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 own approximately 83.9% of our outstanding common stock and the former stockholders of E-Compass
own 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”.
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 (9) retail supermarkets
across New York, Massachusetts and Florida, with over 6,920,500 sales transactions in the fiscal year ended March 31,
2018. NYM also has three stores under construction which are expected to open in the fourth quarter in 2018. In addition to
retail supermarkets, iFresh operates two in-house wholesale businesses, Strong America Inc. (“Strong America”)
and New York Mart Group (“NYMG”), 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 businesses 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 64.8% of iFresh’s total retail sales during the fiscal
year ended March 31, 2018.
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, will be 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 will be the Company’s first store in Long
Island and the sixth in New York. The Company expects iFresh Glen Cove to open in the last quarter of 2018.
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 the last quarter of 2018.
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 is currently under construction. The Company expects the store to open in the last quarter of 2018.
iFresh
currently operates nine (9) retail super markets and two (2) wholesale facilities. iFresh plans to strategically expand along
the I-95 corridor and eventually operate super markets in all states on the east coast.
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 is 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 $136.7 million and $130.1 million for the years ended March 31, 2018 and 2017, respectively. iFresh’s net
loss was $0.8 million for the year end March 31, 2018, a decrease of $2.0 million, or 166%, from $1.2 million of net income for
the year end March 31, 2017. Adjusted EBITDA was $2.0 million for the year end March 31, 2018, a decrease of $3.9 million, or
66.6%, from $5.9 million for the year end March 31, 2017. 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 34.
In
terms of sales by category, perishables, including vegetables, seafood, meat, fruit and hot food (collectively, the “Perishables”),
constituted approximately 64.8% of iFresh’s total annual retail sales during the fiscal year 2018 ended March 31, 2018.
Within this category, vegetables and seafood constituted 37.1% of overall annual retail sales.
The
table and graph below depicts sales of iFresh by category of iFresh for the fiscal year ended March 31, 2018:
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 Report
1
. 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 47.3% to iFresh’s total sale as of March 31, 2018.
Table
1 Asian-American Consumption of Perishables
2
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 oilSome 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.
Growth
Potential and Features of Asian/Chinese Americans
Fast
growing population
— According to the Nielsen Asian American 2015 Report, the Asian-American population grew 46% from
2002 to 20.3 million people as of 2014. Beginning in 2013, China replaced Mexico as the number one country for recent immigration.
3
According to the U.S. census bureau, as of 2014, the Chinese population was the largest Asian group in the United States
with a population of 4.52 million people, almost 1 million over the Asian-Indian population and accounts for 21.4% of the total
Asian-American population
4
. We believe Chinese Americans will be an increasingly significant part of the multicultural
majority U.S. population.
Fast
growing purchasing power
— The Nielsen report points that Asian-American population is not only the fastest growing
population demographic in the U.S., but the Asian American demographic is the demographic with the largest percentage increase
in buying power. The buying power of Asian-Americans was $770 billion in 2014 and is estimated to increase to $1 trillion by 2018.
5
In terms of household income for Chinese Americans, they recorded a median household income of $67,396,
6
which
was 31% higher than the U.S. national average of $53,250
7
, possibly due to their high education level and cultural
emphasis on education. With respect to shopping habits, Asian-Americans are 31% more likely than non-Asian Americans to spend
more than $200 a week at the grocery store
8
, and spend 19% more on food than general market consumers.
9
Online
prone —
According to the Nielsen report, the Asian-American population is young, tech savvy and frequently shops online.
Asian Americans visit digital stores 37% more frequently and spend 22% more monthly than their non-Hispanic white peers.
10
We believe that Asian Americans’ avid use and adoption of technology illustrates the importance of an online platform,
social Media and mobile apps when promoting brand to this specific customer group.
Concentrated
but on the move —
Asian and Chinese Americans are most highly concentrated in west and east coast metropolitan areas,
but as the need for a highly educated high-technology workforce increases, suburbs with better work and living environments and
schools are attracting a large numbers of skilled Asian-Americans which encourages “ethnoburbs” of various scales
nationwide dominated by non-white ethnic groups.
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 market
11
, 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
facilities and logistics which distinguishes iFresh from its competitive peers. Currently a leader on the east coast, iFresh is
setting its short term goal to achieve the scale of HMart, the Korean specialty grocery chain operating 51 stores with over $1.5
billion annual revenue as of 2015. The reality of low market concentration and unsophisticated competitors gives iFresh the opportunity
to consolidate the market and cement its dominant market position.
3
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P6, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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4
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US Census Bureau, 2010 –
2014 American Community Survey, 1 year estimates
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5
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P7, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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6
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P39, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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7
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P33, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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8
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P13, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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9
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P8, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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10
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P24, Culturally Connected
and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company
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11
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P19 IBISWorld Industry Report
OD4333: Ethnic Supermarkets, by Andrew Alvarez, November 2015
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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 businesses, Strong America and New York Mart Group (“NYMG”), which supply 31% of the items sold
in its retail supermarkets with ten self-owned brands, including Family Elephant, Feiyan and Green Acre, and an exclusive distributorship
for eight 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
two wholesale businesses, Strong America and NYMG, collectively provide 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. The two wholesale arms have distinct focuses: Strong America
mainly provides grocery products and services to iFresh retail store and external supermarkets, while NYMG focuses on supplying
fresh perishable items to retail supermarkets. Strong America owns nine exclusive distributorship rights and iFresh’s ten
self-owned brands. Strong America acquired its self-owned brands from third parties and integrated them into its wholesale catalog.
The ten 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.
NYMG serves as an important connection to farms in New Jersey and Florida, which ensures reliable supplies of popular vegetables,
fruits and seafood to iFresh’s retail stores. The two in-house wholesale arms of iFresh not only secure 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 facilities, 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 6.9 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 facilities further enables iFresh to best deploy its experienced staff
to coordinate stock and to make 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 sale performance. iFresh’s two in-house wholesale facilities are 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 facilities 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 ten
self-owned brands and obtained the exclusive distributorship for 9 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 and NYMG. In the aggregate, Strong America and NYMG import over 2,000
items from all over Asia. The top three importing countries are China, Thailand and Taiwan, making up 95% of total imports. iFresh’s
wholesale businesses together supply 23% of total goods, in which 6% are imported goods, sold in iFresh retail supermarkets at
attractive prices.
Strong
America is also the exclusive distributor of eight 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
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Name
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Trademark
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Products
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Exclusive
Region
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Strong America
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ShuangDeng
(1)
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Cooking
Wine
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East
America, Central and South America
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Strong America
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Gu
Yue Long Shan
(2)
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Yellow
Wine
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North
America
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Strong America
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Bai
Lu
(1)
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Rice
Noodles
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East
America, Central and South America
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Strong America
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Igagoe
(3)
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Soy
Sauce
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East
America, Central and South America
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Strong America
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You
Joy
(5)
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Seasonings
and spices
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East
Coast of the U.S., Midwestern U.S. and Central and South America
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Strong America
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Hao
Ren Jia
(6)
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Seasonings
and spices
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U.S.
East Coast
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Strong America
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Da
Hong Pao
(6)
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Seasonings
and spices
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U.S.
East Coast
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Strong America
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Bei
Da Huang
(7)
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Beans
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U.S.
East Coast
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(1)
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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.
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(2)
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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.
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(3)
|
Strong America entered into an exclusive distribution
agreement with Igagoe Co., Ltd., which granted Strong America exclusive distribution rights for the products registered under
the brand of “Igagoe” for East America, Central America and South America for a period of five years from October
1, 2015 to December 31, 2019. The agreement can be renewed six months before expiration with consents of both parties.
|
|
|
(5)
|
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 for a period of five years, from January 1, 2015 till December 31, 2019. The agreement can be renewed six months before
expiration with consents of both parties. Strong America agreed to make annual purchase of over RMB 2,200,000 under this agreement.
|
|
|
(6)
|
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 July 1, 2014 to July 31, 2019. The agreement can be renewed six months before expiration
with consents of both parties.
|
|
|
(7)
|
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 one year
from August 1, 2017 to August 1, 2018.
|
ii.
Self-owned brands for target customers at competitive prices
Since
2011, Strong America, one of iFresh’s wholesale facilities, 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
|
Strong America
|
|
ShuangDeng/
Double
Lantern Brand
|
|
|
|
Cooking wine
|
|
N/A
|
|
Pending
|
Strong America
|
|
Seastar
|
|
|
|
Frozen seafood and
frozen seafood products
|
|
N/A
|
|
Pending
|
Strong America
|
|
Huang Duan Xiang
1987
|
|
|
|
Rice noodles; Chinese
rice noodles (bifun, uncooked)
|
|
N/A
|
|
Pending
|
iFresh Inc.
|
|
I FRESH
|
|
|
|
Supermarkets
|
|
N/A
|
|
Pending
|
iFresh Inc.
|
|
I FRESH
|
|
|
|
Supermarkets
|
|
N/A
|
|
Pending
|
Online
Grocery Pioneer
To
satisfy the needs of the growing suburban Chinese population, iFresh started its online shopping and delivery service in
January 2016 and has achieved good growth momentum since then. In May 2016, iFresh launched its mobile App, NYMart, to
further enhance the shopping experience for its customers. The online shopping and delivery service currently covers New
York, New Jersey and Connecticut. The yearly orders placed and yearly sales have witnessed 143% and
49%
growth, respectively. With capital support and experienced personnel in place, iFresh believes that online shopping and
delivery will be a crucial part in iFresh’s future growth strategy. iFresh’s online grocery initiative witnesses
an accumulated transaction volume of 19,741 and accumulated sales of approximately $1,585,120.71 from its commencement of
operation to March 31, 2018.
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
Historical
Growth strategy
iFresh
grew via two major paths in the past 20-year operation: organic growth and acquisition. The vertically integrated network, steadily
growing new stores and online shopping initiative constituted the 3 pillars for organic growth. As of acquisitions, iFresh was
highly selective in its past acquisitions and had ensured its expansion path was coordinated with its infrastructure construction.
