Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Check whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the 8,617,858 voting and non-voting
common equity stock held by non-affiliates of the Registrant was approximately $16 million as of September 30, 2019, the last business
day of the Registrant’s most recently completed second fiscal quarter, based on the last sale price of the Registrant’s
common stock on such date of $1.86 per share.
There were a total of 25,194,085 shares of the registrant’s
Common Stock, par value $0.0001 per share, outstanding as of August 06, 2020.
The Company filed
its Annual Report on Form 10-K for the year ended March 31, 2020 (the “Annual Report”) after the June 29, 2020 deadline
applicable to the Company for the filing of its Annual Report on Form 10-K in reliance on an order issued by the U.S. Securities
and Exchange Commission dated on March 25, 2020 (Release No. 34-88465) (the “SEC Order”), providing conditional relief
to public companies that were unable to timely comply with their filing obligations as a result of the outbreak of COVID-19.
On June 12, 2020,
the Company filed a Current Report on Form 8-K (the “Form 8-K) to indicate its intention to rely on the SEC Order to extend
the due date for the filing of its Annual Report on Form 10-K until August 13, 2020 (45 days after the original due date) because
the outbreak of COVID-19 posed a significant impact on the Company’s ability to file on a timely basis its Annual Report
on Form 10-K and thus the Annual Report would not be completed by the filing deadline due to insufficient time to facilitate the
internal and external review process.
This report contains forward-looking statements
and information relating to iFresh, Inc., that are based on the beliefs of our management as well as assumptions made by and information
currently available to us. When used in this report, the words “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “plan” and similar expressions, as they relate to us or our management,
are intended to identify forward-looking statements. These statements reflect our current view concerning future events and are
subject to risks, uncertainties and assumptions, including among many others: a general economic downturn; a downturn in the securities
markets; Securities and Exchange Commission regulations which affect trading in the securities of “penny stocks,”
and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. Except
as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available
in the future. Important factors that may cause actual results to differ from those projected include the risk factors specified
above. Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act expressly state
that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time
to time be considered as an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain
times.
All statements other than statements of
historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing
products and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing
products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies
and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties
related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk
Factors” section of this Form 10-K; and any statements or assumptions underlying any of the foregoing. Also, forward-looking
statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents
that we reference in this report, or that we filed as exhibits to this report, completely and with the understanding that our
actual future results may be materially different from what we expect.
Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially
from those anticipated in any forward-looking statements, even if new information becomes available in the future.
PART I
Item 1. Business
We were formerly a special purpose company
incorporated under the laws of the Cayman Islands on September 23, 2014 under the name E-Compass Acquisition Corp. (“E-Compass”)
in order to serve as a vehicle for the acquisition of an operating business in the e-commerce and consumer retail industry. On
February 10, 2017, pursuant to the terms of a merger agreement, dated as of July 25, 2016 (the “Merger Agreement”),
through a series of transactions, we merged with our wholly owned subsidiary to reincorporate into Delaware and then acquired
NYM Holding, Inc. (“NYM”), and as a result, NYM became our direct wholly-owned subsidiary (the “Transactions”).
As a result of the Transactions, as of immediately after the Transactions, the former stockholders of NYM owned approximately
83.9% of our outstanding common stock and the former stockholders of E-Compass owned the remaining 16.1%.
The Merger Agreement is described more
fully in the sections entitled “The Business Combination Proposal” and “The Acquisition Agreement”
beginning at pages 38 and 60, respectively, of the final prospectus contained in the Registration Statement on Form S-4
and definitive proxy statement (the “Proxy Statement/Prospectus”) filed with the Securities and Exchange Commission
(the “Commission”) on December 16, 2016 by iFresh and E-Compass, and such description is incorporated herein by reference.
Upon the closing of the Transactions, E-Compass’s
common stock, rights and units ceased trading and our common stock began trading on the NASDAQ Capital Market under the symbol
“IFMK”.
Recent Developments
Termination of Acquisition
On June 7, 2019, iFresh
Inc. entered into a Share Exchange Agreement (the “Exchange Agreement”) with Xiaotai International Investment Inc.
(“Xiaotai International”) and the equity holders of Xiaotai International (the “Xiaotai Shareholders”),
pursuant to which, among other things and subject to the terms and conditions contained therein, iFresh would acquire all of the
outstanding issued shares and other equity interests in Xiaotai International from the Xiaotai Shareholders (the “Acquisition”).
Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Xiaotai International, iFresh agreed to issue
254,813,383 shares of its common stock to the Xiaotai Shareholders. Xiaotai International operates through its variable interest
entity, Zhejiang Xiaotai Technology Co. Ltd. (“Zhejiang Xiaotai”), in China.
As disclosed in a
current report on Form 8-K filed on November 5, 2019, we received news regarding an ongoing investigation of Zhejiang Xiaotai
by the Hangzhou Police Department, Binjiang Branch (“Hangzhou Police”) through a public notice released by the Hangzhou
Police on November 3, 2019 (the “Police Report”). Zhejiang Xiaotai is alleged to have conducted illegal fundraising
from the public. The report also stated that several executives of Zhejiang Xiaotai have been detained and are being held in custody.
On November 5, 2019
(the “Termination Date”), iFresh issued written notice to Xiaotai International and Xiaotai Shareholders to terminate
the Exchange Agreement pursuant to section 9.1(c), (e) and (f) of the Exchange Agreement, effective immediately.
From and after the
Termination Date, the Exchange Agreement will be of no further force or effect, and the rights and obligations of each party thereunder
shall terminate, except for (a) any rights and obligations of the parties that are expressly designated thereunder to survive
the termination of the Exchange Agreement and (b) any other rights and obligations of the parties that come into being or effect
upon the termination of the Exchange Agreement.
In conjunction with
the Acquisition, on June 7, 2019, iFresh and NYM Holding, Inc. (“NYM”) entered into a Share Purchase Agreement (the
“Purchase Agreement”) with Go Fresh 365 Inc. (“Go Fresh”), a corporation solely owned by Mr. Long Deng,
iFresh’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to
Go Fresh for cash consideration of $9.1 million (the “Spin-off”). Pursuant to the Purchase Agreement, one of the closing
conditions of the Spin-off is that all the conditions to the obligations of each party to consummate the Acquisition described
in the Exchange Agreement shall have been satisfied.
As a result of the
termination of the Exchange Agreement, on November 5, 2019, iFresh, NYM and Go Fresh mutually agreed to terminate the Purchase
Agreement, effective immediately.
The board of directors
of the Company approved the termination of both the Exchange Agreement and the Purchase Agreement on November 5, 2019.
Forbearance Agreement
On May 20, 2019, iFresh,
NYM (or the “Borrower”), certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank”
or the “Lender”) entered into the first forbearance agreement (the “First Forbearance Agreement”) with
respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank made available
to NYM a revolving credit facility, a term loan facility, and other credit accommodations (the “Loan Agreements”).
The Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreements based on the existence of certain
events of default until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the
First Forbearance Agreement (the “First Forbearance Period”); and (b) a Forbearance Event of Default. Reference is
made to the current report on Form 8-K filed with the SEC on May 21, 2019.
The Borrower did not
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank
entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement
dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain
subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the
“Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the
Credit Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings ascribed to them in
the Second Forbearance Agreement.
The Lender agreed
to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default
(the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the November 29,
2019; and (b) a Forbearance Event of Default. No subsequent agreements or amendments have been entered into.
The Borrower is not current in its payments
to Keybank. As of June 30, 2020 we owe $21,266,149 to Keybank.
Our principal liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Our ability to
fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other
factors beyond its control. In addition, if Keybank accelerates the loan, we may be forced to declare bankruptcy. These conditions
raise substantial doubt as to our ability to remain a going concern.
Acquisitions
An agreement (the “Acquisition
Agreement”) between the Company and Long Deng, the Chief Executive Officer and Chairman of the Company, pursuant to which
Mr. Deng will sell his 70% interest in Dragon Seeds LLC to the Company in exchange for the Company’s common stock. The closing
of the acquisition is contingent on receiving stockholder approval for the transaction and the Company’s receipt of a valuation
opinion demonstrating that the fair market value of the Interest is equal to or greater than the aggregate fair market value of
the consideration to be paid by the Company. Dragon Seeds LLC makes certain customary representations and warranties to the Company
in connection with the Acquisition Agreement. Subsequently on June 1, 2020, Long Deng entered into an agreement with a third party
individual, Yiliang Liu and sold his 20% interest in Dragon Seeds LLC to Yiliang Liu for $2 million. As of the date of the report,
these transactions are still contingent on stockholders’ approval.
In April 2020, we acquired 70% of Xiamen
DL Medical Technology Co, Ltd., a People’s Republic of China company, in exchange for $600,000 in cash and 900,000 shares
of our common stock. After the acquisition, iFresh began to produce self-branded disposable masks, N95 masks and KN95 masks. These
masks will be sold both online and in iFresh stores once we launch production in the fourth quarter of 2020.
In April 2020, we acquired 100% equity interests
in Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd. (collectively, the “Target Companies”)
in exchange for the issuance in the aggregate of 3,852,372 shares of common stock of the Company and 1,000 shares of the Company’s
Series B Convertible Preferred Stock (the “Series B Preferred Stock”) to the sellers, resulting in Target Companies
becoming our indirect wholly-owned subsidiaries. These companies are engaged in the business of manufacturing and selling rice
liquor products and herbal rice wine products.
On August 6, 2020, iFresh Inc. (the “Company”)
entered into an agreement (the “Acquisition Agreement”) with Zhang Fei and Liu Meng (collectively, the “Sellers”)
and Jiuxiang Blue Sky Technology (Beijing) Co., Ltd. (the “Target” or “Jiuxiang”), pursuant to which the
Sellers will sell their 100% interest in the Target to the Company in exchange for 5,036,298 shares of the Company’s common
stock and 1,000 shares of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred Stock”).
Upon approval of the Company’s shareholders, the 1,000 shares of Series C Preferred Stock will be converted into 1,916,781
shares of the Company’s common stock。Jiuxiang is a technology company that engages in supply chain financial services,
integrated payment systems, and prepaid card marketing systems.
Sale of Securities
On April 6, 2020, we issued an aggregate
of 1,783,167 shares of the Company’s common stock (the “Shares”) to two investors for a purchase price of $1.402
per share and gross proceeds of approximately $2.5 million pursuant to a purchase agreement entered into by and among us and the
investors on March 25, 2020.
Impact of Covid-19
The Company was significantly impacted by
the COVID-19 outbreak as it operates in area under stay-at-home orders since mid-March 2020. The Company had to operate under reduced
hours including closure of the stores located in in Brooklyn, New York and in Flushing, New York, where are with high population
and at high risk of infection during April peak period. This has significantly impacted our sales, profit and cash flow.
Starting from March 2020, the Company started
online grocery delivery service in New York City and Long island, and expanded its online grocery delivery service to Florida,
Maryland and Massachusetts in May 2020
Overview and History
iFresh, through its wholly owned subsidiary,
NYM, is a fast growing Asian/Chinese grocery supermarket chain in the North Eastern U.S. providing food and other merchandise
hard to find in mainstream grocery stores. Since NYM was formed in 1995, it has targeted the Chinese and other Asian populations
(collectively, the “Asian Americans”) in the U.S. with a deep cultural understanding of its consumers’ unique
consumption habits. iFresh currently has nine retail supermarkets across New York, Massachusetts and Florida, with over
4,938,600 sales transactions in the fiscal year ended March 31, 2020. NYM also has one store under construction which is expected
to open in the first quarter in 2021 In addition to retail supermarkets, iFresh operates one in-house wholesale business, Strong
America Inc. (“Strong America”), that offer more than 6,000 wholesale products and service to iFresh retail supermarkets
and over 1,000 external customers including wholesale stores, retail supermarkets and restaurants. iFresh has a stable supply
of food from farms in New Jersey and Florida, ensuring reliable supplies of popular vegetables, fruits and seafood. iFresh’s
wholesale business and long term relationships with various farms insulate iFresh from supply interruptions, allowing it remain
competitive even during difficult markets.
Based on management’s understanding
of the Asian American market, iFresh aims to satisfy the increasing demands of Asian Americans, whose purchasing power has been
growing rapidly, for fresh and unique produce, seafood and other groceries that are not found in mainstream supermarkets, such
as produce like Shanghai baby bok choy, snap bean, winter gourd, baby Chinese kale, longyan and lychee; a variety of live seafood
such as shrimp, clams, lobster, geoduck, and Alaska king crab; and Chinese specialty groceries like soy sauce, sesame oil, oyster
sauce, bean paste, Sriracha, tofu, noodles and dried mushrooms. With an in-house logistics team and strong relationships with
farms, iFresh is capable of offering high quality specialty perishables at competitive prices. Specialty produce, live seafood
and other perishables constituted 54.4% of iFresh’s total retail sales during the fiscal year ended March 31, 2020.
iFresh’s business began as Strong
America, a wholesale business founded in 1995 in Long Island City, New York. Strong America imported food and groceries from China
and other East Asian countries and sold them to various types of retailers in the New York area. Witnessing the rapid growth of
Chinese immigrants and the potential of this niche market, iFresh opened its first retail supermarket in Chinatown in downtown
Manhattan in August 2001. From 2001 to 2014, iFresh expanded steadily, hired a bilingual team that grew into midlevel managers,
and reshaped itself into a retail supermarket chain featuring exotic Asian food and other items. Since 2001, iFresh opened five
stores in Brooklyn, Flushing, Elmhurst and Manhattan’s Chinatown, where the Asian and Chinese population is highly concentrated.
In 2009, iFresh acquired Ming’s supermarket in Boston, Massachusetts. Observing that the Chinese and Asian population was
growing quickly in Florida, iFresh opened its first store in Sunrise, Florida in 2012. In 2013, it acquired Zen Supermarket in
Quincy, Massachusetts to better cater to the growing demand in the Greater Boston Area.
On July 13, 2017, the Company acquired assets
from Mia Supermarket in Orlando FL, a 20,370 square-foot grocery store located at 2415 E. Colonial Drive, from Michael Farmers
Supermarket, LLC. The new store, which is called iFresh East Colonial, is the first iFresh store in Orlando and the second in Florida.
iFresh acquired the supermarket for $1,050,000 in cash. The purchase included property and equipment, and inventory of the old
store. The Company did not assume any liabilities. The store started to operate in August 2017.
Also on July 13, 2017, the Company acquired
all of the shares of iFresh Glen Cove Inc. (“Glen Cove”) from Long Deng, the Company’s Chairman and Chief Executive
Officer, for 50,000 shares of the Company’s common stock. The transaction was approved by the Company’s Board of Directors
and the price was agreed to be based upon a review of the assets and financial statements of Glen Cove. Glen Cove is setting up
a 22,859 square-foot brand new grocery store in Garden City, New York located at 192 Glen Cove Road, within the Roosevelt Field
Mall business district. This was the Company’s first store in Long Island and the sixth in New York. The store commenced
in January, 2019but was closed in June 2019 due to poor sales performance.
On October 2, 2017, the Company
acquired all of the shares of New York Mart CT, Inc. (“NYM CT”) from Long Deng, the Company’s Chairman and
Chief Executive Officer, for $3,500,000. The store is currently under renovation and the Company expects the Connecticut
store to open in spring 2021.
Also on October 2, 2017, the Company acquired
all of the shares of New York Mart N. Miami Inc. (“NYM N. Miami”) from Long Deng, the Company’s Chairman and
Chief Executive Officer, and Yang Yu Gao for $3,500,000 and 45,000 shares of the Company’s common stock. The store opened
in January 2020.
In September 2019, the company closed New
York Mart Ave U2 Inc. store, in Brooklyn, New York, due to continually poor performance in operating.
iFresh currently operates nine (9) retail
super markets and one (1) wholesale facility within the United states. iFresh plans to strategically expand along the I-95 corridor
and eventually operate super markets in all states on the east coast.
In April 2020, we acquired 70% of Xiamen
DL Medical Technology Co, Ltd., a People’s Republic of China company, in exchange for $600,000 in cash and 900,000 shares
of our common stock. After the acquisition, iFresh began to produce self-branded disposable masks, N95 masks and KN95 masks. These
masks are being sold both online and in retail stores of iFresh.
In April 2020, we
acquired 100% equity interests in Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd. (collectively, the
“Target Companies”) in exchange for the issuance in the aggregate of 3,852,372 shares of common stock of the Company
and 1,000 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) to the
sellers, resulting in Target Companies becoming our indirect wholly-owned subsidiaries. These companies are engaged in the business
of manufacturing and selling rice wine products and herbal rice wine products.
Grocery Business
iFresh believes that the following characteristics
of its business shapes its leadership and success in its industry:
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iFresh
provides unique products to meet the demands of the Asian-American Market;
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iFresh
has established a merchandising system backed by an in-house wholesale business and by long-standing relationships with farms;
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iFresh
maintains an in-house cooling system with unique hibernation technology that has developed over 20 years to preserve perishables,
especially produce and seafood;
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iFresh
capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable competitors;
and
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iFresh
has a proven and replicable track record of management, operation, acquisition and organic growth.
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iFresh’s
net sales were $89.5 and $125.4 million for the years ended March 31, 2020 and 2019, respectively. iFresh’s net loss was
$8.3 million for the year ended March 31, 2020, a decrease of $3.7 million, or 31.0%, from $12 million of net loss for the year
end March 31, 2019. Adjusted EBITDA was negative $4.2 million for the year end March 31, 2020, a decrease of $3.6 million, or 46.1%,
from negative $7.8 million for the year end March 31, 2019. For additional information on Adjusted EBITDA, See the section entitled
“iFresh’s Management’s Discussion and Analysis of Financial Condition and Results of Operations — Adjusted
EBITDA,” beginning on page 43.
In terms of sales by category, perishables,
including vegetables, seafood, meat, fruit and hot food (collectively, the “Perishables”), constituted approximately
54.4% of iFresh’s total annual retail sales during the fiscal year ended March 31, 2020. Within this category, vegetables
and seafood constituted 32.0% of overall annual retail sales.
The table and graph below depicts sales
of iFresh by category for the fiscal year ended March 31, 2020:
Figure 1 Sales by Category
Industry and Market Analysis
Grocery Shopping Habits of
Target Market
Buy Fresh — Asian Americans,
of which Chinese Americans constitute a significant percentage, typically purchase fresh, perishable food, according to Nielsen’s
Asian-American Consumer 2015 Report1. Unique cooking styles of Asian Americans, such as steaming, wokking
and shared hot-pot cooking, require fresh ingredients not commonly found in the U.S. Asian Americans purchase Perishables that
are all over-index compared with that of general U.S. population. For example, Asian Americans purchase fresh seafood 50% more
frequently than the general market and spend 147% more on the category than non-Asian Americans in the total U.S. population.
Asian Americans purchase fresh vegetables 26% more frequently than non-Asian American consumers and spend 62%more than the total
U.S. population. Additionally, Asian Americans purchase fresh fruit 11% more frequently than non-Asian Americans and spend 27%
more than the total U.S. population. Consistent with the foregoing, iFresh’s fresh seafood, fresh vegetables and fresh fruit
in the aggregate contributed 39.6% to iFresh’s total sales as of March 31, 2020.
Table 1 Asian-American Consumption of Perishables2
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Asian-American Fresh Category Consumption (Index vs. Total Population of 100)
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$ Volume
Index
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Purchasing
Frequency
Index
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Fresh Fruits
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127
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111
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Fresh Meats
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106
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103
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Prepared Foods
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143
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115
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Takeout
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121
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102
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Fresh Vegetables
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162
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126
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Fresh Poultry
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108
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103
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Fresh Seafood
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247
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150
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1
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Culturally
Connected and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company.
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Unique Species and Cuisines
— Asian cuisines incorporate many perishables that are hard to find in traditional U.S. supermarkets. Many cuisines require
vegetables not commonly planted in the U.S. or meat not widely used by mass market consumers. The following two examples help
illustrate the unique foods used in Asian cuisines:
Example 1: Unique vegetable species
Vegetables make up the bulk of daily consumption
by Asian Americans. Asian American consumers usually buy a variety of vegetables in large quantities and use unique vegetable
species such as bitter melons, Chinese yams, vine spinaches, Chinese cabbages and winter melon. Asian Americans therefore value
supermarkets that provide fresh vegetable offerings at affordable prices.
Example 2: Unique fish species and cooking styles
Asian American consumers consume fish not
commonly sold in mainstream supermarkets. Unlike many mainstream supermarkets, iFresh offers consumers live fish in fish tanks
and has fish experts readily available to provide fish cleaning services free of charge.
In addition, Asian American consumers use
many more parts of the fish than do non-Asian American consumers. For example, fish head soup and fish tail soup are two popular
dishes that require only the fish head or fish tail as ingredients. Asian Americans also buy live fish and ask fish experts to
cut them in thin slices as an ingredient of boiled fish in hot sauce or fish hot pot. iFresh organizes the seafood section according
to the needs of its customers, which iFresh believes not only attracts customers, but effectively boosts sales of seafood.
In addition to vegetables and fish, Asian
Americans look for the following additional specialty products:
Fruits — Mainstream
supermarkets rarely have pitaya, longyan, lychee and star fruit available. Such unavailability motivates Asian Americans to shop
at Chinese and Asian grocery stores on a regular basis to purchase such specialty fruits.
Meat — Mainstream supermarkets
generally offer meats in cuts such as cubes, steaks, slices and ribs. However, such supermarkets rarely offer super-thinly sliced
hot-pot meat, organ meat or chicken feet. Chinese and Asian cuisines use various kinds of meat for different purposes. Asian specialty
supermarkets such as iFresh understand such Asian cuisines and dietary needs, and fill the market gap in offering hot-pot meat,
organ meat, chicken feet and other rare cuts of meat on a regular basis.
Snacks, Seasonings and Other
— Asian specialty supermarkets offer various snacks, seasonings, cooking utensils and other items not generally found in
mainstream U.S. supermarkets. Chinese and Asian seasonings and spices include peanut oil, cooking wine, vinegars, dark soy sauce,
black bean sauce, pepper oil and chilly oil. Some seasoning or spice can include sub-types, each of which has its own target customers.
For example, people from the northern and southern parts of China usually shop for different type of vinegars.
Consequently, we believe that the uniqueness
in the shopping habits of iFresh’s target customers evidences the importance of Asian American specialty supermarkets such
as iFresh. iFresh’s understanding of Asian American culture and eating habits fill a market gap and distinguishes Asian
supermarkets from mainstream competitors.
Current Industry Landscape
Highly Fragmented and unsophisticated
competitors — We consider the markets we participate in to be highly fragmented. There is no recognized industry
leader nationwide. Most market participants are small players with a single store run by family members catering to the local
market11, meaning that the bulk of competitors are unsophisticated. Because of this, iFresh believes that most of its
competitors are unable to take advantage of economies of scale, modern management, in-house wholesales facility and logistics
which distinguishes iFresh from its competitive peers. The reality of low market concentration and unsophisticated competitors
gives iFresh the opportunity to consolidate the market and cement its dominant market position.
Unsatisfied Customers —
As previously mentioned, there are an increasing number of younger Chinese that choose to reside out of traditional Chinese communities
for better working, educational and environmental opportunities. However, large-scale comprehensive Chinese groceries tend to
exist only in Chinatowns. The weekly shopping for this group of Asian Americans involves either long distance travel or a compromise
at local small grocery stores with limited selections and high prices. iFresh will try to meet their demand as well as reshape
the market by increasing the number of stores and via its online-shopping initiatives.
Limited Vendors — Many
of the products that stock iFresh’s shelves can rarely be sourced from the typical U.S. vendors. Most vendors of U.S. Chinese
and Asian supermarkets are individually owned and small in size. Securing a sufficient and stable supply of core perishables,
therefore, is a recognized challenge in this niche market. Observing the challenge and through years of effort, iFresh has established
long-standing relationships with several large farms. We believe that the relationships with these farms is symbiotic —
on one hand, cooperative farms provide iFresh with priority when supplying core produce popular with Asian American customers;
on the other hand, iFresh communicates the latest market trends and customer preference to cooperating farms, ensuring the farms’
produce selection and activities closely target the market demand.
Fast Growing Market —
The growing population and increasing purchasing power cultivate a promising market prospect in good momentum. According
to The US Census Bureau — American Community Survey 2011 – 2015, the Chinese population had a growth rate of 17.43%
from 2011 to 2015, far beyond the 3.07% growth rate of US population and even the 8.77% Hispanic population growth rate. New York,
New Jersey, Pennsylvania, Florida and Maryland alone have a total Chinese population of 1,139136, making up more than 27.56% of
total Chinese American population nationwide.
