281,213    90,684    190,529    210.10%
General and administrative expenses   876,746    731,008    145,738    19.94%
Income from operations   1,385,203    1,277,587    107,616    8.42%
Interest income   451    376    75    19.95%
Interest expense   (1,527,302)   (86,138)   (1,441,164)   1,673.09%
Other income (expense), net   (1,583)   7,452    (9,035)   (121.24)%
Income (loss) before income taxes   (143,231)   1,199,277    (1,342,508)   (111.94)%
Provision for income taxes   27,860    1,591    26,269    1,651.10%
Net income (loss)  $(171,091)  $1,197,686   $(1,368,777)   (114.29)%

 

15

 

 

Revenue

 

Currently, we have three main types of revenue streams deriving from our three major product categories: Shiitake, Mu Er and other edible fungi and other agricultural products.

 

The following table sets forth the breakdown of our revenues for the six months ended March 31, 2019 and 2018, respectively:

 

   Six Months Ended March 31   Variance 
   2019   %   2018   %   Amount   % 
Shiitake  $8,346,344    58.01%  $7,972,621    61.24%  $373,723    4.69%
Mu Er   5,167,414    35.91%   4,833,461    37.12%   333,953    6.91%
Other edible fungi and other agricultural products   874,429    6.08%   213,955    1.64%   660,474    308.70%
Total Amount  $14,388,187    100.00%  $13,020,037    100.00%  $1,368,150    10.51%

 

Total revenues for the six months ended March 31, 2019 increased by $1,368,150, or 10.51%, to $14,388,187 from $13,020,037 for the same period of last year. 

 

Revenue from sales of Shiitake increased by $373,723, or 4.69%, to $8,346,344 for the six months ended March 31, 2019 from $7,972,621 for the same period of last year, mainly due to the increased sales volume of our Shiitake products, from 601 tons for the six months ended March 31, 2018 to 662 tons for the six months ended March 31, 2019, while unit sales price for Shiitake remained stable.

 

Revenue from sales of Mu Er increased by $333,953, or 6.91%, to $5,167,414 for the six months ended March 31, 2019 from $4,833,461 for the same period of last year, mainly due to the increased sales volume of our Mu Er products. Sales volume of Mu Er increased to 419 tons for the six months ended March 31, 2019 from 351 tons for the same period of last year. The volume increase was partially offset by a lower average selling price. Average unit sales price of Mu Er decreased by 5.51%, which changed in line with the price of raw materials. As a result of the increased competition amongst the local suppliers. the Company was able to purchase raw materials from suppliers at lower prices during the six months ended March 31, 2019.

 

Revenue from sales of other edible fungi and other agricultural products increased by $660,474, or 308.70%, to $874,429 for the six months ended March 31, 2019 from $213,955 for the same period of last year. The increase was primarily due to the increased online sales of the products, including high-end edible fungi. The sales volume increased to 28 tons for the six months ended March 31, 2019 from 7 tons for the same period of last year. After the completion of software development and payment system upgrades in March 2018, the Company reorganized its operating team to put greater effort into advertising activities in order to enhance brand awareness and attract more customers. As a result, online sales increased significantly in the six months ended March 31, 2019.

 

16

 

 

Cost of Revenue

 

The following table sets forth the breakdown of the Company’s cost of revenue for the six months ended March 31, 2019 and 2018, respectively:

 

   Six Months Ended March 31   Variance 
   2019   %   2018   %   Amount   % 
Shiitake  $6,885,006    58.12%  $6,697,781    61.33%  $187,225    2.80%
Mu Er   4,295,736    36.27%   4,040,814    37.00%   254,922    6.31%
Other edible fungi and other agricultural products   664,283    5.61%   182,163    1.67%   482,120    264.66%
Total Amount  $11,845,025    100.00%  $10,920,758    100.00%  $924,267    8.46%

 

Cost of revenues increased by $924,267, or 8.46%, to $11,845,025 for the six months ended March 31, 2019 from $10,920,758 for the same period of last year.

 

Cost of revenues of Shiitake increased by $187,225 or 2.80%, to $6,885,006 for the six months ended March 31, 2019 from $6,697,781 for the same period of last year. While the purchase volume increased in line with sales, the average unit cost of Shiitake remained stable. Cost of revenues of Mu Er increased by $254,922, or 6.31%, to $4,295,736 for the six months ended March 31, 2019 from $4,040,814 for the same period of last year. As mentioned above, due to the increased competition amongst the local suppliers, we were able to purchase raw materials from suppliers at lower prices. As a result, the average unit cost of Mu Er decreased by 6.07% in the six months ended March 31, 2019 as compared to the same period last year. Cost of revenues of other edible fungi and agricultural products increased by $482,120, or 264.66%, to $664,283 for the six months ended March 31, 2019 from $182,163 for the same period of last year. The percentage of the variance in costs was proportional to the percentage of the variance in sales due to the stable gross margin of our products.

 

Gross Profit

 

The following table sets forth the breakdown of the Company’s gross profit for the six months ended March 31, 2019 and 2018, respectively:

 

   Six Months Ended March 31   Variance 
   2019   %   2018   %   Amount   % 
Shiitake  $1,461,338    57.46%  $1,274,840    60.73%  $186,498    14.63%
Mu Er   871,678    34.28%   792,647    37.76%   79,031    9.97%
Other edible fungi and other agricultural products   210,146    8.26%   31,792    1.51%   178,354    561.00%
Total Amount  $2,543,162    100.00%  $2,099,279    100.00%  $443,883    21.14%

 

17

 

 

Overall gross profit increased by $443,883, or 21.14%, to $2,543,162 for the six months ended March 31, 2019 from $2,099,279 for the same period of the last fiscal year. Gross profit from sales of Shiitake increased by $186,498, or 14.63%, to $1,461,338 for the six months ended March 31, 2019 from $1,274,840 for the same period of last year. Gross profit from sales of Mu Er increased by $79,031, or 9.97%, to $871,678 for the six months ended March 31, 2019 from $792,647 for the same period of last year. Gross profit from sales of other edible fungi and agricultural products increased by $178,354, or 561.00%, to $210,146 for the six months ended March 31, 2019 from $31,792 for the same period of last year. The increased gross profit was led by increased sales for the six months of fiscal year 2019 ended March 31, 2019, as compared to the prior period.

 

Overall gross margin increased by 1.56 percentage points to 17.68% for the six months ended March 31, 2019 from 16.12% for the same period of last year. The increase in overall gross margin was primarily due to more revenue generated from the Company’s online shopping platforms. Sales made through the online shopping platforms have higher gross margin than traditional sales.

 

Selling and Distribution Expenses

 

Selling and distribution expenses increased by $190,529, or 210.10%, to $281,213 for the six months ended March 31, 2019 from $90,684 for the same period of last year, primarily due to the increased advertising and marketing expenses as the Company focused on the promotion for the Company’s online platforms, as well as the increased shipping expenses along with the increased sales volume during the six months ended March 31, 2019, as compared to the same period of last year.

 

General and Administrative Expenses

 

General and administrative expenses increased by $145,738, or 19.94%, to $876,746 for the six months ended March 31, 2019 from $731,008 for the same period of last year. The increase was primarily attributable to the increased payroll expenses, as the Company expanded its team to support the business growth.

 

Interest Expense

 

Interest expense was $1,527,302 for the six months ended March 31, 2019, as compared to $86,138 for the same period of last year. The increase in interest expense was primarily attributable to the amortization of debt issuance costs and interest expense incurred for the senior convertible notes during the six months ended March 31, 2019.

 

Provision for Income Taxes

 

For the six months ended March 31, 2019 and 2018, our income tax expense was $27,860 and $1,591, respectively. The low-income tax expense was primarily due to an income tax incentive the Company received from the tax authority of Lishui City. During the six months ended March 31, 2019, FLS Mushroom and Farmmi Food received a temporary income tax break from the local tax authority of Lishui City, for engaging in agricultural industry. Management expects that the Company will continue to enjoy the tax break going forward.

 

18

 

 

A total net income of $1.5 million and $1.7 million was exempt from income tax for the six months ended March 31, 2019 and 2018, respectively. The aggregate amount of our tax holiday was approximately $0.37 million and $0.42 million for the six months ended March 31, 2019 and 2018, respectively. From April 1, 2019 to December 31, 2019, we expect to enjoy the tax exemption for 95% of our taxable income. The summary is below:

 

   Exempted Net Income  Tax holiday
October 1, 2015 – September 30, 2016  RMB 7.8 million
(approximately $1.2 million)
  RMB 1.87 million
(approximately $0.28 million)
October 1, 2016 – September 30, 2017  RMB 23.71 million
(approximately $3.5 million)
  RMB 5.9 million
(approximately $0.87 million)
October 1, 2017 – September 30, 2018  RMB 25.38 million
(approximately $3.9 million)
  RMB 6.3 million
(approximately $0.97 million)
October 1, 2018 – March 31, 2019  RMB 10.19 million
(approximately $1.5 million)
  RMB 2.5 million
(approximately $0.37 million)
April 1, 2019 – December 31, 2019  95% of Taxable Income   

 

Net Income (loss)

 

As a result of the factors described above, our net loss was $171,091 for the six months ended March 31, 2019, an increase of  $1,368,777 from net income of $1,197,686 for the same period of fiscal year 2018.

 

Liquidity and Capital Resources

 

We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends.

 

Further, although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividends or make other payments to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and their ability to pay dividends out of earnings. Management believes that our current cash, cash flows provided by operating activities, and access to loans will be sufficient to meet our working capital needs for at least the next 12 months. We intend to continue to carefully execute our growth plans and manage market risk.

 

19

 

 

As of March 31, 2019 and September 30, 2018, we had cash on hand in the amount of $5,338,219 and $4,925,165, respectively. Total current assets as of March 31, 2019 amounted to $30,408,865, an increase of $9,069,231 compared to $21,339,634 at September 30, 2018. The increase in total current assets at March 31, 2019 compared to September 30, 2018 was mainly due to the increase in accounts receivable, net and advance to suppliers. Current liabilities amounted to $8,529,057 at March 31, 2019, in comparison to $2,221,900 at September 30, 2018. This increase of current liabilities was mainly attributable to the increase in convertible notes payable.

 

Indebtedness.  As of March 31, 2019, we incurred $1,490,070 of short-term bank loans and $655,631 of long-term bank loans. Beside these loans, we did not have any finance leases or purchase commitments, guarantees or other material contingent liabilities. In addition, on November 1, 2018, we issued and sold an aggregate of $7.5 million of senior convertible notes due April 1, 2020 and warrants to purchase an aggregate of 800,000 of the Company’s Ordinary Shares.

 

Off-Balance Sheet Arrangements.  We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that we provide financing, liquidity, market risk or credit support to or engages in hedging or research and development services with us.

 

Capital Resources.  The primary drivers and material factors impacting our liquidity and capital resources include our ability to generate sufficient cash flows from our operations and renew commercial bank loans, as well as proceeds from equity and debt financing, to ensure our future growth and expansion plans. On February 21, 2018, we announced the closing of our initial public offering of 1,680,000 ordinary shares at a price to the public of $4.00 per share for a total of $6,720,000 in gross proceeds. As of March 31, 2019, we had total assets of $31.2 million, which includes cash of $5.3 million, accounts receivable of $14.0 million, advance to suppliers of $8.5 million and inventory of $1.9 million, working capital of $21.9 million, and total equity of $22.7 million.

 

Working Capital.  Total working capital as of March 31, 2019 amounted to $21,879,808, compared to $19,117,734 as of September 30, 2018.

 

Capital Needs.  Our capital needs include our daily working capital needs and capital needs to finance the development of our business. We have established effective collection procedures of our accounts receivable, and have been able to realize or receive the refund of the advances to suppliers in the past. Our management believes that income generated from our current operations can satisfy our daily working capital needs over the next 12 months. We may also raise additional capital through public offerings or private placements to finance our business development and to consummate any merger or acquisition, if necessary.

 

20

 

 

Cash Flows

 

The following table provides detailed information about our net cash flows for the six months ended March 31, 2019 and 2018.