Acquisition
Record
— iFresh has strategically targeted only those locations compatible with its infrastructure.
iFresh
was able to build its brand within the local Asian and Chinese community and quickly turned distressed stores into profitable
assets despite different geographic locations and market conditions. Based on its understanding of the market, iFresh quickly
identified the weakness of acquired stores and took specific actions. For example, prior to acquisition, Ming’s Supermarkets
sold mainly imports from China, had high sourcing and operation costs and offered limited live seafood and produce. After taking
it over, iFresh immediately increased its produce and live seafood offerings thanks to its in-house logistics system and partnership
with farms. iFresh’s wholesale subsidiaries also enable iFresh to offer diversified selections, attracting customers not
only from China, but from Korea, Japan, Thailand and other East and Southeast Asian countries. For the Brooklyn store, iFresh
identified that high worn-out rate and lack of standardized operation hindered store profitability. After taking it over, iFresh
started a 3-month personnel training course for live product management and equipment procedures, which led a significant reduction
in wear-and-tear rate from 6% to 1% and an equivalent 5% increase in profitability. A performance related pay system and internal
promotion was also introduced to and encouraged in the Brooklyn store to best stimulate staff performance in the store.
iFresh
has a record of successful acquisitions. For example:
|
●
|
In 2009, iFresh acquired Ming’s Supermarket
in Boston, Massachusetts and turned Ming’s Supermarket into a subsidiary retailer under iFresh management. The initial
acquisition investment and renovation cost was about $2.7 million. NYM increased sales from $8.2 million to $17.0 million,
or 107.3%, one year after the acquisition. For the year ended March 31, 2018, Ming’s Supermarket recorded net sales
of $17.2 million and Adjusted EBITDA of $0.72 million.
|
|
●
|
In 2011, iFresh acquired a store in Brooklyn,
New York and operates it as New York Mart 8
th
Ave, Inc (8
th
Ave). The initial investment was about $1.3
million. After two years operating under iFresh’s management, the store’s annual sales increased from $11.0 million
to 18.0 million, or 63.6%. For the year ended March 31, 2018, New York Mart 8
th
Ave, Inc. realized net sales of
$18.5 million and Adjusted EBITDA of $0.93 million.
|
|
●
|
In 2013, iFresh acquired Zen Mkt Quincy, Inc.
(“Zen”) in Quincy, Massachusetts. The acquisition and renovation cost was $0.7 million. Prior to the Acquisition,
the store realized $3.0 million in sales per year. After the acquisition, iFresh improved its annual sales and profitability.
Zen’s sales and adjusted EBITDA for the year ended March 31, 2018 were $8.8 million.
|
For
additional information on Adjusted EBITDA, see the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Adjusted EBITDA,” beginning on page 34.
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 WeChat
12
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.
12
|
WeChat is a popular social media among Chinese
speaking communities.
|
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.
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 $50 million of capital in addition to its cash flow in place for the year ended March 31, 2018 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, 2018, the perishable categories contributed approximately 64.5% to iFresh’s total net sales,
similar to 64% for the year ended March 31, 2017, 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, 2018, the non-perishable grocery category contributed approximately
35.5% to iFresh’s total Net Sales and realized a markup of 46.1% on average for the year ended March 31, 2018.
The
table below depicts the components of net sales and gross margin in detail as of March 31, 2018:
Table
4 Contribution of Categories
Category
|
|
Net Sales
%
|
|
|
Markup
%
|
|
Vegetables
|
|
|
20.8
|
%
|
|
|
39.2
|
%
|
Seafood
|
|
|
16.3
|
%
|
|
|
27.9
|
%
|
Meat
|
|
|
13.9
|
%
|
|
|
38.2
|
%
|
Fruit
|
|
|
10.2
|
%
|
|
|
32.3
|
%
|
Hot Food
|
|
|
3.3
|
%
|
|
|
58.7
|
%
|
Perishable Total/Average
|
|
|
64.5
|
%
|
|
|
35.7
|
%
|
|
|
|
|
|
|
|
|
|
Grocery
|
|
|
35.5
|
%
|
|
|
46.1
|
%
|
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 46.1%). 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, 2018 and 2017, iFresh recognized $143,824 and $388,450 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.
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 11.9 years. Five of
the ten current leases have remaining periods of at least 10 years; and the rest five 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 8
th
Ave,
Brooklyn, NY 11120
|
|
15,000
|
|
11/1/2011
|
|
10/31/2036
|
|
18.3
|
|
N/A
|
New York Mart Roosevelt Inc.
|
|
142-41 Roosevelt Ave,
Flushing, NY 11354
|
|
18,000
|
|
6/8/2010
|
|
6/7/2040
|
|
21.9
|
|
10 years
|
New York Mart East Broadway Inc.
|
|
75 East Broadway,
New York, NY 10002
|
|
7,500
|
|
12/28/2001
|
|
10/31/2024
|
|
6.3
|
|
5 years
|
New York Mart Mott St. Inc.
|
|
128 Mott Street,
New York, NY 10013
|
|
12,000
|
|
11/1/2010
|
|
10/31/2025
|
|
7.3
|
|
10 years
|
New York Mart Ave U 2
nd
Inc.
|
|
17-21 Ave U,
Brooklyn, NY 11229
|
|
14,000
|
|
5/31/2011
|
|
8/31/2028
|
|
10.1
|
|
N/A
|
Ming’s Supermarket Inc.
|
|
1102 Washington Street,
Boston, MA 02118
|
|
23,356
|
|
1/1/2007
|
|
12/1/2026
|
|
8.4
|
|
10 years
|
Zen Mkt Quincy, Inc.
|
|
733 Hancock St. Quincy,
MA 02170
|
|
10,000
|
|
3/1/2003
|
|
6/30/2023
|
|
5.7
|
|
10 years
|
New York Mart Sunrise Inc.
|
|
10101 Sunset Strop Sunrise,
FL 33322
|
|
15,033
|
|
12/1/2010
|
|
11/30/2030
|
|
12.4
|
|
20 years
|
iFresh E. Colonial, Inc.
|
|
2415 E Colonial Drive,
Orlando, FL 32803
|
|
20,370
|
|
7/5/2017
|
|
1/1/2024
|
|
5.5
|
|
N/A
|
Strong America Limited
|
|
2-39 54
th
Ave,
Long Island City,
NY 11101
|
|
59,000
|
|
5/1/2016
|
|
4/30/2026
|
|
7.8
|
|
N/A
|
Strong America Limited
|
|
2-39 54
th
Ave,
Long Island City,
NY 11101
|
|
10,886
|
|
3/1/2017
|
|
9/30/2027
|
|
9.4
|
|
Auto renewal each
year (unless 60 day notice)
|
New York Mart Group Inc.
|
|
55-01 2
nd
Street,
Long Island City, NY 11101
|
|
20,000
|
|
3/1/2011
|
|
2/28/2021
|
|
2.6
|
|
N/A
|
New York Mart Group Inc.
|
|
2-39 54
th
Ave,
Long Island City, NY 11101
|
|
14,048
|
|
3/1/2017
|
|
9/30/2027
|
|
9.4
|
|
5 years
|
Employees
As
of March 31, 2018, we had approximately 445 employees, 366 of whom are full-time employees and the remaining 79 of whom work part-time.
We have 60 employees who have worked with us for 10 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.
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.
Ming’s
Supermarket, Inc. (“Ming”), the subsidiary of the Company, is a tenant at a building located at 140-148 East Berkeley
Street, Boston, MA (the “Property”), pursuant to a lease dated September 24, 1999 (the “Lease”). The Lease
had a 10-year initial term, followed by an option for two additional 10-year terms. Ming has exercised that first option and the
Lease has approximately 15 years remaining to run if the second option is also exercised. The Lease also gives Ming a right of
first refusal on any sale of the building.
On
February 22, 2015, a sprinkler pipe burst in the Property. This caused the Inspectional Services Department of the City of Boston
(“ISD”) to inspect the Property. The ISD found a number of problems which have prevented further use of the Property.
The ISD notified both landlord and tenant that the Property was only permitted for use as an elevator garage and that its use
as a warehouse was never permitted and that a conditional use permit must be obtained from the City of Boston to make such use
lawful. Moreover, the Property was found to have major structural issues requiring repair, as well as issues with the elevator
and outside glass. The result of the ISD’s findings are that Ming was ordered not to use the Property for any purpose unless
and until the structural and other repairs are completed and its use as a warehouse is permitted by the Boston Zoning Board.
While
the Lease provides that the elevator (approximate cost $400,000) and glass repairs (approximate cost $30,000) are the responsibility
of the tenant, the structural repairs (approximate cost $500,000) are the landlord’s responsibility under the Lease, unless
the structural damage was caused by the tenant’s misuse of the Property. In this regard Ming has retained an expert who
will testify the structural damage to the building was caused by long term water infiltration and is not the result of anything
Ming did. Ming initially sought for the landlord to perform the structural repairs and agreed that upon completion of those repairs,
Ming would repair the elevator and the broken glass. In addition, Ming asked the landlord to cooperate in permitting use of the
Property as a warehouse.
The
landlord refused to either perform structural repairs or to cooperate on the permitting. As a result, as of April 2015, Ming
began withholding rent, since Ming was barred from using the Property by order of the ISD. 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 a Notice of Appeal, which
will delay ultimate resolution of this matter for potentially one year or more. Ming has filed a lien against the landlord’s
real estate as security for the judgment.
On May 31, 2018, the ISD issued an occupancy
permit, triggering Ming’s requirement to resume regular rental payments. Ming paid rent for June 2018 to the landlord.
No guaranties or predictions can be made
at this time as to ultimate final outcome of this case.
SKKR Trading LLC d/b/a 38 Live Bait v. New Sunshine
Group LLC and New York Mart Group Inc.