In sum, we see a great opportunity for
market consolidation and significant potential for improvement in this market. We believe iFresh has all the right ingredients
to address the current market imperfections and we are ready to catch the wave to make iFresh a national leader in the niche market.
iFresh’s Business Model
iFresh’s business model features
a vertically integrated structure covering upstream supply and downstream retail supermarkets. iFresh has its own wholesale business,
Strong America, which supplies one third of the items sold in its retail supermarkets with nine self-owned brands, including Family
Elephant, Feiyan and Green Acre, and an exclusive distributorship for seven famous foreign brands such as Shuang Deng, You Joy,
Bai Lu and Gu Yue Long Shan. For many years, iFresh has worked with farms that mainly grow Chinese specialty vegetables
and fruits and supply the most popular yet hard-to-source vegetables and fruits directly to iFresh supermarkets and maintains
long-term and stable relationships with them. iFresh centralizes purchases through one of its wholesale facilities by making quarterly
purchase plans and placing weekly order with farms. The long-term relationships with farms and the central purchase management
system secure its supply of the most popular vegetables and fruits, even though iFresh doesn’t have any long-term contractual
relationships with its farm suppliers. Working with its vendors, iFresh can respond to market trends to avoid supply interruption
in high seasons. iFresh has a diversified vendor base and has established sustainable relationships during its 20-year history
in this niche market sector.
iFresh’s wholesale business, Strong
America, provides more than 6,000 wholesale products and services to iFresh’s retail supermarkets and over 1,000 external
customers throughout the United States. Such external customers include, but are not limited to, wholesale stores, retail supermarkets
and restaurants. Strong America mainly provides grocery products and services to iFresh retail store and external supermarkets,
and it will also focus on supplying fresh perishable items to retail supermarkets. Strong America owns nine exclusive distributorship
rights and iFresh’s six self-owned brands. Strong America acquired its self-owned brands from third parties and integrated
them into its wholesale catalog. The six self-owned brands cover rice, noodles, seasonings (including Chinese spices), frozen vegetables,
frozen seafood, and frozen dumplings, which are all popular daily staples for Chinese and other Asian consumers in the United States.
Strong America imports over 2,000 items from all over Asia, with products from mainland China, Thailand and Taiwan making up 95%
of its total imports. Strong America not only secures the supply of products for iFresh’s retail business, but also offer
significant synergies in iFresh’s operations.
Produce and groceries are delivered to
iFresh supermarkets in New York, Massachusetts and Florida on a daily basis from iFresh’s wholesale facility, farm partners
and external vendors as directed by iFresh’s in-house logistics system. iFresh has an 80,000 square foot warehouse in Long
Island City, New York, which serves as its regional distribution center for imported and frozen products. For live seafood or
produce, the in-house logistics team uses hibernation technology and the cold-chain network to best ensure freshness from farm
to shelf.
With nine retail supermarkets in New York,
Massachusetts and Florida, mainly in Chinatowns or city centers, and average store sizes over 10,000 square feet, iFresh has over
4.9 million annual sales transactions. At the same time, iFresh continues to reach out to the growing Asian American population
living in suburban areas through its online shopping and delivery initiative. iFresh also has successfully exported live lobsters
to China, which bears the potential to ignite the demand of a large market.
The graph below depicts iFresh’s
business model and its vertically integrated structure:
Figure 2 Business Model of iFresh
iFresh’s Competitive Strengths
Well Recognized Brand in
Niche Market
iFresh capitalizes on its established brand
and reputation in the following respects:
i. Benefit from cost efficiency and
economies of scale:
Unlike many of its direct competitors which
are family-owned single stores, iFresh has 9 retail supermarkets. With larger supplies and strong sales, iFresh is often approached
by third party vendors and capable of getting competitive prices for a wide range of items. This corporate structure coupled with
its wholesale facility further enables iFresh to best deploy its experienced staff to coordinate stock and to make the most use
of its infrastructure and distribution network.
ii. Strong negotiation power with vendors
and competitors
iFresh is often approached by third party
vendors and capable of getting competitive price due to its chain store structure and sustainably strong sales performance. iFresh’s
in-house wholesale facility is influential in Chinese and Asian goods importing and wholesale industries. At least five of iFresh’s
largest direct competitors are also its clients for imported goods, frozen seafood and other frozen products. Additionally, iFresh’s
long-standing relationship with farms in New Jersey and Florida reduce its reliance on external vendors. We believe the iFresh
brand, scale, in-house wholesale facility and long-standing relationship with farm partners shaped its negotiation power with
vendors and competitors.
iii. Developed Infrastructure
Unlike many of its competitors, iFresh
has its own wholesale channel, Strong America, which has been in the business of importing and exporting Chinese and Asian specialty
food and groceries for over 20 years. Apart from channel advantages, Strong America specializes in identifying products that are
popular among Asian American consumers but rarely found in mainstream stores. Without multi-layer intermediates, iFresh retail
supermarkets set such products at competitive prices, not only securing the supply of popular products, but boosting its operation
profitability as well. Furthermore, for most commonly needed ingredients like rice, noodles, frozen Chinese and Asian convenience
foods, imported snacks and Chinese and Asian seasonings and spices, Strong America established nine self-owned brands and obtained
the exclusive distributorship for 8 famous Chinese brands, as listed in Table 3 and Table 2 below, respectively. In addition,
iFresh has built and maintained relationships with retailers of various sizes. In other words, iFresh’s advantages in market
familiarity, established infrastructure, scale, sourcing management capability and well-recognized brand reputation shape a high
barrier protecting it from immediate impact of new entrants.
Track Record in Operation
and Expansion
i. Record of acquisitions in different
locations
Since 2009, iFresh successfully acquired
four stores, one in New York, one in Florida, and two in Massachusetts. In July and October 2017, iFresh acquired iFresh Glen
Cove Inc. (“Glen Cove”), New York Mart CT, Inc. (“NYM CT”) and New York Mart N. Miami Inc. (“NYM
N. Miami”) from Long Deng, the Company’s Chairman and Chief Executive Officer. iFresh targeted stores in desirable
locations, especially under-performers that iFresh could acquire at an advantageous cost. iFresh then utilized its well-developed
in-house distribution networks, corporate infrastructure and long-term relationship with farm partners and third-party vendors
to boost performance. All three acquired stores realized enhanced and stabilized profit the first year after acquisition.
ii. Adoption of scalable small-box format
iFresh brands itself as a player in the
specialty store sector and adopts the small-box format generally adopted in this sector. We believe the small-box format fits
into iFresh’s business model and enables it to boost profitability from structural synergy and efficiency.
Compared with iFresh’s mainstream
competitors whose average store size normally ranges from 40,000 — 60,000 square feet, the average store size of iFresh
is approximately 19,000 square feet with average selling space of approximately 14,000 square feet. iFresh’s adoption of
small-box model is rooted on its understanding that customers shop with iFresh mainly for unique produce, seafood and groceries
that are difficult to find elsewhere. The small-box format forces iFresh to focus on products that cover the target customer’s
unique needs. In addition, the small-box format ensures flexibility, makes it easier for iFresh to discontinue individual products
and react quickly to market changes.
Strong Vendor Management
i. Capability to source globally
iFresh has global sourcing capability mainly
through Strong America. In the aggregate, Strong America imports over 2,000 items from all over Asia. The top three importing
countries are China, Thailand and Taiwan, making up 95% of total imports. Strong America supplies 15.3% of total goods, in which
8.4% are imported goods, sold in iFresh retail supermarkets at attractive prices.
Strong America is also the exclusive distributor
of seven famous overseas brands, covering cooking wine, yellow wine, rice noodles, seasonings and spices and snacks. They
are all famous daily food staple brands in China and are familiar to iFresh’s target customers. We believe that the exclusive
distributorship strengthens iFresh brand and its negotiation power among current competitors, new market entrants and consumers.
The table below lists the details of iFresh’s exclusive distributorship:
Table 2 Exclusive Distributorship
|
Company
|
|
Name
|
|
Trademark
|
|
Products
|
|
Exclusive Region
|
|
Strong America
|
|
ShuangDeng(1)
|
|
|
|
Cooking Wine
|
|
East America, Central and South America
|
|
Strong America
|
|
Gu Yue
Long Shan(2)
|
|
|
|
Yellow Wine
|
|
North America
|
|
Strong America
|
|
Bai Lu(1)
|
|
|
|
Rice Noodles
|
|
East America, Central and South America
|
|
Strong America
|
|
You Joy(5)
|
|
|
|
Seasonings and spices
|
|
East Coast of the U.S., Midwestern U.S. and Central and South America
|
|
Strong America
|
|
Hao Ren Jia(6)
|
|
|
|
Seasonings and spices
|
|
U.S. East Coast
|
|
Strong America
|
|
Da Hong Pao(6)
|
|
|
|
Seasonings and spices
|
|
U.S. East Coast
|
|
Strong America
|
|
Bei Da Huang(7)
|
|
|
|
Beans
|
|
U.S. East Coast
|
|
Strong America
|
|
Sister Ma Kitchen
|
|
|
|
Beans
|
|
U.S. East Coast
|
|
Strong America
|
|
BaiweiZhai
|
|
|
|
Seasonings and spices
|
|
U.S. East Coast
|
|
iFresh Inc.
|
|
Yiling Pharmaceutical
|
|
|
|
Dietary Supplement
|
|
U.S
|
|
(1)
|
Strong America has an exclusive distribution agreement with Fujian International Trade Development Company, Ltd., which granted Strong America exclusive distribution rights for the products registered under the brands of “Shuang Deng” and “Bai Lu” for East America, Central America and South America for a period of five years from October 1, 2015 to September 30, 2020. The agreement can be renewed six months before expiration with the consent of both parties.
|
|
(2)
|
Strong America entered an exclusive distribution agreement with Zhejiang Gu Yue Long Shan Wine Co., Ltd. since January 1, 2015, which granted Strong America exclusive distribution rights for the products registered under the brand of “Gu Yue Long Shan” for North America. Under the consent of both parties, Strong America is currently the sole distributor of “Gu Yue Long Shan” within the North America Region.
|
|
|
|
|
(3)
|
Strong America has an exclusive distribution agreement with Sichuan Youjia Foodstuffs Co., Ltd., which granted Strong America exclusive distribution right for the products registered under the brand of “You Joy” for the East Coast of the U.S., Midwestern U.S. and Central and South America since January 1, 2015. The agreement can be renewed six months before expiration with consents of both parties. Strong America agreed to make annual purchases of over RMB 2,200,000 under this agreement.
|
|
|
|
|
(4)
|
Strong America has an exclusive distribution agreement with Sichuan Teway Food Group Co., Ltd., which granted Strong America exclusive distribution rights for the products registered under the brands of “Hao Ren Jia” and “Da Hong Pao” for the region of East Coast of America for a period of three years from June 1, 2020 to May 31, 2022. The agreement can be renewed six months before expiration with consents of both parties.
|
|
|
|
|
(5)
|
Strong America has extended the exclusive distribution agreement with Beidahuang (Dalian) Ouya International Trade Co., Ltd. (CHINA), which granted Strong America exclusive distribution rights for the products registered under the brands of “Bei Da Huang” for the East Coast of America for a period of three years from August 1, 2020 to August 1, 2023.
|
|
|
|
|
(6)
|
Strong America has an exclusive distribution
agreement with Sichuan Zigong Baiweizhai Food Limited Liability Company (CHINA), which granted Strong America exclusive distribution
rights for the products registered under the brands of “Baiweizhai” for the East Coast of America for six month from
May 6, 2020 to December 31, 2020.
|
|
(7)
|
Strong America has an exclusive distribution
agreement with Hebei Sister Ma Food Co., Ltd. (CHINA), which granted Strong America exclusive distribution rights for the products
registered under the brands of “Sister Ma Kitchen” for the East Coast of America for two years from June 8, 2020 to
June 7, 2022.
|
|
(8)
|
iFresh Inc. has an exclusive
distribution agreement with Yiling Pharmaceutical Co., Ltd (CHINA), which granted iFresh Inc. exclusive distribution
rights for the products registered under the brands of Lianhua Qingwen Plus Dietary Supplement Capsules in the U.S. for 1 year
from June, 2020 to June, 2021.
|
ii. Self-owned brands for target customers
at competitive prices
Since 2011, Strong America,
iFresh’s wholesale facility, established ten brands, covering items such as rice, noodles, Chinese spices and
seasonings, frozen vegetables, frozen seafood, and frozen dumplings. They are all popular sellers because they are staples
for iFresh’s target customers. iFresh believes that these self-owned brands enable it to enjoy competitive sourcing
price, protect it from source and sale interruption, and enhance its negotiating power with existing competitors and new
entrants. Also, iFresh Inc. registered its own name as the brand of the supermarket chain stores. The table below provides
details regarding iFresh’s self-owned brands.
Table 3 Self-owned brands
|
Company
|
|
Name
|
|
Trademark
|
|
Products
|
|
Registration
Number
|
|
Date Registered
|
|
Strong America
|
|
Family elephant
|
|
|
|
Rice and rice products
|
|
4839414
|
|
10/27/2015
|
|
Strong America
|
|
Feiyan
|
|
|
|
Chinese noodles, Chinese rice noodles, noodles vermicelli
|
|
3945424
|
|
4/12/2011
|
|
Strong America
|
|
Green Acre
|
|
|
|
Dried beans, dried fruit and vegetables, frozen vegetables
|
|
4933029
|
|
4/5/2016
|
|
Strong America
|
|
Golden Smell
|
|
|
|
Processed vegetables and fruits; Noodles, seasoning, edible oil and flavoring combined in unitary packages; Beauty beverages, namely, fruit juices and energy drinks
|
|
5035326
|
|
12/31/2015
|
|
Strong America
|
|
Redolent
|
|
|
|
Rice porridge, namely, congee
|
|
N/A
|
|
Pending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iFresh Inc.
|
|
I FRESH
|
|
|
|
Supermarkets
|
|
88901375
|
|
5/5/2020
|
Proprietary and in-house Cold
Chain System
Since Mr. Long Deng established Strong America
in 1995, iFresh has strived to build a proprietary cold-chain logistics system which evolved with the expansion of iFresh. Based
on years of experience, iFresh’s logistics team is now capable of delivering frozen goods to more than 20 states in the Eastern
U.S. using its unique packing and temperature control technology.
Live Seafood — All live
seafood is collected daily from wharfs or markets at midnight, and immediately distributed via in-house logistics to all retail
supermarkets. For different species, iFresh maintains different water temperatures and oxygen density in its tanks and containers.
Hibernation technology is widely used in the in-house cold-chain system for long distance distribution to best ensure freshness
and quality. The hibernation technology even enables iFresh to deliver live lobsters to China with an over 95% survival rate.
Fruit & Vegetables
— iFresh adopts different storage technologies based on characteristics of different fruits and vegetables, the
knowledge only obtained from years of experience. All vegetables and fruits are delivered and sold on a daily basis, to lower
worn rate, lower human cost and keep up the high quality.
Growth Strategy
Stores Site Selection —
For new stores, iFresh has an established procedure to select new stores sites. First, iFresh contacts local real estate brokers
and appraisers for demographic reports for a group of locations it is interested in. After reading the reports carefully, it narrows
down the alternatives for further study. Next, it interviews with a diverse selection of influential local groups, including but
not limited to, local Chinese associations, Chinese schools and local WeChat12 groups, to better understand local preference
in food and grocery shopping. After further narrowing down the alternative sites, the iFresh team visits the target sites and conducts
a field survey on the distribution, density and purchasing preferences of the local Chinese community. The team then runs systematic
comparisons through acquiring cost and return analysis and investment feasibility evaluation on target alternatives, and reaches
a conclusion on where to open the new store.
Figure 3 Procedure of Store Site Selection
Future Growth Prospects
iFresh plans to continue its vertically-integrated
model and cultivate future growth by opening new stores, acquisition and developing online business. Geographically, iFresh plans
to first expand along I-95 corridor based on its established logistics system and industry leadership, and then gradually go nationwide.
For new stores, iFresh has already been approached by or has approached some targets for the purpose of possible acquisitions.
Although it has no definitive agreements in place, iFresh has a detailed expansion plan in place. The current logistics network
will also be coordinated to cover the new stores in the most efficient and economical way. In addition, iFresh stores in new locations
will serve as distribution centers for its online shopping and delivery services to capture the growing Chinese population in large
suburban areas.
|
12
|
WeChat is a popular social media among Chinese speaking communities.
|
Figure 4 Future Expansion Plan
iFresh will continue targeting stores averaging
over 10,000 square feet. Based on its experience, iFresh expects that the average investment per store will be $2.0 million to
$3.0 million and that the conversion period will be about 2 years, which means it will take about 2 years on average for newly
acquired stores to enter into normal sales scale and profitability. In the aggregate, iFresh will need approximately $10 million
of capital in addition to its cash flow in place for the year ended March 31, 2021 to fully execute the physical acquisitions,
online platform development and new-store openings in the future.
Stores and Operation
iFresh offers well-assorted, high-quality
and globally-sourced food products in its stores, with a special focus on perishable categories and hard-to-find products important
to its target customers.
Store Layout
We believe that iFresh’s cultural
advantage is unique in comparison with its mainstream peers. iFresh’s ability to identify, source, merchandise and market
differentiated Asian and Chinese products that sharply meet the need of its target customers are critical to its success. Its centralized
merchandising team rigorously rotates, updates and re-evaluates its existing merchandise offerings and regularly tests new products
in retailing stores to excite its customers and to better understand customer preference. iFresh maintains a consistent flow of
new products in its stores and keeps its product assortment fresh and relevant.
iFresh plans to use consistent decoration
across all stores to emphasis iFresh’s brand and evoke a feeling of trustworthiness and consistent high-quality. It puts
special focus on seafood and produce because their price and quality are key determining factors of Chinese or Asian customers’
shopping experience. Perishables in aggregate make up approximately 60% of store selling space on average. To optimize usage of
available space, iFresh places popular items such as bok choy, lychee, longyan in most noticeable areas, and prices them competitively
to attract customer traffic. The idea is to adopt a standardized product display with flexible arrangements customized to the shopping
habits of local consumers.
iFresh has a significant focus on perishable
product categories which include vegetables, seafood, fruit, meat and prepared foods. In fiscal year ended March 31, 2020, the
perishable categories contributed approximately 54.4% to iFresh’s total net sales, in alignment with the space occupancy
of perishables. The top three sales generators are vegetables, seafood and meat as shown in Table 4 below. iFresh’s focus
on perishables came from its years of research and analysis of target customer’s shopping preferences. This also echoed well
with conclusions given in Nielsen report that Asian and Chinese Americans prefer to buy fresh and shop for seafood and vegetables
most often.
With respect to non-perishables, iFresh
has over 6,600 grocery products on shelf ranging from cooking utensils, canned foods, Chinese and Asian seasonings and spices,
to domestic and imported snacks. With a small-box format, iFresh is highly selective in its grocery offerings and is flexible enough
to remove unprofitable or poor-selling items quickly. 95% of iFresh’s imported groceries are sourced from China, Thailand
and Taiwan to meet the diverse demand of not only Chinese Americans but targeted customers originated from east and south-east
Asia. In fiscal year ended March 31, 2020, the non-perishable grocery category contributed approximately 45.6% to iFresh’s
total Net Sales and realized a markup of 38.8% on average for the year ended March 31, 2020.
The table below depicts the components of
net sales and gross margin in detail as of March 31, 2020:
Table 4 Contribution of Categories
|
Category
|
|
Net Sales
%
|
|
|
Markup
%
|
|
|
Vegetables
|
|
|
15.1
|
%
|
|
|
46.6
|
%
|
|
Seafood
|
|
|
16.9
|
%
|
|
|
23.0
|
%
|
|
Meat
|
|
|
11.6
|
%
|
|
|
36.8
|
%
|
|
Fruit
|
|
|
7.6
|
%
|
|
|
32.6
|
%
|
|
Hot Food
|
|
|
3.2
|
%
|
|
|
33.9
|
%
|
|
Perishable Total/Average
|
|
|
54.4
|
%
|
|
|
33.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Grocery
|
|
|
45.6
|
%
|
|
|
38.8
|
%
|
Management and sale of Perishables
Vegetables — All iFresh
stores receive deliveries of vegetables every day and are required to sell out all vegetables on daily basis. iFresh discounts
its vegetables after 7:00 p.m., which significantly lowers the storage cost and worn-and-torn rate and improves profitability.
In addition, to lower the worn-out rate of green-leaf vegetables due to customer rummage, iFresh usually packs and sells such vegetables
in bags. iFresh also displays and sells different kinds of vegetables according to their characteristics. For example, Chinese
yams need to be displayed on wood shreds to keep them fresh, while winter melons are typically sold in pieces due to their large
size.
Seafood — As an established
procedure, in-house merchants of iFresh collect live seafood from wharfs and markets at midnight on a daily basis. The purchases
are immediately distributed to all retailing stores via iFresh’s in-house cold chain systems in which hibernation technology
keeps seafood alive and ensures their freshness and high-quality. iFresh discounts remaining stock after 7pm, to make space for
new deliveries, reduce storage costs and maintain its standard for freshness and quality.
Meat— Since iFresh can
sell more body parts of an animal than a mainstream grocery store, the sales it generates from a whole pig, chicken or cattle are
much higher than that of mainstream groceries, which leads to higher margin in meat and meat products sales.
Fruit— Almost all of
the iFresh’s unique fruit species are seasonal offerings and the quality and price are decisive to customer traffic during
high season. Financially, the unique fruit species are sold at higher unit prices and generally offer higher profit margins. iFresh
benefits from its long-standing relationship with farm vendors to stay competitive in high seasons and enjoy better sourcing price
and higher profit margin from fruit sales.
Hot Food — Hot food
options vary among iFresh’s different store locations. iFresh provides prepared Chinese cuisines which require specific cooking
utensils and are thus not easily made at home by customers, such as Char Siu, qingtuan, roasted duck, roasted goose, as well as
an assortment of dim sums. In addition, iFresh adjusts its hot food offerings periodically based on the responses from customers.
As a commitment to freshness and quality, all prepared food in iFresh are made and sold on a daily basis. Leftovers are sold at
a discount after 7:00 p.m.
Pricing Strategy
In general, iFresh’s pricing strategy
is to provide premium products at reasonable prices. iFresh believes pricing should be based on the quality of products and the
shopping experience rather than promotional pricing to drive sales. Its goal is to deliver a sense of value to and foster a relationship
of trust with its target and loyal customers.
iFresh adopts different pricing strategies
for different food categories. For best sellers such as seafood and core produce such as swimming shrimp and bok choy, iFresh prices
competitively and aims to attract consumer traffic. For groceries and dry foods which are usually imported and have a long shelf
life, iFresh prices at a premium (average markup of 36.0%). Due to changes in market conditions and seasonal supply, iFresh’s
pricing for seafood and produce are more volatile when compared with other categories. Despite the effects of seasonality, iFresh
is able to maintain competitive pricing even in high seasons thanks to its long-standing relationship with its farm partners.
Marketing and advertising
iFresh believes its unique offerings, competitive
price of popular produce, and word-of–mouth are major drivers of store sales. Apart from word-of-mouth, iFresh advertises
using in-store tastings, in-store weekly promotion signage, cooking demonstrations and product sampling. iFresh also promotes its
stores on its official website, uses an electronic newsletter, and/or inserts sales flyers in local Chinese newspapers or magazines
on a monthly or weekly basis. iFresh’s online business is marketed mainly on its official website and on WeChat, the most
widely-used mobile social app among Chinese immigrant. As of the fiscal years ended March 31, 2020 and 2019, iFresh recognized
$431,355 and $410,671 for marketing and advertising expenses, respectively. Overall, iFresh utilized a mixed marketing and advertising
methods to enhance iFresh brand and sales, to regularly communicate with its target customers and to strengthen its ability to
market new and differentiated products.
Store Staffing and Operations
iFresh adopts a systematic approach to support
operations and the sustainable development of stores. The comprehensive support includes, but is not limited to, employee training
and scheduling, store design, layout, product sourcing and inventory management systems, especially focusing on perishables. The
support enables iFresh to lower worn-and-tear rate, to enhance operating margins and profit and to help build iFresh’s image
of a Chinese supermarket chain committed to freshness and high-quality.
Each iFresh retail supermarket is operated
with high autonomy. A store manager oversees the general operation and an assistant manager is also appointed to assist the supervision.
To ensure expertise in management and high quality of offerings, department managers are also appointed by category at each store.
The department managers in each store generally include a vegetable manager, a fruit manager, a seafood manager, a meat manager,
a grocery manager and a hot food manager. Since a department manager shoulders the detailed management for the specific category
he or she is in charge of, he or she is commonly experienced in this category or has been with iFresh for years and exhibited superior
performance. As a group, the store manager and store department managers help to ensure the quality of iFresh’s offerings.
Competition
Food retail is a large and highly competitive
industry, but we believe that the market participants in the Chinese supermarket industry, a niche market are highly fragmented
and immature. Currently, iFresh faces competition from smaller or dispersed competitors focusing on the niche market of Chinese
and other Asian consumers. However, with the rapid growth of the Chinese and other Asian population and their consumption power,
other competitors may also begin operating in this niche market in the future. Those competitors include: (i) national conventional
supermarkets, (ii) regional supermarkets, (iii) national superstores, (iv) alternative food retailers, (v) local foods stores,
(vi) small specialty stores, and (vii) farmers’ markets.