 

   For the six months ended
March 31,
 
   2019   2018 
Net cash used in operating activities  $(5,916,038)  $(3,352,025)
Net cash used in investing activities   (104,110)   (2,782)
Net cash provided by financing activities   6,707,429    6,154,135 
Effect of exchange rate changes on cash, cash equivalents and restricted cash   225,773    77,547 
Net increase in cash, cash equivalents and restricted cash   913,054    2,876,875 
Cash, cash equivalents and restricted cash, beginning of period   5,525,165    2,590,539 
Cash, cash equivalents and restricted cash, end of period  $6,438,219   $5,467,414 

 

Operating Activities

 

Net cash used in operating activities was $5,916,038 for the six months ended March 31, 2019. This was an increase of $2,564,013 compared to net cash used in operating activities of $3,352,025 for the six months ended March 31, 2018. The increase in net cash used in operating activities was primarily attributable to net loss of $171,091, an increase of $5,096,374 in accounts receivable and an increase of $2,437,474 in advances to suppliers.

 

Investing Activities

 

For the six months ended March 31, 2019, net cash used in investing activities amounted to $104,110 as compared to net cash used in investing activities of $2,782 for the same period of 2018. The increase of $101,328 was primarily due to an increase of $97,764 in purchase of intangible assets.

 

Financing Activities

 

Net cash provided by financing activities amounted to $6,707,429 for the six months ended March 31, 2019, as compared to net cash provided by financing activities of $6,154,135 for the same period in 2018. The increase of $553,294 in net cash provided by financing activities was mainly due to an increase of $7,500,000 in gross proceeds from the issuance of convertible notes, a decrease of $1,147,549 in direct costs disbursed from Initial Public Offering proceeds, partially offset by a decrease of $7,728,000 in gross proceeds from Initial Public Offering in the prior period.

 

21

v3.19.3
Segment reporting - Revenue by major product categories (Details) - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Segment Reporting Information [Line Items]    
Total $ 14,388,187 $ 13,020,037
Shiitake    
Segment Reporting Information [Line Items]    
Total 8,346,344 7,972,621
Mu Er    
Segment Reporting Information [Line Items]    
Total 5,167,414 4,833,461
Other edible fungi and other agricultural products    
Segment Reporting Information [Line Items]    
Total $ 874,429 $ 213,955
v3.19.3
Summary of significant accounting policies - Estimated useful lives for property and equipment (Details)
6 Months Ended
Mar. 31, 2019
Accounting Policies [Line Items]  
Intangibel assets estimated useful lives 10 years
Machinery and equipment  
Accounting Policies [Line Items]  
Estimated useful lives 5 – 10 years
Transportation equipment  
Accounting Policies [Line Items]  
Estimated useful lives 4 years
Office equipment  
Accounting Policies [Line Items]  
Estimated useful lives 3 – 5 years
Leasehold improvement  
Accounting Policies [Line Items]  
Estimated useful lives Shorter of lease term or useful life
v3.19.3
Property, plant and equipment, net (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Property, Plant and Equipment [Line Items]    
Subtotal $ 338,261 $ 324,121
Accumulated depreciation and amortization (215,594) (187,758)
Total 122,667 136,363
Office equipment    
Property, Plant and Equipment [Line Items]    
Subtotal 47,157 39,755
Vehicles    
Property, Plant and Equipment [Line Items]    
Subtotal 69,926 68,307
Machinery and equipment    
Property, Plant and Equipment [Line Items]    
Subtotal 100,746 98,414
Leasehold improvement    
Property, Plant and Equipment [Line Items]    
Subtotal $ 120,432 $ 117,645
v3.19.3
Short-term bank loans (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Short-term Debt [Line Items]    
Short-term bank loans $ 1,490,070 $ 1,455,580
Bank Of China (Lishui Branch)    
Short-term Debt [Line Items]    
Short-term bank loans $ 1,490,070 $ 1,455,580
v3.19.3
Property, plant and equipment, net (Tables)
6 Months Ended
Mar. 31, 2019
Property, plant and equipment, net  
Schedule of property, plant and equipment, stated at cost less accumulated depreciation

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Office equipment

 

$

47,157

 

$

39,755

Vehicles

 

 

69,926

 

 

68,307

Machinery and equipment

 

 

100,746

 

 

98,414

Leasehold improvements

 

 

120,432

 

 

117,645

Subtotal

 

 

338,261

 

 

324,121

Accumulated depreciation and amortization

 

 

(215,594)

 

 

(187,758)

Total

 

$

122,667

 

$

136,363

 

v3.19.3
Organization and nature of business (Tables)
6 Months Ended
Mar. 31, 2019
Organization and nature of business  
Schedule of subsidiaries upon reorganization

 

 

 

 

 

 

 

 

 

 

 

Date of 

 

Place of 

 

% of 

 

 

Name of Entity

    

Incorporation

    

Incorporation

    

Ownership

    

Principal Activities

FMI

 

July 28,2015

 

Cayman

 

Parent

 

Holding Company

Farmmi International

 

August 20,2015

 

Hong Kong

 

100

 

Holding Company

Farmmi Enterprise

 

May 23,2016

 

Zhejiang, China

 

100

 

Holding Company

Farmmi Technology

 

June 6,2016

 

Zhejiang, China

 

100

 

Holding Company

Suyuan Agriculture

 

December 8,2015

 

Zhejiang, China

 

100

 

Holding Company

Forest Food

 

May 8,2003

 

Zhejiang, China

 

96.15

 

Drying, further processing and distribution of edible fungus

FLS Mushroom

 

March 25,2011

 

Zhejiang, China

 

100

 

Light processing and distribution of dried mushrooms

Farmmi Food

 

December 26,2017

 

Zhejiang, China

 

100

 

Drying, further processing and distribution of edible fungus

Nongyuan Network

 

July 7,2016

 

Zhejiang, China

 

0 (VIE)

 

Trading

Farmmi E-Commerce

 

March 22,2019

 

Zhejiang, China

 

Subsidiary of the VIE

 

Technology development, technical services and technical consultation related to agricultural products

 

v3.19.3
Commitment and contingency
6 Months Ended
Mar. 31, 2019
Commitment and contingency  
Commitment and contingency

Note 14 — Commitment and contingency

Operating lease commitments

The Company leases one main office space through May 9, 2020, and one factory building through October 2019. Rental expense charged to operations under operating leases in the six months ended March 31, 2019 and 2018 amounted to $55,628 and $32,621, respectively.

Future minimum lease obligations for operating leases with initial terms in excess of one year at March 31, 2019 are as follows:

 

 

 

 

 

Twelve months ending March 31:

    

 

 

2020

 

 

79,472

2021

 

 

4,694

Total

 

$

84,166

 

v3.19.3
Advance to suppliers (Tables)
6 Months Ended
Mar. 31, 2019
Advance to suppliers  
Schedule of advance to suppliers

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Beginning balance

 

$

5,868,486

 

$

4,112,915

Increased during the period/year

 

 

12,898,056

 

 

32,093,609

Less: utilized during the period/year

 

 

(10,416,956)

 

 

(30,209,196)

Exchange rate difference

 

 

139,054

 

 

(128,842)

Ending balance

 

$

8,488,640

 

$

5,868,486

 

v3.19.3
Taxes (Tables)
6 Months Ended
Mar. 31, 2019
Taxes  
Schedule of effective tax rates

 

 

 

 

 

 

 

 

For the six months  ended March 31,

 

 

    

2019

    

2018

 

 

 

 

 

 

 

Statutory PRC income tax rate

 

25.00

%  

25.00

%  

Effect of income tax exemption on certain income

 

(25.93)

%  

(27.25)

%  

Favorable tax rate impact (a)

 

1.43

%  

0.30

%  

Permanent difference

 

0.22

%  

 —

 

Changes of deferred tax assets valuation allowances

 

1.22

%  

2.05

%  

Non-PRC entities not subject to PRC income tax

 

(21.39)

%  

0.03

%  

Effective tax rate

 

(19.45)

%  

0.13

%  

 

Schedule of provision for income tax

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Current

 

$

27,860

 

$

1,591

Deferred

 

 

 —

 

 

 —

Total

 

$

27,860

 

$

1,591

 

Schedule of components of deferred tax

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30,  

 

 

2019

 

2018

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

151,459

 

$

150,620

Valuation allowance

 

 

(151,459)

 

 

(150,620)

Total

 

$

 —

 

$

 —

 

v3.19.3
Organization and nature of business - Additional information (Details) - USD ($)
1 Months Ended 6 Months Ended
Feb. 23, 2018
Feb. 21, 2018
Mar. 31, 2019
Mar. 31, 2018
Mar. 22, 2019
Nov. 24, 2016
Oct. 24, 2016
Aug. 10, 2016
Jul. 05, 2016
Organization And Nature Of Business [Line Items]                  
Gross proceeds from initial public offering       $ 7,728,000          
IPO                  
Organization And Nature Of Business [Line Items]                  
Number of ordinary shares   1,680,000              
Initial public offering price   $ 4.00              
Gross proceeds from initial public offering   $ 6,720,000              
Net proceeds from initial public offering   $ 5,374,341              
Option granted term   45 days              
IPO | Underwriter                  
Organization And Nature Of Business [Line Items]                  
Number of ordinary shares   252,000              
Forest Food | Zhengyu Wang                  
Organization And Nature Of Business [Line Items]                  
% of Ownership           96.15%      
China                  
Organization And Nature Of Business [Line Items]                  
Percentage of product sold     90.00%            
International                  
Organization And Nature Of Business [Line Items]                  
Percentage of product sold     10.00%            
National Trust Co., Ltd | Forest Food                  
Organization And Nature Of Business [Line Items]                  
Remaining percentage of ownership equity interest             3.85%    
View Trade Securities, Inc. | IPO                  
Organization And Nature Of Business [Line Items]                  
Number of ordinary shares 252,000                
Initial public offering price $ 4.00                
Gross proceeds from initial public offering $ 1,008,000                
Net proceeds from initial public offering $ 927,330                
Nongyuan Network Technology Co., Ltd. | Farmmi E-Commerce                  
Organization And Nature Of Business [Line Items]                  
% Ownership in subsidiary         98.00%        
Suyuan Agriculture Technology Co., Ltd | Farmmi Enterprise | Zhengyu Wang                  
Organization And Nature Of Business [Line Items]                  
Percentage of ownership interest                 50.00%
Suyuan Agriculture Technology Co., Ltd | Farmmi Technology | Zhengyu Wang                  
Organization And Nature Of Business [Line Items]                  
Percentage of ownership interest               50.00%  
Suyuan Agriculture Technology Co., Ltd | FLS Mushroom | Zhengyu Wang                  
Organization And Nature Of Business [Line Items]                  
% of Ownership             100.00%    
Suyuan Agriculture Technology Co., Ltd | Farmmi E-Commerce                  
Organization And Nature Of Business [Line Items]                  
Remaining percentage of ownership equity interest         2.00%        
Reportable Legal Entities [Member] | FMI | Zhengyu Wang                  
Organization And Nature Of Business [Line Items]                  
% of Ownership             100.00%    
v3.19.3
Related party transactions
6 Months Ended
Mar. 31, 2019
Related party transactions  
Related party transactions

Note 10 — Related party transactions

The relationship and the nature of related party transactions are summarized as follow:

 

 

 

 

 

 

Name of Related Party

    

Relationship to the Company

    

Nature of Transactions

Forasen Group Co., Ltd. (‘‘Forasen Group’’)

 

Owned by the Chairman of Board of Directors

 

Provides guarantee for the Company’s bank loans; purchases from the Company; leases factory building to the Company

FarmNet Limited

 

Parent company of FMI

 

Provides working capital loan

Yefang Zhang

 

Chief Executive Officer (‘‘CEO’’)

 

Provides working capital loan; provides guarantee for the Company’s bank loans

Zhengyu Wang

 

Chairman of Board of Directors

 

Provides guarantee for the Company’s bank loans

 

Due to related parties consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

Zhengyu Wang

 

$

47,232

 

$

 —

Forasen Group

 

 

149

 

 

 —

FarmNet Limited

 

 

 —

 

 

122,800

Total

 

$

47,381

 

$

122,800

 

Sales to related party

The Company periodically sells merchandise to its affiliates during the ordinary course of business. Forasen Group was the seventh largest customer of the Company for the six months ended March 31, 2018. For the six months ended March 31, 2019 and 2018, the Company recorded sales to Forasen Group of $1,783 and $154,452, respectively. Sales to Forasen Group accounted for 0.01% and 1.19% of the total sales for the six months ended March 31, 2019 and 2018, respectively.