A
lawsuit has been filed against New York Mart Group, Inc. (“NYMG”), a subsidiary of iFresh, and New
Sunshine Group, LLC (“New Sunshine”), by SKKR Trading, LLC (“Plaintiff”) for breach of contract and
failure to pay. The plaintiff is seeking from NYMG and New Sunshine for principal damages the amount of $116,878 for
the total amount of invoices allegedly past due, a penalty of $256,000, and attorney’s fees
estimated to be $80,000 to $90,000.
The
Plaintiff claimed that NYMG and New Sunshine failed to pay for an order of shrimp. NYMG and New Sunshine have raised various defenses,
most of which center on the arguments that NYMG and New Sunshine abandoned the Distribution Agreement and did not order, receive,
or benefit from the shrimp at issue. Rather, the shrimp was ordered by a tenant of NYMG, Hong Hai, who was a completely separate
entity than NYMG or New Sunshine.
The
case went to trial on March 12 to 15, 2017. On April 17, 2017, the Count ruled in favor of Plaintiff and against NYMG and New
Sunshine in the amount of $385,492. NYMG hired a new law firm to appeal the case. The appeal process will take approximately 1
year. During the appeal, NYMG will not be required to pay the amount under the Final Judgment. While discovery is ongoing
and no guaranties or predictions can be made at this time as to ultimate outcome, the Company and its attorney believe a fair
estimate of the chance the Company will prevail on the appeal of the Final Judgment is approximately 50%.
Most
recently, on August 11, 2017, approximately $196,000 in funds held in one of New York Mart’s bank accounts at TD Bank
was ordered by the Court to be frozen until the appeal has been concluded, after Plaintiff tried to seize these funds to enforce the aforementioned judgement.
Once
the appeal is concluded, the ownership of the $196,000 will be determined. SKKR is not permitted to take any other action to
enforce the judgment, including attempting to seize any other funds in the TD Bank accounts, any other funds, or any assets
owned by NYM. Accordingly, NYM is able to continue to use all bank accounts at TD Bank (with the exception of the frozen
$196,000 which has been set aside) without the threat of those accounts being seized by SKKR.
The
principal shareholder of the Company, Mr. Long Deng, made a personal pledge to pay for the entire amount of the damage if
the appeal is ruled against NYMG. The Company did not accrue any of this potential liability.
Jendo Ermi, LP v iFresh Inc.; iFresh Inc. v.
Jendo Ermi LP
On
October 20, 2017, Jendo Ermi, LP filed an unlawful detainer action against iFresh, Inc. (Los Angeles Superior Court Case No.:
KC069728). The case involved a dispute over property leased to iFresh, Inc. to operate a grocery store in El Monte, California.
Jendo Ermi, LP claimed that iFresh, Inc. had not properly paid rents as required by the lease. On March 29, 2018, the court entered judgment in favor of Jendo and against iFresh for possession
of the Premises, forfeiture of the lease, and damages in the preliminary amount of $309,009, with the final amount to be determined
by the court. On April 23, 2018, iFresh filed a Notice of Appeal of the judgment. On April 26, 2018, the court entered an amended
judgment in favor of Jendo and against iFresh for possession of the Premises, forfeiture of the lease, and damages in the amount
of $952,691.56, with attorneys’ fees and costs to be determined by the court.
On
November 27, 2017, iFresh, Inc. filed a complaint against Jendo Ermi, LP for, among other things, fraud and breach of contract
associated with the lease (Los Angeles Superior Court Case No.: BC684617). iFresh, Inc. alleged that Jendo Ermi (1) overstated
the square footage of the property to obtain higher rents; (2) failed to provide certain furniture, fixtures, and equipment (FF&E)
valued at approximately $300,000 that were promised under the lease; and (3) failed to disclose that parts of the building were
not habitable.
On
May 31, 2018, the Company entered into a settlement agreement with Jendo Ermi, LP whereby iFresh agreed to transfer possession
of the premises to Jendo and pay Jendo the total amount of $652,038.73 in satisfaction of all disputes between the parties. The
Company timely transferred possession of the premises to Jendo. New York Mart El Monte, Inc., a third party, timely paid the
full settlement amount on behalf of iFresh.
Pursuant to the parties’ settlement agreement, iFresh dismissed with
prejudice its action against Jendo and dismissed its appeal of the unlawful detainer judgment. Pursuant to the parties’
settlement agreement, Jendo shall file an Acknowledgment of Satisfaction of Judgment with respect to the unlawful detainer judgment
on or around September 17, 2018.
The Company evaluates contingencies on an
ongoing basis and will establish loss provisions for matters in which losses are probable and the amount of loss can be reasonably
estimated. The Company is not currently a party to any legal proceeding that management believes could have a material adverse
effect on the Company’s results of operations, cash flows, or balance sheet.
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.
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%. Although the Company has been repaying the Key Bank facility in accordance with its terms, the Company failed to timely
pay taxes in the aggregate principal amount of $1,187,693, which resulted in a tax lien being imposed upon the Company by the
IRS on June 11, 2018 in the amount of $1,236,831.08. Due to these outstanding taxes owed and the tax lien, the Company is currently
in default under the Credit Agreement. We have advised Key Bank of the default, and while Key Bank has not yet acted to accelerate
payment of the facility, Key Bank does consider us to be in default and will not make any further advances under the Credit Facility
until we comply with our obligations under the Credit Agreement. Our inability to draw down amounts under the credit facility
significantly impairs the Company’s growth plans and limits its liquidity. In addition, if Key Bank were to decide to accelerate
repayment of the Credit Facility, our financial condition and results of operation would be negatively impacted. By June 29, 2018,
the Company had paid the full amount of the outstanding IRS obligation. Although the Company anticipates being able to obtain
a waiver from Key Bank regarding the Company’s default, there is no guarantee that we will be successful in doing so.
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.
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 64% of iFresh’s
net sales in fiscal year ended March 31, 2017. iFresh has self-owned wholesale facilities 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 two subsidiaries, Strong America and NYMG, 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 nine 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, one of iFresh’s wholesale subsidiaries, is located. During fiscal year ended March 31, 2017, rental
payments (excluding maintenance and taxes that iFresh is obligated to pay) under the leases from Dragon Development LLC were $637,273.
The leases with Dragon Development LLC renewed on May 1, 2016, and their remaining terms are 10 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.
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.
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. 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
needs approximately $50 million for the year ended March 31, 2018 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 combination
will be adversely affected.
iFresh
believes that it needs approximately $50 million for the year ended March 31, 2018 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 December 31, 2020. 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.
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 54
th
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.
The
table below sets forth the high and low bid prices of our shares, rights, and units as reported on the NASDAQ Stock Market, under
the symbols “ECACU,” “ECAC” and “ECACR,” respectively, for the period from April 1, 2016 through
February 9, 2017. (nothing to fill)
|
|
(1)
Units
|
|
|
Shares
|
|
|
Rights
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Year Ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter ended June 30, 2016
|
|
$
|
10.32
|
|
|
|
10.20
|
|
|
|
10.20
|
|
|
|
10.05
|
|
|
|
0.26
|
|
|
|
0.24
|
|
Second Quarter ended September 30, 2016
|
|
|
12.48
|
|
|
|
10.28
|
|
|
|
10.25
|
|
|
|
10.15
|
|
|
|
0.69
|
|
|
|
0.26
|
|
Third Quarter ended December 31, 2016
|
|
|
10.74
|
|
|
|
10.00
|
|
|
|
10.30
|
|
|
|
10.20
|
|
|
|
0.98
|
|
|
|
0.39
|
|
Fourth Quarter ended March 31, 2017 (ending
February 9, 2017)
|
|
|
11.25
|
|
|
|
5.38
|
|
|
|
11.45
|
|
|
|
9.90
|
|
|
|
1.02
|
|
|
|
0.75
|
|
(1)
|
Our units began trading on
August 13, 2015. The shares and warrants did not begin separate trading until November 25, 2015.
|
The
table below sets forth the high and low bid prices of our common stock as reported on the NASDAQ Stock Market, under the symbol
“IFMK”, for the period from February 10, 2017 (the date on which our common stock was first quoted on the NASDAQ Stock
Market) through March 31, 2018 and for a portion of the first quarter of the fiscal year ended March 31, 2019.
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
Year Ended March 31, 2019:
|
|
|
|
|
|
|
First Quarter (through June 21, 2018)
|
|
$
|
8.30
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2018:
|
|
|
|
|
|
|
|
|
First Quarter ended June 30, 2017 (beginning February 10, 2017)
|
|
$
|
16.00
|
|
|
|
11.72
|
|
Second Quarter ended September 30, 2017
|
|
|
15.28
|
|
|
|
11.50
|
|
Third Quarter ended December 31, 2017
|
|
|
14.2999
|
|
|
|
10.82
|
|
Fourth Quarter ended March 31, 2018
|
|
|
17.4862
|
|
|
|
5.0001
|
|
Holders
of Common Equity
As
of June 29, 2018, there were 123 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, 2018 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))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans
approved by security holders
|
|
|
61,950
|
|
|
|
—
|
|
|
|
1,338,050
|
|
Equity compensation plans not approved by security
holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
61,950
|
|
|
|
—
|
|
|
|
1,338,050
|
|
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 eight
retail supermarkets across New York, Massachusetts and Florida, with in excess of 6,920,500 sales transactions in its stores in
the fiscal year ended March 31, 2018. It also has two in-house wholesale businesses, Strong America Limited (“Strong America”)
and New York Mart Group, Inc. (“NYMG”), 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.
Outlook
iFresh
is an Asian Chinese supermarket chain in the U.S. northeastern region with nine retail super markets and two wholesale facilities.
iFresh plans to strategically expand along the I-95 corridor and its goal is to cover all states on the east coast.
|
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;
|
|
d.
|
iFresh
capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable
competitors; and
|
|
e.
|
iFresh
has a proven and replicable track record of management, operation, acquisition and organic growth.
|
iFresh’s
net sales were $136.7 million and $130.1 million for the years ended March 31, 2018 and 2017, respectively. In terms of sales
by category, Perishables constituted approximately 64.5% of the total sales for the year ended March 31, 2018. iFresh’s
net loss was $0.8 million for the year end March 31, 2018, a decrease of $2 million, or 166%, from $1.2 million of net income
for the year end March 31, 2017. Adjusted EBITDA was $2.0 million for the year end March 31, 2018, a decrease of $3.9 million,
or 66.6%, from $5.9 million for the year end March 31, 2017.