The national and regional supermarket chains
are experienced in operating multiple store locations, expansion management and have greater marketing or financial resources than
iFresh does. Even though currently they offer only a limited selection of Chinese and Asian specialty foods, they may be able to
devote greater resources to sourcing, promoting and selling their products if they choose to do so. The local food stores and markets
are small in size with a deep understanding of local preferences. Their lack of scale results in high risk and limited growth potential.
Liquor Business
In April 2020, we acquired 100% of the
equity interests in each of Hubei Rongentang Wine Co., Ltd. (“Wine Co.”) and Hubei Rongentang Herbal Wine Co., Ltd.
(“Herbal Wine Co.”). Wine Co. is engaged in the business of manufacturing and sales of rice liquor products and Herbal
Wine Co. is engaged in the business of manufacturing and sales of herbal rice liquor products. These liquor products are called
“Baijiu” in Chinese made from rice, which are popular in China and among oversea Chinese populations.
Wine Co. has an automatic filling production
line with an annual production capacity of 5,000 tons of liquor products at a 1,000 square-meter facility. Herbal Wine Co.
has an automatic filling production line with an annual production capacity of 6,000 tons of herbal liquor products.
The companies have
three major product lines, branded as “ Shi”, “Jian” and “Guo”.
Market
The spirits market
in China is flourishing and highly competitive. Spirits in China is dominated by baijiu. Niulanshan Er Guo Tou, as a
representative of lower mid-range local spirits, led overall spirits in total volume terms in 2018, followed by Jing Jiu and
Classic Blue Haizhilan. Baijiu’s popularity in the country of 1.4 billion people makes it the world’s most
consumed spirit—10.8 billion liters were sold in 2017, according to an analysis by the International Wines and Spirits
Record (IWSR).
According to Baijiu
Market in China 2017-2021 published by Technavio, one of the positive trends of the baijiu market in China is the increasing export
of baijiu to the US and European countries. The increasing demand for baijiu in the US has led to the opening of cafes offering
only baijiu drinks in the US. In 2016, the export of baijiu from China increased by about 90% as compared to 2015, which is likely
to increase during the forecast period.
Distribution
We market our rice liquor products through
online platforms, such as Chaohaigou, Jiayoubei and Taobao, sales agents and our distribution network to local stores. We market
and sell our herbal liquor products by collaborating with hospitals and pharmacies. We also sell our herbal liquor products directly
to end customers. We plan to begin exporting our liquor products to the United States by the end of 2020.
Face Mask Business
Xiamen DL Medical Technology Co, Ltd is
our newly acquired subsidiary that produces face masks in China founded in March 2020. Its core business includes engineering and
technical research and experimental development in and production of medical protective masks, non-medical daily protective masks,
cotton spinning processing. We have built our production lines from scratch, with an estimated aggregate annual output of 5 million
masks. We have one medical mask production line, which we expect, once operational, can handle a daily capacity of up to 30,000
masks, and two non-medical mask production lines, with an output capacity of up to 400,000 masks per day. We expect to launch the
medical mask production from these production lines in the fourth quarter of 2020.
Xiamen DL is expected to provide medical
masks to the extent that the demand for personal protective equipment remains strong. The mask has already been FDA registered
and in the process of applying for NIOSH and FDA 510K certification. The company is applying for China’s certificate and
licenses in the medical device and technology area. Once the further licenses are approved, the company is expected to receive
more orders from institution, hospitals and governments and will also increase its exports to US, Japan and Europe.
Brand Names and Models
|
|
1.
|
FDA Registered Disposable Face Mask
|
Market and Industry Analysis
The increasing incidence
of coronavirus across the world has had a huge impact on market growth. The global medical mask market size was USD 2.15 billion
in 2019 and is projected to reach USD 4.11 billion by 2027, exhibiting a CAGR of 8.5% during the forecast period. Due to the COVID-19
pandemic, the health departments of several countries have issued guideline to increase awareness and promote usage of the protective
masks.
Competition
The global market is
highly fragmented as many emerging market players focusing to meet the supply-demand balance of the industry. Some top players
such as 3M, Kimberly Clark and Honeywell lead the market. However, the emergence of the coronavirus epidemic has led to robust
demand in the medical mask market.
Trademarks and Other Intellectual Property
iFresh owns four Trademarks: (i) Family
Elephant; (ii) Green Acre; (iii) Golden Smell; and (iv) Redolent. iFresh’s trademarks cover rice and rice products and seasonings
and spices, as well as assortment of noodles, frozen vegetables, frozen dumplings and frozen seafood. Trademarks are generally
renewed for a 10-year period. We consider iFresh’s trademarks to be valuable assets that diversify customer’s value
alternatives, a useful strategy to enhance profit margins and an important way to establish and protect iFresh brand in a competitive
environment.
iFresh plans to acquire more brands or even
develop NYM-branded products in the near future. iFresh will evaluate the acquisition opportunities on a case by case basis, considering
the timing, impact to current products and the product quality.
The Fresh Market, Inc., the owner of the
federally registered THE FRESH MARKET trademark, has informed the Company that The Fresh Market considers the Company’s use
of the words “iFresh Market” on some of its storefronts as well as the domain name “www.ifreshmarket.com”
to infringe on The Fresh Market’s trademark. The Company is considering its response to The Fresh Market’s communication.
Insurance
iFresh uses insurance to provide coverage
for potential liability for worker’s compensation, automobile and general liability, product liability, director and officers’
liability, employee health care benefits and other casualty and property risks. Changes in legal trends and interpretations, variability
in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws,
insolvency or insurance carriers, and changes in discount rates could all affect ultimate settlements of claims. iFresh evaluates
its insurance requirements on an ongoing basis to ensure it maintains adequate levels of coverage.
Properties
iFresh’s headquarters has been located
in Long Island City since 1999. The head office is leased at current market rate from a real estate company in which our Director
and Chief Executive Officer, Long Deng, has a significant equity interest. The headquarter and the attached warehouse spaces are
located in a desirable area in New York City’s up and coming Hunters Point neighborhood. We believe that the space can be
easily rented to or sold to any third party if not used by us. All of our retail supermarkets lease operating space from various
third parties with which we maintain long-term leases averaging approximately 7.6 years. Three of the ten current leases have remaining
periods of at least 10 years; and the rest three current leases come with a renewal option ranging from 10 to 20 years. New York
Mart Group rents 20,000 square feet of storage from third parties, while Strong America rents 60,000 square feet of storage from
a real estate company in which Long Deng, our Director and Chief Executive Officer, has a significant equity and control.
The list below details the information related
to iFresh’s leases:
Table 5 iFresh’s leases
|
Store Name
|
|
Location
|
|
Gross Sq.
Ft.
|
|
Lease
Start
|
|
Lease End
|
|
Remaining
Years
|
|
Renewal
Options
|
|
New York Mart 8 Ave, Inc.
|
|
6023 8th Ave,
Brooklyn, NY 11120
|
|
15,000
|
|
11/1/2011
|
|
10/31/2036
|
|
16.1
|
|
N/A
|
|
New York Mart Roosevelt Inc.
|
|
142-41 Roosevelt Ave,
Flushing, NY 11354
|
|
18,000
|
|
6/8/2010
|
|
6/7/2040
|
|
19.7
|
|
10 years
|
|
New York Mart East Broadway Inc.
|
|
75 East Broadway,
New York, NY 10002
|
|
7,500
|
|
12/28/2001
|
|
10/31/2024
|
|
4.1
|
|
5 years
|
|
New York Mart Mott St. Inc.
|
|
128 Mott Street,
New York, NY 10013
|
|
12,000
|
|
11/1/2010
|
|
10/31/2025
|
|
5.1
|
|
10 years
|
|
New York Mart Ave U 2nd Inc.
|
|
17-21 Ave U,
Brooklyn, NY 11229
|
|
14,000
|
|
5/31/2011
|
|
8/31/2028
|
|
7.9
|
|
N/A
|
|
Ming’s Supermarket Inc.
|
|
1102 Washington Street,
Boston, MA 02118
|
|
23,356
|
|
1/1/2007
|
|
12/1/2026
|
|
6.2
|
|
10 years
|
|
Ming’s Supermarket Inc.
|
|
140-148 East Berkeley St
Boston, MA 02118
|
|
34,400
|
|
1/1/2000
|
|
5/31/2030
|
|
9.10
|
|
10 years
|
|
Zen Mkt Quincy, Inc.
|
|
733 Hancock St. Quincy,
MA 02170
|
|
10,000
|
|
3/1/2003
|
|
6/30/2023
|
|
3.5
|
|
10 years
|
|
New York Mart Sunrise Inc.
|
|
10101 Sunset Strop Sunrise,
FL 33322
|
|
15,033
|
|
12/1/2010
|
|
11/30/2030
|
|
10.2
|
|
N/A
|
|
iFresh E. Colonial, Inc.
|
|
2415 E Colonial Drive,
Orlando, FL 32803
|
|
20,370
|
|
7/5/2017
|
|
1/1/2024
|
|
3.3
|
|
N/A
|
|
Strong America Limited
|
|
2-39 54th Ave,
Long Island City,
NY 11101
|
|
59,000
|
|
5/1/2016
|
|
4/30/2026
|
|
5.6
|
|
N/A
|
|
Strong America Limited
|
|
2-39 54th Ave,
Long Island City,
NY 11101
|
|
10,886
|
|
3/1/2017
|
|
02/28/2027
|
|
7.2
|
|
Auto renewal each year (unless 60 day notice)
|
|
New York Mart Group Inc.
|
|
55-01 2nd Street,
Long Island City, NY 11101
|
|
20,000
|
|
3/1/2011
|
|
12/31/2020
|
|
0.4
|
|
N/A
|
|
New York Mart N. Miami Inc
|
|
551 NE 167th St N. Miami Beach Florida
|
|
25,088
|
|
5/27/2015
|
|
4/30/2029
|
|
9.8
|
|
5 years
|
|
Xiamen DL Medical Technology LTD
|
|
No.18 HongXi Road South, Room 501, HuoJu(Xiang'an) District, Xiamen, Fujian, 361009
|
|
24,757
|
|
03/29/2020
|
|
03/28/2021
|
|
1
|
|
N/A
|
Employees
As of March 31, 2020, we had approximately
320 employees, 276 of whom are full-time employees and the remaining 44 of whom work part-time. We have 72 employees who have worked
with us for 5 years or more. Our employees are not unionized nor, to our knowledge, are there any plans for them to unionize. We
have never experienced a strike or significant work stoppage. iFresh regards its employee relations to be good.
Seasonality
As with other participants in the food
retail industry, iFresh’s sales are affected by seasonality. First, weekly sales fluctuate throughout the year, with weekends
generating more sales over weekdays. Weekends enable customers living further from iFresh’s stores to shop in iFresh’s
stores.
iFresh also has higher sales in its third
fiscal quarter when customers make holiday purchases. In contrast to conventional supermarkets, iFresh’s are not only affected
by U.S. holidays, but by traditional Chinese holidays as well, such as the Spring Festival (in January or February), the Dragon
Boat Festival (in June), and the Mid-Autumn Festival (in September or October). Each of the Chinese festivals features a specific
traditional food which will be very popular just prior to or at the holiday season. Therefore, iFresh observes not only a general
sales increase but also a sharp sales increase for that traditional Chinese food related to the festival.
iFresh’s target customers also believe
that food in season is the best. Therefore, popular species of vegetables, fruit and seafood change with season. For example, iFresh
target customers will look for longyan and lychee in summer but not in winter even if they are on shelf; similarly, customers look
for Chinese dates and sugar cane in winter but never in summer. The seasonality in both customer demand and supply has a direct
impact on iFresh’s merchandising, pricing, sales and profitability.
Regulation
iFresh operates in multiple states and is
subject to federal, state and local laws and regulations in states it operates. Particularly, the jurisdictions in which it operates
regulate the licensing of supermarkets, the sale of alcoholic beverages and the sale of lotteries. iFresh must comply with provisions
regulating health and sanitation standards, food labeling, licensing for alcoholic beverages and lottery sales. The manufacturing,
processing, formulating, packaging, labeling and advertising of product are subject to regulation by various federal agencies including
the Food and Drug Administration, the Federal Trade Commission, the United States Department of Agriculture, the Consumer Product
Safety Commission and the Environmental Protection Agency. iFresh stores are subject to regular but unscheduled inspections. iFresh
stores are also subject to laws governing its relationship with employees including minimum wage requirement, overtime, working
conditions, immigration, disabled access and work permit requirements. Certain of iFresh’s parking lots and warehouses and
its prepared food sections either have temporary certificates of occupancy or are awaiting certificates of occupancy. In addition,
a number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled
persons. iFresh believes that it is in material compliance with laws and regulations in each jurisdiction. iFresh’s compliance
with these regulations may require additional capital expenditures and could materially adversely affect its ability to conduct
business as planned.
KeyBank National Association – Senior Secured Credit
Facilities
On December 23, 2016,
NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank
National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit
of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000
of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the
Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term loans are December
23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit Facility and 0.25%
of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of December 31, 2018.
$15,000,000 of the
term loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments
of principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid
principal balance of the term loan, plus accrued interest on the maturity date.
A Delayed Draw Term
Loan was available and would be advanced on the Delayed Draw Funding date (as defined in the Credit Agreement, which is no later
than December 23, 2021. A withdrawal of $5 million under the Delayed Draw Term Loan was made as of March 31, 2019.
The senior secured
credit facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains
financial and restrictive covenants. The financial covenants require NYM to deliver audited consolidated financial statements within
one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior
funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at
the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. Except as stated below, the senior
secured credit facility is subject to customary events of default. It will be an event of default if Mr. Long Deng resigns, is
terminated, or is no longer actively involved in the management of NYM and a replacement reasonably satisfactory to the Lender
is not made within sixty (60) days after such event takes place. The Company violated the loan covenant when Mr. Long Deng, CEO
and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited on January 23,
2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to
obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March 1, 2019, interest was
accrued on all loans at the default rate and the monthly principal and interest payment due under the effective date term loan
will be $155,872 instead of $142,842.
On May 20, 2019, iFresh,
NYM (or the “Borrower”), certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank”
or the “Lender”) entered into the first forbearance agreement (the “First Forbearance Agreement”) with
respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank made available to
NYM a revolving credit facility, a term loan facility, and other credit accommodations (the “Loan Agreements”). The
Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreements based on the existence of certain
events of default until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the
First Forbearance Agreement (the “First Forbearance Period”); and (b) a Forbearance Event of Default. Reference is
made to the current report on Form 8-K filed with the SEC on May 21, 2019.
The Borrower did not
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank
entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement
dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain
subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the
“Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit
Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings ascribed to them in the Second
Forbearance Agreement.
From Jan to June 2020, non-payment of amount
due by the Company was $1,194,878. Also, the Company has failed certain loan covenants. On August 6, 2020 the Company received
3rd forbearance agreement from Key Bank If agreement cannot be reached, KeyBank is fully prepared to pursue legal remedies.
As of the date of this report, the Forbearance Agreement is still under negotiation.
As of June 30, 2020 we owe $21,266,149 to
Keybank.
Our principal liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Our ability to
fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other
factors beyond its control. In addition, if Keybank accelerates the loan, we may be forced to declare bankruptcy. These conditions
raise substantial doubt as to our ability to remain a going concern.
Legal Proceedings
In the ordinary course of our business,
we are subject to periodic lawsuits, investigations and claims, including, but not limited to, contractual disputes, premises claims
and employment, environmental, health, safety and intellectual property matters. Although we cannot predict certainty the ultimate
resolution of any lawsuits, investigations and claims asserted against it, we do not believe any currently pending legal proceedings
to which it is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results
of operations other than the following:
Leo J. Motsis, as Trustee of the 140-148 East
Berkeley Realty Trust v. Ming’s Supermarket, Inc.
This case relates to
a dispute between Ming’s Supermarket, Inc. (“Ming”), the subsidiary of the Company and the landlord of the building
located at 140-148 East Berkeley Street, Boston, MA (the “Property”), under a long-term operating lease (“Lease”).
Since February 2015, Ming was unable to use the premise of the property due to a structure damage assessed by the Inspectional
Services Department of the City of Boston (“ISD”), and stopped paying the rent since April 2015 after the landlord
refused to perform structural repairs. The landlord then sued Ming for breach of the Lease and unpaid rent, and Ming counterclaimed
for constructive eviction and for damages resulting from the landlord’s breach of its duty to perform structural repairs
under the Lease.
The case was tried
before a jury in August 2017. The jury awarded Ming judgment against the landlord in the amount of $795,000, plus continuing damages
of $2,250 per month until the structural repairs are completed. The court found that the landlord’s actions violated the
Massachusetts unfair and deceptive acts and practices statute and therefore doubled the amount of damages to $1,590,000 and further
ruled that Ming should also recover costs and attorneys’ fees of approximately $250,000. The result is a judgment in favor
of Ming and against the landlord that will total approximately $1.85 million. The judgment requires the landlord to repair the
premises and obtain an occupancy permit. The landlord is responsible to Ming for damages in the amount of $2,250 per month until
an occupancy permit is issued. The judgment also accrues interest at the rate of 12% per year until paid.
The landlord filed
an appeal, the appeal hearing was held in July 12, 2019 and judge concluded that the landlord should be required both to perform
the relevant obligations of the lease in the future and to pay damages caused by his previous failure to do so and for any period
of delay in completing specific performance. On November 5, 2019, the Appeal Count issued a full decision affirming the judgment
was entered and transmitted a rescript of the affirmance of the judgment to the superior count.
The final judgment was entered after rescript
on May 7, 2020. On June 29, 2020, the landlord executed the final judgment and finally made the payment of $2,536,142 to Ming.
Hartford Fire
Insurance Company v. New York Mart Group Inc
On November 28, 2018, a lawsuit was filed
against New York Mart Group, Inc. by Hartford Fire Insurance Company (“Hartford”), who seeks contractual indemnification
from the Company and other defendants relating to certain supersedeas bonds issued by Hartford in connection with the unsuccessful
appeal of state court litigation by iFresh’s codefendant. Hartford alleges that iFresh guaranteed performance of the bonds
and therefore seeks to enforce the indemnification terms thereof against iFresh in addition to the other defendants. On June 14,
2019, Hartford filed a motion for summary judgment against iFresh, arguing that Hartford is entitled to judgment as a matter of
law. The deadline for iFresh to respond to that motion has not yet occurred. In view of the uncertainties inherent in litigation,
we are unable to form a judgment as to the likelihood of an unfavorable outcome. If the plaintiff was to prevail on the merit,
it could obtained a judgment against iFresh in the amount of its alleged loss under the bonds for the amount of $424,772, in addition
to attorney’s fee, costs and interest. The Company has accrued $500,000 for the potential loss and expense associated with
this case.
Winking Group
LLC v. New York Supermarket E. Broadway Inc
A
subsidiary of the Company, New York Supermarket E. Broadway Inc., entered into a lease with Winking Group LLC for the Company’s
store located at 75 East Broadway, NY, 10002. The landlord sued the Company for failing to pay rent and additional fee of $450,867.
The Company negotiated an agreement with the landlord to settle the case. On November 21, 2019, the Company consented to a final
judgment of possession in favor of Winking Group LLC in the amount of $400,000, with $50,867 being waived by the landlord. $400,000
has been paid in full as of December 31, 2019.
Earl M. Wheby,
Jr. v. iFresh Inc.
On August 7, 2019,
the Company received a complaint from a shareholder for the inspection of the Company’s books and records and to request
expedited proceedings. On October 7, 2019, the Company filed an answer in response to the shareholder’s complaint, pursuant
to which, among other things, the Company has agreed to produce some documents responsive to the shareholder’s demand. No
hearing has been scheduled for this matter. On November 15, 2019, The Court approved plaintiff’s voluntarily withdrawal
of the lawsuit.
JD Produce Maspeth LLC v. iFresh,
Inc. alt.
On September 16, 2019,
the JD Produce Maspeth (“plaintiff”) seeks $178,953 in unpaid goods purchased by the Company. The legal process was
just initiated and interrupted by the outbreak of COVID-19. The Company has recorded the purchase and payable on the financial
statements.
Don Rick Associates
LLC. v. New York Mart Roosevelt Inc.
One of the subsidiaries
of the Company, New York Mart Roosevelt Inc, has failed to pay the rents on time. The landlord has sued the Company for nonpayment.
On May 31, 2019, a motion for summary Judgement was filed for unpaid rent in the amount of $102,792 and $14,984 for attorney fees.
These amounts have been fully accrued as of March 31, 2020.
SEC Subpoena
On March 6, 2020, the Company announced
that it has received a subpoena from the Securities and Exchange Commission (“SEC”) requesting certain information.
The subpoena sought various documents and information regarding, among other things, the Company’s financial institution
accounts, accounting practices, auditing practices, internal controls, payroll, and information furnished to auditors. Although
the Company is not currently the subject of any enforcement proceedings, the investigation could lead to enforcement proceedings
if SEC contends that the Company has not complied with securities laws. The Company is fully cooperating with the SEC's request.
ITEM 1A. Risk Factors
An investment in our Common Stock is speculative and involves
a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information
contained in this report, including the consolidated financial statements and notes thereto, before deciding to invest in our Common
Stock. Any of the risk factors described below could significantly and adversely affect iFresh’s business, prospects, sales,
revenues, gross profit, cash flows, financial condition, and results of operations.
Risks Related to the Company
We are currently in default under our Credit Facility
with Key Bank, which limits our liquidity and could result in Key Bank accelerating amounts we owe to it under the facility.
On December 23, 2016, NYM, as borrower,
entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank National Association
(“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit of $5,000,000 for making
advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000 of delayed draw term loan.
The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the Adjusted LIBOR rate plus 1.95%.
As reflected in the Company’s consolidated financial statements, the Company had operating losses in fiscal year 2020 and
had negative working capital of $28.6 and 21.7 million as of March 31, 2020 and 2019, respectively. The Company had negative equity
of $2.6 million as of March 31, 2020. The Company did not meet the financial covenant required in the credit agreement with Keybank.
As of March 31, 2020, the Company has outstanding loan facilities of approximately $20.1 million due to Keybank. Failure to maintain
these loan facilities will have a significant impact on the Company’s operations.
On May 20, 2019, iFresh,
NYM (or the “Borrower”), certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank”
or the “Lender”) entered into the first forbearance agreement (the “First Forbearance Agreement”) with
respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank made available to
NYM a revolving credit facility, a term loan facility, and other credit accommodations (the “Loan Agreements”). The
Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreements based on the existence of certain
events of default until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the
First Forbearance Agreement (the “First Forbearance Period”); and (b) a Forbearance Event of Default. Reference is
made to the current report on Form 8-K filed with the SEC on May 21, 2019.
The Borrower did not
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank
entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement
dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain
subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the
“Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit
Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings ascribed to them in the Second
Forbearance Agreement.
The Lender agreed to
delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default (the
“Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the November 29, 2019;
and (b) a Forbearance Event of Default. No subsequent agreements or amendments have been entered into.
The Borrower is not current in its payments
to Keybank. As of June 30, 2020 we owe $21,266,148 to Keybank. We have retained as bankruptcy counsel to prepare bankruptcy filings
for certain of our subsidiaries.
Our principal liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Our ability to
fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other
factors beyond its control. In addition, if Keybank accelerates the loan, we may be forced to declare bankruptcy. These conditions
raise substantial doubt as to our ability to remain a going concern.
We received a subpoena from
the SEC, and if the SEC discovers that we have not complied with applicable securities laws, we could be subject to significant
monetary penalties and other relief imposed on us by the SEC
On March 6, 2020, the Company announced
that it had received a subpoena from the Securities and Exchange Commission (“SEC”) requesting certain information.
The subpoena sought various documents and information regarding, among other things, the Company’s financial institution
accounts, accounting practices, auditing practices, internal controls, payroll, and auditors. Although the Company is not currently
the subject of any enforcement proceedings, the investigation could lead to enforcement proceedings if the SEC contends that the
Company has not complied with securities laws. The Company is fully cooperating with the SEC's request.
If the SEC determines
that we have not complied with applicable securities laws, the SEC could initiate a proceeding against us, which may ultimately
lead to significant penalties and other relief assessed against us, including significant monetary fines.
There is substantial doubt about the Company’s ability
to continue as a going concern.
As discussed in this Annual Report on Form
10-K, we incurred operating losses, did not meet the financial covenant required in the Credit Agreement and are currently in default
of the Credit Agreement due to our failure to pay certain tax obligations. These conditions raise substantial doubt about our ability
to continue as a going concern.
We may be delisted from the Nasdaq
Stock Market.
Although we are currently
in compliance with applicable Nasdaq listing requirements, we have previously received delisting notices from Nasdaq. If we are
delisted from the Nasdaq Stock Market, we and our shareholders could face significant material adverse consequences including:
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limited availability of market quotations for our securities;
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determination that our ordinary shares are a “penny stock,” which will require brokers trading in our ordinary shares
to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for
our ordinary shares;
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limited amount of analyst coverage; and
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decreased ability to issue additional securities or obtain additional financing in the future.