Operating lease from related party

In October 2009, the Company entered into a lease agreement with Forasen Group for leasing the factory building. The lease term is 10 years with monthly rent of RMB 22,400 (equivalent of $3,279).

Guarantees provided by related parties

The Company’s related parties provide guarantees for the Company’s short-term and long-term bank loans (see Note 7 and Note 8).

v3.19.3
Advance to suppliers
6 Months Ended
Mar. 31, 2019
Advance to suppliers  
Advance to suppliers

Note 6 — Advance to suppliers

Movement of advance to suppliers is as follows:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Beginning balance

 

$

5,868,486

 

$

4,112,915

Increased during the period/year

 

 

12,898,056

 

 

32,093,609

Less: utilized during the period/year

 

 

(10,416,956)

 

 

(30,209,196)

Exchange rate difference

 

 

139,054

 

 

(128,842)

Ending balance

 

$

8,488,640

 

$

5,868,486

 

Advances to suppliers represent prepayments made to ensure continuous high-quality supply and favorable purchase prices for premium quality. These advances are closely and directly related to the acquisition of inventory used to fulfill sales orders. These advances are settled upon suppliers delivering dried mushrooms to the Company when the transfer of ownership of the products occurs.

On April 1, 2016, the Company entered into two separate framework supply agreements (“Framework Agreements”) with two co-operatives, Jingning Liannong Trading Co., Ltd (“JLT”) and Qingyuan Nongbang Mushroom Industry Co., Ltd (“QNMI”). Jingning County and Qingyuan County where JLT and QNMI are located produce premium Shiitake and Mu Er. Many competitors of the Company and other large buyers go there to source their supplies. Family farms and co-operatives traditionally request advance payments to be made to secure supplies. By making advance payments to these suppliers, the Company is also able to lock in a more favorable price for premium quality than would be available in the open market.

The Framework Agreements only provide general guidelines. Actual prices are negotiated and agreed upon in individual purchase orders, and are typically set at market prices based on the quality grade and quantities determined and agreed with the suppliers. Prices may vary based on market demand and crop condition etc. The Company can generally secure the premium quality raw material supplies at prices slightly higher than the typical market prices for average quality raw materials. The quality of supplies must meet standardized specifications of both the mushroom industry and standards set by the Company.

The Company advances certain initial payments based on its estimated purchase plan from these two suppliers and additional advances based on individual purchase orders placed. The Company pays advances for no other reason than to secure an adequate supply of dried mushrooms to meet its sales demands. The Company’s purchase orders require that the advances shall be refunded by suppliers if they fail to produce any dried mushrooms or fail to deliver supplies to the Company timely.

Advances to suppliers are carried at cost and evaluated for recoverability. The realizability evaluation process is similar to that of the lower of cost or net realizable value evaluation process for inventories. The Company periodically evaluates its advances for recoverability by monitoring suppliers’ ability to deliver a sufficient supply of mushrooms as well as current crop and market condition. This includes analyzing historical quantity and quality of production with monitoring of crop information provided by the Company’s field personnel related to weather or disaster or any other reason. If for any reason the Company believes that it will not receive supplies of the contracted volumes, the Company will assess its advances for any likelihood of recoverability and adjust advances on its financial statements at the lower of cost or estimated recoverable amounts. The advances are made primarily to JLT and QNMI, which are co-operatives formed by many family farms, with which the Company has had long-term relationships over the years. If any of these family farms fail to deliver supplies, the Company would expect to receive a refund of the advances through JLT/QNMI. The Company accrues for any allowance for possible loss on advances when there is doubt as to the collectability of the refund.

As of March 31, 2019, total advances made to these two suppliers amounted to $8,412,607, of which 100% has been utilized as of September 30, 2019. The Company continuously makes advances to its suppliers on a rolling basis, which typically represent 30% of the total amount of each purchase order. The Company may maintain its outstanding advance payments at a relatively high level going forward because the Company anticipates continuous large orders from its largest customer, China Forestry Group Corporation.

v3.19.3
Document and Entity Information
6 Months Ended
Mar. 31, 2019
Document and Entity Information  
Entity Registrant Name Farmmi, Inc.
Entity Central Index Key 0001701261
Current Fiscal Year End Date --09-30
Document Fiscal Year Focus 2019
Document Fiscal Period Focus Q2
Document Type 6-K/A
Document Period End Date Mar. 31, 2019
Amendment Flag true
Amendment Description This Amendment No. 1 to the Report on Form 6-K for the six months ended March 31, 2019, originally filed with the Securities and Exchange Commission on September 24, 2019 (the "Original 6-K"), is being filed solely for the purposes of furnishing (1) Management's Discussion and Analysis of Financial Condition and Results of Operations, (2) the unaudited condensed interim consolidated financial statements and related notes, and (3) Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T. Except the financial statements, those documents were not previously disclosed. Other than as expressly set forth above, this Form 6-K/A does not, and does not purport to, amend, update or restate the information in any other item of the Original 6-K, or reflect any events that have occurred after the Original 6-K was filed. This Report is hereby incorporated by reference into the registration statement on Form F-1 (registration No. 333-228677) filed with the U.S. Securities and Exchange Commission on December 4, 2018, as amended.
v3.19.3
Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($)
Common Stock
Additional Paid in Capital
Accumulated Other Comprehensive Income (loss)
Statutory Reserve
Retained earnings
Total Stockholders' Equity
Non-Controlling Interest
Total
Balance at Sep. 30, 2017 $ 10,000 $ 5,023,080 $ 718,941 $ 229,512 $ 3,774,805 $ 9,756,338 $ 896,576 $ 10,652,914
Balance (in shares) at Sep. 30, 2017 10,000,000              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Share issuance - IPO, net $ 1,932 6,299,739       6,301,671   6,301,671
Share issuance - IPO, net (in shares) 1,932,000              
Foreign currency translation gain     647,231     647,231 53,364 700,595
Net income (loss) for the period         1,199,353 1,199,353 (1,667) 1,197,686
Balance at Mar. 31, 2018 $ 11,932 11,322,819 1,366,172 229,512 4,974,158 17,904,593 948,273 18,852,866
Balance (in shares) at Mar. 31, 2018 11,932,000              
Balance at Sep. 30, 2018 $ 11,932 11,322,819 (222,830) 229,512 6,996,837 18,338,270 875,372 19,213,642
Balance (in shares) at Sep. 30, 2018 11,932,000              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Issuance of common shares for convertible notes redemption $ 131 485,077       485,208   485,208
Issuance of common shares for convertible notes redemption (in shares) 131,223              
Beneficial conversion feature associated with convertible notes   670,618       670,618   670,618
Issuance of warrants associated with convertible notes   1,819,997       1,819,997   1,819,997
Foreign currency translation gain     662,891     662,891 20,723 683,614
Net income (loss) for the period         (170,076) (170,076) (1,015) (171,091)
Balance at Mar. 31, 2019 $ 12,063 $ 14,298,511 $ 440,061 $ 229,512 $ 6,826,761 $ 21,806,908 $ 895,080 $ 22,701,988
Balance (in shares) at Mar. 31, 2019 12,063,223              
v3.19.3
Summary of significant accounting policies
6 Months Ended
Mar. 31, 2019
Summary of significant accounting policies  
Summary of significant accounting policies

Note 2 — Summary of significant accounting policies

FMI, Farmmi International, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, Forest Food, FLS Mushroom, Farmmi Food, Nongyuan Network and Farmmi E-Commerce (herein collectively referred to as the “Company”) are engaged in processing and distributing dried Shiitake mushrooms and Mu Er mushrooms. Approximately 90% of the Company’s products are sold in China and the remaining 10% internationally, including USA, Japan, Canada, Europe and the Middle East.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The accompanying unaudited condensed consolidated financial statements have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal years ended September 30, 2018 and 2017.

The unaudited condensed consolidated financial statements of the Company reflect the principal activities of FMI, Farmmi international, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, and Suyuan Agriculture’s main operation subsidiaries, Forest Food, Farmmi Food and FLS Mushroom, and the VIE Nongyuan Network and its subsidiary Farmmi E-Commerce. All intercompany transactions and balances have been eliminated upon consolidation.

Consolidation of Variable Interest Entities

In accordance with accounting standards regarding consolidation of variable interest entities (“VIEs”), VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company determined that Nongyuan Network is a VIE because the Company is the primary beneficiary of risks and rewards of this VIE. The carrying amount of this VIE’s assets and liabilities are as follows:

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

September 30, 2018

 

 

 

 

 

 

 

Current assets

 

$

616,242

 

$

481,228

Non-current assets

 

 

170,396

 

 

71,239

Total assets

 

 

786,638

 

 

552,467

Total liabilities

 

 

(580,633)

 

 

(272,715)

Net assets

 

$

206,005

 

$

279,752

 

The financial performance of the VIE reported in the unaudited condensed consolidated statement of income and comprehensive income for the six months ended March 31, 2019 includes sales of $3,097,876, operating expenses of $3,176,450, and net loss of $78,962.

Use of Estimates

In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowance for doubtful accounts and advance to suppliers; the valuation of inventories; the valuation of beneficial conversion feature of the convertible notes; and the valuation of deferred tax assets.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. All cash balances are in bank accounts in PRC and are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted Cash

The Company adopted Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows: Restricted Cash" on October 1, 2018. This ASU applies to all entities that have restricted cash or restricted cash equivalents to be presented in the statement of cash flows under Topic 230. As of March 31, 2019 and September 30, 2018, the Company had restricted cash of $1,100,000 and $600,000, respectively. $600,000 of the restricted cash were the proceeds from the Initial Public Offering and will be released in February 2021, the rest $500,000 were the proceeds from the private placement (Note 9) and is designated to pay for professional service fees at any time.

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after efforts at collection prove unsuccessful.

Inventory

The Company values its inventories at the lower of cost, determined on a weighted average basis, or net realizable value. The Company reviews its inventories periodically to determine if any reserves are necessary for potential obsolescence or if the carrying value exceeds net realizable value.

Advances to Suppliers

Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for premium quality. The Company is required from time to time to make cash advances when placing its purchase orders. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.

Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and equipment are as follows:

 

 

 

 

Machinery and equipment

    

5 – 10 years

Transportation equipment

 

4 years

Office equipment

 

3 – 5 years

Leasehold improvement

 

Shorter of lease term or useful life

 

Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized.

Intangible assets

Intangible assets consist primarily of purchased software. Intangible assets are stated at cost less accumulated amortization, which are amortized using the straight-line method with the estimated useful lives of 10 years. 

Revenue Recognition

On October 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers ("ASC Topic 606") using the modified retrospective method for contracts that were not completed as of October 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements, and no adjustments to opening retained earnings were made as the Company's revenue was recognized based on the amount of consideration expected to be received in exchange for satisfying the performance obligations.

ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per ton. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company's consolidated financial statements upon adoption of ASC 606.

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of March  31, 2019 and September  30, 2018. For the six months ended March  31, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

Refer to Note 15 - Segment reporting for details of revenue segregation.

Cost of Revenues

Cost of revenues includes cost of raw materials purchased, inbound freight cost, cost of direct labor, depreciation expense and other overhead. Write-down of inventory for lower of cost or net realizable value adjustments is also recorded in cost of revenues.

Fair Value of Financial Instruments

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, defines fair value, establishes a three-level valuation hierarchy for fair value measurements and enhances disclosure requirements.

The three levels are defined as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.

Level 3 — Inputs to the valuation methodology are unobservable.

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, restricted cash, accounts receivable, advances to suppliers, other current assets, accounts payable, due to related parties, advances from customers , other current liabilities and short-term bank loans approximate their recorded values due to their short-term maturities.

Beneficial conversion features

The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.

Debt Issuance Costs and Debt Discounts

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed.