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).
Parking
The
availability of parking is important to iFresh’s sales volume, and changes in the availability of parking would affect iFresh’s
sales volume. For example, one of the two parking lots serving iFresh’s Ming store in Boston was required to be temporarily
lease to a farmers market on Sundays by the city of Boston from April to October 2016, which reduced sales at the store by about
10% during this period. The requirement to lease the parking lot to the farmers market expired on October 31, 2016.
Competition
Competitors
opened two new stores in Brooklyn’s Chinatown in early 2016, which negatively impacted the sales of iFresh’s two stores
located in the area for the year ended March 31, 2017. iFresh’s management believes that this impact is temporary and expects
sales to rebound because the stores are the only ones owned by the operators and therefore lack the sophisticated procurement
process that NYM has and do not have the same influence over suppliers as iFresh.
Payroll
Minimum
wage rates in some states increased in 2016. For example, the minimum wage went from $10 to $11 per hour in Massachusetts. Payroll
and related expenses increased by $1.3 million, or 10% for the year ended March 31, 2018 as compared to the same period of last
year as a result of increase of head count and addition of its business operation and financial reporting department in anticipation
of becoming a public company. iFresh plans to implement systems in the future to improve operating efficiency and reduce labor
costs.
Merger
with E-Compass
In
March 2016, NYM signed a letter of intent of merger with E-Compass and began to engage third parties in connection therewith,
including a financial advisor, legal counsel and auditor, and incurred $992,000 of professional fees related thereto in the year
ended March 31, 2017.
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 37% of its procurement for the fiscal year ended March 31, 2018. iFresh centralized
the management of its vendors and procurement. It believes that such 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.
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, 2018, iFresh has three stores under renovation and they are expected to open by the end of September.
We had $737,000 expense incurred for these three stores for the year ended March 31, 2018, however, no sales has been generated
from them yet.
Store
Acquisitions and Openings
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.
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 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.
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. The Company accounted for this acquisition as a business combination under ASC 805-50-30 whereby we recognize assets
acquired and liabilities assumed in an acquisition at their historical costs as of the date of acquisition, since the acquisition
took place between entities under common control. Prior year financial statements were retrospectively adjusted to combine the
financial information of these entities as if the acquisitions occurred at the beginning of the period of transfer.
Results
of Operations for the years ended March 31, 2018 and 2017
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Net sales-third parties
|
|
$
|
126,874,761
|
|
|
$
|
121,826,207
|
|
|
$
|
5,048,554
|
|
|
|
4.1
|
%
|
Net sales-related parties
|
|
|
9,813,766
|
|
|
|
9,050,553
|
|
|
|
763,213
|
|
|
|
8.42
|
%
|
Total Sales
|
|
|
136,688,527
|
|
|
|
130,876,760
|
|
|
|
5,811,767
|
|
|
|
4.4
|
%
|
Cost of sales-third parties
|
|
|
91,241,612
|
|
|
|
87,610,152
|
|
|
|
3,631,460
|
|
|
|
4.1
|
%
|
Cost of sales-related parties
|
|
|
8,877,854
|
|
|
|
8,162,545
|
|
|
|
715,309
|
|
|
|
8.8
|
%
|
Occupancy costs
|
|
|
7,575,478
|
|
|
|
7,219,860
|
|
|
|
355,618
|
|
|
|
4.9
|
%
|
Gross Profit
|
|
|
28,993,583
|
|
|
|
27,884,203
|
|
|
|
1,109,380
|
|
|
|
4.0
|
%
|
Selling, general and administrative expenses
|
|
|
30,738,330
|
|
|
|
26,087,868
|
|
|
|
4,650,462
|
|
|
|
17.8
|
%
|
Income from operations
|
|
|
(1,744,747
|
)
|
|
|
1,796,335
|
|
|
|
(3,541,082
|
)
|
|
|
-197
|
%
|
Interest expense
|
|
|
(817,227
|
)
|
|
|
(303,894
|
)
|
|
|
(513,333
|
)
|
|
|
169
|
%
|
Other income
|
|
|
1,668,496
|
|
|
|
1,360,616
|
|
|
|
307,880
|
|
|
|
22.6
|
%
|
Income before income tax provision
|
|
|
(893,478
|
)
|
|
|
2,853,057
|
|
|
|
(3,746,535
|
)
|
|
|
-131
|
%
|
Income tax provision
|
|
|
102,185
|
|
|
|
(1,656,334
|
)
|
|
|
1,758,519
|
|
|
|
-106
|
%
|
Net income
|
|
$
|
(791,293
|
)
|
|
$
|
1,196,723
|
|
|
$
|
(1,988,016
|
)
|
|
|
-166
|
%
|
Net income attributable to common shareholders
|
|
|
(791,293
|
)
|
|
$
|
1,196,723
|
|
|
$
|
(1,988,016
|
)
|
|
|
-166
|
%
|
Net
Sales
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Net sales of retail-third parties
|
|
$
|
109,251,522
|
|
|
$
|
106,779,803
|
|
|
$
|
2,471,719
|
|
|
|
2.3
|
%
|
Net sales of retail-related parties
|
|
|
157,346
|
|
|
|
-
|
|
|
|
157,346
|
|
|
|
100
|
%
|
Net sales of wholesale-third parties
|
|
|
17,623,239
|
|
|
|
15,046,404
|
|
|
|
2,576,835
|
|
|
|
17.1
|
%
|
Net sales of wholesale-related parties
|
|
|
9,656,420
|
|
|
|
9,050,553
|
|
|
|
605,867
|
|
|
|
7
|
%
|
Total Net Sales
|
|
$
|
136,688,527
|
|
|
$
|
130,876,760
|
|
|
$
|
5,811,767
|
|
|
|
4.4
|
%
|
iFresh’s
net sales were $136.7 million for the year ended March 31, 2018, an increase of $5.8 million, or 4.4%, from $ 130.1 million for
the year ended March 31, 2017.
Net
retail sales to third parties increased by $2.5 million, or 2.3%, from $106.8 million for the year ended March 31, 2017, to $109.3
million for the year ended March 31, 2018. The increase resulted mainly from new stores opened in 2017, which contribute $3.0
million of retail sales, offset by a decrease of sales in our stores in Florida due to Hurricane Irma; The Company’s affiliates
made immaterial purchase from its retail stores in 2018. Our total net wholesale sales increased by $3.3 million from $24.1 million
for the year ended March 31, 2017 to $27.4 million for the year ended March 31, 2018, which was attributable to an increase of
$0.2 million in sales to related parties due to iFresh focusing on improving its central procurement system through its wholesale
facilities and an increase of $3.1 million from its wholesale revenue to third parties due to expansion of the wholesales business.
Cost
of sales, Occupancy costs and Gross Profit
Retail Segment
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
80,047,600
|
|
|
$
|
77,073,922
|
|
|
$
|
2,973,678
|
|
|
|
3.9
|
%
|
Occupancy costs
|
|
|
7,575,479
|
|
|
|
7,219,860
|
|
|
|
355,619
|
|
|
|
4.9
|
%
|
Gross profit
|
|
|
21,785,789
|
|
|
|
22,486,021
|
|
|
|
(700,232
|
)
|
|
|
-3.1
|
%
|
Gross margin
|
|
|
20.0
|
%
|
|
|
21.1
|
%
|
|
|
-1.1
|
%
|
|
|
-
|
|
For
the retail segment, Cost of sales increased by $3.0 million, or 3.9%, from $77 million for the year ended March 31, 2017, to $80.0
million for the year ended March 31, 2018. The increase was mainly attributable to the increased sales in the year ended March
31, 2018, as well as write- off of inventory amounted to $360,000 which was damaged in Hurricane Irma.
Occupancy
costs consist of store-level expenses such as rental expense, property taxes and other store specific costs. Occupancy costs increased
by approximately 4.9%, from $7.2 million for the year ended March 31, 2017 to $7.6 million for the year ended March 31, 2018,
which was attributable to the new store opened in 2017.
Gross
profit was $21.8 and $22.5 million for the years ended March 31, 2018 and 2017, respectively. Gross margin was 20.0% and 21.1%
for the years ended March 31, 2018 and 2017, respectively. The gross profit decreased due to the increase of occupancy cost, as
well as the increased cost of sales discussed above.
Wholesale Segment
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
20,071,865
|
|
|
$
|
18,698,777
|
|
|
$
|
1,373,088
|
|
|
|
7.3
|
%
|
Gross profit
|
|
|
7,207,794
|
|
|
|
5,398,181
|
|
|
|
1,809,613
|
|
|
|
33.5
|
%
|
Gross margin
|
|
|
26.4
|
%
|
|
|
22.4
|
%
|
|
|
4.0
|
%
|
|
|
-
|
|
For
wholesale segment, cost of sales increased by $1.4 million or 7.3% from $18.7 million in 2017 to $20.1 million in 2018. The increase
is consistent with the significant increase of sales from the wholesale segment in 2017.
Gross
profit increased by $1.8 million, or 33.5% from $5.4 million in 2017 to $7.2 million in 2018. Gross margin increased by 4.0% from
22.4% to 26.4%. The increase was due to the relative proportion if related parties sales to the total wholesale revenue, compared
to 2017. Related party wholesale had relative lower gross profit.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses was $30,738,330 million for the year ended March 31, 2018, an increase of $4,650,463 million, or 17.8%,
compared to $26.1 million for the year ended March 31, 2017, which was mainly attributable to an increase of $1.3 million in payroll
and related insurance and taxes, and an increase of $1.9 million of selling, general and administrative expenses from the acquired
entities in this year, compared to 0.3 million in 2017, which is the year of inception, an increase of $0.5million of rental and
utility expenses, increase of $0.2 million of depreciation expense due to the increase of property and equipment, and increase
of $0.5 million of bad debt expense. The remaining $0.5 million increase was from other general expense which was due to the expansion
of our wholesales business.