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The COVID-19 epidemic may adversely
impact our sales and financial results.
The COVID-19 epidemic
may pose significant risks to our business. For example, April 2020 sales were down 13% compared to the prior year period due to
COVID-19 (there was an additional 12% reduction as compared to the prior year period due to our closing two underperforming stores
in March 2020), and restocking certain items, such as paper towels and toilet paper has been difficult. Accordingly, management
is evaluating our liquidity position, communicating with and monitoring customers and suppliers, and reviewing our analysis of
our financial performance as we seek to position ourselves to withstand the uncertainty related to the coronavirus.
The occurrence of a widespread health epidemic may materially
adversely affect iFresh’s financial condition and results of operations.
iFresh’s business may be severely
impacted by wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic, such as
pandemic flu and COVID-19 pandemic. Such activities, threats or epidemics may materially adversely impact iFresh’s business
by disrupting production and delivery of products to iFresh’s stores, by affecting iFresh’s ability to appropriately
staff its stores or by causing customers to avoid public gathering places or otherwise change their shopping behaviors.
iFresh’s continued growth depends on new store acquisitions
and openings and on increasing same store sales, and iFresh’s failure to achieve these goals could negatively impact its
results of operations and financial condition.
Our growth strategy depends, in large part,
on acquiring and opening new stores in existing and new areas and operating those stores successfully. Successful implementation
of this strategy is dependent on sufficient capital support from financing, finding suitable stores to acquire, identifying suitable
locations and negotiating acceptable lease terms for store sites, as it faces competition from other retailers for such sites.
There can be no assurance that we will continue to grow through new store acquisitions and openings. We may not be able to obtain
sufficient capital support for the expansion plan, or successfully implement the plan to acquire or open new stores timely or within
budget or operate them successfully, and there can be no assurance that store acquisition or opening costs for, net sales of, contribution
margin of and average payback period on initial investment for new stores will conform to our operating model discussed elsewhere
in this report. Lower contribution margins from new stores, along with the impact of related store acquisition, opening and store
management relocation costs, may have an adverse effect on our financial condition and operating results. In addition, if we acquire
stores in the future, it may not be able to successfully integrate those stores into its existing store base and those stores may
not be as profitable as its existing stores.
Also, we may not be able to successfully
hire, train and retain new store employees or integrate those employees into the programs, policies and culture of us. We or our
third party vendors may not be able to adapt our distribution, management and other operating systems to adequately supply products
to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. We may not have the
level of cash flow or financing necessary to support our growth strategy.
Additionally, our acquisition and opening
of new stores will place increased demands on our operational, managerial and administrative resources. These increased demands
could cause the Company to operate its existing business less effectively, which in turn could cause deterioration in the financial
performance of our existing stores. If the Company experiences a decline in performance, it may slow or discontinue store openings,
or may decide to close stores that it is unable to operate in a profitable manner.
Additionally, some of our new stores may
be located in areas where the Company has little experience or a lack of brand recognition. Those markets may have different competitive
conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these
new stores to be less successful than stores in our existing markets.
Our operating results and stock price will
be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately
proves unsuccessful.
Our newly opened stores may negatively impact our financial
results in the short-term and may not achieve sales and operating levels consistent with our mature store base on a timely basis
or at all.
The Company has actively pursued new store
growth and plans to continue doing so in the future. The Company cannot assure you that its new store acquisitions or openings
will be successful or result in greater sales and profitability. New store openings may negatively impact our financial results
in the short-term due to the effect of store opening costs and lower sales and contribution margin during the initial period following
opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins and
higher operating expenses, as a percentage of net sales, than our more mature stores. A new store can take more than a year to
achieve a level of operating performance comparable to our similarly existing stores. Further, we have experienced in the past,
and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing
customers switch to new, closer locations. As a result, part of the increase of the overall sales to us arising from a new store
opening or a store acquisition may be offset by the “sales volume transfer” phenomena.
The competition from competitors may increase intensively
in the future.
Food retail is a large and highly competitive
industry. However, iFresh believes that the market participants in the Chinese supermarket industry are highly fragmented and immature.
Currently, iFresh faces competition from smaller or dispersed competitors focusing on the niche market of Chinese consumers. However,
with the rapid growth of the Chinese and other Asian population and their consumption power, other competitors may also begin operating
in this niche market in the future. Those competitors include: (i) national conventional supermarkets, (ii) regional supermarkets,
(iii) national superstores, (iv) alternative food retailers, (v) local foods stores, (vi) small specialty stores, and (vii) farmers’
markets.
The
national and regional supermarket chains are experienced in operating multiple stores locations, expanding management and they
have greater marketing or financial resources than iFresh does. Even though they currently offer only a limited selection of Chinese
and Asian specialty foods, they may be able to devote greater resources to sourcing, promoting and selling their products if they
choose to do so. On the contrary, the local food stores and markets are small in size with a deep understanding of local preferences,
but their lack of scale results in high risk and limited growth potential.
If
more and more competitors devote into this market segment aiming to serve Chinese and other Asian customers in the future, the
competition will increase. Our operating results may be negatively impacted through a loss of sales, reduction in margin from
competitive price changes and/or greater operating costs such as marketing, due to the increase of competition.
iFresh
relies on a combination of product offerings, customer service, store format, location and pricing to compete.
iFresh
competes with other food retailers on a combination of factors, primarily product selection and quality, customer service, store
layout and decoration, location and price. Our success depends on its ability to offer products that appeal to its customers’
preferences. Failure to offer such products, or to accurately forecast changing customer preferences, could lead to a decrease
in the number of customer transactions at our stores and in the amount customers spend at our stores.
Pricing
in particular is a significant driver of consumer choice in our industry and iFresh expects competitors to continue to apply pricing
and other competitive pressures. To the extent that our competitors lower prices, its ability to maintain gross profit margins
and sales levels may be negatively impacted. Some of Our competitors may have greater resources than it does. These competitors
could use these advantages to take measures, including reducing prices, which could adversely affect our competitive position,
financial condition and results of operations.
If
iFresh does not succeed in offering attractively priced products that consumers intend to purchase or are unable to provide a
convenient and appealing shopping experience, Our sales, operating margins and market share may decrease, resulting in reduced
profitability.
Economic
conditions that impact consumer spending could materially affect our business.
Ongoing
economic uncertainty continues to negatively affect consumer confidence and discretionary spending. iFresh’s operating results
may be materially affected by changes in economic conditions nationwide or in the regions in which iFresh operates that impact
consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost
alternatives to iFresh’s product offerings in response to economic conditions. In particular, a decrease in discretionary
spending could adversely impact sales of certain of iFresh’s higher margin product offerings. Future economic conditions
affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the
availability of consumer credit, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending or
cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact iFresh’s
business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending,
could reduce gross profit margins. As a result, iFresh’s results of operations could be materially adversely affected.
Fresh’s
existing stores are mainly located in Northeastern American metropolitan areas. The geographic concentration of its stores creates
an exposure to the economy of the Northeastern United States and any downturn in this region could materially adversely affect
iFresh’s financial condition and results of operations.
Perishable
products make up a significant portion of iFresh’s sales, and ordering errors or product supply disruptions may have an
adverse effect on iFresh’s profitability and operating results.
iFresh has a significant focus on perishable
products. Sales of perishable products accounted for approximately 54.4% of iFresh’s net sales in fiscal year ended March
31, 2020. iFresh has self-owned wholesale facility and stable supply relationship with farm partners, which significantly reduces
ordering errors and product disruption. However, iFresh still relies on various suppliers and vendors to provide and deliver its
product inventory on a continuous basis. iFresh could suffer significant perishable product inventory losses in the event of the
loss of a major supplier or vendor, disruption of its supply chain, extended power outages, natural disasters or other catastrophic
occurrences. While iFresh has implemented certain systems to ensure that its ordering is in line with demand, it cannot assure
you that its ordering systems will always work efficiently, in particular in connection with the new additional stores, which have
no, or a limited, ordering history. If iFresh were to over-order, it could suffer inventory losses, which would negatively impact
its operating results.
Interruption
of exclusive distribution of brands or imports relating to iFresh’s wholesale operations may adversely impact iFresh’s
financial conditions and operating results.
iFresh
conducts wholesale business through its subsidiary, Strong America, which enables iFresh to have stronger negotiating power with
vendors as well as a way to source products from China, Thailand and Taiwan to its own retail stores. Strong America is also the
exclusive distributor of seven famous oversea brands. If iFresh can’t renew its exclusive distribution contracts relating
to those brands, iFresh’s sales, both retail and wholesale, may be adversely affected. Furthermore, importing products from
other countries is subject to the impact of various international factors, including international trading policies, shipping
costs, currency fluctuations, tariffs and customs procedures for imports, which may affect the supply and purchase prices of the
products to be imported by iFresh’s wholesale distributors and sold by them to iFresh. If iFresh fails to obtain or maintain
a sustainable supply of these products from its vendors, its financial conditions and operating results will be adversely impacted.
The
operation of new stores and online sales may cannibalize sales in iFresh’s stores and its financial results can be affected
by economic and competitive conditions in this area.
All
of iFresh’s existing stores are located in the Northeastern United States and it intends to grow its store base in this
area. New stores are expected to be opened in the Greater New York City and Boston metropolitan areas. As iFresh opens new stores
in closer proximity to its customers who currently travel longer distances to shop at iFresh’s stores, iFresh expects some
of these customers to take advantage of the convenience of iFresh’s new locations. Simultaneously, iFresh will develop online
sales to cover the customers living in a 2.5-hour drive radius, which may satisfy the demand from those Chinese customers living
in the suburbs.
Some
sales volume may transfer from iFresh’s existing stores to its new stores as some of its existing customers switch to these
new, closer locations, or convenient online shopping. Consequently, iFresh’s new stores and online sales may adversely impact
sales at iFresh’s existing stores.
Disruption
of relationships with vendors could negatively affect iFresh’s business.
iFresh
purchases vegetables and fruits directly from farms and other vendors and maintains stable relationships with the vendors to ensure
reliable supplies of popular seasonal Chinese specialty of vegetables and fruits. iFresh also depends on third-party suppliers
for exclusive third-party brands. The cancellation of iFresh’s supply arrangement with any of its suppliers or the disruption,
delay or inability in supply from its suppliers could adversely affect iFresh’s sales. If iFresh’s suppliers fail
to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted.
iFresh cannot assure you that it would be able to find replacement suppliers on commercially reasonable terms.
iFresh
may be unable to protect or maintain its intellectual property, which could result in customer confusion, a negative perception
of its brand and adversely affect its business.
iFresh
believes that its intellectual property has substantial value and has contributed significantly to the success of iFresh’s
business. In particular, iFresh’s trademarks, including New York Mart, are valuable assets that reinforce iFresh’s
customers’ favorable perception of its stores.
From
time to time, third parties have used names similar to iFresh’s, have applied to register trademarks similar to iFresh’s
and, as iFresh believes, have infringed or misappropriated iFresh’s intellectual property rights. iFresh responds to these
actions on a case-by-case basis, including, where appropriate, by sending cease and desist letters and commencing opposition actions
and litigation. The outcomes of these actions have included both negotiated out-of-court settlements as well as litigation. iFresh
cannot assure you that the steps it has taken to protect its intellectual property rights are adequate, that its intellectual
property rights can be successfully defended and asserted in the future or that third parties will not infringe upon or misappropriate
any such rights. In addition, iFresh’s trademark rights and related registrations may be challenged in the future and could
be canceled or narrowed. Failure to protect iFresh’s trademark rights could prevent iFresh in the future from challenging
third parties who use names and logos similar to iFresh’s trademarks, which may in turn cause consumer confusion or negatively
affect consumers’ perception of iFresh’s brand and products, and eventually adversely affect iFresh’s sales
and profitability. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant
distraction for management and significant expense, which may not be recoverable regardless of whether iFresh is successful. Such
proceedings may be protracted with no certainty of success, and an adverse outcome could subject iFresh to liabilities, force
iFresh to cease use of certain trademarks or other intellectual property or force iFresh to enter into licenses with others. Any
one of these occurrences may have a material adverse effect on iFresh’s business, results of operations and financial condition.
If
iFresh experiences a data security breach and confidential customer information is disclosed, iFresh may be subject to penalties
and experience negative publicity, which could affect iFresh’s customer relationships and have a material adverse effect
on its business.
iFresh
and its customers could suffer harm if customer information was accessed by third parties due to a security failure in iFresh’s
systems. The collection of data and processing of transactions requires iFresh to receive, transmit and store a large amount of
personally identifiable and transaction related data. This type of data is subject to legislation and regulation in various jurisdictions.
Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media
attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals
are adopted, iFresh may be subject to more extensive requirements to protect the customer information that it processes in connection
with the purchases of iFresh’s products. iFresh may become exposed to potential liability with respect to the data that
it collects, manages and processes, and may incur legal costs if its information security policies and procedures are not effective
or if it is required to defend its methods of collection, processing and storage of personal data. Future investigations, lawsuits
or adverse publicity relating to iFresh’s methods of handling personal data could adversely affect its business, results
of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.
Additionally, if iFresh suffers data breaches, one or more of the credit card processing companies that it relies on may refuse
to allow it to continue to participate in their network, which would limit iFresh’s ability to accept credit cards at its
stores and could adversely affect its business, results of operations, financial condition and cash flows.
Data
theft, information espionage or other criminal activity directed at the retail industry or computer or communications systems
may materially adversely affect iFresh’s business by causing iFresh to implement costly security measures in recognition
of actual or potential threats, by requiring iFresh to expend significant time and expense developing, maintaining or upgrading
its information technology systems and by causing it to incur significant costs to reimburse third parties for damages. Such activities
may also materially adversely affect iFresh’s financial condition, results of operations and cash flows by reducing consumer
confidence in the marketplace and by modifying consumer spending habits.
If
iFresh is unable to renew or replace current store leases or if it is unable to enter into leases for additional stores on favorable
terms, or if one or more of its current leases are terminated prior to expiration of their stated term, and it cannot find suitable
alternate locations, iFresh’s growth and profitability could be negatively impacted.
iFresh
currently leases all of its store locations. Many of iFresh’s current leases provide unilateral option to renew for several
additional rental periods at specific rental rates. iFresh’s ability to re-negotiate favorable terms on an expiring lease
or to negotiate favorable terms for a suitable alternate location, and iFresh’s ability to negotiate favorable lease terms
for additional store locations, could depend on conditions in the real estate market, competition for desirable properties, its
relationships with current and prospective landlords, or other factors that are not within iFresh’s control. Any or all
of these factors and conditions could negatively impact iFresh’s growth and profitability.
iFresh
leases certain of its stores and related properties from related parties.
Long Deng, one of iFresh’s directors
and executive officers, owns 50% of Dragon Development LLC, which leases to iFresh the premises at which Strong America, iFresh’s
wholesale subsidiary, is located. During fiscal year ended March 31, 2020, rental payments (excluding maintenance and taxes that
iFresh is obligated to pay) under the leases from Dragon Development LLC were $886,543. The leases with Dragon Development LLC
renewed on May 1, 2016, and their remaining terms are 6 years. iFresh has no assurance that these related parties will renew the
lease agreements with it after expiration. If iFresh cannot renew the leases, it will have to move its stores and warehouses locations,
which increases the uncertainty of finding suitable locations for those stores and the reputation recognition in new locations,
which may adversely affect iFresh’s sales, expenses, profit and financial position.
Failure
to retain iFresh’s senior management and other key personnel may adversely affect its operations.
iFresh’s
success is substantially dependent on the continued service of its senior management and other key personnel. These executives,
and in particular Long Deng, iFresh’s Executive Chairman and Chief Executive Officer and Chief Operating Officer, have been
primarily responsible for determining the strategic direction of iFresh’s business and for executing its growth strategy
and are integral to its brand and culture, and the reputation iFresh enjoys with suppliers and consumers. The loss of the services
of any of these executives and other key personnel could have a material adverse effect on iFresh’s business and prospects,
as iFresh may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure
could be viewed in a negative light by investors and analysts, which may cause iFresh’s stock price to decline. The loss
of key employees could negatively affect iFresh’s business.
If
iFresh is unable to attract, train and retain employees, it may not be able to grow or successfully operate its business.
The
retail store industry is labor intensive, and iFresh’s success depends in part upon its ability to attract, train and retain
a sufficient number of employees who understand and appreciate iFresh’s culture and are able to represent its brand effectively
and establish credibility with its business partners and consumers. iFresh’s ability to meet its labor needs, while controlling
wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified
persons in the workforce in the markets in which iFresh is located, unemployment levels within those markets, prevailing wage
rates, changing demographics, health and other insurance costs and changes in employment legislation. In the event of increasing
wage rates, if iFresh fails to increase its wages competitively, the quality of its workforce could decline, causing its customer
service to suffer, while increasing its wages could cause its earnings to decrease. If iFresh is unable to hire and retain employees
capable of meeting its business needs and expectations, its business and brand image may be impaired. Any failure to meet iFresh’s
staffing needs or any material increase in turnover rates of iFresh’s employees may adversely affect its business, results
of operations and financial condition.
Changes
in and enforcement of immigration laws could increase iFresh’s costs and adversely affect iFresh’s ability to attract
and retain qualified store-level employees.
Federal
and state governments from time to time implement immigration laws, regulations or programs that regulate iFresh’s ability
to attract or retain qualified foreign employees. Some of these changes may increase iFresh’s obligations for compliance
and oversight, which could subject iFresh to additional costs and make iFresh’s hiring process more cumbersome, or reduce
the availability of potential employees. Although iFresh has implemented, and is in the process of enhancing, procedures to ensure
its compliance with the employment eligibility verification requirements, there can be no assurance that these procedures are
adequate and some of its employees may, without iFresh’s knowledge, be unauthorized workers. The employment of unauthorized
workers may subject iFresh to fines or civil or criminal penalties, and if any of iFresh’s workers are found to be unauthorized,
iFresh could experience adverse publicity that negatively impacts its brand and makes it more difficult to hire and keep qualified
employees. iFresh may be required to terminate the employment of certain of its employees who were determined to be unauthorized
workers. The termination of a significant number of employees may disrupt iFresh’s operations, cause temporary increases
in iFresh’s labor costs as it trains new employees and result in additional adverse publicity. iFresh’s financial
performance could be materially harmed as a result of any of these factors.
Prolonged
labor disputes with employees and increases in labor costs could adversely affect iFresh’s business.
A
considerable amount of iFresh’s operating costs is attributable to labor costs and, therefore, its financial performance
is greatly influenced by increases in wage and benefit costs, including pension and health care costs. As a result, iFresh is
exposed to risks associated with a competitive labor market. Rising health care and pension costs and the nature and structure
of work rules will be important issues. Any work stoppages or labor disturbances as a result of employees’ dissatisfaction
of their current employment terms could have a material adverse effect on iFresh’s financial condition, results of operations
and cash flows. iFresh also expects that in the event of a work stoppage or labor disturbance, it could incur additional costs
and face increased competition.
Various
aspects of iFresh’s business are subject to federal, state and local laws and regulations. iFresh’s compliance with
these regulations may require additional capital expenditures and could materially adversely affect its ability to conduct its
business as planned.
iFresh
is subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, workplace
safety, food safety, public health, community right-to-know and alcoholic beverage and tobacco sales. In particular, the states
in which iFresh operates and several local jurisdictions regulate the licensing of supermarkets and the sale of alcoholic beverages.
In addition, certain local regulations may limit iFresh’s ability to sell alcoholic beverages at certain times. iFresh is
also subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions,
immigration, disabled access and work permit requirements. Compliance with new laws in these areas, or with new or stricter interpretations
of existing requirements, could reduce the revenue and profitability of iFresh’s stores and could otherwise materially adversely
affect iFresh’s business, financial condition or results of operations. iFresh’s new store openings could be delayed
or prevented or its existing stores could be impacted by difficulties or failures in iFresh’s ability to obtain or maintain
required approvals or licenses. iFresh’s stores are subject to unscheduled inspections on a regular basis, which, if violations
are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical”
violations, closure of the store until a re-inspection demonstrates that iFresh has remediated the problem. Certain of iFresh’s
parking lots and warehouses either have only temporary certificates of occupancy or are awaiting a certificate of occupancy which,
if not granted, would require iFresh to stop using such property. Additionally, a number of federal, state and local laws impose
requirements or restrictions on business owners with respect to access by disabled persons. iFresh’s compliance with these
laws may result in modifications to iFresh’s properties, or prevent iFresh from performing certain further renovations.
iFresh cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either
additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory
schemes would have on iFresh’s business in the future.
iFresh’s
plans to acquire and open new stores requires iFresh to spend capital. Failure to use its capital efficiently could have an adverse
effect on iFresh’s profitability.
iFresh’s
growth strategy depends on its acquisition of and opening new stores, which will require iFresh to use cash generated by its operations
and a portion of the net proceeds of future equity or debt financing and borrowing under bank credit line. iFresh cannot assure
you that cash generated by its operations, the net proceeds of future equity or debt financing and borrowing under bank credit
line will be sufficient to allow iFresh to implement its growth strategy. If any of these initiatives prove to be unsuccessful,
iFresh may experience reduced profitability and it could be required to delay, significantly curtail or eliminate planned store
openings, which could have a material adverse effect on its financial condition and future operating performance and the price
of its common stock.
Changes
in U.S. trade policies, including the imposition of tariffs on various goods and a potential resulting trade war with China
and other countries, could have a material adverse impact on our business.
Some
of our merchandise is produced in foreign countries, primarily in China, making the price and availability of our merchandise
susceptible to international trade risks and other international conditions. The imposition of tariffs, duties, border adjustment
taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other
trade restrictions by other countries. Recently, the current U.S. administration and China have imposed significant tariffs on
goods imported from the other’s country, and more recently, the United States has proposed the imposition of additional tariffs
on various goods. If the current administration follows through with such tariffs, or if additional tariffs or trade restrictions
are implemented by the United States or other countries, the resulting trade barriers could have a significant adverse impact
on the cost of our goods, the prices at which we offer them for sale and our overall financial performance. We are not able to
predict future trade policy of the United States, China, or of any foreign countries in which we operate or purchase goods, or
the terms of any renegotiated trade agreements, or their impact on our business. The adoption and expansion of trade restrictions
and tariffs, quotas and embargoes, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements
or policies, has the potential to adversely impact the cost of and demand for our products, our overall costs, our customers,
our suppliers and the world economy, which in turn could have a material adverse effect on our business, operational results,
financial position and cash flows.
Litigation
may materially adversely affect iFresh’s business, financial condition and results of operations.
iFresh’s
operations are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections.
These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in
many other industries. Consequently, iFresh may be a party to individual personal injury, product liability and other legal actions
in the ordinary course of its business, including litigation arising from food-related illness. The outcome of litigation, particularly
class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek
recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain
unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity
associated with litigation that may decrease consumer confidence in iFresh’s businesses, regardless of whether the allegations
are valid or whether iFresh is ultimately found liable. As a result, litigation may materially adversely affect iFresh’s
businesses, financial condition, results of operations and cash flows.
Increased
commodity prices and availability may impact profitability.
Many
of iFresh’s products include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other commodities. Commodity
prices worldwide have been increasing. While commodity price inputs do not typically represent the substantial majority of iFresh’s
product costs, any increase in commodity prices may cause its vendors to seek price increases from iFresh. Although iFresh is
typically able to mitigate vendor efforts to increase its costs, it may be unable to continue to do so, either in whole or in
part. In the event iFresh is unable to continue mitigating potential vendor price increases, it may in turn consider raising its
prices, and its customers may be deterred by any such price increases. iFresh’s profitability may be impacted through increased
costs to it which may impact gross margins, or through reduced revenue as a result of a decline in the number and average size
of customer transactions.
Severe
weather, natural disasters and adverse climate changes may materially adversely affect iFresh’s financial condition and
results of operations.
Severe
weather conditions and other natural disasters in areas where iFresh has stores or from which iFresh obtains the products it sells
may materially adversely affect its retail operations or its product offerings and, therefore, its results of operations. Such
conditions may result in physical damage to, or temporary or permanent closure of, one or more of iFresh’s stores, an insufficient
workforce in iFresh’s markets and/or temporary disruption in the supply of products, including delays in the delivery of
goods to iFresh’s stores or a reduction in the availability of products in its stores. In addition, adverse climate conditions
and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may
materially adversely affect the availability or cost of certain products within its supply chain. Any of these factors may disrupt
iFresh’s businesses and materially adversely affect its financial condition, results of operations and cash flows.
iFresh
needs approximately $10 million for the year ended March 31, 2021 in order to achieve its planned growth for that year and if
it cannot successfully obtain sufficient capital, the financial results and stock price of iFresh after the business combinations
will be adversely affected.
iFresh
believes that it needs approximately $10 million for the year ended March 31, 2021 mainly for the purpose of acquiring additional
stores to achieve its planned growth for that year. If it is not able to obtain financing on commercially reasonable terms in
connection with the Business Combination, as is contemplated by the parties, it may not be able to implement its growth plan.