Concentrations of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts receivable and advances to suppliers. As of March 31, 2019 and September 30, 2018, $5,320,357 and $4,918,183 of the Company’s cash is maintained in banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay are dependent upon the industry economics prevailing in these areas. The Company also makes cash advances to certain suppliers to ensure the stable supply of key raw materials. The Company performs ongoing credit evaluations of its customers and key suppliers to help further reduce credit risk.

Comprehensive Income

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholder’s equity but are excluded from net income. Other comprehensive income consists of foreign currency translation adjustment from the Company not using the U.S. dollar as its functional currency.

Foreign Currency Translation

The Company’s financial information is presented in U.S. dollars (“USD”). The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”), the currency of PRC. Any transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The unaudited condensed consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

The exchange rates in effect as of March 31, 2019 and September 30, 2018 were RMB1 for $0.1490 and $0.1456, respectively. The average exchange rates for the six months ended March 31, 2019 and 2018 were RMB1 for $0.1464 and $0.1542, respectively.

Shipping and Handling

All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $114,669 and $77,910 for the six months ended March 31, 2019 and 2018, respectively.

Value Added Tax

The Company is generally subject to the value added tax (“VAT”) for selling merchandise, except for FLS Mushroom. Before May 1, 2018, the applicable VAT rate was 13% or 17% (depending on the type of goods involved) for products sold in PRC. After May 1, 2018, the Company is subject to a tax rate of 12% or 16%, and after April 1, 2019, the tax rate was further reduced to 9% or 13% based on the new Chinese tax law. Pursuant to approval issued by the State Administration of Taxation, FLS Mushroom’s major operation can be classified as agriculture products and its revenue is exempt from VAT. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax authorities has the right to assess a penalty based on the amount of taxes which is determined to be late or deficient, with any penalty being expensed in the period when a determination is made by the tax authorities that a penalty is due. During the reporting periods, the Company had no dispute with PRC tax authorities and there was no tax penalty incurred.

Income Taxes

The Company is subject to the income tax laws of the PRC. No taxable income was generated outside the PRC for the six months ended March 31, 2019 and 2018. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or not be deductible in the future.

ASC 740‑10‑25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of March 31, 2019 and September 30, 2018. As of March 31, 2019, the tax years ended December 31, 2014 through December 31, 2018 for the Company’s PRC subsidiary remain open for statutory examination by PRC  tax authorities.

Statement of Cash Flows

In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Risks and Uncertainties

The operations of the Company are located in PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in PRC, in addition to the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.

The Company does not carry any business interruption insurance, product liability insurance or any other insurance policy except for a limited property insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment in the Company.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its financial statements and related disclosures. The Company has estimated that the adoption of this AUS will not have material impact on the results of the operations and cash flows, however, it may have a material impact on the consolidated balance sheets. As required by this ASU, the Company will record the right of use assets and operating lease liabilities on the consolidated balance sheets.

In November 2017, the FASB issued ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the new revenue recognition standard. This standard will be effective for fiscal years beginning after December 15, 2018. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018‑02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company expects that the adoption of this ASU would not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

v3.19.3
Taxes - Additional information (Details) - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Sep. 30, 2018
Taxes      
Corporate income tax at a statutory rate 25.00% 25.00%  
Net income exempt from income tax $ 1,500,000 $ 1,690,000  
Tax savings from tax break $ 373,043 $ 421,437  
Per share effect of the tax exemption $ 0.03 $ 0.04  
Cumulative net operating loss $ 606,000   $ 602,000
Valuation allowance $ 151,459   $ 150,620
v3.19.3
Stockholder's Equity - Additional information (Details)
1 Months Ended 6 Months Ended
Nov. 01, 2018
USD ($)
shares
Mar. 31, 2019
USD ($)
shares
Feb. 23, 2018
USD ($)
$ / shares
shares
Feb. 21, 2018
USD ($)
$ / shares
shares
Feb. 29, 2016
CNY (¥)
Feb. 29, 2016
USD ($)
Mar. 31, 2019
USD ($)
shares
Mar. 31, 2018
USD ($)
Sep. 30, 2018
USD ($)
Oct. 24, 2016
Jan. 22, 2016
CNY (¥)
Jan. 22, 2016
USD ($)
Jan. 21, 2016
CNY (¥)
Jan. 21, 2016
USD ($)
Stockholders Equity [Line Items]                            
Gross proceeds from initial public offering               $ 7,728,000            
Statutory reserve   $ 229,512         $ 229,512   $ 229,512          
Amount of aggregate principal securities sold under private placement $ 7,500,000                          
Number of investor warrant issued to purchase | shares 800,000                          
Intrinsic value of the BCF $ 670,618                          
Investor Warrants [Member]                            
Stockholders Equity [Line Items]                            
Fair value of warrants $ 1,496,153                          
Placement agent warrants                            
Stockholders Equity [Line Items]                            
Number of investor warrant issued to purchase | shares 119,808                          
Percentage of warrants issued to purchase note 10.00%                          
Fair value of warrants $ 323,843                          
IPO                            
Stockholders Equity [Line Items]                            
Initial public offering price | $ / shares       $ 4.00                    
Gross proceeds from initial public offering       $ 6,720,000                    
Number of ordinary shares | shares       1,680,000                    
Private placement                            
Stockholders Equity [Line Items]                            
Number of ordinary shares | shares   131,223         131,223              
Amount of aggregate principal securities sold under private placement   $ 485,208         $ 485,208              
View Trade Securities, Inc. | IPO                            
Stockholders Equity [Line Items]                            
Initial public offering price | $ / shares     $ 4.00                      
Gross proceeds from initial public offering     $ 1,008,000                      
Number of ordinary shares | shares     252,000                      
Forest Food | National Trust Co., Ltd                            
Stockholders Equity [Line Items]                            
Minority interest                   3.85%        
Board of Directors | National Trust Co., Ltd                            
Stockholders Equity [Line Items]                            
Minority interest         3.85% 3.85%                
Board of Directors | National Trust Co., Ltd                            
Stockholders Equity [Line Items]                            
Capital contribution from non controlling interest         ¥ 5,999,784 $ 915,414                
Counted toward registered capital         ¥ 704,200 $ 107,461                
Board of Directors | Forest Food                            
Stockholders Equity [Line Items]                            
Increase registered capital                     ¥ 17,600,000 $ 2,124,320 ¥ 5,000,000 $ 603,500
v3.19.3
Convertible notes payable and warrants (Details) - USD ($)
1 Months Ended 6 Months Ended
Nov. 01, 2018
Mar. 31, 2019
Mar. 31, 2019
Debt Conversion [Line Items]      
Amount of aggregate principal securities sold under private placement $ 7,500,000    
Number of investor warrant issued to purchase 800,000    
Intrinsic value of the BCF $ 670,618    
Amortization of the debt discounts     $ 943,215
Notes      
Debt Conversion [Line Items]      
Fair value of notes   $ 5,251,075 5,251,075
Carrying value   7,514,792 7,514,792
Unamortized debt discounts   2,263,717 2,263,717
Investor Warrants [Member]      
Debt Conversion [Line Items]      
Fair value of investor warrants $ 1,496,153    
Placement agent warrants      
Debt Conversion [Line Items]      
Number of investor warrant issued to purchase 119,808    
Percentage of warrants issued to purchase note 10.00%    
Fair value of investor warrants $ 323,843    
Private placement      
Debt Conversion [Line Items]      
Amount of aggregate principal securities sold under private placement   $ 485,208 $ 485,208
Number of aggregate principal securities sold under private placement   131,223 131,223
Private placement | One institutional investor | Securities purchase agreement      
Debt Conversion [Line Items]      
Amount of aggregate principal securities sold under private placement $ 7,500,000    
Number of investor warrant issued to purchase 800,000    
Investor warrants exercise price $ 6.53    
Interest rate 10.00%    
Private placement | One institutional investor | Securities purchase agreement | Notes      
Debt Conversion [Line Items]      
Amount of aggregate principal securities sold under private placement $ 7,500,000    
Number of aggregate principal securities sold under private placement 1,198,084    
Sale of stock, price per share $ 6.26    
Private placement | Placement agent warrants | One institutional investor | Securities purchase agreement      
Debt Conversion [Line Items]      
Number of investor warrant issued to purchase 119,808    
Investor warrants exercise price $ 7.183    
Percentage of warrants issued to purchase note 10.00%    
Term of placement agent warrants 4 years    
v3.19.3
Summary of significant accounting policies - VIE (Details) - Nongyuan Network (VIE) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Variable Interest Entity [Line Items]    
Current assets $ 616,242 $ 481,228
Non-current assets 170,396 71,239
Total assets 786,638 552,467
Total liabilities (580,633) (272,715)
Net assets $ 206,005 $ 279,752
v3.19.3
Short-term bank loans (Tables)
6 Months Ended
Mar. 31, 2019
Short-term bank loans  
Schedule of short-term bank loans

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

Bank of China (Lishui Branch)

 

$

1,490,070

 

$

1,455,580

Total

 

$

1,490,070

 

$

1,455,580

 

v3.19.3
Commitment and contingency (Tables)
6 Months Ended
Mar. 31, 2019
Commitment and contingency  
Schedule of operating leases for minimum rentals

 

 

 

 

Twelve months ending March 31:

    

 

 

2020

 

 

79,472

2021

 

 

4,694

Total

 

$

84,166

 

v3.19.3
Convertible notes payable and warrants
6 Months Ended
Mar. 31, 2019
Convertible notes payable and warrants  
Convertible notes payable and warrants

Note 9 — Convertible notes payable and warrants

On November 1, 2018, the Company completed a $7.5 million private placement with an institutional investor (the “Buyer”). Pursuant to the Securities Purchase Agreement, dated as of November 1, 2018 (the “Securities Purchase Agreement”), the Company issued and sold an aggregate of $7.5 million of senior convertible notes due April 1, 2020 (the “Notes”) and warrants (the “Investor Warrants”) to purchase an aggregate of 800,000 of the Company’s Ordinary Shares. The Notes were initially convertible into 1,198,084 Ordinary Shares at the rate of $6.26 per Ordinary Share, which rate is subject to adjustment as referenced in the form of Notes. The Notes bear interest at 10% per year. The Investor Warrants are exercisable by the holder thereof at any time on or after November 1, 2018 and before November 1, 2022. One year from the date of issuance of the Investor Warrants, the Exercise Price of the Investor Warrants will be lowered to the then-current Market Price (as such term is defined in the Notes) of an Ordinary Share, if such Market Price is less than the initial Exercise Price of $6.53 per Ordinary Share.

On November 1, 2018, the Company issued warrants to purchase 10% of the shares placed under the Notes (initially 119,808) to the placement agent, at an exercise price of $7.183 per share (the “Placement Agent Warrants”). The Investor and Placement Agent Warrants have a term of four years and are subject to adjustment under certain events.

At the time of issuance, the Company allocated the proceeds to the Notes and Investor Warrants based on their relative fair values, and evaluated the intrinsic value of the beneficial conversion feature (“BCF”) associated with the conversion feature of the Notes. The Investor Warrants and BCF were recorded into additional paid-in capital.

The Investor Warrants were treated as a discount on the Notes and were valued at $1,496,153. Additionally, the Notes were considered to have an embedded BCF because the effective conversion price was less than the fair value of the Company's common stock on November 1, 2018. The value of the BCF was $670,618 and was also recorded as a discount on the Notes. Hence, in connection with the issuance of the Notes and the Investor Warrants, together with other issuance costs, the Company recorded a total debt discount of $3,206,932 that will be amortized over the term of the Notes. For the six months ended March 31, 2019, a total of $943,215 in amortization of the debt discounts was recorded and charged to the interest expense. As of March 31, 2019, ordinary shares totaling 131,223 were issued by the Company to the Buyer equaling principal and interests amounted to $485,208, and the Notes balance was $5,251,075, with a carrying value of $7,514,792, net of unamortized debt discounts of $2,263,717.