Interest
Expense
Interest
expense was $0.8 million for the year ended March 31, 2018, an increase of $0.5 million, or 169%, from $0.3 million for the year
ended March 31, 2017, primarily attributable to the Key Bank loan, which was borrowed in the last quarter of 2017 and only was
outstanding for one quarter , compared to a full year in 2018, In addition, the Company borrowed $4.3 million under the letter
of credit and delayed term loan with Key Bank in 2018.
Other
income
Other
income was $1.7 million for the year ended March 31, 2018, which included management and advertising fee income of $563,000,
rental income of $439,000 , insurance claim proceeds of $335,000 and lottery sales and other income of $329,000. Other income
increased 0.3 million, or 22.6%, from $1.4 million for the year ended March 31, 2017, primarily attributable to an increase
of $110,000 of management fee income and advertising fee income charged to non-related third-party stores based on sale
volume, $200,000 of insurance claims due to the fire accident in Ming store.
Income
Taxes Provision
NYM
is subject to U.S. federal and state income taxes. Income taxes benefit was $0.1 million for the year ended March 31, 2018, a
decrease of $1.8 million, or 106.2%, compared to $1.7 million of income tax expense for the year ended March 31, 2017, which was
mainly attributable the decrease in taxable income. The effective income tax rate was 11% and 58% for the years ended March 31,
2018 and 2017. The significant decrease was due to the fact that federal tax rate was decreased from 34% to 21% in 2018.
Net
Income (loss)
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Net income
|
|
$
|
(791,293
|
)
|
|
$
|
1,196,723
|
|
|
$
|
(1,988,017
|
)
|
|
|
-166.1
|
%
|
Net Profit Margin
|
|
|
-0.58
|
%
|
|
|
0.91
|
%
|
|
|
-1.49
|
%
|
|
|
|
|
Net
loss was $0.8 million for the year ended March 31, 2018, a decrease of $2.0 million, or 166%, from $1.2 million of net income
for the year ended March 31, 2017, mainly attributable to the increase of selling, general and administrative expenses as described
above as well as damage made by Hurricane Irma . Net profit margin as percentage of sales was -0.58% and 0.91% for the years ended
March 31, 2018 and 2017, respectively.
Adjusted
EBITDA
|
|
For the years ended
March 31,
|
|
|
Changes
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Net income
|
|
$
|
(791,293
|
)
|
|
$
|
1,196,723
|
|
|
$
|
(1,988,017
|
)
|
|
|
-166
|
%
|
Interest expenses
|
|
|
817,227
|
|
|
|
303,894
|
|
|
|
88,400
|
|
|
|
41
|
%
|
Income tax provision
|
|
|
(102,185
|
)
|
|
|
1,656,334
|
|
|
|
(1,758,519
|
)
|
|
|
-106
|
%
|
Depreciation
|
|
|
1,729,852
|
|
|
|
1,562,043
|
|
|
|
167,809
|
|
|
|
10.7
|
%
|
Amortization
|
|
|
315,832
|
|
|
|
178,957
|
|
|
|
136,875
|
|
|
|
76
|
%
|
Merger expenses
(1)
|
|
|
-
|
|
|
|
992,116
|
|
|
|
992,116
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
1,969,433
|
|
|
$
|
5,890,067
|
|
|
$
|
(3,920,635
|
)
|
|
|
-66.6
|
%
|
Percentage of sales
|
|
|
1.4
|
%
|
|
|
4.5
|
%
|
|
|
-3.1
|
%
|
|
|
|
|
(1)
|
Merger
expenses were professional fees paid to a financial advisor, legal counsel and auditors in connection with the business combination
transaction with E-Compass, which are non-recurring expenses and added back for adjusted EBITDA.
|
Adjusted
EBITDA was $2.0 million for the year ended March 31, 2018, a decrease of $3.9 million, or 66.6%, as compared to $5.9 million for
the year ended March 31, 2017, mainly attributable to the decrease of net income resulting from increase of selling, general and
administrative expenses as described above. The ratio of Adjusted EBITDA to sales was 1.4% and 4.5% for the years ended March
31, 2018 and 2017, respectively.
Liquidity and Capital Resources
As of March
31, 2018, iFresh had cash and cash equivalents of approximately $0.6 million. iFresh had operating losses in fiscal year 2018
and had negative working capital of $2.6 million and $5.3 million as of March 31, 2018 and 2017, respectively. The Company did
not meet the financial covenant required in the credit agreement with Keybank National Association (“Keybank”). By June 29, 2018, the Company had paid the full amount of the outstanding IRS obligation. As of March 31, 2018, the Company has outstanding
loan facilities of approximately $17 million due to Keybank. Failure to maintain these loan facilities will have a significant
impact on the Company’s operations. 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, 2018. 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. If the future cash flow from operations
and other capital resources are insufficient to fund its liquidity needs, iFresh may be forced to reduce or delay its expected
new store acquisition and openings, sell assets, obtain additional debt or equity capital or refinance all or a portion of its
debt. Our working capital position benefits from the fact that it generally collects cash from sales to customers the same day
or, in the case of credit or debit card transactions, within a few business days of the related sale and the quick inventory turnover.
For
the year ended March 31, 2019, iFresh is projecting that it would need approximately $50 million of capital in addition to its
cash flow in place to fully execute the planned acquisitions, online platform development and new-store openings.
We have
$10 million of advances and receivable from the related parties we intend to collect or acquire, which will be used to offset
part of the acquisition consideration for such related parties. In addition, we had $5.8 million of unused credit line from Key
Bank, which includes a revolving credit of $1.8 million for making advance and issuance of letter of credit, and $4,000,000 of
delayed draw term loan, which we may not draw down on until we resolve the default described below. We also plan to issue additional
stock in lieu of cash as part of the acquisition consideration and plan to raise additional capital through sales of our stock
if necessary. We intend to use part of the cash generated from our operations to fund our online sales initiative. Based on the
above considerations, iFresh’s management is of the opinion that iFresh has sufficient funds to meet its working capital
requirements, capital expenditure and debt obligations as they become due.
The
following table summarizes iFresh’s cash flow data for the years ended March 31, 2018 and 2017.
|
|
For the years ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
(2,562,300
|
)
|
|
$
|
5,924,673
|
|
Net cash used in investing activities
|
|
|
(1,800,091
|
)
|
|
|
(13,900,651
|
)
|
Net cash provided by (used in) financing activities
|
|
|
2,452,487
|
|
|
|
9,973,535
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(1,909,904
|
)
|
|
$
|
1,997,557
|
|
Operating Activities
Net cash provided by operating activities
consists primarily of net income adjusted for non-cash items, including depreciation, changes in deferred income taxes and loss
on early extinguishment of debt, and the effect of working capital changes. Net cash used in operating activities was approximately
$2.6 million for the year ended March 31, 2018, a decrease of $8.5 million, or 143%, compared to $6.0 million for the year ended
March 31, 2017. The decrease was a result of a decrease of cash generated from net income of $2.0 million, an increase of $6.5
million from change of working capital mainly resulting from an increase in account receivable, offset by the increase of accounts
payable.
Investing Activities
Net cash used in investing activities was
approximately $1.8 million for the year ended March 31, 2018, an decrease of $12.1 million, compared to $14.0 million for the year
ended March 31, 2017. The decrease was primarily attributable to the decrease in acquisition of property and equipment of $2.9
million and collection of advance made to related parties of $2.1 million, compared to cash paid for advance to related parties
for $7.2 million.
Financing
Activities
Net
cash provided by financing activities was approximately $2.5 million for the year ended March 31, 2018, which mainly consisted
of net cash flow from borrowing bank loans of $2.9 million, offset by $0.5 million cash paid for notes payable and capital lease.
Net cash provided from financing activities was $10 million for the year ended March 31, 2017, which mainly consisted of net cash
flow from borrowing bank loans of $10.3 million, offset by $0.5 million cash paid for notes payable and capital lease.
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. $3,200,000 of the revolving credit was used as of March 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 $1.05 million under the Delayed Draw Term Loan was made as of September
30, 2017 to acquire iFresh E. Colonial, Inc.
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 has been repaying this facility
in accordance with its terms. However, we failed to timely pay taxes in the aggregate principal amount of $1,187,693, which resulted
in a tax lien being imposed upon the Company by the IRS on June 11, 2018 in the amount of $1,236,831.08. Due to these outstanding
taxes owed and the tax lien, we are currently in default under the Credit Agreement. We have advised Key Bank of the default,
and while Key Bank has not yet acted to accelerate payment of the facility, Key Bank does consider us to be in default and will
not make any further advances under the Credit Facility until come into compliance with the Credit Agreement. By June 29,
2018, the Company had paid the full amount of the outstanding IRS obligation.
Pursuant to the financial covenants of the Key Bank loan, the Company shall not permit the Senior Funded
Debt to EBITDA Ratio for the trailing 12 month period to be greater than 3.00 to 1.00. As of March 31, 2018, this ratio was greater
than 3.00 to 1.00, and the Company was therefore not in compliance with the financial covenants of the Key Bank loan.