If it is unable to affect its growth plan, iFresh’s financial results will be significantly worse than anticipated and its
stock price may decline as a result.
iFresh
is an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may
make its securities less attractive to investors.
iFresh
is an “emerging growth company,” as defined in the JOBS Act. It may remain an “emerging growth company”
until the fiscal year ended March31, 2021. However, if its non-convertible debt issued within a three-year period or revenues
exceeds $1 billion, or the market value of its common stock that are held by non-affiliates exceeds $700 million on the last day
of the second fiscal quarter of any given fiscal year, iFresh would cease to be an emerging growth company as of the following
fiscal year. As an emerging growth company, iFresh is not required to comply with the auditor attestation requirements of section
404 of the Sarbanes-Oxley Act, has reduced disclosure obligations regarding executive compensation in its periodic reports and
proxy statements, and is exempt from the requirements of holding a non binding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, iFresh has elected
to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies
until those standards apply to private companies. As such, iFresh’s financial statements may not be comparable to companies
that comply with public company effective dates. As a result, potential investors may be less likely to invest in our securities.
There
is no assurance that the Company will be able to comply with the requirements in the Forbearance Agreement. If KeyBank elects
to exercise its rights and remedies under the Forbearance Agreement with respect to any event of default, then it will have a
material adverse effect on us and create substantial doubt about the Company’s ability to continue as a going concern.
On
May 20, 2019, iFresh Inc. (the “Company”), NYM Holding, Inc. (“NYM” or the “Borrower”), certain
subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank” or the “Lender”) entered
into the first forbearance agreement (the “First Forbearance Agreement”) with respect to that certain Credit Agreement,
dated as of December 23, 2016, as amended, pursuant to which KeyBank made available to NYM a revolving credit facility, a term
loan facility, and other credit accommodations (the “Loan Agreements”). The Lender has agreed to delay the exercise
of its rights and remedies under the Loan Agreements based on the existence of certain events of default until the earlier to
occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the First Forbearance Agreement (the “First
Forbearance Period”); and (b) a Forbearance Event of Default. Reference is made to the current report on Form 8-K filed
with the SEC on May 21, 2019.
The
Borrower did not meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019
(the “Effective Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”),
Mr. Long Deng and Keybank entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant
to certain Guaranty Agreement dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance
Agreement, the Company, certain subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and
together with the Borrower, the “Loan Parties”) have agreed to guarantee the payment and performance of the obligations
of the Borrower under the Credit Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings
ascribed to them in the Second Forbearance Agreement.
The
Lender agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events
of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the November
29, 2019; and (b) a Forbearance Event of Default. No subsequent agreements or amendments have been entered into.
The Borrower is not current in its payments
to Keybank. As of June 30, 2020 we owe $21,266,149 to Keybank..
Our
principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Our
ability to fund these needs will depend on its future performance, which will be subject in part to general economic, competitive
and other factors beyond its control. In addition, if Keybank accelerates the loan, we may be forced to declare bankruptcy. These
conditions raise substantial doubt as to our ability to remain a going concern.
If
we fail to effectively operate our self-insured health plan, we may not be able to retain employees and may be subject to tax
penalties and legal proceedings.
Under
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, employers with 50 or more
full-time equivalent employees must offer health insurance to certain of their employees and their dependent children, and if
coverage meeting certain minimum requirements is not offered the employer may face non-deductible tax penalties.
We
and our subsidiaries operate self-insurance health plan for our employees. We could be subject to payment of health care claims
from employees, which vary from time to time. If we do not settle such health care claims in time, we may be subject to various
tax penalties, legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other
legal or administrative proceeding, regardless of the outcome, is likely to result in a substantial cost and diversion to our
resources, including our management’s time and attention. Any tax penalties may adversely affect our financial performance.
Risks Related to Our Liquor products Business
A reduction in the supply of fundamental herbs in traditional
Chinese medicine and base alcohol available to us from the independent herb growers and base alcohol suppliers could reduce our annual
production of liquor products.
We rely on growers to purchase substantially
all the fundamental herbs in traditional Chinese medicine used in our herbal liquor production. These ingredients include rehmannia
glutinosa, Chinese yams, lyceum chinense, velvet antler, cyathula officinalis, angelica sinensis, and dwarf lilyturf, among other
ingredients. We believe that the fundamental herbs we use in our herbal liquor products are readily available in China and that
the supply of these herbs and the edible base alcohol are stable. However, if the supply of fundamental herbs and base alcohol
available to us from the independent herb growers and base alcohol suppliers reduce, it could negatively impact our liquor business.
We face significant competition which could adversely
affect profitability.
The liquor and herbal liquor industries
are intensely competitive and highly fragmented in China. Our liquor products compete in several liquor products market segments
with many other domestic liquor and herbal liquor products. Our liquor products also compete with other alcoholic and, to a lesser
degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by independent distributors, many of
which carry extensive brand portfolios. As a result of this intense competition there has been and may continue to be upward pressure
on selling and promotional expenses. In addition, the liquor industry has experienced significant consolidation. Many competitors
have greater financial, technical, marketing and public relations resources. Our sales may be harmed to the extent we are not
able to compete successfully against such liquor products or alternative beverage producers’ costs. There can be no assurance
that in the future that we will be able to successfully compete with current competitors or that we will not
face greater competition from other wineries and beverage manufacturers.
If we experience problems with
our product quality, customer satisfaction with respect to pricing of our products or the timely delivery of our products, we could
lose our customers and market acceptance which will affect our sales and have an adverse effect on our business, financial condition
and results of operations.
Our growth and
sales relating to our herbal liquor products primarily depend on our maintenance of quality control, customer satisfaction with
respect to pricing and the punctual availability and delivery of our products. If we fail to deliver the same quality of our products
with the same punctuality and pricing which our customers have grown accustomed to, or in accordance with the terms of our sales
agreements, we could damage our customer relations and market acceptance, which will affect sales and our business in general.
For example, we have to maintain food production licenses and GMP certificates for pharmaceutical products as an indication of
the quality of our products. If we experience deterioration in the performance or quality of any of our products, whether due to
problems internally or externally, it could result in delays in delivery, cancellations of orders or customer complaints, loss
of goodwill, diversion of the attention of our senior personnel and harm to our brand and reputation. Any and all of these results
would have an adverse effect on our business, financial condition and results of operations.
We are subject to a series of
food and drug supervision and management regulations of our liquor products business. If we are unable to comply with relevant
regulations, we may face penalties or our licenses may be revoked.
To conduct our
liquor and herbal liquor products business, we have obtained a Food Business License, a Food Production License, a Pharmaceutical
Manufacturing Permit and GMP Certificate. We are also required to comply with a series of food and drug regulations and national
standards, such as the technical standards and advertising regulations regarding rug products. If we fail to comply with relevant
regulations or national standards, we may face penalties or our licenses may be revoked.
The price of the ingredients
for our liquor and herbal liquor is controlled by government. If there is a significant increase in the market price of ingredients,
it might increase our cost and have a material adverse effect on our business, financial condition and results of operations.
The PRC government
has the power to intervene in the price of important types of grain under certain circumstances, such as when a material change
occurs to the market supply and demand and/or the grain price fluctuates significantly, in order to protect the interests of farmers.
Although such pricing guidance has not had a material impact on our business in the past, we cannot guarantee you the market price
of our ingredients would always be kept at the current level. If there is a significant increase in the market price of ingredients,
it would increase our cost of sales, and we would not be able to pass those increased costs on to our customers. Such increased
costs could have a material adverse effect on our business, financial condition and results of operations.
The liquor industry might be
heavily influenced by national and local policies. Given the current unclear situation of local and national regulations and policies,
we cannot predict the impact of future policy changes on the industry.
Local policies
and national policies regarding the liquor industry are inconsistent to some degree. At the national level, the liquor products
business is in a restricted industry. According to the “Industrial Structure Adjustment Guidance Catalogue” promulgated
by the National Development and Reform Commission in 2011 and revised in 2013, the liquor products business is in the restricted
industry category. However, Hubei Province, where our liquor business is located, issued a notice on “Strengthening the Hubei
Liquor Industry Action Plan” in 2016, encouraging further expansion into the liquor industry and comprehensively improving
the strength and competitiveness of the liquor industry. We cannot predict the impact of the inconsistency between national and
local politics and any future change in policy on the industry. If the national or the local government further adjusts the current
liquor industry policy, such as placing restrictions on liquor production and consumption through regulations on taxation, bank
loans, land supply, advertising, pricing or other aspects, it might have an adverse impact on our production and operation.
Risks
related to Face Mask production
As
COVID-19 is brought under control, the demand for masks will decrease.
As
the transmission of COVID-19 is brought under control and vaccines are developed, the market demand for face masks will decline.
This will result in reduced revenues from the sale of face masks due to fewer masks being sold and a decline of prices for the
masks.
We
may not be able to import our face mask products into the United States due to tensions between the United States and China.
The
trade tension between the United States and China may impact imports and exports. For example, the Trump administration is suspending
passenger flights to the U.S. by Chinese airlines, saying it was retaliating after Beijing barred American carriers from re-entering
China amid escalating tensions between the two nations. The order took effect June 16, 2020. The move ratchets up tensions between
the U.S. and China over trade, which may prevent us from importing face masks from our manufacturing facility in China.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
principal executive offices are located at its headquarters comprising approximately 2,200 square meters at 2-39 54th
Avenue, Long Island City, New York. Please see “Item 1 –Business – Properties.”
Item
3. Legal Proceedings
Please
see “Item 1 – Business – Legal Proceedings” For a discussion of the significant legal proceedings we are
involved in.
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
Our
equity securities trade on the NASDAQ Capital Market. Prior to December 16, 2016, our units, shares and rights were each
quoted on the NASDAQ Capital Market, under the symbols “ECACU,” “ECAC” and “ECACR,”
respectively. Each of our units consisted of one ordinary share and one right to acquire 1/10 of a share of the Company. Our
units commenced trading on August 13, 2015. Our shares and rights commenced trading on November 25, 2015. Upon the closing of
the Transactions described above, our rights and units ceased trading and iFresh’s common stock began trading on the
NASDAQ Capital Market under the symbol “IFMK” as of February 10, 2017. As of August 6, 2020, the last
reported sales price reported on the NASDAQ Capital Market for our common stock was $0.91 per share.
Holders
of Common Equity
As of August 11, 2020, there were 122 holders
of record of our common stock. Such numbers do not include beneficial owners holding shares, rights or units through nominee names.
Dividends
The
Company has not paid any cash dividends on its ordinary shares to date. It is the present intention of the Company’s board
of directors to retain all earnings, if any, for use in the Company’s business operations and, accordingly, the Company’s
board of directors does not anticipate declaring any dividends in the foreseeable future. The payment of dividends is within the
discretion of the Company’s board of directors and will be contingent upon the Company’s future revenues and earnings,
if any, capital requirements and general financial condition.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information as of March 31, 2020 about our equity compensation plans and arrangements.
|
Plan category
|
|
Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
|
|
|
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number of
securities
remaining
available for
future
issuance
under equity
compensation plans
(excluding
securities
reflected in
column (a))(1)
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
0
|
|
|
|
—
|
|
|
|
350,000
|
|
|
Equity compensation plans not approved by security holder
|
|
|
0
|
|
|
|
—
|
|
|
|
0
|
|
|
Total
|
|
|
0
|
|
|
|
—
|
|
|
|
350,000
|
|
|
|
(1)
|
Consists
of shares of common stock available for future issuance under our equity incentive plans.
|
Equity
Repurchases
None.
Item
6. Selected Financial Data
As
a smaller reporting company, we are not required to provide this information.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
This
report includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about
us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”)
filings. References to “we”, “us”, “our,” “iFresh” or the “Company”
are to iFresh Inc., except where the context requires otherwise. The following discussion should be read in conjunction
with our unaudited condensed financial statements and related notes thereto included elsewhere in this report.
Overview
iFresh
Inc. (“we,” “us,” “our,” or “iFresh” or the “Company”) is a Delaware
company incorporated in July 2016 in order to reincorporate E-Compass Acquisition Corp. (“E-Compass”) to Delaware
pursuant to the Merger Agreement (as defined below). Immediately following the reincorporation, we acquired NYM Holding, Inc (“NYM”).
E-Compass was a blank check company formed for the purpose of entering into a share exchange, asset acquisition, share purchase,
recapitalization, reorganization or other similar business combination with one or more businesses or entities. NYM is a fast
growing Asian/Chinese grocery supermarket chain in the north-eastern U.S. providing food and other merchandise hard to find in
mainstream grocery stores. Since NYM was formed in 1995, NYM has been targeting the Chinese and other Asian population in the
U.S. with its in-depth cultural understanding of its target customer’s unique consumption habits. iFresh currently has ten
retail supermarkets across New York, Massachusetts and Florida, with in excess of 4,938,600 sales transactions in its stores in
the fiscal year ended March 31, 2020. It also has one in-house wholesale businesses, Strong America Limited (“Strong America
covering more than 6,000 wholesale products and servicing both NYM retail supermarkets and over 1,000 external clients that range
from wholesalers to retailing groceries and restaurants. NYM has a stable supply of food from farms in New Jersey and Florida,
ensuring reliable supplies of the most popular vegetables, fruits and seafood. Its wholesale business and long term relationships
with farms insulate NYM from supply interruptions and sales declines, allowing it to remain competitive even during difficult
markets.
On March 26, 2020, the Company entered into
an agreement (the “Acquisition Agreement”) with Kairui Tong and Hao Huang (collectively, the “Sellers”)
and Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd (collectlively, the “Wine Co.”)., pursuant
to which the Sellers will sell their 100% interest in Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd.
(collectively, the “Target Companies”) to the Company in exchange for 3,852,372 shares of the Company’s common
stock and 1,000 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”).
Upon approval of the Company’s shareholders, the 1,000 shares of Series B Preferred Stock will be converted into 3,834,796
shares of the Company’s common stock. The acquisition was closed on April 22, 2020. Wine Co. is engaged in the business of
manufacturing and sales of rice liquor products and Herbal Wine Co. is engaged in the business of manufacturing and sales of herbal
rice liquor products.
Wine Co. has an automatic filling production
line with an annual production capacity of 5,000 tons of liquor products at a 1,000 square-meter facility. Herbal Wine Co.
has an automatic filling production line with an annual production capacity of 6,000 tons of herbal liquor.
In
April 2020, we acquired 70% of Xiamen DL Medical Technology Co, Ltd., a People’s Republic of China company, in exchange
for $600,000 in cash and 900,000 shares of our common stock. The acquisition was closed on April 28, 2020.
Xiamen DL Medical Technology Co, Ltd is
our subsidiary that produces face masks in China founded in March 2020. Its core business includes engineering and technical research
and experimental development in and production of medical protective masks, non-medical daily protective masks, cotton spinning
processing. We have built our production lines from scratch, with an estimated aggregate annual output of 5 million masks. We have
one medical mask production line, which we expect, once operational, can handle a daily capacity of up to 30,000 masks, and two
non-medical mask production lines, with an output capacity of up to 400,000 marks per day. We expect to launch production from
these production lines in the fourth quarter of 2020. Around $420,000 was needed to fund the production.
These
acquisitions are aimed to diversify the Company’s revenue stream and reduce the operational risk in the US. The operation
of these two companies is expected to increase the Company’s profitability, increase the cash flow and improve the Company’s
liquidity.
Outlook
iFresh is an Asian
Chinese supermarket chain in the U.S. northeastern region with nine retail super markets and one wholesale facility. iFresh has
strategically expanded along the I-95 corridor in the past few years.
|
|
a.
|
iFresh
provides unique products to meet the demands of the Asian/Chinese American Market;
|
|
|
b.
|
iFresh
has established a merchandising system backed by an in-house wholesale business and by long-standing relationships with farms;
|
|
|
c.
|
iFresh
maintains an in-house cooling system with unique hibernation technology that is has developed over 20 years to preserve perishables,
especially produce and seafood; and
|
|
|
d.
|
iFresh
capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable
competitors;
|
As mentioned above, starting from 2020,
the Company started to expand its operations in China by acquiring two companies in liquor products making business and mask making
business to diversify its revenue stream and reduce the supermarket operational risk in the US.
iFresh’s
net sales were $89.5 million and $125.4 million for the years ended March 31, 2020 and 2019, respectively. In terms of sales by
category, Perishables constituted approximately 54.4% of the total sales for the year ended March 31, 2020. iFresh’s net
loss was $8.3 million for the year end March 31, 2020, a decrease of $3.7 million, or 31%, from $12 million of net loss for the
year end March 31, 2019. Adjusted EBITDA was negative $4.2 million for the year end March 31, 2020, a decrease of $3.6million,
or 46.1%, from negative $7.8 million for the year end March 31, 2019.
Factors
Affecting iFresh’s Operating Results
Seasonality
iFresh’s
business shows seasonal fluctuations. Sales in its first and second fiscal quarters (ending June 30 and December 31, respectively)
are usually 5% to 10% lower than in third and fourth quarters (ending December 31 and March 31, respectively). In its third fiscal
quarter, customers make holiday purchases for Thanksgiving and Christmas. In its fourth quarter, customers make purchases for
traditional Chinese holidays, such as the Spring Festival (Chinese New Year, in January or February).
Competition
The
Company faces competition from other Asian supermarkets. In the fiscal year 2019, two of our stores located in Boston and New
York experienced significantly decreased sales due to competition from newly opened grocery stores. In first quarter of fiscal
year 2020, the Company contracted these two stores to third party to operate and are collecting contracting fees. The Company’s
retail sales decreased significantly due to the change of operations of these two stores.
Payroll
Minimum
wage rates in some states increased. For example, the minimum wage rose from $13 to $15 per hour in New York City. Payroll and
related expenses decreased by $3.9million, or 31%% for the year ended March 31, 2020 as compared to the same period of last year
as a result of workforce reduction to reduce costs.
Vendor
and Supply Management
iFresh
believes that a centralized and efficient vendor and supply management system are the keys to profitability. iFresh operates its
own wholesale facilities, which supplied about 15.3% of its procurement for the fiscal year ended March 31, 2020. iFresh believes
that its centralized vendor management enhances iFresh’s negotiating power and improves its ability to turnover inventory
and vendor payables. Any changes to the vendor and supply management could affect iFresh’s purchasing costs and operating
expenses. Starting from Q4 of fiscal year 2019, the Company’s wholesale business gradually slows down and the retail stores
are heavily rely on third party vendors for inventory supplies instead of centralized supply system.
Store
Maintenance and Renovation
From time to time, iFresh conducts maintenance
on the fixtures and equipment for its stores. Any maintenance or renovations could interrupt the operation of our stores and result
in a decline of customer volume, and therefore sales volume, but will, in the opinion of management, boost sales after they are
completed. Significant maintenance or renovation would affect our operation and operating results. As of March 31, 2020, one iFresh
store is under renovation and has not opened yet. iFresh incurred $518,379 in expenses for three stores for the year ended March
31, 2020. Two stores renovated for the year of 2020 and incurred around $2 million in capital expenditure. Because these stores
are being renovated, sales are affected.
Store
Acquisitions, openings and closure.
iFresh
expects the new stores it acquires or opens to be the primary driver of its sales, operating profit and market share gains. iFresh’s
results will be materially affected by the timing and number of new store additions and the amount of new store opening costs.
For example, iFresh would incur rental, utilities and employee expenses during any period of renovation, which would be recorded
as expenses on the income statement and would decrease iFresh’s profit when a store opens. iFresh may incur higher than
normal employee costs associated with setup, hiring, training, and other costs related to opening a new store. Operating margins
are also affected by promotional discounts and other marketing costs and strategies associated with new store openings, primarily
due to overstocking, and costs related to hiring and training new employees. Additionally, promotional activities may result in
higher than normal net sales in the first several weeks following a new store opening. A new store builds its sales volume and
its customer base over time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales,
than our more mature stores. A new store could take more than a year to achieve a level of operating performance comparable to
our existing stores. Due to operational difficulties and loss, iFresh closed two stores in New York and opened one store in Florida
for the year ended March 31, 2020.
COVID-19
The
Company was significantly impacted by the COVID-19 outbreak as it operates in area under stay-at-home orders since mid-March 2020.
The Company is classified as an essential business and has remained open to serve our customers and the communities. The safety
of our associates and our customers is always our first priority. In response to COVID-19, iFresh incurred incremental operating
expenses of over $300,000 in the 14 weeks ended June 15, 2020 for new initiatives implemented to support and protect
our associates, customers and the communities:
|
|
1.
|
Enhanced and more frequent sanitation practices, including hourly cleaning of high touch point areas throughout our stores, like cashier station, and customer bathroom, nightly deep cleaning and disinfectant fogging in every store
|
|
|
2.
|
Reduced store operating hours, including the closure of the stores located in Brooklyn, New York and in Flushing, New York, where are with high population and at high risk of infection during the end of March and April peak period.
|
|
|
3.
|
Posting and educating official recommended guidance and adhere to guidelines within safety plan.
|
|
|
4.
|
Created a centralized call center to provide our associates with single guidance and direct reporting.
|
|
|
5.
|
Expanded remote work capabilities for office associates and provided private numerous private car pools in order to limit access to public transportation.
|
|
|
6.
|
Implemented a temporary wage or allowance premium of 15%-50% above standard base rate of pay for front line associates
|
|
|
7.
|
Donated over 200,000 masks to local police precinct, school, community and our customers.
|
|
|
8.
|
Expanded online order sales and mobile order delivery
|
|
|
9.
|
Limited bulk sales per customer on diary produce such as milk, eggs, seafood & produce.
|
|
|
10.
|
Limited the number of customers to approximately 25% of each store’s maximum occupancy, test the temperature of each customer, sterilize, and distribute masks and gloves before entering to facility.
|
|
|
11.
|
Implemented
a Personal Protective Equipment program, provided associates with masks and gloves, provide
frontline associates, such as cashiers, security guard, delivery team with protective
clothing, goggles, and complimentary herbal heath care supplies to enhance immune system.
|
|
|
12.
|
Step
Marking for Social Distancing program - installed floor markers and additional signage
in high traffic areas to signify six-foot distances to encourage proper social distancing,
hiring safe guard to monitor the social distance and customer safety in store.
|
|
|
13.
|
Reserved
the first two hours of business each day for elderly and at-risk customers
|
|
|
14.
|
Implemented
temperature checks for all associates
|
|
|
15.
|
Acquiring
mask supplies business oversea, to stock up on in demand related products.
|
|
|
16.
|
Installed
plexiglass shields at all registers, guest services and pharmacy counters
|
Please
refer to the “Results of Operations for the years ended March 31, 2020 and 2019” below for more discussion regarding
the impact of Covid-19 on financial results.
How
to Assess iFresh’s Performance
In
assessing performance, iFresh’s management considers a variety of performance and financial measures, including principal
growth in net sales, gross profit and Adjusted EBITDA. The key measures that we use to evaluate the performance of our business
are set forth below:
Net
Sales
iFresh’s
net sales comprise gross sales net of coupons and discounts. We do not record sales taxes as a component of retail revenues as
it considers it a pass-through conduit for collecting and remitting sales taxes.
Gross
Profit
iFresh
calculates gross profit as net sales less cost of sales and occupancy costs. Gross margin represents gross profit as a percentage
of its net sales. Occupancy costs include store rental costs and property taxes. The components of our cost of sales and occupancy
costs may not be identical to those of its competitors. As a result, our gross profit and gross margin may not be comparable to
similar data made available by our competitors.
Cost
of sales includes the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of
discounts and allowances), distribution and supply chain costs, buying costs and supplies. iFresh recognizes vendor
allowances and merchandise volume related rebate allowances as a reduction of inventories during the period when earned and
reflects the allowances as a component of cost of sales as the inventory is sold. Shipping and handling for inventories
purchased are included in the cost of goods sold.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses primarily consist of retail operational expenses, administrative salaries and benefits costs,
marketing, advertising and corporate overhead.
Adjusted
EBITDA
iFresh
believes that Adjusted EBITDA is a useful performance measure and can be used to facilitate a comparison of NYM’s operating
performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends
affecting our business than GAAP measures alone can provide. iFresh also uses Adjusted EBITDA as one of the primary methods for
planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against
such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans
for employees, including senior executives. Other companies in the industry may calculate Adjusted EBITDA differently than iFresh
does, limiting its usefulness as a comparative measure.
iFresh’s
management defines Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, store
opening costs, and non-recurring expenses. All of the omitted items are either (i) non-cash items or (ii) items that we do
not consider in assessing its ongoing operating performance. Because it omits non-cash items, iFresh’s management believes
that Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other
non-cash charges and more reflective of other factors that affect its operating performance. iFresh’s management believes
that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating
results and trends and in comparing the company’s financial measures with other specialty retailers, many of which present
similar non-GAAP financial measures to investors.