 

The fair value of the Investor Warrants and Placement Agent Warrants was computed using the Black-Scholes option-pricing model. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (2.94)%, (2) expected warrant life of 4 years, (3) expected volatility of 72.57%, and (4) expected dividend yield of 0.

v3.19.3
Property, plant and equipment, net
6 Months Ended
Mar. 31, 2019
Property, plant and equipment, net  
Property, plant and equipment, net

Note 5 — Property, plant and equipment, net

Property, plant and equipment, stated at cost less accumulated depreciation, consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Office equipment

 

$

47,157

 

$

39,755

Vehicles

 

 

69,926

 

 

68,307

Machinery and equipment

 

 

100,746

 

 

98,414

Leasehold improvements

 

 

120,432

 

 

117,645

Subtotal

 

 

338,261

 

 

324,121

Accumulated depreciation and amortization

 

 

(215,594)

 

 

(187,758)

Total

 

$

122,667

 

$

136,363

 

Depreciation expense was $22,976 and $6,464 for the six months ended March 31, 2019 and 2018, respectively.

v3.19.3
Organization and nature of business
6 Months Ended
Mar. 31, 2019
Organization and nature of business  
Organization and nature of business

Note 1 — Organization and nature of business

Farmmi, Inc. (“FMI”) is a holding company incorporated under the laws of the Cayman Islands on July 28, 2015. FMI’s Chief Executive Officer (“CEO”) Ms. Yefang Zhang, as the sole shareholder of FarmNet Limited which is the sole shareholder of FMI, and her husband Mr. Zhengyu Wang, a director of the Company, are the ultimate shareholders of the Company (“Controlling Shareholders”).

Reorganization

The Reorganization of the legal structure involved the incorporation of FMI, a Cayman Islands holding company; the incorporation of Farmmi International Limited (“Farmmi International”), a Hong Kong company; the incorporation of Hangzhou Suyuan Agriculture Technology Co., Ltd. (“Suyuan Agriculture”), a PRC company; the incorporation of Farmmi (Hangzhou) Enterprise Management Co., Ltd. (“Farmmi Enterprise”) and Lishui Farmmi Technology Co., Ltd. (“Farmmi Technology”), two new wholly foreign-owned entities (“WFOE”) formed by Farmmi International under the laws of China; and the equity transfer of Suyuan Agriculture, Zhejiang Forest Food Co., Ltd. (“Forest Food”) and Zhejiang FLS Mushroom Co., Ltd. (“FLS Mushroom”) (collectively, the “Transferred Entities”) from the Controlling Shareholders.

On July 5, 2016 and August 10, 2016, Zhengyu Wang transferred all of his equity interests in Suyuan Agriculture to Farmmi Enterprise and Farmmi Technology with each owning 50% of Suyuan Agriculture. On November 24, 2016, Zhengyu Wang, the controlling shareholder of Forest Food, transferred 96.15% of his interest in Forest Food to Suyuan Agriculture. On October 24, 2016, Zhengyu Wang, the controlling shareholder of FLS Mushroom, transferred 100% of his interest in FLS Mushroom to Suyuan Agriculture. After the Reorganization, FMI, the ultimate holding company, owns 100% equity interest of Suyuan Agriculture and FLS Mushroom, and 96.15% equity interest of Forest Food. The remaining 3.85% equity interest of Forest Food is owned by a minority interest shareholder.

On September 18, 2016, Suyuan Agriculture entered into a series of contractual agreements with Zhengyu Wang, the owner of Hangzhou Nongyuan Network Technology Co., Ltd. (“Nongyuan Network”) and Nongyuan Network. Nongyuan Network is a company incorporated on December 8, 2015 that focuses on the development of network marketing and provides a network platform for sales of agriculture products. These agreements include Exclusive Management Consulting and Technology Service Agreement, Proxy Agreement, Equity Pledge Agreement and Executive Call Option Agreement. Pursuant to these agreements, Suyuan Agriculture has the exclusive rights to provide to Nongyuan Network consulting services related to business operation and management. All the above contractual agreements obligate Suyuan Agriculture to absorb all of the loss from Nongyuan Network’s activities and entitle Suyuan Agriculture to receive all of its residual returns. In essence, Suyuan Agriculture has gained effective control over Nongyuan Network. Therefore, the Company believes that Nongyuan Network should be considered as Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts of this entity are consolidated with those of Suyuan Agriculture.

Since FMI and its subsidiaries are effectively controlled by the same Controlling Shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

On December 26, 2017, Zhejiang Farmmi Food Co., Ltd. (“Farmmi Food”) was established under the laws of the PRC. Initially Farmmi Food was wholly owned by Farmmi Technology. In January 2018, the share ownership was transferred to Suyuan Agriculture. In May 2018, Farmmi Food received its food production permit and began operation.

On March 22, 2019, Lishui Farmmi E-Commerce Co., Ltd. ("Farmmi E-Commerce") was established under the laws of the PRC. Nongyuan Network and Suyuan Agriculture owns 98% and 2% of interests in Farmmi E-Commerce, respectively.

Upon the reorganization, Farmmi has subsidiaries in countries and jurisdictions including PRC, Hong Kong and Cayman Islands. Details of the subsidiaries of Farmmi are set out below:

 

 

 

 

 

 

 

 

 

 

 

 

Date of 

 

Place of 

 

% of 

 

 

Name of Entity

    

Incorporation

    

Incorporation

    

Ownership

    

Principal Activities

FMI

 

July 28,2015

 

Cayman

 

Parent

 

Holding Company

Farmmi International

 

August 20,2015

 

Hong Kong

 

100

 

Holding Company

Farmmi Enterprise

 

May 23,2016

 

Zhejiang, China

 

100

 

Holding Company

Farmmi Technology

 

June 6,2016

 

Zhejiang, China

 

100

 

Holding Company

Suyuan Agriculture

 

December 8,2015

 

Zhejiang, China

 

100

 

Holding Company

Forest Food

 

May 8,2003

 

Zhejiang, China

 

96.15

 

Drying, further processing and distribution of edible fungus

FLS Mushroom

 

March 25,2011

 

Zhejiang, China

 

100

 

Light processing and distribution of dried mushrooms

Farmmi Food

 

December 26,2017

 

Zhejiang, China

 

100

 

Drying, further processing and distribution of edible fungus

Nongyuan Network

 

July 7,2016

 

Zhejiang, China

 

0 (VIE)

 

Trading

Farmmi E-Commerce

 

March 22,2019

 

Zhejiang, China

 

Subsidiary of the VIE

 

Technology development, technical services and technical consultation related to agricultural products

 

Initial Public Offering

On February 21, 2018, the Company announced the closing of its initial public offering (“IPO”) of 1,680,000 ordinary shares at a price to the public of $4.00 per share for a total of $6,720,000 in gross proceeds. The Company raised total net proceeds of $5,374,341 after deducting underwriting discounts and commissions and offering expenses. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 252,000 ordinary shares at the public offering price. This offering was conducted on a firm commitment basis. The Company’s shares began trading on The NASDAQ Capital Market on February 16, 2018 under the ticker symbol “FAMI.”

On February 23, 2018, the Company announced that ViewTrade Securities, Inc., who acted as the sole underwriter and book-runner of the Company’s IPO, exercised the full over-allotment option to purchase an additional 252,000 ordinary shares at the IPO price of $4.00 per share for a total of gross proceeds of approximately $1,008,000 from the exercise of this over-allotment option. The Company raised total net proceeds of $927,330 after deducting underwriting discounts and commissions and offering expenses.

 

v3.19.3
Condensed Consolidated Statements of Operations and Comprehensive Income - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Revenues    
Sales to third parties $ 14,386,404 $ 12,865,585
Sales to related party 1,783 154,452
Total revenues 14,388,187 13,020,037
Cost of revenues 11,845,025 10,920,758
Gross Profit 2,543,162 2,099,279
Operating expenses    
Selling and distribution expenses 281,213 90,684
General and administrative expenses 876,746 731,008
Total operating expenses 1,157,959 821,692
Income from operations 1,385,203 1,277,587
Other income (expenses)    
Interest income 451 376
Interest expense (1,527,302) (86,138)
Other (expenses) income, net (1,583) 7,452
Total other expenses (1,528,434) (78,310)
(Loss) income before income taxes (143,231) 1,199,277
Provision for income taxes 27,860 1,591
Net (loss) income (171,091) 1,197,686
Less: net loss attributable to non-controlling interest (1,015) (1,667)
Net (loss) income attributable to Farmmi, Inc. (170,076) 1,199,353
Comprehensive income    
Net (loss) income (171,091) 1,197,686
Other comprehensive income: foreign currency translation gain 683,614 700,595
Total comprehensive income 512,523 1,898,281
Comprehensive income attributable to non-controlling interest 19,708 51,697
Comprehensive income attributable to Farmmi, Inc. $ 492,815 $ 1,846,584
Weighted average number of shares, basic and diluted (in shares) 11,427,753 10,411,231
Basic and diluted (loss) earnings per common share $ (0.01) $ 0.12
v3.19.3
Stockholder's Equity (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Stockholders Equity [Line Items]    
Total noncontrolling interest $ 895,080 $ 875,372
Original paid-in capital    
Stockholders Equity [Line Items]    
Total noncontrolling interest 107,461 107,461
Additional Paid in Capital    
Stockholders Equity [Line Items]    
Total noncontrolling interest 807,953 807,953
Foreign currency translation loss attributed to noncontrolling interest    
Stockholders Equity [Line Items]    
Total noncontrolling interest (21,517) (42,240)
Net gain attributed to noncontrolling interest    
Stockholders Equity [Line Items]    
Total noncontrolling interest $ 1,183 $ 2,198
v3.19.3
Long-term bank loan (Details)
¥ in Millions
Jul. 04, 2017
CNY (¥)
Sep. 30, 2018
USD ($)
Jul. 04, 2017
USD ($)
Debt Instrument [Line Items]      
Working capital loan   $ 640,455  
Jianxin Bank of Lishui | Loan agreement      
Debt Instrument [Line Items]      
Working capital loan ¥ 4.4   $ 655,631
Maturity date May 15, 2019    
Effective interest rate 9.60%   9.60%
v3.19.3
Taxes - Components of deferred tax assets (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Taxes    
Net operating loss carryforwards $ 151,459 $ 150,620
Valuation allowance (151,459) (150,620)
Total $ 0 $ 0
v3.19.3
Commitment and contingency - Additional Information (Details)
6 Months Ended
Mar. 31, 2019
USD ($)
building
Office
Mar. 31, 2018
USD ($)
Commitment and contingency    
Number of office spaces on lease | Office 1  
Number of factory buildings on lease | building 1  
Rental expense | $ $ 55,628 $ 32,621
v3.19.3
Short-term bank loans - Additional information (Details)
¥ in Millions
Jan. 15, 2019
CNY (¥)
Jul. 11, 2018
CNY (¥)
Mar. 31, 2019
USD ($)
Jan. 15, 2019
USD ($)
Sep. 30, 2018
USD ($)
Jul. 11, 2018
USD ($)
Short-term Debt [Line Items]            
Short-term bank loans     $ 1,490,070   $ 1,455,580  
Bank Of China (Lishui Branch)            
Short-term Debt [Line Items]            
Short-term bank loans     $ 1,490,070   $ 1,455,580  
Loan agreement | Bank Of China (Lishui Branch) | Forest Food            
Short-term Debt [Line Items]            
Short-term bank loans ¥ 10 ¥ 10   $ 1,490,070   $ 1,455,580
Maturity date Jan. 14, 2020 Jan. 10, 2019        
Effective interest rate 4.86% 6.09%   4.86%   6.09%
v3.19.3
Summary of significant accounting policies - Additional information (Details)
6 Months Ended
Apr. 01, 2019
Mar. 31, 2019
USD ($)
Mar. 31, 2018
USD ($)
Sep. 30, 2018
USD ($)
Accounting Policies [Line Items]        
Sales   $ 3,097,876    
Operating expenses   3,176,450    
Net income (Loss)   78,962    
Restricted cash   1,100,000   $ 600,000
Cash maintained with People's Republic of China of which no deposits are covered by insurance   $ 5,320,357   $ 4,918,183
Exchange rates (per RMB1)   0.1490   0.1456
Applicable VAT rate   13% or 17%    
Tax Rate 9% or 13% 12% or 16%    
IPO        
Accounting Policies [Line Items]        
Restricted cash   $ 600,000    
Private placement        
Accounting Policies [Line Items]        
Restricted cash   500,000    
Shipping and handling        
Accounting Policies [Line Items]        
Shipping and handling expenses   $ 114,669 $ 77,910  
Average        
Accounting Policies [Line Items]        
Exchange rates (per RMB1)   0.1464 0.1542  
v3.19.3
Property, plant and equipment, net - Additional information (Details) - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Property, plant and equipment, net    
Depreciation expense $ 22,976 $ 6,464
v3.19.3
Summary of significant accounting policies (Policies)
6 Months Ended
Mar. 31, 2019
Summary of significant accounting policies  
Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The accompanying unaudited condensed consolidated financial statements have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal years ended September 30, 2018 and 2017.