Commitments
and Contractual Obligations
The
following table presents the Company’s material contractual obligations as of March 31, 2018:
Contractual Obligations (unaudited)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Bank Loans
|
|
$
|
17,044,485
|
|
|
$
|
1,486,253
|
|
|
$
|
3,051,648
|
|
|
$
|
12,506,584
|
|
|
|
—
|
|
Estimated interest payments on bank loans
|
|
|
1,521,826
|
|
|
|
387,034
|
|
|
|
662,997
|
|
|
|
471,795
|
|
|
|
—
|
|
Notes payable
|
|
|
366,298
|
|
|
|
135,203
|
|
|
|
183,775
|
|
|
|
47,320
|
|
|
|
—
|
|
Capital lease obligations including interest
|
|
|
136,153
|
|
|
|
65,190
|
|
|
|
68,964
|
|
|
|
1,999
|
|
|
|
—
|
|
Operating Lease Obligations
(1)
|
|
|
107,687,071
|
|
|
|
8,418,152
|
|
|
|
18,070,981
|
|
|
|
17,879,334
|
|
|
|
63,318,604
|
|
|
|
$
|
126,755,833
|
|
|
$
|
10,491,832
|
|
|
$
|
22,038,365
|
|
|
$
|
30,907,032
|
|
|
$
|
63,318,604
|
|
(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.
|
Off-balance
Sheet Arrangements
iFresh
is not a party to any off-balance sheet arrangements.
Critical
Accounting Estimates
The
discussion and analysis of iFresh’s financial condition and results of operations are based upon its financial statements,
which have been prepared in accordance with GAAP. These principles require iFresh’s management to make estimates and judgments
that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets
and liabilities. The estimates include, but are not limited to, revenue recognition, inventory valuation, impairment of long-lived
assets, and income taxes. iFresh bases its estimates on historical experience and on various other assumptions that it believes
to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material
differences between these estimates and the actual results, future financial statements will be affected.
iFresh’s
management believes that among their significant accounting policies, which are described in Note 3 to the audited consolidated
financial statements of iFresh included in this Form 10-K, the following accounting policies involve a greater degree of judgment
and complexity. Accordingly, iFresh’s management believes these are the most critical to fully understand and evaluate its
financial condition and results of operations.
Revenue
Recognition
For
retail sales, revenue is recognized at the point of sale. Discounts provided to customers at the time of sale are recognized as
a reduction in sales as the discounted products are sold. Sales taxes are not included in revenue. Proceeds from the sale of coupons
are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by customers. For wholesales sales,
revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, the Company has no other obligations and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are recorded as customer deposits.
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.
Impairment
of Long-Lived Assets
iFresh
assesses its long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The Company groups and
evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which independent identifiable
cash flows are available. Factors which may indicate potential impairment include a significant underperformance relative to the
historical or projected future operating results of the store or a significant negative industry or economic trend. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value
over the estimated fair value of the asset group. The fair value is estimated based on the discounted future cash flows or comparable
market values, if available.
Income
Taxes
iFresh
must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes
currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in income tax rates is
recognized in income in the period that includes the enactment date.
iFresh
apply the provisions of the authoritative guidance on accounting for uncertainty in income taxes that was issued by the Financial
Accounting Standards Board, or FASB. Pursuant to this guidance, and may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the
technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should
be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The
authoritative guidance also addresses other items related to uncertainty in income taxes, including derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits
the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. For public entities, the
guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting
periods within those periods), and for all other entities, ASU 2014-09 will be effective for annual reporting periods beginning
after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The
Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating
activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows
arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted. The Company does not expect the adoption of this guidance will
have a material impact on its unaudited condensed consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.
The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these
amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first,
require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing
elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods
within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. The Company does not expect the adoption of this
guidance will have a material impact on its unaudited condensed consolidated financial statements.
In
February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial
Assets” to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20,
which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance
for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. For public entities,
the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods
beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15,
2019. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements
and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting”, which amends the scope of modification
accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based
payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, the ASU
is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December
15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not expect that adoption of
this guidance will have a material impact on its consolidated financial statements and related disclosures. In January 2017, the
FASB issued ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for us in the first
quarter of our fiscal 2019. The Company expects that the adoption of this ASU would not have a material impact on the Company’s
consolidated financial statements.
In June 2018 2017, 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 Dec. 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. The Company expects that
the adoption of this ASU would not have a material impact on the Company’s consolidated financial statements.
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-24 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, 2018, 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, 2018, due to our lack of experience being a public company and lack of professional staffs with
adequate knowledge of SEC’s rules and requirements.
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 such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed
by, or under the supervision of, our principal executive, principal financial and principal accounting officer, and effected by
our Board of Directors, management and other personnel, 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,
and includes those policies and procedures that:
1) Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets;
2) Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization
of our management and directors; and
3) Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that
could have a material effect on the financial statements.
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, 2018 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. Based on this assessment, our principal executive, principal financial and principal
accounting officer has concluded that our internal control over financial reporting was not effective as of March 31, 2018.
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 quarter 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.
The
above-mentioned business combination with NYM was accounted for as a reverse acquisition at the date of the consummation of the
transaction since the shareholders of NYM own at least 83.9% of the outstanding ordinary shares of iFresh immediately following
the completion of the transaction. Accordingly, NYM is deemed to be the accounting acquirer in the transaction and, consequently,
the transaction is treated as a recapitalization of NYM. As a result, following the Business Combination, the historical financial
statements of NYM and its subsidiaries are treated as the historical financial statements of the combined company. Accordingly,
the assets and liabilities and the historical operations that are reflected in the iFresh financial statements after consummation
of the transaction are those of NYM and are recorded at the historical cost basis of NYM. NYM’s assets, liabilities and
results of operations have been consolidated with the assets, liabilities and results of operations of iFresh upon consummation
of the transaction.
iFresh,
NYM and its subsidiaries (herein collectively referred to as the “Company”) 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 in fiscal year 2018 and had negative working capital of $2.6 million and
$5.3 million as of March 31, 2018 and 2017, respectively. The Company did not meet the financial covenant required in the credit
agreement with Keybank National Association (“Keybank”). As of March 31, 2018, the Company has outstanding loan facilities
of approximately $17 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, 2018, the Company also has $10
million of advances and receivable from the related parties we intend to collect or used to offset part of consideration for future
acquisitions. We also plan to issue additional stock in lieu of cash as part of the acquisition consideration and plan to raise
additional capital through sales of our stock if necessary.
Although the Company has been repaying
the Key Bank facility in accordance with its terms, the Company failed to timely pay taxes in the aggregate principal amount of
$1,187,693, which resulted in a tax lien being imposed upon the Company by the IRS on June 11, 2018 in the amount of $1,236,831.08.
Due to these outstanding taxes owed and the existence of the tax lien, the Company is currently in default under the Key Bank
Credit Agreement. We have advised Key Bank of the default. Key Bank is continuing to monitor the default situation. Keybank has
notified the Company that it has not waived the default and reserves all of its rights, power, privileges, and remedies under
the Credit Agreement. Key Bank has not yet acted to accelerate payment of the facility. By June 29, 2018, the Company had paid
the full amount of the outstanding IRS obligation.
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.
Restricted
Cash
Restricted
cash represents cash held by depository banks in order to comply with the provisions of certain debt agreements.
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.
Operating
Leases
The
Company leases retail stores, warehouse facilities and administrative offices under operating leases. Incentives received from
lessors are deferred and recorded as a reduction of rental expense over the lease term using the straight-line method. Store lease
agreements generally include rent escalation provisions. The Company recognizes escalations of minimum rents as deferred rent
and amortizes these balances on a straight-line basis over the term of the lease.
Capital
Lease Obligations
The
Company has recorded capital lease obligations for equipment leases at both March 31, 2018 and 2017. In each case, the Company
was deemed to be the owner under lease accounting guidance. Further, each lease contains provisions indicating continuing involvement
with the equipment at the end of the lease period. As a result, in accordance with applicable accounting guidance, related assets
subject to the leases are reflected on the Company’s consolidated balance sheets and amortized over the lesser of the lease
term or their remaining useful lives. The present value of the lease payments associated with the equipment is recorded as capital
lease obligations.
Deferred
financing costs
The
Company presents deferred financing costs as a reduction of the carrying amount of the debt rather than as an asset. Deferred
financing costs are amortized over the term of the related debt using the effective interest method and reported as interest
expense in the consolidated financial statements.
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, restricted cash, 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, 2018 and 2017, 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
For
retail sales, revenue is recognized at the point of sale. Discounts provided to customers at the time of sale are recognized as
a reduction in sales as the discounted products are sold. Sales taxes are not included in revenue. Proceeds from the sale of coupons
are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by customers. For wholesales sales,
revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, the Company has no other obligations and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are recorded as customer deposits.
Business
combination involves entities under common control
The
Company accounted for business acquisitions involving entities under common control under ASC 805-50-30 whereby we recognize assets
acquired and liabilities assumed in an acquisition at their historical costs as of the date of acquisition. In additional, these
transactions complies with the requirement in ASC 805-50-45-1 through 45-5 whereby the financial statements of the receiving entity
report results of operations for the period in which the transfer occurs as though the transfer of net assets or exchange of equity
interests had occurred at the beginning of the period. Results of operations for that period will thus comprise those of the previously
separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations
from that date to the end of the period.
Financial
statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information.
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits
the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. For public entities, the
guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting
periods within those periods), and for all other entities, ASU 2014-09 will be effective for annual reporting periods beginning
after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The
Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating
activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows
arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted. The Company does not expect the adoption of this guidance will
have a material impact on its unaudited condensed consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.
The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these
amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first,
require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing
elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods
within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. The Company does not expect the adoption of this
guidance will have a material impact on its unaudited condensed consolidated financial statements.
In
February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial
Assets” to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20,
which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance
for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. For public entities,
the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods
beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15,
2019. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements
and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting”, which amends the scope of modification
accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based
payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, the ASU
is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December
15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not expect that adoption of
this guidance will have a material impact on its consolidated financial statements and related disclosures. In January 2017, the
FASB issued ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for us in the first
quarter of our fiscal 2019. The Company expects that the adoption of this ASU would not have a material impact on the Company’s
consolidated financial statements.
In June 2018 2017, 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 Dec. 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. The Company expects that
the adoption of this ASU would not have a material impact on the Company’s consolidated financial statements.
No
other new accounting pronouncements issued or effective had, or are expected to have, a material impact on the Company’s
consolidated financial statements.