Results
of Operations for the years ended March 31, 2020 and 2019
|
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Net
sales-third parties
|
|
$
|
87,503,281
|
|
|
$
|
121,281,093
|
|
|
$
|
(33,777,812
|
)
|
|
|
(27.9
|
)%
|
|
Net
sales-related parties
|
|
|
1,949,750
|
|
|
|
4,150,346
|
|
|
|
(2,200,596
|
)
|
|
|
(53.0
|
)%
|
|
Total
Sales
|
|
|
89,453,031
|
|
|
|
125,431,439
|
|
|
|
(35,978,408
|
)
|
|
|
(28.7
|
)%
|
|
Cost
of sales-third parties
|
|
|
64,377,063
|
|
|
|
92,215,568
|
|
|
|
(27,838,505
|
)
|
|
|
(30.2
|
)%
|
|
Cost
of sales-related parties
|
|
|
1,580,880
|
|
|
|
3,674,407
|
|
|
|
(2,093,527
|
)
|
|
|
(57.0
|
)%
|
|
Occupancy
costs
|
|
|
6,660,448
|
|
|
|
9,148,872
|
|
|
|
(2,488,424
|
)
|
|
|
(27.2
|
)%
|
|
Gross
Profit
|
|
|
16,834,640
|
|
|
|
20,392,592
|
|
|
|
(3,557,952
|
)
|
|
|
(17.4
|
))%
|
|
Selling,
general, and administrative expenses
|
|
|
25,043,254
|
|
|
|
31,899,310
|
|
|
|
(6,856,056
|
)
|
|
|
(21.5
|
)%
|
|
Income
from operations
|
|
|
(8,208,614
|
)
|
|
|
(11,506,718
|
)
|
|
|
3,298,104
|
|
|
|
(28.7
|
)%
|
|
Interest
expense
|
|
|
(1,824,667
|
)
|
|
|
(1,314,295
|
)
|
|
|
(510,372
|
)
|
|
|
38.8
|
%
|
|
Impairment
loss
|
|
|
(1,100,000
|
)
|
|
|
-
|
|
|
|
(1,100,000
|
)
|
|
|
(100
|
)%
|
|
Other
income
|
|
|
2,660,232
|
|
|
|
1,385,093
|
|
|
|
1,275,139
|
|
|
|
92.1
|
%
|
|
Income
before income tax provision
|
|
|
(8,473,049
|
)
|
|
|
(11,435,920
|
)
|
|
|
2,962,871
|
|
|
|
(25.9
|
)%
|
|
Income
tax provision (benefit)
|
|
|
(186,195
|
)
|
|
|
567,523
|
|
|
|
(753,718
|
)
|
|
|
(132.8
|
)%
|
|
Net
income
|
|
|
(8,286,854
|
)
|
|
$
|
(12,003,443
|
)
|
|
$
|
3,716,589
|
|
|
|
(31.0
|
)%
|
|
Net
income attributable to common shareholders
|
|
|
(8,286,854
|
)
|
|
|
(12,003,443
|
)
|
|
|
3,716,589
|
|
|
|
(31.0
|
)%
|
Net
Sales
|
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Net
sales of retail-third parties
|
|
$
|
73,116,236
|
|
|
$
|
106,967,554
|
|
|
$
|
(33,851,318
|
)
|
|
|
(31.6
|
)%
|
|
Net
sales of wholesale-third parties
|
|
|
14,387,045
|
|
|
|
14,313,539
|
|
|
|
73,506
|
|
|
|
0
|
%
|
|
Net
sales of wholesale-related parties
|
|
|
1,949,750
|
|
|
|
4,150,346
|
|
|
|
(2,200,596
|
)
|
|
|
(53.0
|
)%
|
|
Total
Net Sales
|
|
$
|
89,453,031
|
|
|
$
|
125,431,439
|
|
|
$
|
(35,978,408
|
)
|
|
|
(28.7
|
)%
|
iFresh’s
net sales were $89.5 million for the year ended March 31, 2020, a decrease of $36.0 million, or 28.7%, from $125.4 million for
the year ended March 31, 2019.
Net
retail sales to third parties decreased by $33.8 million, or 31.6%, from $107.0 million for the year ended March 31, 2019, to
$73.1 million for the year ended March 31, 2020. The decrease resulted mainly due to the following:
1).
The closure of two stores in New York because of increased competition in the local market. These two stores contributed $8.6
million sales for the year ended March 31, 2019, compared to $3.4 million sales for the year ended March 31, 2020.
2).
On April 1, 2019, the Company entered into an agreement for the two stores in Boston area with third parties to operate those
stores, and the Company is collecting management fees from the third parties. Management fees are $40,000 per month for the first
six months and $50,000 after the first six months, and the term of the agreements is 36 months. The Company bills the other party
for rent and utilities expense incurred and the other party will be responsible for payroll and employee benefits. The Company
sold all inventory at net book value of $1.5 million, but retains ownership of all property and equipment. These two stores contributed
22.0 million of sales for the year ended March 31, 2019, compared to nil for the year ended March 31, 2020.
3).
Due to the outbreak of Covid-19 in March, we had to reduce business hours and close stores located in Brooklyn, New York and in
Flushing, New York, where are with high population and at high risk of infection. The sales decreased by around $300,000 in March
due to the lockdown.
4) The Company outsourced part of vegetables
and fruits business to third parties in our stores to improve margins;
Our total net wholesale sales decreased
by $2.1 million from $18.5 million for the year ended March 31, 2019 to $16.2 million for the year ended March 31, 2020, mainly
attributable that New York Mart Group. Inc is going out of business and its sales decreased by $2.9 million for the year ended
March 31, 2019 to the year ended March 31, 2020 as compared to the same period for the year ended March 31, 2020.
Cost
of sales, Occupancy costs and Gross Profit
|
Retail
Segment
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Cost
of sales
|
|
$
|
53,805,938
|
|
|
$
|
81,664,829
|
|
|
$
|
(27,858,891
|
)
|
|
|
(34.1
|
)%
|
|
Occupancy
costs
|
|
|
6,660,448
|
|
|
|
9,148,872
|
|
|
|
(2,488,424
|
)
|
|
|
(27.2
|
)%
|
|
Gross
profit
|
|
|
12,649,850
|
|
|
|
16,153,853
|
|
|
|
(3,504,003
|
)
|
|
|
(21.7
|
)%
|
|
Gross
margin
|
|
|
17.3
|
%
|
|
|
15.1
|
%
|
|
|
2.2
|
%
|
|
|
-
|
|
For the retail segment, cost of sales decreased
by $27.9 million, from $81.7 million for the year ended March 31, 2019, to $53.8 million for the year ended March 31, 2020. The
decrease was as a result of the fierce competition and decrease of our overall sales of retail segment.
Occupancy
costs consist of store-level expenses such as rental expenses, property taxes, and other store specific costs. Occupancy costs
decreased by approximately $2.5 million, which was mainly attributable to closure of 2 stores in the fiscal year of 2020.
Gross profit was $12.6 and $16.2 million
for the year ended March 31, 2020 and 2019, respectively. Gross margin was 17.3% and 15.1% for the year ended March 31, 2020 and
2019, respectively. The gross profit increased due to the closure of the two store in New York that incurred significant operating
loss. In addition, the Company outsourced the operation of two stores in Boston with lower margin to third parties. Instead, the
Company collected management fee to cover rent, utilities and depreciation expense of the equipment.
|
Wholesale
Segment
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Cost
of sales
|
|
$
|
12,152,005
|
|
|
$
|
14,225,146
|
|
|
$
|
(2,073,141
|
)
|
|
|
(14.6
|
)%
|
|
Gross
profit
|
|
|
4,184,790
|
|
|
|
4,238,739
|
|
|
|
(53,949
|
)
|
|
|
(1.3
|
)%
|
|
Gross
margin
|
|
|
25.6
|
%
|
|
|
23
|
%
|
|
|
2.6
|
%
|
|
|
-
|
|
For
our wholesale segment, the cost of sales for the year ended March 31, 2020 decreased by $2.1 million, or 14.6%, from $14.2 million
in 2019 to $12.2 million in 2020. The decrease is consistent with the significant decrease of sales from the wholesale segment
in 2020.
Gross
profit for the year ended March 31, 2020 decreased by $54,000, or 1.3%. Gross margin increased by 2.6% from 23% to 25.6%. The
increase was due to the significant sales decrease to its related parties, of which the margin is lower than sales made to third
parties.
Selling,
General and Administrative Expenses
Selling, general, and administrative expenses
were $25.0 million for the year ended March 31,2020, a decrease of $6.9 million, or 21.5%, compared to $31.9 million for the year
ended March 31, 2019, which was mainly attributable to the closure of two stores in New York and outsourcing of the two stores
in Boston area. The selling, general and administrative expense from these four stores decreased by $4.4million for the year ended
March 31, 2020. In addition, the Company shut down one of its wholesale entities which saved $1.9 million in selling, general and
administrative expense in the year ended March 31, 2020, compared to that for the year ended March 31, 2019.
Interest
Expense
Interest expense was $1.8 million for the
year ended March 31, 2020, an increase of $0.5 million, or 38.8%, from $1.3 for the year ended March 31, 2019.For the year ended
March 31, 2020, there are $0.2 million fees related to default of payment. In addition, the interest rate for the year ended March
31, 2020 has slightly increased from 5.45%-6.2% to 5.7%-6.45%.
Impairment Loss and Other income
The Company charged $1.1 million impairment
loss related leasehold improvements in closed stores in New York area.
Other income was $2.7 million for the year
ended March 31, 2020, which included management and advertising fee income, rental income, lottery sales, and other miscellaneous
income. Other income increased $1.3 million, or 92.1%, from $1.4 million for the year ended March 31, 2019. The Company collected
$0.7 million of management fee from outsourcing operations of Ming and Zen stores in Boston to third parties, net of rental expense
the Company for these two stores. In addition, the Company has subleased some spaces in its stores for small vendors to sell prepared
foods. Rental income increased by $0.8 million.
Income
Taxes Provision
We
are subject to U.S. federal and state income taxes. Income tax benefit was approximately $190,000 for the year ended March 31,
2020 primarily due to the deferred tax assets recognized under The Coronavirus Aid, Relief, and Economic Security Act, also known
as the CARES Act, pursuant to which, NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax
years (beginning with the earliest year first) and suspends the 80% of taxable income limitation through the 2020 tax year. The
effective income tax rate was 2.2and -5% for the year ended March 31, 2020 and 2019, respectively.
Net
Income (loss)
|
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Net
loss
|
|
$
|
(8,286,854
|
)
|
|
$
|
(12,003,004
|
)
|
|
$
|
3,716,589
|
|
|
|
(31
|
)%
|
|
Net
Loss Margin
|
|
|
-9.26
|
%
|
|
|
-9.57
|
%
|
|
|
-0.31
|
%
|
|
|
|
|
Net
loss was $8.3 million for the year ended March 31, 2020, a decrease of $3.7 million, or 31.0%, from $12.0 million of net loss
for the year ended March 31, 2019, mainly attributable to the decreased selling, general, and administrative expenses and tax
expense described above. Net loss as a percentage of sales was -9.26% and -9.57% for the year ended March 31, 2020 and 2019, respectively.
Adjusted
EBITDA
|
|
|
For
the years ended
March 31,
|
|
|
Changes
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Net
income
|
|
$
|
(8,286,854
|
)
|
|
$
|
(12,003,443
|
)
|
|
$
|
3,716,589
|
|
|
|
(31
|
)%
|
|
Interest
expense
|
|
|
1,824,667
|
|
|
|
1,314,295
|
|
|
|
510,372
|
|
|
|
38.8
|
%
|
|
Income
tax provision
|
|
|
(186,195
|
)
|
|
|
567,523
|
|
|
|
(753,718
|
)
|
|
|
(132.8
|
)%
|
|
Depreciation
|
|
|
2,121,564
|
|
|
|
1,999,562
|
|
|
|
122,002
|
|
|
|
6.1
|
%
|
|
Amortization
|
|
|
315,832
|
|
|
|
315,832
|
|
|
|
-
|
|
|
|
0
|
%
|
|
Adjusted
EBITDA
|
|
$
|
(4,210,986
|
)
|
|
$
|
(7,806,231
|
)
|
|
$
|
3,595,245
|
|
|
|
(46.1
|
)%
|
|
Percentage of
sales
|
|
|
-4.7
|
%
|
|
|
-6.2
|
%
|
|
|
1.5
|
%
|
|
|
|
|
Loss
before income tax, depreciation, and amortization was $4.2 million for the year ended March 31, 2020, a decrease of $3.4 million,
as compared to loss before income tax, depreciation, and amortization of $7.8 million for the year ended March 31, 2019, mainly
attributable to the decrease in net loss resulting from decreased in selling, general, and administrative expenses described above.
The ratio of Adjusted EBITDA to sales was -4.7% and -6.2% for the year ended March 31, 2020 and 2019, respectively.
Liquidity
and Capital Resources
As of March 31, 2020, iFresh had cash and
cash equivalents of approximately $0.8 million. iFresh had operating losses of $8.3 million and $12 million for the fiscal years
ended March 31, 2020 and 2019, respectively, and had negative working capital of $28.6 million and $21.6 million as of March 31,
2020 and March 31, 2019, respectively. iFresh had negative equity of $2.6 million as of March 31, 2020. The long-term KeyBank loan
of $20.1 million has been reclassified as short-term because the Company is not in compliance with the KeyBank loan covenants and
KeyBank has the option to accelerate payment at any time. The Company did not meet certain financial covenants required in the
credit agreement with KeyBank National Association (“KeyBank”). As of March 31, 2020, the Company has outstanding loan
facilities of approximately $20.1 million due to KeyBank. Failure to maintain these loan facilities will have a significant impact
on the Company’s operations. Refer to the discussion below in “KeyBank National Association – Senior Secured
Credit Facilities” section for more detail.
iFresh
had funded working capital and other capital requirements in the past primarily by equity contribution from shareholders, cash
flow from operations, and bank loans. Cash is required to pay purchase costs for inventory, rental, salaries, office rental expenses,
income taxes, other operating expenses and repay debts. iFresh’s ability to repay its current obligation will depend on
the future realization of its current assets. iFresh’s management has considered the historical experience, the economy,
trends in the retail industry, the expected collectability of the accounts receivables and the realization of the inventories
as of March 31, 2020. iFresh’s ability to continue to fund these items may be affected by general economic, competitive
and other factors, many of which are outside of our control.
We have $5.1 million of advances and receivables
from related parties that we intend to collect or acquire. For the year ended March 31, 2020, the Company’s shareholder contributed
$4.8 million to fund our operations.
The
Company’s principal liquidity needs are to meet its working capital requirements, operating expenses, and capital expenditure
obligations. As of March 31, 2020, the Company remains in noncompliance with the financial covenants of the KeyBank Loan.
These conditions continue to raise doubt as to the Company’s ability to remain a going concern.
The
following table summarizes iFresh’s cash flow data for the years ended March 31, 2020 and 2019.
|
|
|
For
the years ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net
cash used in operating activities
|
|
$
|
(861,789
|
)
|
|
$
|
(8,364,263
|
)
|
|
Net
cash used in (provided by) investing activities
|
|
|
(2,668,318
|
)
|
|
|
913,129
|
|
|
Net
cash provided by financing activities
|
|
|
3,233,959
|
|
|
|
7,858,309
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(296,148
|
)
|
|
$
|
407,175
|
|
Operating
Activities
Net cash used in operating activities consists
primarily of net income adjusted for non-cash items, including depreciation, changes in deferred income taxes, loss on early extinguishment
of debt, and the effect of working capital changes. Net cash used in operating activities was approximately $0.9 million for the
year ended March 31, 2020, a decrease of $7.5 million, or 906%, compared to $8.4 million used in operating activities for the year
ended March 31, 2019. The decrease was a result of a decrease in net loss of $3.7 million, decrease of inventory change by $4.2
million and decrease of tax payable change of $1.6 million
Investing
Activities
Net
cash used in investing activities was approximately $2.7 million for the year ended March 31, 2020, a decrease of $3.6 million,
compared to $0.9 million provided by investing activities for the year ended March 31, 2019. The decreased was primarily attributable
to the decrease in cash receivable from repayment of related party receivables of $4.6 million, offset by the $1.0 million decrease
of cash used for acquisition of property and equipment.
Financing
Activities
Net
cash provided by financing activities was approximately $3.2 million for the year ended March 31, 2020, which mainly consisted
of net cash from shareholder contribution of $1.3 million and issuance of preferred stock of $3.5 million offset by $1.6 million
cash paid for loans, notes payable, and capital leases.
Net
cash provided by financing activities was approximately $7.9 million for the year ended March 31, 2019, which mainly consisted
of net cash flow from bank loans of $5.7 million, cash received from issuance of stock of $3.7 million, capital contribution of
$0.3 million, offset by $1.9 million cash paid for loans, notes payable, and capital leases.
KeyBank
National Association – Senior Secured Credit Facilities
On
December 23, 2016, NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”)
with Key Bank National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving
credit of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3)
$5,000,000 of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%,
or (b) the Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term
loans are December 23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit
Facility and 0.25% of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of December 31,
2018.
$15,000,000
of the term loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly
payments of principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire
unpaid principal balance of the term loan, plus accrued interest on the maturity date.
A
Delayed Draw Term Loan was available and would be advanced on the Delayed Draw Funding date (as defined in the Credit Agreement,
which is no later than December 23, 2021. A withdrawal of $5 million under the Delayed Draw Term Loan was made as of March 31,
2019.
The
senior secured credit facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries
and contains financial and restrictive covenants. The financial covenants require NYM to deliver audited consolidated financial
statements within one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than
1.1 to 1.0 and senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio
less than 3.0 to 1.0 at the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. Except as
stated below, the senior secured credit facility is subject to customary events of default. It will be an event of default if
Mr. Long Deng resigns, is terminated, or is no longer actively involved in the management of NYM and a replacement reasonably
satisfactory to the Lender is not made within sixty (60) days after such event takes place. The Company violated the loan covenant
when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co.,
Limited on January 23, 2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018.
The Company failed to obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March
1, 2019, interest was accrued on all loans at the default rate and the monthly principal and interest payment due under the effective
date term loan will be $155,872 instead of $142,842.
On
May 20, 2019 (the “Effective Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”)
with KeyBank, pursuant to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based
on the existence of the events of defaults for certain period of time. The Forbearance Agreement contains customary forbearance
covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment
decreased to $142,842 as originally required per the credit facility agreements.
The
Company failed to meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019
(the “Effective Date”), the Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered
into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement
dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain
subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the
“Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the
Credit Agreement (“Obligations”). Key Bank has agreed to delay the exercise of its rights and remedies under the Loan
Agreement based on the existence of certain events of default (the “Specified Events of Default”) until the earlier
to occur of: (a) 5:00 p.m. Eastern Time on the November 29, 2019; and (b) a Forbearance Event of Default.
From
Jan to June 2020, non-payment of amount due by the Company was $1,194,878. Also, the Company has filed certain loan covenants.
On August 6, 2020 the Company received 3rd forbearance agreement from Key Bank, which includes the following terms:
|
|
●
|
All
delinquent regular interest paid at or before settlement.
|
|
|
●
|
July
and August required payments will be regular interest amounts.
|
|
|
●
|
Default
interest will be deferred until 9/25/2020
|
|
|
●
|
Store
valuations will be ordered immediately.
|
|
|
●
|
Continue
to provide weekly cash flow reports.
|
|
|
●
|
Provide
quarterly financial statements of NYM, iFresh and newly acquired businesses.
|
|
|
●
|
Monthly
financial projections.
|
|
|
●
|
Cost/work
detail on the completion of the CT store.
|
|
|
●
|
Pledge
of the equity and guarantee of newly acquired businesses.
|
|
|
●
|
File
a UCC-1 financing statement for iFresh Inc.
|
If
agreement cannot be reached, KeyBank is fully prepared to pursue legal remedies. As of the date of this report. The Forbearance
Agreement is still under negotiation.
Commitments
and Contractual Obligations
The
following table presents the Company’s material contractual obligations as of March 31, 2020:
|
Contractual Obligations (unaudited)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
Bank Loans
|
|
$
|
20,141,297
|
|
|
$
|
20,141,297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Estimated interest payments on bank loans
|
|
|
1,398,563
|
|
|
|
852,902
|
|
|
|
545,660
|
|
|
|
—
|
|
|
|
—
|
|
|
Notes payable
|
|
|
124,609
|
|
|
|
77,903
|
|
|
|
46,706
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital lease obligations including interest
|
|
|
534,445
|
|
|
|
200,784
|
|
|
|
322,948
|
|
|
|
10,714
|
|
|
|
—
|
|
|
Operating Lease Obligations(1)
|
|
|
87,827,630
|
|
|
|
8,295,618
|
|
|
|
16,408,156
|
|
|
|
15,753,349
|
|
|
|
47,370,507
|
|
|
|
|
$
|
110,026,544
|
|
|
$
|
29,568,504
|
|
|
$
|
17,323,470
|
|
|
$
|
15,764,063
|
|
|
$
|
47,370,507
|
|
|
(1)
|
Operating
lease obligations do not include common area maintenance, utility and tax payments to which iFresh is obligated, which is
estimated to be approximately 50% of operating lease obligation.
|
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this
Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item
8. Financial Statements and Supplementary Data
Consolidated
Financial Statements
The
information required by Item 8 appears after the signature page to this report. Please refer to F-1 to F-27 of this document.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation
of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation
of the effectiveness of our disclosure controls and procedures as of March 31, 2020, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial and accounting
officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2020, due to our lack of
experience being a public company and lack of professional staffs with sufficient knowledge of US GAAP and SEC reporting experiences.
Disclosure
controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our principal executive officer and principal financial
officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officers
and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
As of March 31, 2020, our management assessed
the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial
reporting established in “Internal Control - Integrated Framework”, issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 2013. In connection with this review and the audit of our consolidated financial statements for the
year ended March 31, 2020, we identified material weaknesses and control deficiencies in our internal control over financial reporting.
The material weaknesses related to (1) of the Company does not have in-house accounting personnel with sufficient knowledge
of US GAAP and SEC reporting experiences, especially related to complex transactions and new accounting pronouncements; and (2)
The Company failed to maintain certain controls to prevent or timely detect unauthorized expenditure, acquisition or disposition
of our assets that could have a material effect on the financial statements.
Our independent registered public accounting
firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not
be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.
Internal
control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and
is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the company.
Our
management’s assessment of the effectiveness of our internal control system as of March 31, 2020 was based on the framework
for effective internal control over financial reporting described in Internal Control—Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO. In connection with this review and the
audit of our consolidated financial statements for the year ended March 31, 2020, we identified material weakness and control
deficiencies in our internal control over financial reporting. The material weakness related to (i) the deficiency in the
ability of our in-house accounting professionals to generate financial statements in accordance with U.S. GAAP; and (ii) lack
of accounting and internal control staff experienced in U.S. GAAP. This material weakness may result in reconciliations, reports
and other documents being insufficiently reviewed prior to approval by management. Significant deficiencies are related to the
lack of whistleblower policy to encourage employees to report any irregularities and to report any possible violations or fraudulent
activities. Due to the foregoing material weakness and control deficiencies, management concluded that as of March 31, 2020, our
internal control over financial reporting was not effective.
In order to address and resolve the foregoing
material weakness, we will begin to implement measures designed to improve our internal control over financial reporting to remediate
these material weaknesses, including hiring additional financial personnel with requisite training and experience in the preparation
of financial statements in compliance with applicable SEC requirements and building up whistleblower policy to encourage employees
to report possible violations or fraudulent activities. In March 2020, the Company appointed Ms. Amy Xue as Chief Financial officer
of the Company, who has extensive experience in financial reporting, SEC audit service, and internal control. Ms. Xue is also a
certified public accountants in the US.
The
measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit
committee oversight. Management remains committed to the implementation of remediation efforts to address these material weaknesses.
Although we will continue to implement measures to remedy our internal control deficiencies, there can be no assurance that our
efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed
and/or operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses
identified and described above will continue to exist.
This
Form 10-K does not include an attestation report of internal controls from the company’s registered public accounting firm
due to our status as an emerging growth company under the JOBS Act.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the
Exchange Act) during our most recently completed fiscal year that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item
9B. Other Information.
There
is no information required to be disclosed in a report on Form 8-K during the fourth quarter of the year covered by this Form
10-K but not reported.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Description of Business
Organization
and General
iFresh
Inc. (“iFresh”) is a Delaware company incorporated in July 2016 to reincorporate E-Compass Acquisition Corp. (“E-Compass”)
to Delaware pursuant to the Merger Agreement (as defined below under “Redomestication”). E-Compass was incorporated
in Cayman Islands on September 23, 2014 as a blank check company whose objective is to enter into a merger, share exchange, asset
acquisition, share purchase, recapitalization, reorganization or other similar business combination with one or more businesses
or entities, or entering into contractual arrangements that gives E-Compass control over such a target business (a “Business
Combination”).