The unaudited condensed consolidated financial statements of the Company reflect the principal activities of FMI, Farmmi international, Farmmi Enterprise, Farmmi Technology, Suyuan Agriculture, and Suyuan Agriculture’s main operation subsidiaries, Forest Food, Farmmi Food and FLS Mushroom, and the VIE Nongyuan Network and its subsidiary Farmmi E-Commerce. All intercompany transactions and balances have been eliminated upon consolidation.

Consolidation of Variable Interest Entities

Consolidation of Variable Interest Entities

In accordance with accounting standards regarding consolidation of variable interest entities (“VIEs”), VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company determined that Nongyuan Network is a VIE because the Company is the primary beneficiary of risks and rewards of this VIE. The carrying amount of this VIE’s assets and liabilities are as follows:

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

September 30, 2018

 

 

 

 

 

 

 

Current assets

 

$

616,242

 

$

481,228

Non-current assets

 

 

170,396

 

 

71,239

Total assets

 

 

786,638

 

 

552,467

Total liabilities

 

 

(580,633)

 

 

(272,715)

Net assets

 

$

206,005

 

$

279,752

 

The financial performance of the VIE reported in the unaudited condensed consolidated statement of income and comprehensive income for the six months ended March 31, 2019 includes sales of $3,097,876, operating expenses of $3,176,450, and net loss of $78,962.

Use of Estimates

Use of Estimates

In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowance for doubtful accounts and advance to suppliers; the valuation of inventories; the valuation of beneficial conversion feature of the convertible notes; and the valuation of deferred tax assets.

Cash and Cash Equivalents

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. All cash balances are in bank accounts in PRC and are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted Cash

Restricted Cash

The Company adopted Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows: Restricted Cash" on October 1, 2018. This ASU applies to all entities that have restricted cash or restricted cash equivalents to be presented in the statement of cash flows under Topic 230. As of March 31, 2019 and September 30, 2018, the Company had restricted cash of $1,100,000 and $600,000, respectively. $600,000 of the restricted cash were the proceeds from the Initial Public Offering and will be released in February 2021, the rest $500,000 were the proceeds from the private placement (Note 9) and is designated to pay for professional service fees at any time.

Accounts Receivable

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after efforts at collection prove unsuccessful.

Inventory

Inventory

The Company values its inventories at the lower of cost, determined on a weighted average basis, or net realizable value. The Company reviews its inventories periodically to determine if any reserves are necessary for potential obsolescence or if the carrying value exceeds net realizable value.

Advances to Suppliers

Advances to Suppliers

Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for premium quality. The Company is required from time to time to make cash advances when placing its purchase orders. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.

Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and equipment are as follows:

 

 

 

 

Machinery and equipment

    

5 – 10 years

Transportation equipment

 

4 years

Office equipment

 

3 – 5 years

Leasehold improvement

 

Shorter of lease term or useful life

 

Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized.

Intangible assets

Intangible assets

Intangible assets consist primarily of purchased software. Intangible assets are stated at cost less accumulated amortization, which are amortized using the straight-line method with the estimated useful lives of 10 years.

Revenue Recognition

Revenue Recognition

On October 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers ("ASC Topic 606") using the modified retrospective method for contracts that were not completed as of October 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements, and no adjustments to opening retained earnings were made as the Company's revenue was recognized based on the amount of consideration expected to be received in exchange for satisfying the performance obligations.

ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per ton. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company's consolidated financial statements upon adoption of ASC 606.

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of March  31, 2019 and September  30, 2018. For the six months ended March  31, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

Refer to Note 15 - Segment reporting for details of revenue segregation.

Cost of Revenues

Cost of Revenues

Cost of revenues includes cost of raw materials purchased, inbound freight cost, cost of direct labor, depreciation expense and other overhead. Write-down of inventory for lower of cost or net realizable value adjustments is also recorded in cost of revenues.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, defines fair value, establishes a three-level valuation hierarchy for fair value measurements and enhances disclosure requirements.

The three levels are defined as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.

Level 3 — Inputs to the valuation methodology are unobservable.

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, restricted cash, accounts receivable, advances to suppliers, other current assets, accounts payable, due to related parties, advances from customers , other current liabilities and short-term bank loans approximate their recorded values due to their short-term maturities.

Beneficial conversion features

Beneficial conversion features

The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.

Debt Issuance Costs and Debt Discounts

Debt Issuance Costs and Debt Discounts

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed.

Concentrations of Credit Risk

Concentrations of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts receivable and advances to suppliers. As of March 31, 2019 and September 30, 2018, $5,320,357 and $4,918,183 of the Company’s cash is maintained in banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay are dependent upon the industry economics prevailing in these areas. The Company also makes cash advances to certain suppliers to ensure the stable supply of key raw materials. The Company performs ongoing credit evaluations of its customers and key suppliers to help further reduce credit risk.

Comprehensive Income

Comprehensive Income

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholder’s equity but are excluded from net income. Other comprehensive income consists of foreign currency translation adjustment from the Company not using the U.S. dollar as its functional currency.

Foreign Currency Translation

Foreign Currency Translation

The Company’s financial information is presented in U.S. dollars (“USD”). The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”), the currency of PRC. Any transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The unaudited condensed consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

The exchange rates in effect as of March 31, 2019 and September 30, 2018 were RMB1 for $0.1490 and $0.1456, respectively. The average exchange rates for the six months ended March 31, 2019 and 2018 were RMB1 for $0.1464 and $0.1542, respectively.

Shipping and Handling

Shipping and Handling

All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $114,669 and $77,910 for the six months ended March 31, 2019 and 2018, respectively.

Value Added Tax

Value Added Tax

The Company is generally subject to the value added tax (“VAT”) for selling merchandise, except for FLS Mushroom. Before May 1, 2018, the applicable VAT rate was 13% or 17% (depending on the type of goods involved) for products sold in PRC. After May 1, 2018, the Company is subject to a tax rate of 12% or 16%, and after April 1, 2019, the tax rate was further reduced to 9% or 13% based on the new Chinese tax law. Pursuant to approval issued by the State Administration of Taxation, FLS Mushroom’s major operation can be classified as agriculture products and its revenue is exempt from VAT. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax authorities has the right to assess a penalty based on the amount of taxes which is determined to be late or deficient, with any penalty being expensed in the period when a determination is made by the tax authorities that a penalty is due. During the reporting periods, the Company had no dispute with PRC tax authorities and there was no tax penalty incurred.

Income Taxes

Income Taxes

The Company is subject to the income tax laws of the PRC. No taxable income was generated outside the PRC for the six months ended March 31, 2019 and 2018. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or not be deductible in the future.

ASC 740‑10‑25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of March 31, 2019 and September 30, 2018. As of March 31, 2019, the tax years ended December 31, 2014 through December 31, 2018 for the Company’s PRC subsidiary remain open for statutory examination by PRC  tax authorities.

Statement of Cash Flows

Statement of Cash Flows

In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Risks and Uncertainties

Risks and Uncertainties

The operations of the Company are located in PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in PRC, in addition to the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.

The Company does not carry any business interruption insurance, product liability insurance or any other insurance policy except for a limited property insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment in the Company.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its financial statements and related disclosures. The Company has estimated that the adoption of this AUS will not have material impact on the results of the operations and cash flows, however, it may have a material impact on the consolidated balance sheets. As required by this ASU, the Company will record the right of use assets and operating lease liabilities on the consolidated balance sheets.

In November 2017, the FASB issued ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the new revenue recognition standard. This standard will be effective for fiscal years beginning after December 15, 2018. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018‑02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company expects that the adoption of this ASU would not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

v3.19.3
Concentration of major customers and suppliers
6 Months Ended
Mar. 31, 2019
Concentration of major customers and suppliers  
Concentration of major customers and suppliers

Note 13 — Concentration of major customers and suppliers

For the six months ended March 31, 2019 and 2018, one major customer accounted for approximately 66% and 74% of the Company’s total sales, respectively. Any decrease in sales to this major customer may negatively impact the Company’s operations and cash flows if the Company fails to increase its sales to other customers.

As of March 31, 2019 and September 30, 2018, one major customer accounted for approximately 95% and 96% of the Company’s accounts receivable balance, respectively.

For the six months ended March 31, 2019, three major suppliers accounted for approximately 41%,  28% and  17% of the total purchases, respectively. For the six months ended March 31, 2018, two major suppliers accounted for approximately 45% and 32% of the total purchases, respectively. A loss of either of these suppliers could have a negative effect on the operations of the Company.

v3.19.3
Inventory (Tables)
6 Months Ended
Mar. 31, 2019
Inventory  
Schedule of inventory

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Raw materials

 

$

1,777,672

 

$

1,742,005

Packaging materials

 

 

28,903

 

 

65,966

Finished goods

 

 

53,992

 

 

172

Total

 

$

1,860,567

 

$

1,808,143

 

v3.19.3
Stockholder's Equity
6 Months Ended
Mar. 31, 2019
Stockholder's Equity  
Stockholder's Equity

Note 11 — Stockholder’s Equity

Capital contribution

On January 22, 2016, the Board of Directors of the Company entered into a resolution to increase the registered capital of Forest Food from RMB 5,000,000 ($603,500) to RMB 17,600,000 ($2,124,320).

On February 29, 2016, the Board of Directors of the Company approved a new investment from National Trust Co., Ltd. (the “Investor”), pursuant to which, the Investor agreed to invest RMB 5,999,784 ($915,414) into the Company, of which RMB 704,200 ($107,461) was counted toward the registered capital. After these equity changes, National Trust Co., Ltd. owned a minority interest of 3.85% in Forest Food.

On February 21, 2018, the Company announced the closing of its IPO of 1,680,000 ordinary shares at a price to the public of $4.00 per share for a total of $6,720,000 in gross proceeds.

On February 23, 2018, the Company announced that ViewTrade Securities, Inc., who acted as the sole underwriter and book-runner of the Company’s IPO, exercised the full over-allotment option to purchase an additional 252,000 ordinary shares at the IPO price of $4.00 per share for a total of gross proceeds of approximately $1,008,000 from the exercise of this over-allotment option.

Noncontrolling interest

The Company’s noncontrolling interest consists of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Original paid-in capital

 

$

107,461

 

$

107,461

Additional paid-in capital

 

 

807,953

 

 

807,953

Foreign currency translation loss attributed to noncontrolling interest

 

 

(21,517)

 

 

(42,240)

Net gain  attributed to noncontrolling interest

 

 

1,183

 

 

2,198

Total noncontrolling interest

 

$

895,080

 

$

875,372

 

Statutory Reserve

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).

Appropriations to the statutory surplus reserve are required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. As of March 31, 2019 and September 30, 2018, the balance of the required statutory reserves was $229,512 and $229,512, respectively.

Conversion of convertible notes

As disclosed in Note 9, in March 2019, the Company issued total of 131,223 ordinary shares to the Buyer equaling principal and interests amounted to $485,208 of the convertible notes.

Additional paid-in capital

As disclosed in Note 9, on November 1, 2018, the Company issued and sold an aggregate of $7.5 million of senior convertible notes due April 1, 2020 and warrants to purchase an aggregate of 800,000 of its Ordinary Shares. In addition, the Company also issued warrants to purchase 10% of the shares placed under the Notes (initially 119,808) to the placement agent.