5.
Acquisitions
iFresh
Glen Cove Acquisition
On
July 13, 2017, the Company acquired from Long Deng, the Company’s largest shareholder, 100% of the ownership interests of
iFresh Glen Cove Inc. (“Glen Cove”). Glen Cove is a 22,859 square-foot brand new grocery store being set up in Garden
City, New York located at 192 Glen Cove Road, within the Roosevelt Field Mall business district. Subsequent to the closing of
the Glen Cove Acquisition, Glen Cove became a wholly owned subsidiary of iFresh.
The
Company issued 50,000 shares of its common stock to Long Deng for the acquisition of Glen Cove. The Company accounted for this
acquisition as a business combination under ASC 805-50-30 whereby we recognize assets acquired and liabilities assumed in an acquisition
at their historical costs as of the date of acquisition, since the acquisition took place between entities under common control.
The
total purchase consideration and the costs of the assets and liabilities at the acquisition date were as follows:
|
|
Fair value
allocation
|
|
Fair value of stock issued
|
|
|
645,500
|
|
Cash acquired
|
|
|
(5,631
|
)
|
Advances made to Glen Cove
|
|
|
139,577
|
|
Net consideration
|
|
$
|
779,446
|
|
The
following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date.
Assets acquired:
|
|
Cost allocation
|
|
Property and equipment
|
|
|
92,433
|
|
Security deposit
|
|
|
79,417
|
|
Due from related parties
|
|
|
10,000
|
|
Subtotal
|
|
$
|
181,850
|
|
Liability assumed:
|
|
|
|
|
Deferred rent liability
|
|
|
178,897
|
|
Historical cost of net assets acquired
|
|
$
|
2,953
|
|
Prior
year financial statements were retrospectively adjusted to combine the financial information of Glen Cove as if the acquisition
occurred at the beginning of the period of transfer.
iFresh
E. Colonial Asset Purchase
On
July 13, 2017, the Company’s wholly-owned subsidiary, iFresh E. Colonial, completed the acquisition of Mia Supermarket in
Orlando FL, a 20,370 square-foot grocery store located at 2415 E. Colonial Drive, from Michael Farmers Supermarket, LLC, including
inventory, property and equipment. This acquisition expands the Company’s footprint in the State of Florida and expects
to increase its revenue base.
The
aggregate purchase price paid for the iFresh E. Colonial acquisition was $1,050,000. The fair value of the assets acquired
approximates the consideration paid. The Company did not assume any liabilities. The consideration for the transaction was funded
by the Company with $1.05 million in proceeds from the delayed term loan withdrawn under Key Bank credit facility. The
Company accounted for the iFresh E. Colonial acquisition as an asset acquisition under ASC 805-10-55 because the workforce retained
from Mia Supermarket does not include key management members, and is not difficult to replace. Thus, management concluded that
the acquisition did not include both an input and substantive processes that together significantly contribute to the ability
to create outputs.
New
York Mart CT, Inc. (“NYM CT”) Acquisition
On
October 2, 2017, the Company acquired 100% equity interest of NYM CT from Long Deng, the Company’s Chairman and Chief Executive
Officer, for $3,500,000. The purchase included the business, lease and equipment of the store. The store is currently under renovation
and the Company expects the Connecticut store to open in the fourth quarter of 2018.
The
Company accounted for this acquisition as a business combination under ASC 805-50-30 whereby we recognize assets acquired and
liabilities assumed in an acquisition at their historical costs as of the date of acquisition, since the acquisition took place
between entities under common control.
The
total purchase consideration and the costs of the assets and liabilities at the acquisition date were as follows:
|
|
Fair value
allocation
|
|
Advances made to NYM CT
|
|
|
3,5000,000
|
|
Cash acquired
|
|
|
(2,988
|
)
|
Net consideration
|
|
$
|
3,497,012
|
|
The
following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date.
Assets acquired:
|
|
Cost
allocation
|
|
Property and equipment
|
|
|
3,695,834
|
|
Due from related parties
|
|
|
820
|
|
Subtotal
|
|
$
|
3,696,654
|
|
Liability assumed:
|
|
|
|
|
Due to related parties
|
|
|
87,741
|
|
Account payable
|
|
|
122,555
|
|
Subtotal
|
|
$
|
210,296
|
|
Historical cost of net assets acquired
|
|
$
|
3,486,358
|
|
Prior
year financial statements were retrospectively adjusted to combine the financial information of NYM CT as if the acquisition occurred
at the beginning of the period of transfer.
New
York Mart N. Miami Inc. (“NYM N. Miami”) Acquisition
On
October 2, 2017, the Company acquired 100% equity interest of 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 purchase included
the business, lease and equipment of the store. The store is also currently under construction, and, once finished, will be one
of the largest Asian supermarkets in South Florida. NYM N. Miami will open in the first quarter of 2018.
The
Company accounted for this acquisition as a business combination under ASC 805-50-30 whereby we recognize assets acquired and
liabilities assumed in an acquisition at their historical costs as of the date of acquisition, since the acquisition took place
between entities under common control.
The
total purchase consideration and the costs of the assets and liabilities at the acquisition date were as follows:
|
|
Fair value
allocation
|
|
Advances made to NYM N. Miami
|
|
|
3,5000,000
|
|
Fair value of stocks issued
|
|
|
549,450
|
|
Cash acquired
|
|
|
(5,217
|
)
|
Net consideration
|
|
$
|
4,044,233
|
|
The
following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date.
Assets acquired:
|
|
Cost
allocation
|
|
Property and equipment
|
|
|
3,179,647
|
|
Security deposit
|
|
|
100,000
|
|
Due from related parties
|
|
|
244,308
|
|
Subtotal
|
|
$
|
3,523,955
|
|
Liability assumed:
|
|
|
|
|
Due to related parties
|
|
|
455,101
|
|
Account payable
|
|
|
41,300
|
|
Deferred rent liability
|
|
|
65,199
|
|
Subtotal
|
|
$
|
561,600
|
|
Historical cost of net assets acquired
|
|
$
|
2,962,355
|
|
Prior
year financial statements were retrospectively adjusted to combine the financial information of NYM N. Miami as if the acquisition
occurred at the beginning of the period of transfer.
6.
Accounts Receivable
A
summary of accounts receivable, net is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Customer purchases
|
|
$
|
4,643,922
|
|
|
$
|
2,133,689
|
|
Credit card receivables
|
|
|
332,136
|
|
|
|
134,177
|
|
Food stamps
|
|
|
101,105
|
|
|
|
62,900
|
|
Others
|
|
|
30,945
|
|
|
|
29,250
|
|
Total accounts receivable
|
|
|
5,108,108
|
|
|
|
2,360,016
|
|
Allowance for bad debt
|
|
|
(204,768
|
)
|
|
|
(88,005
|
)
|
Accounts receivable, net
|
|
$
|
4,903,340
|
|
|
$
|
2,272,011
|
|
7.
Inventories
A
summary of inventories, net is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Non-perishables
|
|
$
|
9,206,442
|
|
|
$
|
8,339,787
|
|
Perishables
|
|
|
1,798,970
|
|
|
|
1,535,777
|
|
Inventories
|
|
|
11,005,412
|
|
|
|
9,875,564
|
|
Allowance for slow moving or defective inventories
|
|
|
(99,928
|
)
|
|
|
(78,580
|
)
|
Inventories, net
|
|
$
|
10,905,484
|
|
|
$
|
9,796,984
|
|
8.
Advances and receivables - related parties
A
summary of advances and receivables - related parties is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
Entities
|
|
2018
|
|
|
2017
|
|
New York Mart, Inc.
|
|
$
|
838,096
|
|
|
$
|
2,438,316
|
|
Pacific Supermarkets Inc.
|
|
|
1,151,338
|
|
|
|
808,115
|
|
NY Mart MD Inc.
|
|
|
3,709,493
|
|
|
|
6,290,067
|
|
iFresh Harwin Inc
|
|
|
557,262
|
|
|
|
-
|
|
Advances - related parties
|
|
$
|
6,256,189
|
|
|
$
|
9,536,498
|
|
|
|
|
|
|
|
|
|
|
New York Mart, Inc.
|
|
|
1,021,572
|
|
|
|
476,884
|
|
Pacific Supermarkets Inc.
|
|
|
210,450
|
|
|
|
604,469
|
|
NY Mart MD Inc.
|
|
|
2,290,197
|
|
|
|
1,426,303
|
|
iFresh Harwin Inc
|
|
|
241,280
|
|
|
|
-
|
|
Receivables – related parties
|
|
|
3,763,499
|
|
|
|
2,507,656
|
|
Total advances and receivables – related parties
|
|
$
|
10,019,688
|
|
|
$
|
12,044,154
|
|
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 15).
The advances and receivables are interest free, repayable on demand, and guaranteed by Mr. Long Deng. Most of these entities are
newly established and have limited or no operations since their inception. As of the date of these financial statements, the Company
completed the acquisitions of New York Mart N. Miami Inc. and New York Mart CT Inc.
9.
Property and Equipment
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Furniture, fixtures and equipment
|
|
$
|
17,190,356
|
|
|
$
|
14,602,991
|
|
Automobiles
|
|
|
2,125,874
|
|
|
|
2,252,874
|
|
Leasehold improvements
|
|
|
7,234,484
|
|
|
|
5,742,460
|
|
Software
|
|
|
6,735
|
|
|
|
6,735
|
|
Total property and equipment
|
|
|
26,557,449
|
|
|
|
22,605,240
|
|
Accumulated depreciation and amortization
|
|
|
(8,738,644
|
)
|
|
|
(7,137,438
|
)
|
Property and equipment, net
|
|
$
|
17,818,805
|
|
|
$
|
15,467,802
|
|
Depreciation
expense for the year ended March 31, 2018 and 2017 was $1,729,852 and $1,562,043, respectively.
10.