Redomestication
On
July 25, 2016, iFresh entered into the Merger Agreement with E-Compass, iFresh Merger Sub Inc. (“Merger Sub”), a Delaware
corporation and wholly owned subsidiary of iFresh, and NYM Holding, Inc. (“NYM”), the stockholders of NYM, and Long
Deng, as representative of the stockholders of NYM. Pursuant to the terms of the Merger Agreement, on February 10, 2017, E-Compass
would merge with and into iFresh in order to redomesticate E-Compass into Delaware (the “Redomestication Merger”).
At the time of the Redomestication, each E-Compass ordinary share was converted into one share of common stock of iFresh and each
E-Compass Right was converted into one substantially equivalent right (“iFresh Right”) to receive one-tenth (1/10)
of a share of iFresh common stock on the consummation of the Business Combination. In connection with the Redomestication, E-Compass
ceased to exist and iFresh is the surviving corporation and successor registrant that will continue to file reports under Section
12(b) of the Securities Exchange Act of 1934.
Business
Combination
On
February 10, 2017, after the Redomestication Merger, Merger Sub merged with and into NYM, resulting in NMY being a wholly owned
subsidiary of iFresh (the “Merger”). The transaction constituted a business combination. iFresh closed the business
combination by paying NYM’s stockholders an aggregate of: (i) $5 million in cash, plus, (ii) 12,000,000 shares of iFresh’s
common stock (the deemed value of the shares in the Merger Agreement) as consideration. At closing, iFresh also executed an option
agreement to acquire up to additional four supermarkets prior to March 31, 2017 for aggregate consideration of $10 million in
cash, less any advances or receivables owed to the Company (see Note 6). The option agreement subsequently expired unexercised.
In
connection with the closing, holders of 1,937,967 of the Company’s ordinary shares elected to redeem their shares and iFresh
paid $20,154,857 ($10.40 per share in accordance with Redemption Clause) in connection with such redemption. Also, on February
10, 2017, iFresh repurchased 1,500,000 of such non-redeemable shares promptly at a purchase price of $10.00 per share according
to an agreement with Handy Global Limited signed on January 11, 2017. On February 10, 2017, iFresh entered into an agreement to
repurchase 200,000 shares of its common stock from Lodestar Investment Holdings Corporation for $200.00. At the closing of the
Redomestication Merger: (i) one share of iFresh common stock for each share of E-Compass common stock, resulting in 1,872,033
non-redeeming E-Compass common stock being converted into iFresh common stock; (ii) each ten E-Compass rights were converted into
one share of common stock of iFresh, resulting in 4,310,010 E-Compass rights automatically converting into 431,000 shares of the
iFresh’s common stock.
Prior
to the closing of the Redomestication Merger and Business Combination, there were 5,310,000 E-Compass shares issued and outstanding.
After the redemption of 1,937,967 shares, the repurchase of 1,700,000 shares and the conversion of 4,310,010 E-Compass rights
into 431,000 shares, there were 2,103,033 shares of E-Compass’s common stock being re-domesticated into the iFresh’s
common stock. With the new issuance of the 12,000,000 shares of iFresh’s common stock in connection with the Business Combination,
there were a total of 14,103,033 shares of iFresh’s common stock issued and outstanding after the business combination.
On
June 7, 2019, the Company, entered into certain Share Exchange Agreement (“Exchange Agreement”) with Xiaotai International
Investment Inc. (“Xiaotai”), a Cayman Island Company, and certain shareholders of Xiaotai (collectively with Xiaotai,
“Seller”), pursuant to which, among other things and subject to the terms and conditions contained therein, the Company
will acquire all of the outstanding issued shares and other equity interests in Xiaotai from certain shareholders of Xiaotai (such
transactions, collectively, the “Acquisition”). The Company agreed to issue to the sellers an aggregate of 254,813,383
shares of the Company’s common stock, par value $0.0001. This Exchange Agreement was terminated and the proposed acquisition
was cancelled in November 2019 after Zhejiang Xiao’s business activities were found in violation of China’s laws and
regulations.
iFresh is an Asian/Chinese supermarket chain with multiple retail
locations and its own distribution operations, currently all located along the East Coast of the United States. The Company offers
seafood, vegetables, meat, fruit, frozen goods, groceries, and bakery products through its retail stores
2.
Liquidity and Going Concern
As
reflected in the Company’s consolidated financial statements, the Company had operating losses of $8.3 million and $12.0
million for the years ended March 31, 2020 and 2019 and had negative working capital of $28.6 million and $21.6 million as of
March 31, 2020 and 2019, respectively. The Company had negative equity of $2.6 million and $1.0 million as of March 31, 2020 and
2019, respectively. The Company did not meet certain financial covenants required in the credit agreement with Keybank National
Association (“Keybank”). As of March 31, 2020, the Company has outstanding loan facilities of approximately $20.1
million due to Keybank. Failure to maintain these loan facilities will have a significant impact on the Company’s operations.
In
assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate
sufficient revenue sources in the future and its operating and capital expenditure commitments. iFresh had funded working
capital and other capital requirements in the past primarily by equity contribution from shareholders, cash flow from
operations, and bank loans. As of March 31, 2020, the Company also has $5.1 million of advances and receivable from the
related parties we intend to collect. Subsequently in April and May 2020, the Company received Paycheck Protection Program
loan of approximately $1.77 million.
The
Company was in default under the Credit Agreement as of March 31, 2020 and 2019. Specifically, the financial covenants of the
Credit Agreement require the Company to maintain a senior funded debt to earnings before interest, tax, depreciation and amortization
(“EBITDA”) ratio for the trailing 12 month period of less than 3.00 to 1.00 at the last day of each fiscal quarter.
As of March 31, 2020 and 2019, this ratio was greater than 3.00 to 1.00, and the Company was therefore not in compliance with
the financial covenants of the KeyBank loan. In addition, the Company violated the loan covenant when Mr. Long Deng, CEO and major
shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited, representing 51% of the
total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to obtain a written consent for
the occurrence of the change of ownership. KeyBank has notified the Company in February that it has not waived the default
and reserves all of its rights, power, privileges, and remedies under the Credit Agreement. effective as of March 1, 2019, interest
was accrued on all loans at the default rate.
On
May 20, 2019 (the “Effective Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”)
with KeyBank, pursuant to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based
on the existence of the events of shares transfer defaults for certain period of time. The Forbearance Agreement contains
customary forbearance covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019,
the monthly payment decreased to $142,842 as originally required per the credit facility agreements.
From
January to June 2020, non-payment of amount due by the Company was $1,194,878. Also, the Company is not incompliance with certain
loan covenants. On August 6, 2020 the Company received 3rd forbearance agreement from Key Bank, which includes the following terms:
|
|
●
|
All
delinquent regular interest paid at or before settlement.
|
|
|
●
|
August
and September required payments will be regular interest amounts
|
|
|
●
|
Default
interest will be deferred until 9/25/2020
|
|
|
●
|
Store
valuations will be ordered by the lender.
|
|
|
●
|
Continue
to provide weekly cash flow reports
|
|
|
●
|
Provide
quarterly financial statements of NYM, iFresh and newly acquired businesses.
|
|
|
●
|
Monthly
financial projections
|
|
|
●
|
Cost/work
detail on the completion of the CT store
|
|
|
●
|
Pledge
of the equity and guarantee of newly acquired businesses.
|
|
|
●
|
File
a UCC-1 financing statement for iFresh Inc.
|
If
agreement cannot be reached, KeyBank is fully prepared to pursue legal remedies. As of the date of this report. The Forbearance
Agreement is still under negotiation.
On
December 17, 2019, the Company received a letter from the Listing Qualifications Staff (the “Staff’) of the Nasdaq
Stock Market LLC (“Nasdaq”), which stated that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2),
which requires an issuer to maintain a minimum closing bid price of $1.00 per share (the “Bid Price Rule”). In accordance
with the Nasdaq Listing Rules, the Company was provided with a 180-day grace period to regain compliance with the Bid Price Rule,
through June 15, 2020. The notice has no immediate impact on the listing or trading of the Company’s securities on Nasdaq. The
Company has received a written notice from the Listing Qualifications Staff of Nasdaq on May 4, 2020, indicating that the Company
has regained compliance with Nasdaq’s continued listing requirements and that its common stock will continue to be listed
on Nasdaq Stock Market.
The Company was
impacted by the COVID-19 outbreak as it operates in area under stay-at-home orders since mid-March 2020. The Company had to operate
under reduced hours including closure of the stores located in in Brooklyn, New York and in Flushing, New York, where are with
high population and at high risk of infection during the end of March and April peak period. Sales was decreased by $0.3 million
due to the lockdown in March 2020.
The
Company’s principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure
obligations. The Company’s ability to fund these needs will depend on its future performance, which will be subject
in part to general economic, competitive and other factors beyond its control. These conditions raise substantial doubt as to
the Company’s ability to remain a going concern.
3.
Basis of Presentation and Principles of Consolidation
The
Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial statements
of iFresh, NYM and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The
Company has two reportable and operating segments. The Company’s Chief Executive Officer is the Chief Operating Decision
Maker (“CODM”). The CODM bears ultimate responsibility for, and is actively engaged in, the allocation of resources
and the evaluation of the Company’s operating and financial results.
4.
Summary of Significant Accounting Policies
Significant
Accounting Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates
and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s
critical accounting estimates included, but are not limited to: allowance for estimated uncollectible receivables, inventory valuations,
lease assumptions, impairment of long-lived assets, impairment of intangible assets, and income taxes. Actual results could differ
from those estimates.
Accounts
Receivable
Accounts
receivable consist primarily of uncollected amounts from customer purchases (primarily from the Company’s two distribution
operations), credit card receivables, and food stamp vouchers, and are presented net of an allowance for estimated uncollectible
amounts.
The
Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability
of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted,
the account receivable is written off against the allowance.
Inventories
Inventories
consist of merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for wholesale
and retail perishable inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of
vendor discounts).
The
Company’s wholesale and retail non-perishable inventory is valued at the lower of cost or market using weighted average
method.
Leases
On
April 1, 2019 the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into
prior to the effective date of ASC 842, we elected to apply the package of practical expedients. Based on this guidance we will
not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification
for any expired or existing leases; and (3) initial direct costs for any existing leases. The adoption of Topic 842 resulted in
the presentation of $65.6 million of operating lease assets and $72.3 operating lease liabilities on the consolidated balance
sheet as of April 1, 2019. See Note 12 for additional information.
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s
consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under
capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.
Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s
leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at
commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments
made and excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend
or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease term.
Fair
Value Measurements
The
Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with
U.S GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level
1: Quoted prices for identical instruments in active markets.
Level
2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that
are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets.
Level
3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair
value measurements of nonfinancial assets and non-financial liabilities are primarily used in the impairment analysis of intangible
assets and long-lived assets.
Cash
and cash equivalents, accounts receivable, prepaid expenses and other current assets, advances to related parties, accounts payable,
deferred revenue and accrued expenses approximate fair value because of the short maturity of those instruments. Based on comparable
open market transactions, the fair value of the lines of credit and other liabilities, including current maturities, approximated
their carrying value as of March 31, 2020 and 2019, respectively. The Company’s estimates of the fair value of line of credit
and other liabilities (including current maturities) were classified as Level 2 in the fair value hierarchy.
Revenue
Recognition
In
accordance with Topic 606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate
possession of the merchandise or delivery is made to our wholesale customers. Payment terms are established for our wholesale
customers based on the Company’s pre-established credit requirements. Payment terms vary depending on the customer. Based
on the nature of receivables, no significant financing components exist. Sales are recorded net of discounts, sales incentives
and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns
based on current sales levels and our historical return experience.
Topic
606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer and is
considered the unit of account. The majority of our contracts have one single performance obligation as the promise to transfer
the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct.
We
had no material contract assets, contract liabilities, or costs to obtain and fulfill contracts recorded on the Consolidated Balance
Sheet as of March 31, 2020 and 2019. For the year ended March 31, 2020 and 2019, revenue recognized from performance
obligations related to prior periods was insignificant.
Revenue
expected to be recognized in any future periods related to remaining performance obligations is insignificant.
The
following table summarizes disaggregated revenue from contracts with customers by product group:
|
|
|
For the years ended
|
|
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
Grocery
|
|
$
|
40,795,051
|
|
|
$
|
54,219,303
|
|
|
Perishable goods
|
|
|
48,657,980
|
|
|
|
71,212,136
|
|
|
Total
|
|
$
|
89,453,031
|
|
|
$
|
125,431,439
|
|
Business
Combinations
The
Company accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC
805”), “Business Combinations”. The purchase method of accounting requires that the consideration transferred
be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated
fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange
of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual
contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are
measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests.
The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value
of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree,
is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired,
the difference is recognized directly in earnings.
The
Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses
its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates
are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are
not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although
the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based
in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain.
During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets
acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final
determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded
to the Company’s consolidated statements of income.
Recently
Issued Accounting Pronouncements
In
June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on
such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes
take effect for public companies for fiscal years starting after December. 15, 2018, including interim periods within that fiscal
year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods
within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption
date of Topic 606. On April 1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s
unaudited condensed consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate
for assets measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU is
effective for annual and interim periods beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers.
Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This
update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured
at amortized cost basis to increase comparability of similar financial assets. The updates should be applied through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is,
a modified retrospective approach). In November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13
to be fiscal years beginning after December 15, 2022 and interim periods therein. The Company does not believe this guidance will
have a material impact on its consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes, which is intended to simplify various aspects related to managerial accounting for income taxes. ASU 2019-12 removes
certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent
application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020, with early adoption permitted. The Company is currently assessing the impact of adopting this standard, and does not
believe this guidance will have a material impact on its consolidated financial statements.
No
other new accounting pronouncements issued or effective had, or are expected to have, a material impact on the Company’s
condensed consolidated financial statements.
5.
Accounts Receivable
A
summary of accounts receivable, net is as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Customer purchases
|
|
$
|
3,975,414
|
|
|
$
|
4,008,747
|
|
|
Credit card receivables
|
|
|
143,851
|
|
|
|
532,369
|
|
|
Food stamps
|
|
|
26,407
|
|
|
|
99,762
|
|
|
Others
|
|
|
2,518
|
|
|
|
2,518
|
|
|
Total accounts receivable
|
|
|
4,148,190
|
|
|
|
4,643,396
|
|
|
Allowance for bad debt
|
|
|
(742,849
|
)
|
|
|
(615,487
|
)
|
|
Accounts receivable, net
|
|
$
|
3,405,341
|
|
|
$
|
4,027,909
|
|
6.
Inventories
A
summary of inventories, net is as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Non-perishables
|
|
$
|
5,396,152
|
|
|
$
|
8,762,634
|
|
|
Perishables
|
|
|
820,761
|
|
|
|
1,723,882
|
|
|
Inventories
|
|
|
6,216,913
|
|
|
|
10,486,516
|
|
|
Allowance for slow moving or defective inventories
|
|
|
(31,811
|
)
|
|
|
(75,150
|
)
|
|
Inventories, net
|
|
$
|
6,185,102
|
|
|
$
|
10,411,366
|
|
7.
Advances and receivables - related parties
A
summary of advances and receivables - related parties is as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Entities
|
|
2020
|
|
|
2019
|
|
|
New York Mart, Inc.
|
|
$
|
2,092
|
|
|
$
|
-
|
|
|
Pacific Supermarkets Inc.
|
|
|
-
|
|
|
|
437,863
|
|
|
NY Mart MD Inc.
|
|
|
363,296
|
|
|
|
335,374
|
|
|
iFresh Harwin Inc
|
|
|
-
|
|
|
|
-
|
|
|
Advances – related
parties
|
|
$
|
365,388
|
|
|
$
|
773,237
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Mart, Inc.
|
|
|
605,265
|
|
|
|
605,265
|
|
|
Pacific Supermarkets Inc.
|
|
|
-
|
|
|
|
428,237
|
|
|
NY Mart MD Inc.
|
|
|
3,841,237
|
|
|
|
3,181,011
|
|
|
iFresh Harwin Inc
|
|
|
248,480
|
|
|
|
232,797
|
|
|
Receivables – related parties
|
|
|
4,694,982
|
|
|
|
4,447,310
|
|
|
Total advances and receivables – related parties
|
|
$
|
5,060,370
|
|
|
$
|
5,220,547
|
|
The
Company has advanced funds to related parties and accounts receivable due from the related parties with the intention of converting
some of these advances and receivables into deposits towards the purchase price upon planned acquisitions of some of these entities,
which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, the majority shareholder and the Chief Executive
Officer of the Company. Accounts receivable due from related parties relate to the sales to these related parties (see Note 16).
The advances and receivables are interest free, repayable on demand, and guaranteed by Mr. Long Deng.
8.
Property and Equipment
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Furniture, fixtures and equipment
|
|
$
|
21,023,715
|
|
|
$
|
19,957,600
|
|
|
Automobiles
|
|
|
1,997,925
|
|
|
|
2,214,306
|
|
|
Leasehold improvements
|
|
|
9,442,401
|
|
|
|
8,849,422
|
|
|
Software
|
|
|
6,735
|
|
|
|
6,735
|
|
|
Total property and equipment
|
|
|
32,470,776
|
|
|
|
31,028,063
|
|
|
Accumulated depreciation and amortization
|
|
|
(12,701,624
|
)
|
|
|
(10,740,877
|
)
|
|
Property and equipment, net
|
|
$
|
19,769,152
|
|
|
$
|
20,287,186
|
|
Depreciation
expense for the year ended March 31, 2020 and 2019 was $2,121,564 and $1,999,562, respectively.
9.
Intangible Assets
A
summary of the activities and balances of intangible assets are as follows:
|
|
|
Balance at
March 31,
|
|
|
|
|
|
Balance at
March 31,
|
|
|
|
|
2019
|
|
|
Additions
|
|
|
2020
|
|
|
Gross Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
Acquired leasehold rights
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
|
Total intangible assets
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
$
|
(1,466,663
|
)
|
|
$
|
(133,332
|
)
|
|
$
|
(1,599,995
|
)
|
|
Intangible assets, net
|
|
$
|
1,033,337
|
|
|
$
|
(133,332
|
)
|
|
$
|
900,005
|
|
Amortization
expense was $133,332 and $133,332 for the year ended March 31, 2020 and 2019, respectively. Future amortization associated with
the net carrying amount of definite-lived intangible assets is as follows:
|
Year
Ending March 31,
|
|
|
|
|
2021
|
|
$
|
133,333
|
|
|
2022
|
|
|
133,333
|
|
|
2023
|
|
|
133,333
|
|
|
2024
|
|
|
133,333
|
|
|
2025
|
|
|
133,333
|
|
|
Thereafter
|
|
|
233,340
|
|
|
Total
|
|
$
|
900,005
|
|
10.
Debt
A
summary of the Company’s debt is as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revolving Line of Credit-KeyBank National Association
|
|
$
|
4,950,000
|
|
|
|
4,950,000
|
|
|
Delayed Term Loan-KeyBank National Association
|
|
|
4,102,483
|
|
|
|
4,494,983
|
|
|
Term Loan-KeyBank National Association
|
|
|
11,408,189
|
|
|
|
12,342,206
|
|
|
Less: Deferred financing cost
|
|
|
(319,375
|
)
|
|
|
(501,875
|
)
|
|
Total
|
|
|
20,141,297
|
|
|
|
21,285,314
|
|
KeyBank
National Association (“KeyBank”) – Senior Secured Credit Facilities
On
December 23, 2016, NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”)
with Key Bank National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving
credit of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3)
$5,000,000 of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%,
or (b) the Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term
loans are December 23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit
Facility and 0.25% of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of March 31,
2020.
$15,000,000
of the term loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly
payments of principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire
unpaid principal balance of the term loan, plus accrued interest on the maturity date. On December 23, 2016, the Company used
the proceeds from the loan term to pay off the outstanding balance under the Bank of America credit line agreement and HSBC line
of credit.
The
Delayed Draw Term Loan shall be advanced on the Delayed Draw Funding date, which is no later than December 23, 2021.
The
senior secured credit facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries
and contains financial and restrictive covenants. The financial covenants require NYM to deliver audited consolidated financial
statements within one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than
1.1 to 1.0 and senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio
less than 3.0 to 1.0 at the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. As of March
31, 2020 and 2019, these ratios were failed, and the Company was therefore not in compliance with the financial covenants of the
KeyBank loan. Except as stated below, the senior secured credit facility is subject to customary events of default. It will be
an event of default if Mr. Long Deng resigns, is terminated, or is no longer actively involved in the management of NYM and a
replacement reasonably satisfactory to the Lender is not made within sixty (60) days after such event takes place. The Company
violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted
shares to HK Xu Ding Co., Limited on January 23, 2019, representing 51% of the total issued and outstanding shares of the Company
as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of the change of ownership. As a result,
effective as of March 1, 2019, interest was accrued on all loans at the default rate and the monthly principal and interest payment
due under the effective date term loan will be $155,872 instead of $142,842.
On
May 20, 2019 (the “Effective Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”)
with KeyBank, pursuant to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based
on the existence of the events of shares transfer defaults for certain period of time. The Forbearance Agreement contains
customary forbearance covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019,
the monthly payment decreased to $142,842 as originally required per the credit facility agreements.
The
Company failed to meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019
(the “Effective Date”), the Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered
into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement
dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain
subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the
“Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the
Credit Agreement (“Obligations”). Key Bank has agreed to delay the exercise of its rights and remedies under the Loan
Agreement based on the existence of certain events of default (the “Specified Events of Default”) until the earlier
to occur of: (a) 5:00 p.m. Eastern Time on the November 29, 2019; and (b) a Forbearance Event of Default.
From
Jan to June 2020, non-payment of amount due by the Company was $1,194,878. Also, the Company has filed certain loan covenants.
On August 6, 2020 the Company received 3rd forbearance agreement from Key Bank, which includes the following terms:
|
|
●
|
All
delinquent regular interest paid at or before settlement.
|
|
|
●
|
July
and August required payments will be regular interest amounts.
|
|
|
●
|
Default
interest will be deferred until 9/25/2020
|
|
|
●
|
Store
valuations will be ordered immediately.
|
|
|
●
|
Continue
to provide weekly cash flow reports.
|
|
|
●
|
Provide
quarterly financial statements of NYM, iFresh and newly acquired businesses.
|
|
|
●
|
Monthly
financial projections.
|
|
|
●
|
Cost/work
detail on the completion of the CT store.
|
|
|
●
|
Pledge
of the equity and guarantee of newly acquired businesses.
|
|
|
●
|
File
a UCC-1 financing statement for iFresh Inc.
|
If agreement cannot
be reached, KeyBank is fully prepared to pursue legal remedies. As of the date of this report, the Forbearance Agreement is still
under negotiation.
Maturities
of borrowings against the term loan under this credit facility for each of the next five years are as follows:
|
Year
Ending March 31
|
|
|
|
|
2021
|
|
$
|
2,146,472
|
|
|
2022
|
|
|
17,994,825
|
|
|
Total
|
|
$
|
20,141,297
|
|
11.
Notes Payable
Notes
payables consist of the following:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Triangle Auto Center, Inc.
|
|
|
|
|
|
|
|
Secured by vehicle, 4.02%, principal and
interest of $890 due monthly through January 28, 2021
|
|
|
8,730
|
|
|
|
18,823
|
|
|
Colonial Buick GMC
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 8.64%, principal and interest of
$736 due monthly through February 1, 2020
|
|
|
-
|
|
|
|
6,350
|
|
|
Koeppel Nissan, Inc.
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 3.99%, principal and interest of
$612 due monthly through January 18, 2021, early paid off in 2020
|
|
|
-
|
|
|
|
12,378
|
|
|
Secured by vehicle, 0.9%, principal and interest of $739
due monthly through March 14, 2020
|
|
|
-
|
|
|
|
8,826
|
|
|
Secured by vehicle, 7.86%, principal and interest of
$758 due monthly through September 1, 2022
|
|
|
18,707
|
|
|
|
25,415
|
|
|
Silver Star Motors
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.22%, principal and interest of
$916 due monthly through June 1, 2021
|
|
|
13,357
|
|
|
|
23,546
|
|
|
BMO
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 5.99%, principal and interest of
$1,924 due monthly through July 1, 2020
|
|
|
29,532
|
|
|
|
50,172
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.01%, principal and interest of
$420 due monthly through December 1, 2021
|
|
|
8,500
|
|
|
|
13,096
|
|
|
Toyota Finance
|
|
|
|
|
|
|
|
|
|
Secured by vehicle, 0%, principal and interest of $632
due monthly through August, 2022
|
|
|
18,340
|
|
|
|
25,928
|
|
|
Secured by vehicle, 4.87%, principal and interest of
$761 due monthly through July, 2021
|
|
|
11,633
|
|
|
|
24,031
|
|
|
Secured by vehicle, 0%, principal
and interest of $633 due monthly through April 1, 2022
|
|
|
15,810
|
|
|
|
19,978
|
|
|
Total Notes Payable
|
|
$
|
124,609
|
|
|
$
|
228,543
|
|
|
Current notes payable
|
|
|
(77,903
|
)
|
|
|
(98,475
|
)
|
|
Long-term notes payable, net of current maturities
|
|
$
|
46,706
|
|
|
$
|
130,068
|
|
All
notes payables are secured by the underlying financed automobiles.