The Company evaluated the intrinsic value of the BCF, the relative fair value of the Investor Warrants and Placement Agent Warrants on their date of grant, which was determined to be $670,618,  $1,496,153 and $323,843, respectively, and they were recorded as additional paid-in capital.

v3.19.3
Short-term bank loans
6 Months Ended
Mar. 31, 2019
Short-term bank loans  
Short-term bank loans

Note 7 — Short-term bank loans

Short-term bank loans consist of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

Bank of China (Lishui Branch)

 

$

1,490,070

 

$

1,455,580

Total

 

$

1,490,070

 

$

1,455,580

 

On July 11, 2018, Forest Food, a subsidiary of the Company, entered into a loan agreement with the Bank of China (Lishui Branch) to borrow RMB 10 million (equivalent of $1,455,580) as working capital for six months, with a due date on January 10, 2019 at an annual effective interest rate of 6.09%.  The loan is secured by the real property and land use right owned by Forasen Group Co., a related party. The loan is also guaranteed by Zhejiang Lishui Xinyite Automation Technology Co., Ltd., Lishui Kaige Bearing Co., Ltd., and Zhejiang MeiFeng Tea Industry co., Ltd, three unrelated parties, as well as two principal officers of the Company. The loan was repaid upon maturity.

On January 15, 2019, Forest Food, entered into a new loan agreement with the Bank of China (Lishui Branch) to borrow RMB 10 million (equivalent of $1,490,070) as working capital for one year, with a due date on January 14, 2020 at an annual effective interest rate of 4.86%.  The loan is secured by the real property and land use right owned by Forasen Group Co., a related party. The loan is also guaranteed by Zhejiang Lishui Xinyite Automation Technology Co., Ltd., Lishui Kaige Bearing Co., Ltd., and Zhejiang MeiFeng Tea Industry co., Ltd, three unrelated parties, as well as two principal officers of the Company.

v3.19.3
Accounts receivable
6 Months Ended
Mar. 31, 2019
Accounts receivable  
Accounts receivable

Note 3 — Accounts receivable

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Accounts receivable - trade

 

$

13,974,824

 

$

8,601,269

Accounts receivable - related party

 

 

19,126

 

 

1,257

Accounts receivable, net

 

$

13,993,950

 

$

8,602,526

 

No allowance for doubtful accounts was deemed necessary for the six months ended March 31, 2019 and 2018.

v3.19.3
Stockholder's Equity (Tables)
6 Months Ended
Mar. 31, 2019
Stockholder's Equity  
Schedule of noncontrolling interest

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Original paid-in capital

 

$

107,461

 

$

107,461

Additional paid-in capital

 

 

807,953

 

 

807,953

Foreign currency translation loss attributed to noncontrolling interest

 

 

(21,517)

 

 

(42,240)

Net gain  attributed to noncontrolling interest

 

 

1,183

 

 

2,198

Total noncontrolling interest

 

$

895,080

 

$

875,372

 

v3.19.3
Organization and nature of business - Details of the subsidiaries (Details)
6 Months Ended
Mar. 31, 2019
Nongyuan Network (VIE)  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Jul. 28, 2015
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership (VIE) 0.00%
Principal Activities Trading
Farmmi E-Commerce  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Mar. 22, 2019
Entity Incorporation, State Country Name Zhejiang, China
Principal Activities Technology development, technical services and technical consultation related to agricultural products
FMI | Reportable Legal Entities [Member]  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Jul. 28, 2015
Entity Incorporation, State Country Name Cayman
Principal Activities Holding Company
Farmmi International  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Aug. 20, 2015
Entity Incorporation, State Country Name Hong Kong
% of Ownership 100.00%
Principal Activities Holding Company
Farmmi Enterprise  
Organization and nature of business  
Entity Incorporation, Date of Incorporation May 23, 2016
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 100.00%
Principal Activities Holding Company
Farmmi Technology  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Jun. 06, 2016
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 100.00%
Principal Activities Holding Company
Suyuan Agriculture  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Dec. 08, 2015
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 100.00%
Principal Activities Holding Company
Forest Food  
Organization and nature of business  
Entity Incorporation, Date of Incorporation May 08, 2003
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 96.15%
Principal Activities Drying, further processing and distribution of edible fungus
FLS Mushroom  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Mar. 25, 2011
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 100.00%
Principal Activities Light processing and distribution of
Farmmi Food  
Organization and nature of business  
Entity Incorporation, Date of Incorporation Dec. 26, 2017
Entity Incorporation, State Country Name Zhejiang, China
% of Ownership 100.00%
Principal Activities Drying, further processing and distribution of edible fungus
v3.19.3
Taxes - Reconciliation of tax rates (Details)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Taxes    
Statutory PRC income tax rate 25.00% 25.00%
Effect of income tax exemption on certain income (25.93%) (27.25%)
Favorable tax rate impact 1.43% 0.30%
Permanent difference 0.22% 0.00%
Changes of deferred tax assets valuation allowances 1.22% 2.05%
Non-PRC entities not subject to PRC income tax (21.39%) 0.03%
Total (19.45%) 0.13%
v3.19.3
Related party transactions (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Related Party Transaction [Line Items]    
Total $ 47,381 $ 122,800
Zhengyu Wang    
Related Party Transaction [Line Items]    
Total 47,232 0
Forasen Group    
Related Party Transaction [Line Items]    
Total 149 0
FarmNet Limited    
Related Party Transaction [Line Items]    
Total $ 0 $ 122,800
v3.19.3
Condensed Consolidated Balance Sheets - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Current Assets    
Cash $ 5,338,219 $ 4,925,165
Restricted cash 500,000  
Accounts receivable, net - trade 13,974,824 8,601,269
Accounts receivable, net - related party 19,126 1,257
Inventory, net 1,860,567 1,808,143
Advances to suppliers 8,488,640 5,868,486
Other current assets 227,489 135,314
Total current assets 30,408,865 21,339,634
Property, plant and equipment, net 122,667 136,363
Intangible assets 99,513  
Restricted cash - long term 600,000 600,000
Total Assets 31,231,045 22,075,997
Current Liabilities    
Short-term bank loans 1,490,070 1,455,580
Long-term bank loans -current portion 655,631  
Accounts payable - trade 423,231 343,141
Due to related parties 47,381 122,800
Advances from customers 54,959  
Convertible notes payable 5,251,075  
Other current liabilities 606,710 300,379
Total current liabilities 8,529,057 2,221,900
Long-term bank loans   640,455
Total Liabilities 8,529,057 2,862,355
Equity    
Common stock, $0.001 par value, 20,000,000 shares authorized, 12,063,223 and 11,932,000 shares issued and outstanding at March 31, 2019 and September 30, 2018 12,063 11,932
Additional paid-in capital 14,298,511 11,322,819
Statutory reserve 229,512 229,512
Retained earnings 6,826,761 6,996,837
Accumulated other comprehensive income (loss) 440,061 (222,830)
Total Stockholders' Equity 21,806,908 18,338,270
Non-controlling Interest 895,080 875,372
Total Equity 22,701,988 19,213,642
Total Liabilities and Equity $ 31,231,045 $ 22,075,997
v3.19.3
Condensed Consolidated Statements of Cash Flows - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net (loss) income $ (171,091) $ 1,197,686
Adjustments to reconcile net (loss) income to net cash used in operating activities:    
Changes in allowances - accounts receivable   12,909
Depreciation expense 22,976 6,464
Loss from disposal of property and equipment   833
Accrued interest expense for convertible notes 500,000  
Amortization of deferred financing costs 943,215  
Changes in operating assets and liabilities:    
Accounts receivable, net (5,096,374) (3,629,315)
Inventory, net (9,412) (648,303)
Advances to suppliers (2,437,474) (104,714)
Other current assets (87,404) (144,724)
Long-term prepaid expenses   4,370
Accounts payable 70,694 (144,282)
Advances from customers 53,993 67,241
Other current liabilities 294,839 29,810
Net cash used in operating activities (5,916,038) (3,352,025)
Cash flows from investing activities    
Purchase of property, plant and equipment (6,346) (2,782)
Purchase of intangible assets (97,764)  
Net cash used in investing activities (104,110) (2,782)
Cash flows from financing activities    
Payments of deferred financing costs (716,318)  
Gross proceeds from issuance of convertible notes 7,500,000  
Net proceeds from Initial Public Offering - stock issuance   7,728,000
Direct costs disbursed from Initial Public Offering proceeds   (1,147,549)
Borrowings from bank loans 1,463,870  
Repayments of bank loans (1,463,870)  
Repayments of loans from related parties (76,253) (426,316)
Net cash provided by financing activities 6,707,429 6,154,135
Effect of exchange rate changes on cash, cash equivalents and restricted cash 225,773 77,547
Net increase in cash, cash equivalents and restricted cash 913,054 2,876,875
Cash, cash equivalents and restricted cash, beginning of period 5,525,165 2,590,539
Cash, cash equivalents and restricted cash, end of period 6,438,219 5,467,414
Supplemental disclosure information:    
Income taxes paid 11,254 4,312
Interest paid 71,670 $ 82,987
Non-cash financing activities    
Conversion of notes to 131,223 shares of common stock 485,208  
Accrued interest for convertible notes $ 500,000  
v3.19.3
Inventory (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Inventory    
Raw materials $ 1,777,672 $ 1,742,005
Packaging materials 28,903 65,966
Finished goods 53,992 172
Total $ 1,860,567 $ 1,808,143
v3.19.3
Advances to suppliers - Additional information (Details)
6 Months Ended
Mar. 31, 2019
USD ($)
item
Sep. 30, 2018
USD ($)
Sep. 30, 2017
USD ($)
Share-based Goods and Nonemployee Services Transaction [Line Items]      
Advances to suppliers $ 8,488,640 $ 5,868,486 $ 4,112,915
Number of suppliers | item 2    
Two suppliers      
Share-based Goods and Nonemployee Services Transaction [Line Items]      
Advances to suppliers $ 8,412,607    
Percentage of advances to suppliers utilized 100.00%    
Percentage of advances to suppliers on each purchase order 30.00%    
v3.19.3
Segment reporting - Geographic information about the revenues (Details) - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Segment Reporting Information [Line Items]    
Total revenues $ 14,388,187 $ 13,020,037
China    
Segment Reporting Information [Line Items]    
Total revenues 12,887,262 11,827,380
Revenue from foreign countries    
Segment Reporting Information [Line Items]    
Total revenues $ 1,500,925 $ 1,192,657
v3.19.3
Concentration of major customers and suppliers (Details)
6 Months Ended 12 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Sep. 30, 2018
Customer concentration risk | Major customer one | Total sales      
Major Customers And Suppliers [Line Items]      
Concentration risk, percentage 66.00% 74.00%  
Customer concentration risk | Major customer one | Accounts receivable      
Major Customers And Suppliers [Line Items]      
Concentration risk, percentage 95.00%   96.00%
Supplier concentration risk | Major supplier one | Total purchases      
Major Customers And Suppliers [Line Items]      
Concentration risk, percentage 41.00% 45.00%  
Supplier concentration risk | Major supplier two | Total purchases      
Major Customers And Suppliers [Line Items]      
Concentration risk, percentage 28.00% 32.00%  
Supplier concentration risk | Major supplier three | Total purchases      
Major Customers And Suppliers [Line Items]      
Concentration risk, percentage 17.00%    
v3.19.3
Summary of significant accounting policies (Tables)
6 Months Ended
Mar. 31, 2019
Summary of significant accounting policies  
Schedule of carrying amount of this variable interest entities assets and liabilities

 

 

 

 

 

 

 

 

    

March 31, 2019

    

September 30, 2018

 

 

 

 

 

 

 

Current assets

 

$

616,242

 

$

481,228

Non-current assets

 

 

170,396

 

 

71,239

Total assets

 

 

786,638

 

 

552,467

Total liabilities

 

 

(580,633)

 

 

(272,715)

Net assets

 

$

206,005

 

$

279,752

 

Schedule of useful lives of property and equipment

 

 

 

Machinery and equipment

    

5 – 10 years

Transportation equipment

 

4 years

Office equipment

 

3 – 5 years

Leasehold improvement

 

Shorter of lease term or useful life

 

v3.19.3
Segment reporting
6 Months Ended
Mar. 31, 2019
Segment reporting  
Segment reporting

Note 15 — Segment reporting

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments.

The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company currently has three main products from which revenue is earned and expenses are incurred: Shiitake Mushroom, Mu Er Mushroom and other edible fungi and other agricultural products. The operations of these product categories have similar economic characteristics. In particular, the Company uses the same or similar production processes; sells to the same or similar type of customers and uses the same or similar methods to distribute these products. The resources required by these products share high similarity. Switching cost between different products is minimal. Production is primarily determined by sales orders received and market trend. Therefore, management, including the chief operating decision maker, primarily relies on the revenue data of different products in allocating resources and assessing performance. Based on management’s assessment, the Company has determined that it has only one operating segment and therefore one reportable segment as defined by ASC.

For other agricultural products, the Company did not generate any revenue until January 2017 and the revenue generated since January 2017 was insignificant so it has not been included in the segment reporting analysis.

The following table presents revenue by major product categories (from third parties and related party) for the six months ended March 31, 2019 and 2018, respectively:

 

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Shiitake

 

$

8,346,344

 

$

7,972,621

Mu Er

 

 

5,167,414

 

 

4,833,461

Other edible fungi and other agricultural products

 

 

874,429

 

 

213,955

Total

 

$

14,388,187

 

$

13,020,037

 

All of the Company’s long-lived assets are located in PRC. Majority of the Company’s products are sold in China. Geographic information about the revenues, which are classified based on customers, is set out as follows:

 

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Revenue from China

 

$

12,887,262

 

$

11,827,380

Revenue from other countries

 

 

1,500,925

 

 

1,192,657

Total Revenue

 

$

14,388,187

 

$

13,020,037

 

v3.19.3
Accounts receivable (Details) - USD ($)
Mar. 31, 2019
Sep. 30, 2018
Accounts receivable    
Accounts receivable - trade $ 13,974,824 $ 8,601,269
Accounts receivable - related party 19,126 1,257
Accounts receivable, net $ 13,993,950 $ 8,602,526
v3.19.3
Advances to suppliers (Details) - USD ($)
6 Months Ended 12 Months Ended
Mar. 31, 2019
Sep. 30, 2018
Supplies [Roll Forward]    
Beginning balance $ 5,868,486 $ 4,112,915
Increased during the period/year 12,898,056 32,093,609
Less: utilized during the period/year (10,416,956) (30,209,196)
Exchange rate difference 139,054 (128,842)
Ending balance $ 8,488,640 $ 5,868,486
v3.19.3
Commitment and contingency (Details)
Mar. 31, 2019
USD ($)
Commitment and contingency  
2020 $ 79,472
2021 4,694
Total $ 84,166
v3.19.3
Accounts receivable (Tables)
6 Months Ended
Mar. 31, 2019
Accounts receivable  
Schedule of accounts receivable

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Accounts receivable - trade

 

$

13,974,824

 

$

8,601,269

Accounts receivable - related party

 

 

19,126

 

 

1,257

Accounts receivable, net

 

$

13,993,950

 

$

8,602,526

 

v3.19.3
Subsequent event
6 Months Ended
Mar. 31, 2019
Subsequent event  
Subsequent event

Note 16 — Subsequent event

These unaudited condensed consolidated financial statements were approved by management and available for issuance on November 25, 2019. The Company evaluated subsequent events through the date these unaudited condensed consolidated financial statements were issued.

v3.19.3
Long-term bank loan
6 Months Ended
Mar. 31, 2019
Long-term bank loan  
Long-term bank loan

Note 8 — Long-term bank loan

On July 4, 2017, the Company entered into a loan agreement with Jianxin Bank of Lishui to borrow RMB 4.4 million (equivalent of $655,631) for working capital needs. The loan matures on May 15, 2019 with an annual effective interest rate of 9.6%. The principle is due in full on the maturity date. The loan is guaranteed by Lishui Jiuanju Trade Co., Ltd., and Wangfeng Yan, two unrelated parties, as well as two principal officers of the Company. The loan was repaid upon maturity.

v3.19.3
Inventory
6 Months Ended
Mar. 31, 2019
Inventory  
Inventory

Note 4 — Inventory

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Raw materials

 

$

1,777,672

 

$

1,742,005

Packaging materials

 

 

28,903

 

 

65,966

Finished goods

 

 

53,992

 

 

172

Total

 

$

1,860,567

 

$

1,808,143

 

Inventory includes raw materials, packaging materials, work in process and finished goods. Finished goods include direct material costs, direct labor costs and manufacturing overhead. As of March 31, 2019 and September 30, 2018, no inventory reserve was deemed necessary.

v3.19.3
Taxes
6 Months Ended
Mar. 31, 2019
Taxes  
Taxes

Note 12 — Taxes

Corporation Income Tax (‘‘CIT’’)

The Company is subject to income taxes on an entity basis on income derived from the location in which each entity is domiciled.

FMI is incorporated in the Cayman Islands as an offshore holding company and is not subject to tax on income or capital gain under the laws of the Cayman Islands.

Farmmi International is incorporated in Hong Kong as a holding company with no activities. Under the Hong Kong tax laws, an entity is not subject to income tax if no revenue is generated in Hong Kong.

In China the Corporate Income Tax Law generally applies an income tax rate of 25% to all enterprises. FLS Mushroom, Nongyuan Network, Farmmi Enterprise and Farmmi Technology are registered in PRC and are all subject to corporate income tax at a statutory rate of 25% on net income reported after certain tax adjustments. Forest Food, Farmmi Food, Nongyuan Network and Farmmi E-Commerce are approved by local government as small-scaled minimal profit enterprises. Once an enterprise meets certain requirements and is identified as a small-scale minimal profit enterprise, the part of its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the part between RMB1 million and 3 million is subject to a reduced rate of 10%. Forest Food, Farmmi Food, FLS Mushroom and Nongyuan Network are entities with primary operating activities. Suyuan Agriculture, Farmmi Enterprise and Farmmi Technology are holding companies with no activities.

Under the Enterprise Income Tax (“EIT”) Law of PRC, domestic enterprises and foreign investment enterprises are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis. EIT is typically governed by the local tax authority in China. Each local tax authority at times may grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. In April 2016, and January 2019, FLS Mushroom and Farmmi Food received a temporary income tax break from the local tax authority of Lishui City. Net income of $1.50 million and $1.69 million was exempt from income tax for the six months ended March 31, 2019 and 2018, respectively. The estimated tax savings as the result of the tax break for the six months ended March 31, 2019 and 2018 amounted to $373,043 and $421,437,  respectively. Per share effect of the tax exemption were $0.03 and $0.04 for the six months ended March 31, 2019 and 2018, respectively.

The following table reconciles PRC statutory rates to the Company’s effective tax rates for the six months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

For the six months  ended March 31,

 

 

    

2019

    

2018

 

 

 

 

 

 

 

Statutory PRC income tax rate

 

25.00

%  

25.00

%  

Effect of income tax exemption on certain income

 

(25.93)

%  

(27.25)

%  

Favorable tax rate impact (a)

 

1.43

%  

0.30

%  

Permanent difference

 

0.22

%  

 —

 

Changes of deferred tax assets valuation allowances

 

1.22

%  

2.05

%  

Non-PRC entities not subject to PRC income tax

 

(21.39)

%  

0.03

%  

Effective tax rate

 

(19.45)

%  

0.13

%  

 

(a)Forest Food, Farmmi Food, Nongyuan Network and Farmmi E-Commerce are subject to corporate income tax at a reduced rate of 5% as approved by local government as small-scaled minimal profit enterprises.

The provision for income tax consists of the following:

 

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Current

 

$

27,860

 

$

1,591

Deferred

 

 

 —

 

 

 —

Total

 

$

27,860

 

$

1,591

 

Components of deferred tax assets are as follows:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30,  

 

 

2019

 

2018

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

151,459

 

$

150,620

Valuation allowance

 

 

(151,459)

 

 

(150,620)

Total

 

$

 —

 

$

 —

 

The deferred tax expense (benefit) is the change of deferred tax assets and deferred tax liabilities resulting from the temporary difference between tax and U.S. GAAP. Forest Food had a cumulative net operating loss of approximately $606,000 and $602,000, respectively, as of March 31, 2019 and September 30, 2018, which may be available to reduce future taxable income. Deferred tax assets were primarily the result of these net operating losses.

As of each reporting date, management considers evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. On the basis of this evaluation, a full valuation allowance of $151,459 was recorded against the gross deferred tax asset balance at March 31, 2019. The amount of the deferred tax asset is considered unrealizable because it is more likely than not that Forest Food will not generate sufficient future taxable income to utilize the net operating loss.

v3.19.3
Related party transactions (Tables)
6 Months Ended
Mar. 31, 2019
Related party transactions  
Schedule of relationship and the nature of related party transactions

 

 

 

 

 

Name of Related Party

    

Relationship to the Company

    

Nature of Transactions

Forasen Group Co., Ltd. (‘‘Forasen Group’’)

 

Owned by the Chairman of Board of Directors

 

Provides guarantee for the Company’s bank loans; purchases from the Company; leases factory building to the Company

FarmNet Limited

 

Parent company of FMI

 

Provides working capital loan

Yefang Zhang

 

Chief Executive Officer (‘‘CEO’’)

 

Provides working capital loan; provides guarantee for the Company’s bank loans

Zhengyu Wang

 

Chairman of Board of Directors

 

Provides guarantee for the Company’s bank loans

 

Schedule of due to related parties

 

 

 

 

 

 

 

 

    

March 31, 

    

September 30, 

 

 

2019

 

2018

Zhengyu Wang

 

$

47,232

 

$

 —

Forasen Group

 

 

149

 

 

 —

FarmNet Limited

 

 

 —

 

 

122,800

Total

 

$

47,381

 

$

122,800

 

v3.19.3
Segment reporting (Tables)
6 Months Ended
Mar. 31, 2019
Segment reporting  
Schedule of revenue by major product categories

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Shiitake

 

$

8,346,344

 

$

7,972,621

Mu Er

 

 

5,167,414

 

 

4,833,461

Other edible fungi and other agricultural products

 

 

874,429

 

 

213,955

Total

 

$

14,388,187

 

$

13,020,037

 

Schedule of revenue by Geographic information

 

 

 

 

 

 

 

 

 

For the six months ended March 31,

 

    

2019

    

2018

 

 

 

 

 

 

 

Revenue from China

 

$

12,887,262

 

$

11,827,380

Revenue from other countries

 

 

1,500,925

 

 

1,192,657

Total Revenue

 

$

14,388,187

 

$

13,020,037

 

v3.19.3
Taxes - Provision for income tax (Details) - USD ($)
6 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Taxes    
Current $ 27,860 $ 1,591
Deferred 0 0
Total $ 27,860 $ 1,591
v3.19.3
Related party transactions - Additional information (Details)
1 Months Ended 6 Months Ended
Oct. 31, 2009
CNY (¥)
Oct. 31, 2009
USD ($)
Mar. 31, 2019
USD ($)
Mar. 31, 2018
USD ($)
Related Party Transaction [Line Items]        
Revenue from Related Parties     $ 1,783 $ 154,452
Forasen Group        
Related Party Transaction [Line Items]        
Monthly rent ¥ 22,400 $ 3,279    
Terms of lease 10 years 10 years    
Forasen Group | Total sales        
Related Party Transaction [Line Items]        
Revenue from Related Parties     $ 1,783 $ 154,452
Concentration risk, percentage     0.01% 1.19%
v3.19.3
Condensed Consolidated Balance Sheets (Parentheticals) - $ / shares
Mar. 31, 2019
Sep. 30, 2018
Condensed Consolidated Balance Sheets    
Common stock, par or stated value per share (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized 20,000,000 20,000,000
Common stock, shares, issued 12,063,223 11,932,000
Common stock, shares, outstanding 12,063,223 11,932,000
v3.19.3
Condensed Consolidated Statements of Cash Flows (Parentheticals)
6 Months Ended
Mar. 31, 2019
shares
Condensed Consolidated Statements of Cash Flows  
Conversion of notes to common stock (in shares) 131,223