Maturities
of the notes payables for each of the next five years are as follows:
|
Year
Ending March 31,
|
|
|
|
|
2021
|
|
$
|
77,903
|
|
|
2022
|
|
|
40,656
|
|
|
2023
|
|
|
6,050
|
|
|
Total
|
|
$
|
124,609
|
|
12.
Lease
The
Company’s material leases consist of store, warehouse, parking lots and its offices with expiration dates through 2027.
In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases. The lease
term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company
determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.
Balance
sheet information related to the Company’s operating and finance leases (noting the financial statement caption each is
included with) as of March 31, 2020 was as follows:
|
|
|
As of
March 31,
2020
|
|
|
Operating Lease Assets:
|
|
|
|
|
|
Operating Lease
|
|
$
|
57,587,790
|
|
|
Total operating lease assets
|
|
|
57,587,790
|
|
|
Operating lease obligations:
|
|
|
|
|
|
Current operating lease liabilities
|
|
|
5,438,356
|
|
|
Non-current operating lease liabilities
|
|
|
58,729,843
|
|
|
Total Lease liabilities
|
|
$
|
64,168,199
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Operating Lease
|
|
|
12.47 years
|
|
|
Weighted Average discount rate
|
|
|
4.3
|
%
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Finance lease Assets
|
|
|
|
|
|
|
|
Vehicles under finance lease
|
|
$
|
874,698
|
|
|
$
|
874,698
|
|
|
Accumulated depreciation
|
|
|
219,679
|
|
|
|
159,938
|
|
|
Finance lease assets, net
|
|
$
|
655,019
|
|
|
$
|
714,760
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Finance lease obligations:
|
|
|
|
|
|
|
|
Current
|
|
$
|
137,243
|
|
|
$
|
148,778
|
|
|
Long-term
|
|
|
277,350
|
|
|
|
413,225
|
|
|
Total obligations
|
|
$
|
414,593
|
|
|
$
|
562,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Finance Lease
|
|
|
|
|
|
|
1.88 years
|
|
|
Weighted Average discount rate
|
|
|
|
|
|
|
7.1
|
%
|
Supplemental
cash flow information related to leases was as follows:
|
|
|
As of
March 31,
2020
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating Lease
|
|
$
|
7,691,944
|
|
|
Finance lease
|
|
|
147,410
|
|
The
estimated future lease payments under the operating and finance leases are as follows:
|
|
|
Capital
|
|
|
Operating,
|
|
|
|
|
Lease
|
|
|
lease
|
|
|
2021
|
|
|
169,004
|
|
|
|
8,088,762
|
|
|
2022
|
|
|
148,162
|
|
|
|
7,833,368
|
|
|
2023
|
|
|
146,831
|
|
|
|
8,078,334
|
|
|
2024
|
|
|
10,522
|
|
|
|
7,896,900
|
|
|
2025
|
|
|
|
|
|
|
7,359,994
|
|
|
Thereafter
|
|
|
-
|
|
|
|
46,108,683
|
|
|
Total minimum lease payments
|
|
$
|
474,519
|
|
|
$
|
85,366,040
|
|
|
Less: Amount representing interest
|
|
|
(59,926
|
)
|
|
|
(21,194,841
|
)
|
|
Total
|
|
$
|
414,593
|
|
|
$
|
64,168,199
|
|
13.
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 CODM for making operating decisions and assessing performance as the source for determining
the Company’s reportable segments. Management, including the CODM, reviews operation results by the revenue of different
products or services. Based on management’s assessment, the Company has determined that it has two operating segments as
defined by ASC 280, consisting of wholesale and retail operations.
The
primary financial measures used by the Company to evaluate performance of individual operating segments are sales and income before
income tax provision.
The
following table presents summary information by segment for the years ended March 31, 2020 and 2019, respectively:
|
|
|
Year ended March 31,
2020
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
16,336,795
|
|
|
$
|
73,116,236
|
|
|
$
|
89,453,031
|
|
|
Cost of sales
|
|
|
12,152,005
|
|
|
|
53,805,938
|
|
|
|
65,957,943
|
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
6,660,448
|
|
|
|
6,660,448
|
|
|
Gross profit
|
|
$
|
4,184,790
|
|
|
$
|
12,649,850
|
|
|
$
|
16,834,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(11,118
|
)
|
|
$
|
(1,813,549
|
)
|
|
$
|
(1,824,667
|
)
|
|
Depreciation and amortization
|
|
$
|
491,233
|
|
|
$
|
9,559,104
|
|
|
$
|
10,050,337
|
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
2,828,495
|
|
|
$
|
2,828,495
|
|
|
Segment loss before income tax provision
|
|
$
|
766,381
|
|
|
$
|
(9,239,428
|
)
|
|
$
|
(8,473,047
|
)
|
|
Income tax provision (benefit)
|
|
$
|
16,841
|
|
|
$
|
(203,036
|
)
|
|
$
|
(186,195
|
)
|
|
Segment assets
|
|
$
|
14,032,417
|
|
|
$
|
85,226,744
|
|
|
$
|
99,259,161
|
|
|
|
|
Year ended March 31,
2019
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,463,885
|
|
|
$
|
106,967,554
|
|
|
$
|
125,431,439
|
|
|
Cost of sales
|
|
|
14,225,146
|
|
|
|
81,664,829
|
|
|
|
95,889,975
|
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
9,148,872
|
|
|
|
9,148,872
|
|
|
Gross profit
|
|
$
|
4,238,739
|
|
|
$
|
16,153,853
|
|
|
$
|
20,392,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(12,803
|
)
|
|
$
|
(1,301,492
|
)
|
|
$
|
(1,314,295
|
)
|
|
Depreciation and amortization
|
|
$
|
234,837
|
|
|
$
|
2,080,557
|
|
|
$
|
2,315,394
|
|
|
Capital expenditures
|
|
$
|
32,061
|
|
|
$
|
4,633,789
|
|
|
$
|
4,665,850
|
|
|
Segment income (loss) before income tax provision
|
|
$
|
(57,863
|
)
|
|
$
|
(11,378,056
|
)
|
|
$
|
(11,435,919
|
)
|
|
Income tax provision (benefit)
|
|
$
|
2,872
|
|
|
$
|
564,651
|
|
|
$
|
567,523
|
|
|
Segment assets
|
|
$
|
10,571,565
|
|
|
$
|
36,529,794
|
|
|
$
|
47,101,359
|
|
14.
Shareholder’s Equity
On
October 19, 2018, the Company and certain institutional investors entered into a securities purchase agreement (the “Purchase
Agreement”), pursuant to which the Company agreed to sell to such investors an aggregate of 1,275,000 shares of common stock
(the “Common Stock”) in a registered direct offering and warrants to purchase up to approximately 1,170,000 shares
of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (the
“Financing”). The warrants will be exercisable immediately following the date of issuance and have an exercise price
of $2.25. The warrants will expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon exercise
of the warrants may be sold pursuant to an effective registration statement or may be exercised on a cashless basis and be immediately
sold pursuant to Rule 144. The purchase price for each share of Common Stock and the corresponding warrant is $2.00. Each warrant
is subject to anti-dilution provisions that require adjustment of the number of shares of Common Stock that may be acquired upon
exercise of the warrant, or to the exercise price of such shares, or both, to reflect stock dividends and splits, subsequent rights
offerings, pro-rata distributions, and certain fundamental transactions.
Management determined that these warrants
are equity instruments because the warrants are both a) indexed to its own stock; and b) classified in stockholders’ equity.
The warrants were recorded at their fair value on the date of grant as a component of stockholders’ equity. On June 5, 2019,
the Company agreed to issue to the Holders an aggregate of 1,170,000 shares (“Exchange Shares”) of the Company’s
common stock, par value $0.0001 per share and warrant to purchase an aggregate of 1,170,000 shares of Common Stock (the “Exchange
Warrants”) as the negotiated purchase price for the Existing Warrants based on the Black Scholes Value as a result of a certain
transaction which was deemed as a Fundamental Transaction as defined in purchase agreement. On March 23, 2020, 585,000 warrants
has been cashless exercised to 287,049 shares of common stock.
On December 11, 2019, iFresh Inc. (the “Company”)
entered into an agreement (the “Conversion Agreement”) between Mr. Deng and the Company, pursuant to which the Mr.
Deng agreed to convert debt owed to him by the Company into 1,000 preferred shares of the Company’s common stock. Upon receiving
stockholder approval for the conversion, the 1,000 shares of preferred stock will automatically convert into shares of the Company’s
common stock.
On January 13, 2020, the Company filed a
Certificate of Designation creating the class of Preferred Stock required by the Conversion Agreement, and $3,500,000 of capital
Mr. Deng contributed to the Company were converted into 1,000 shares of Series A Convertible Preferred Stock (the “Preferred
Stock”). The Preferred Stock has no voting rights, no dividend, no redemption right and will convert automatically into 9,210,526
shares of the Company’s common stock once the conversion is approved by the Company’s stockholders. In the event of
the liquidation of the Company, the Preferred Stock has a preference equal to $3,500,000 over the Company’s common stock.
On
March 25, 2020, the Company entered into an agreement (the “Purchase Agreement”) with two third party individuals,
Dengrong Zhou and Qiang Ou (the “Investors”), pursuant to which the Investors agreed to purchase 1,783,167 shares
of the Company’s common stock in exchange for $2,500,000. Subsequently on April 9, 2020, these shares were issued and the
transaction was closed.
15.
Income Taxes
iFresh
is a Delaware holding company that is subject to the U.S. income tax.
NYM
is taxed as a corporation for income tax purposes and as a result of the “Contribution Agreement” entered into in
December 31, 2014 NYM has elected to file a consolidated federal income tax return with its eleven subsidiaries. NYM and the shareholders
of the eleven entities, as parties to the Contribution Agreement, entered into a tax-free transaction under Section 351 of the
Internal Revenue Code of 1986 whereby the eleven entities became wholly owned subsidiaries of the Company. As a result of the
tax-free transaction and the creation of a consolidated group, the subsidiaries are required to adopt the tax year-end of its
parent, NYM. NYM was incorporated on December 30, 2014 and has adopted a tax-year end of March 31.
Certain
of the subsidiaries have incurred net operating losses (“NOL”) in tax years ending prior to the Contribution Agreement.
The net operating losses are subject to the Separate Return Limitation Year (“SRLY”) rules which limit the utilization
of the losses to the subsidiaries who generated the losses. The SRLY losses are not available to offset taxable income generated
by members of the consolidated group.
Based upon management’s assessment
of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets, primarily for certain
of the subsidiaries SRLY NOL carry-forwards will not be realizable; and therefore, a full valuation allowance is established for
SRLY NOL carry-forwards. Pursuant to The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, NOLs
from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first)
and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate
refund of taxes paid in prior years. The valuation allowance for deferred tax assets was $7,643,963 and $6,260,912 as of March
31, 2020 and 2019.
The Company has approximately $30,496,643
and $20,688,214 of US NOL carry forward of which approximately $3,135,816 and $2,891,876 are SRLY NOL as of March 31, 2020 and
March 31, 2019, respectively. For income tax purposes, those NOLs will expire in the year 2033 through 2037.
Income
Tax Provision (Benefit)
The
provision (benefit) for income taxes consists of the following components:
|
|
|
For the year ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
341,332
|
|
|
|
369,278
|
|
|
|
|
|
341,332
|
|
|
|
369,278
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(711,436
|
)
|
|
|
261,649
|
|
|
State
|
|
|
183,909
|
|
|
|
(63,404
|
)
|
|
|
|
|
(527,527
|
)
|
|
|
198,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(186,195
|
)
|
|
$
|
567,523
|
|
Tax
Rate Reconciliation
Following
is a reconciliation of the Company’s effective income tax rate to the United State federal statutory tax rate:
|
|
|
Years ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Expected tax at U.S. statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
State and local income taxes, net of federal income tax effect
|
|
|
7
|
%
|
|
|
7
|
%
|
|
Other non-deductible fees and expenses
|
|
|
10
|
%
|
|
|
(2.4
|
%)
|
|
Changes in deferred tax allowance
|
|
|
(36
|
%)
|
|
|
(32.2
|
%)
|
|
Other
|
|
|
-
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
2
|
%
|
|
|
(5
|
%)
|
Deferred
Taxes
The
effect of temporary differences included in the deferred tax accounts as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred Tax Assets/ (Liabilities):
|
|
|
|
|
|
|
|
Deferred expenses
|
|
$
|
164,434
|
|
|
$
|
101,829
|
|
|
Sec 263A Inventory Cap
|
|
|
38,207
|
|
|
|
208,514
|
|
|
Deferred rent/Lease obligation
|
|
|
2,215,294
|
|
|
|
2,092,128
|
|
|
Depreciation and amortization
|
|
|
(3,008,058
|
)
|
|
|
(2,305,164
|
)
|
|
Net operating losses
|
|
|
8,305,813
|
|
|
|
5,993,061
|
|
|
163 (j) business interest
|
|
|
-
|
|
|
|
286,133
|
|
|
Valuation allowance
|
|
|
(7,643,963
|
)
|
|
|
(6,260,912
|
)
|
|
Net Deferred Tax Assets
|
|
$
|
643,116
|
|
|
$
|
115,589
|
|
16.
Related-Party Transactions
Management
Fees, Advertising Fees and Sale of Non-Perishable and Perishable Products to Related Parties
The
following is a detailed breakdown of significant management fees, advertising fees and sale of products for the year ended March
31, 2020 and 2019 to related parties, which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, a majority
shareholder, and not eliminated in the consolidated financial statements. In addition, the outstanding receivables due from these
related parties as of March 31, 2020 and 2019 were included in advances and receivables – related parties (see Note 7).
|
Year ended March 31, 2020
|
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
|
Tampa Seafood
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Dragon Seeds
|
|
|
3,650
|
|
|
|
-
|
|
|
|
-
|
|
|
NY Mart MD Inc.
|
|
|
22,550
|
|
|
|
11,520
|
|
|
|
1,004,275
|
|
|
NYM Elmhurst Inc.
|
|
|
90,698
|
|
|
|
4,752
|
|
|
|
828,932
|
|
|
Spring Farm Inc.
|
|
|
6,050
|
|
|
|
-
|
|
|
|
58,134
|
|
|
New Ming
|
|
|
-
|
|
|
|
8,320
|
|
|
|
-
|
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
58,408
|
|
|
Others
|
|
|
80,000
|
|
|
|
250
|
|
|
|
-
|
|
|
|
|
$
|
204,948
|
|
|
$
|
24,842
|
|
|
$
|
1,949,749
|
|
|
Year ended March 31, 2019
|
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
|
New York Mart, Inc.
|
|
$
|
11,651
|
|
|
$
|
880
|
|
|
$
|
2,248,885
|
|
|
Pacific Supermarkets Inc.
|
|
|
77,998
|
|
|
|
14,040
|
|
|
|
1,327,401
|
|
|
NY Mart MD Inc.
|
|
|
86,529
|
|
|
|
10,920
|
|
|
|
193,741
|
|
|
El Monte
|
|
|
4,410
|
|
|
|
-
|
|
|
|
315,641
|
|
|
iFresh Harwin Inc
|
|
|
2,862
|
|
|
|
2,600
|
|
|
|
9,677
|
|
|
Spring Farm Inc.
|
|
|
5,052
|
|
|
|
1,600
|
|
|
|
2,005
|
|
|
Spicy Bubbles, Inc.
|
|
|
4,944
|
|
|
|
-
|
|
|
|
-
|
|
|
Tampa Seafood
|
|
|
3,610
|
|
|
|
-
|
|
|
|
-
|
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
52,996
|
|
|
|
|
$
|
197,056
|
|
|
$
|
30,040
|
|
|
$
|
4,150,346
|
|
Long-Term
Operating Lease Agreement with a Related Party
The Company leases warehouse and stores
from related parties that is owned by Mr. Long Deng, the majority shareholder of the Company, and will expire on April 30, 2026.
Rent incurred to the related party was $886,543 and $1,208,000 for the year ended on March 31, 2020 and 2019.
17. Contingent Liabilities
The
Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve
these matters in a manner that the Company believes best serves the interests of its stakeholders. These matters have not resulted
in any material losses to date.
Leo
J. Motsis, as Trustee of the 140-148 East Berkeley Realty Trust v. Ming’s Supermarket, Inc.
This case relates to
a dispute between Ming’s Supermarket, Inc. (“Ming”), the subsidiary of the Company and the landlord of the building
located at 140-148 East Berkeley Street, Boston, MA (the “Property”), under a long-term operating lease (“Lease”).
Since February 2015, Ming was unable to use the premise of the property due to a structure damage assessed by the Inspectional
Services Department of the City of Boston (“ISD”), and stopped paying the rent since April 2015 after the landlord
refused to perform structural repairs. The landlord then sued Ming for breach of the Lease and unpaid rent, and Ming counterclaimed
for constructive eviction and for damages resulting from the landlord’s breach of its duty to perform structural repairs
under the Lease.
The
case was tried before a jury in August 2017. The jury awarded Ming judgment against the landlord in the amount of $795,000, plus
continuing damages of $2,250 per month until the structural repairs are completed. The court found that the landlord’s actions
violated the Massachusetts unfair and deceptive acts and practices statute and therefore doubled the amount of damages to $1,590,000
and further ruled that Ming should also recover costs and attorneys’ fees of approximately $250,000. The result is a judgment
in favor of Ming and against the landlord that will total approximately $1.85 million. The judgment requires the landlord to repair
the premises and obtain an occupancy permit. The landlord is responsible to Ming for damages in the amount of $2,250 per month
until an occupancy permit is issued. The judgment also accrues interest at the rate of 12% per year until paid.
The landlord filed
an appeal, the appeal hearing was held in July 12, 2019 and judge concluded that the landlord should be required both to perform
the relevant obligations of the lease in the future and to pay damages caused by his previous failure to do so and for any period
of delay in completing specific performance. On November 5, 2019, the Appeal Count issued a full decision affirming the judgment
was entered and transmitted a rescript of the affirmance of the judgment to the superior count.
The final judgment was entered after rescript
on May 7, 2020. On June 29, 2020, the landlord executed the final judgment finally and made the payment of $2,536,142 to Ming.
Hartford Fire
Insurance Company v. New York Mart Group Inc.
On November 28, 2018, a lawsuit was filed
against New York Mart Group, Inc. by Hartford Fire Insurance Company (“Hartford”), who seeks contractual indemnification
from the Company and other defendants relating to certain supersedeas bonds issued by Hartford in connection with the unsuccessful
appeal of state court litigation by iFresh’s codefendant. Hartford alleges that iFresh guaranteed performance of the bonds
and therefore seeks to enforce the indemnification terms thereof against iFresh in addition to the other defendants. On June 14,
2019, Hartford filed a motion for summary judgment against iFresh, arguing that Hartford is entitled to judgment as a matter of
law. On July 29, 2019, the Court granted judgment against iFresh in a consented amount of $458,498 for the alleged loss. The Court
is still having a hearing on Hartford’s entitlement to attorneys’ fees/costs. The Company has accrued $500,000 for
the potential loss and expense associated with this case.
Winking
Group LLC v. New York Supermarket E. Broadway Inc.
A
subsidiary of the Company, New York Supermarket E. Broadway Inc., entered into a lease with Winking Group LLC for the Company’s
store located at 75 East Broadway, NY, 10002. The landlord sued the Company for failing to pay rent and additional fee of $450,867.
The Company is currently negotiating an agreement with the landlord to settle the case. On November 21, 2019, the Company consented
to a final judgement of possession in favor of Winking Group LLC in the amount of $400,000, with $50,867 being waived by the landlord.
$400,000 was paid as of December 31, 2019.
JD
Prroduce Maspeth LLC v. iFresh, Inc. alt.
On
September 16, 2019, the JD Produce Maspeth (“plaintiff”) seeks $178,953 in unpaid goods purchased by the Company.
The legal process was just initiated and interrupted by the outbreak of COVID-19. The Company has recorded the purchase and payable
on the financial statements.
Don
Rick Associates LLC. v. New York Mart Roosevelt Inc.
One of the subsidiaries
of the Company, New York Mart Roosevelt Inc, has failed to pay the rents on time. The landlord has sued the Company for nonpayment.
On May 31, 2019, a motion for summary Judgement was filed for unpaid rent in the amount of $102,792 and $14,984 for attorney fees.
These amounts have been fully accrued as of March 31, 2020.
18.
Subsequent Event
Key
Bank Loans
From Jan to June 2020, the Company failed
to make loan payment of $1,194,878. On August 6, 2020 the Company received 3rd forbearance agreement from Key Bank. Please refer
to Note 10 for key terms.
Acquisitions
On
March 26, 2020, the Company entered into an agreement (the “Acquisition Agreement”) with Kairui Tong and Hao Huang
(collectively, the “Sellers”) and Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd., pursuant
to which the Sellers will sell their 100% interest in Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd.
(collectively, the “Target Companies”) to the Company in exchange for 3,852,372 shares of the Company’s common
stock and 1,000 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”).
Upon approval of the Company’s shareholders, the 1,000 shares of Series B Preferred Stock will be converted into 3,834,796
shares of the Company’s common stock. The Series B Preferred will rank on parity with the Series A Convertible Preferred
Stock of the Company.
On April 22, 2020, the Company consummated
the above transactions. The aggregate fair value of the consideration paid by the Company in the acquisition is approximately $9.8
million and is based on the closing price of the Company’s common stock at the date of closing. The excess of total cost
of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill.
The following table presents the estimated fair value of the
assets acquired and liabilities assumed at the date of this acquisition:
(Unaudited)
|
Cash
|
|
$
|
371,910
|
|
|
Accounts receivable, net
|
|
|
84,260
|
|
|
Inventories, net
|
|
|
2,099,306
|
|
|
Advances to suppliers, net
|
|
|
76,476
|
|
|
Other current assets
|
|
|
910,435
|
|
|
Property and equipment, net
|
|
|
4,310,878
|
|
|
Total tangible assets acquired
|
|
$
|
7,852,665
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
9,260
|
|
|
Advance from customers
|
|
|
386,119
|
|
|
Accrued expenses and other payables
|
|
|
703,060
|
|
|
Deferred tax liability
|
|
|
954,173
|
|
|
Total liability assumed
|
|
|
2,052,612
|
|
|
Net tangible assets acquired
|
|
|
5,800,053
|
|
|
Intangible assets
|
|
|
3,013,272
|
|
|
Goodwill
|
|
|
1,026,250
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
9,839,575
|
|
The
following table presents the Company’s unaudited pro forma results for the years ended March 31, 2020, as if the acquisitions
had occurred on April 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related
to the amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with
the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.
|
|
|
For the year ended
March 31,
2020
|
|
|
Pro forma net revenue
|
|
$
|
91,423,225
|
|
|
Pro forma net loss
|
|
|
(7,538,237
|
)
|
|
Pro forma loss per share
|
|
|
(0.29
|
)
|
|
Weighted average shares-Basic and diluted
|
|
|
26,068,249
|
|
On
March 17, 2020, the Company entered into a purchase agreement (the “Acquisition Agreement”) with Guo Hui Ji, a citizen
of the People’s Republic of China (the “Seller”) and Xiamen DL Medical Technology Co, Ltd., a People’s
Republic of China company, pursuant to which the Seller will sell his 70% equity interests in Xiamen DL Medical Technology Co,
Ltd. to the Company (the “Equity Interests”). In consideration for the Equity Interests, the Company shall pay to
the Seller $600,000 in cash and issue 900,000 shares of common stock of the Company to the Seller.
On
April 28, 2020, the Company consummated the above transactions. The aggregate fair value of the consideration paid by the
Company in the acquisition is approximately $1.7 million and is based on the closing price of the Company’s common
stock at the date of closing. As of this report date, the Company is still gathering information necessary to provide those
disclosures with regard to this transaction. The Company plan to provide this information in its quarterly report on Form
10-Q for the period ended June 30, 2020.
On August 6, 2020, the Company entered into an agreement (the
“Acquisition Agreement”) with Zhang Fei and Liu Meng (collectively, the “Sellers”) and Jiuxiang Blue Sky
Technology (Beijing) Co., Ltd. (the “Target”), pursuant to which the Sellers will sell their 100% interest in the Target
to the Company in exchange for 5,036,298 shares of the Company’s common stock and 1,000 shares of the Company’s Series
C Convertible Preferred Stock (the “Series C Preferred Stock”). Upon approval of the Company’s shareholders,
the 1,000 shares of Series C Preferred Stock will be converted into 1,916,781 shares of the Company’s common stock. The Series
C Preferred Stock will rank on parity with the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock of
the Company. All of the issuances and conversions of the Company’s common stock in the foregoing Acquisition Agreement were
at a price per share of $1.402. The closing of the acquisition as contemplated by the Acquisition Agreement is subject to customary
closing terms and conditions.
F-27