Intangible Assets
A
summary of the activities and balances of intangible assets are as follows:
|
|
Balance
at
March 31,
|
|
|
|
|
|
Balance at
March 31,
|
|
|
|
2017
|
|
|
Additions
|
|
|
2018
|
|
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
|
|
$
|
(1,199,999
|
)
|
|
$
|
(133,332
|
)
|
|
$
|
(1,333,331
|
)
|
Intangible
assets, net
|
|
$
|
1,300,001
|
|
|
$
|
(133,332
|
)
|
|
$
|
1,166,669
|
|
Amortization
expense was $133,332 and $133,332 for the year ended March 31, 2018 and 2017, respectively. Future amortization associated with
the net carrying amount of definite-lived intangible assets is as follows:
Year
Ending March 31,
|
|
|
|
2019
|
|
$
|
133,333
|
|
2020
|
|
|
133,333
|
|
2021
|
|
|
133,333
|
|
2022
|
|
|
133,333
|
|
2023
|
|
|
133,333
|
|
Thereafter
|
|
|
500,004
|
|
Total
|
|
$
|
1,166,669
|
|
11.
Debt
A
summary of the Company’s debt is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revolving Line of Credit-KeyBank National Association
|
|
$
|
3,200,000
|
|
|
|
-
|
|
Delayed Term Loan-KeyBank National Association
|
|
|
997,500
|
|
|
|
-
|
|
Term Loan-KeyBank National Association
|
|
|
13,531,361
|
|
|
|
14,791,281
|
|
Less: Deferred financing cost
|
|
|
(684,375
|
)
|
|
|
(866,875
|
)
|
Subtotal
|
|
|
17,044,486
|
|
|
|
13,924,406
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(1,303,753
|
)
|
|
|
(1,144,568
|
)
|
Bank Loan-Term Loan, non-current
|
|
$
|
15,740,733
|
|
|
$
|
12,779,838
|
|
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. $3,200,000 of the revolving credit was used as of March 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. 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. A withdrawal
of $1.05 million under the Delayed Draw Term Loan has been made as of September 30, 2017 to acquire iFresh E. Colonial, Inc.
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.
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
|
|
|
|
2019
|
|
$
|
1,486,253
|
|
2020
|
|
|
1,506,453
|
|
2021
|
|
|
1,545,195
|
|
2022
|
|
|
12,506,584
|
|
|
|
|
|
|
Total
|
|
$
|
17,044,486
|
|
Although
the Company has been repaying the Key Bank facility in accordance with its terms, the Company failed to timely pay taxes in
the aggregate principal amount of $1,187,693, which resulted in a tax lien being imposed upon the Company by the IRS on June
11, 2018 in the amount of $1,236,831.08. Due to these outstanding taxes owed and the tax lien, the Company is currently in
default under the Credit Agreement. We have advised Key Bank of the default, and while Key Bank has not yet acted to
accelerate payment of the facility, Key Bank does consider us to be in default and will not make any further advances under
the Credit Facility until we pay our tax obligations. By June 29, 2018, the Company had paid the full amount of the
outstanding IRS obligation. Although the Company anticipates being able to obtain a waiver from Key Bank with regard to the
Company’s default, there is no guarantee that we will be successful in doing so.
Simultaneously,
the Company entered into an escrow agreement with Carnelian Bay Capital Inc. (“CBC”), a stockholder of E-Compass,
and Loeb & Loeb LLP, acting as the escrow agent, pursuant to which, the Company agreed to set aside $1,030,000 (the “Escrow
Fund”) from the proceeds received from the effective date term loan to pay for certain expenses associated with the Merger.
As of March 31, 2017, the escrow account has been fully withdrawn for merger expense payments.
12.
Notes Payable
Notes
payables consist of the following:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expressway Motors Inc
.
|
|
|
|
|
|
|
Secured by vehicle, 0%, principal of $490 due monthly through April 9, 2019, paid off in January 2018
|
|
$
|
-
|
|
|
$
|
12,247
|
|
Secured by vehicle, 2.99%, principal and interest of $593 due monthly through February 1, 2021, paid off in January 2018
|
|
|
-
|
|
|
|
25,281
|
|
Secured by vehicle, 0%, principal of $515 due monthly through April 24, 2019
|
|
|
-
|
|
|
|
11,780
|
|
Hitachi Capital America Corp.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 6.95%, principal and interest of $2,109 due monthly through September 18, 2019, paid off in December 2017
|
|
|
-
|
|
|
|
57,927
|
|
Secured by vehicle, 7.35%, principal and interest of $2,219 due monthly through November 7, 2017
|
|
|
-
|
|
|
|
17,269
|
|
Secured by vehicle, 7.10%, principal and interest of $2,094 due monthly through March 28, 2018
|
|
|
-
|
|
|
|
24,186
|
|
Secured by vehicle, 6.99%, principal and interest of $2,170 due monthly through March 10,2019
|
|
|
25,083
|
|
|
|
48,478
|
|
Triangle Auto Center, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.02%, principal and interest of $890 due monthly through January 28, 2021
|
|
|
28,498
|
|
|
|
37,810
|
|
Colonial Buick GMC
|
|
|
|
|
|
|
|
|
Secured by vehicle, 8.64%, principal and interest of $736 due monthly through February 1, 2020
|
|
|
15,535
|
|
|
|
22,660
|
|
Milea Truck Sales of Queens Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 8.42%, principal and interest of $4,076 due monthly through July 1, 2019, paid off in December 2017
|
|
|
-
|
|
|
|
103,276
|
|
Secured by vehicle, 4.36%, principal and interest of $1,558 due monthly through February 20, 2018
|
|
|
-
|
|
|
|
16,768
|
|
Isuzu Finance of America, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 6.99%, principal and interest of $2,200 due monthly through October 1, 2018
|
|
|
15,045
|
|
|
|
39,455
|
|
Koeppel Nissan, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 3.99%, principal and interest of $612 due monthly through January 18, 2021
|
|
|
19,612
|
|
|
|
25,790
|
|
Secured by vehicle, 0.9%, principal and interest of $739 due monthly through March 14, 2020
|
|
|
17,573
|
|
|
|
26,310
|
|
Secured by vehicle, 7.86%, principal and interest of $758 due monthly through September 1, 2022
|
|
|
32,216
|
|
|
|
39,025
|
|
Lee’s Autors, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 0.9%, principal and interest of $832 due monthly through July 22, 2017
|
|
|
-
|
|
|
|
3,321
|
|
Silver Star Motors
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.22%, principal and interest of $916 due monthly through June 1, 2021
|
|
|
34,112
|
|
|
|
42,684
|
|
BMO
|
|
|
|
|
|
|
|
|
Secured by vehicle, 5.99%, principal and interest of $1,924 due monthly through July 1, 2020
|
|
|
68,047
|
|
|
|
87,687
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.01%, principal and interest of $420 due monthly through December 1, 2021
|
|
|
17,516
|
|
|
|
-
|
|
Toyota Finance
|
|
|
|
|
|
|
|
|
Secured by vehicle, 0%, principal and interest of $632 due monthly through August, 2022
|
|
|
33,517
|
|
|
|
-
|
|
Secured by vehicle, 4.87%, principal and interest of $761 due monthly through July, 2021
|
|
|
31,621
|
|
|
|
-
|
|
Secured by vehicle, 0%, principal and interest of $633 due monthly through April 1, 2022
|
|
|
27,924
|
|
|
|
-
|
|
Total Notes Payable
|
|
$
|
366,298
|
|
|
$
|
641,954
|
|
Current notes payable
|
|
|
(135,203
|
)
|
|
|
(262,578
|
)
|
Long-term notes payable, net of current maturities
|
|
$
|
231,095
|
|
|
$
|
379,376
|
|
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 December 31,
|
|
|
|
2018
|
|
$
|
135,203
|
|
2019
|
|
|
99,880
|
|
2020
|
|
|
83,895
|
|
2021
|
|
|
40,649
|
|
2022
|
|
|
6,671
|
|
Total
|
|
$
|
366,298
|
|
13.
Capital lease obligations
The
following capital lease obligations are included in the consolidated balance sheets:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Capital lease obligations:
|
|
|
|
|
|
|
Current
|
|
$
|
55,634
|
|
|
$
|
56,847
|
|
Long-term
|
|
|
70,724
|
|
|
|
77,694
|
|
Total obligations
|
|
$
|
126,358
|
|
|
$
|
134,541
|
|
Interest
expense on capital lease obligations for the years ended March 31, 2018 and 2017 amounted to $8,801 and $2,045, respectively.
Future
minimum lease payments under the capital leases are as follows:
Year
Ending March 31,
|
|
|
|
2019
|
|
$
|
65,190
|
|
2020
|
|
|
46,826
|
|
2021
|
|
|
22,138
|
|
2022
|
|
|
1,999
|
|
Total
minimum lease payments
|
|
|
136,153
|
|
Less:
Amount representing interest
|
|
|
(9,795
|
)
|
Total
|
|
$
|
126,358
|
|
14.
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, 2018 and 2017, respectively:
|
|
Year ended March 31, 2018
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
27,279,659
|
|
|
$
|
109,408,868
|
|
|
$
|
136,688,527
|
|
Cost of sales
|
|
|
20,071,865
|
|
|
|
80,047,600
|
|
|
|
100,119,465
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
7,575,479
|
|
|
|
7,575,479
|
|
Gross profit
|
|
$
|
7,207,794
|
|
|
$
|
21,785,789
|
|
|
$
|
28,993,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(26,255
|
)
|
|
$
|
(790,972
|
)
|
|
$
|
(817,227
|
)
|
Depreciation and amortization
|
|
$
|
249,180
|
|
|
$
|
1,796,504
|
|
|
$
|
2,045,684
|
|
Capital expenditure
|
|
$
|
60,712
|
|
|
$
|
4,032,325
|
|
|
$
|
4,093,037
|
|
Segment income before income tax provision
|
|
$
|
890,643
|
|
|
$
|
(1,784,122
|
)
|
|
$
|
(893,478
|
)
|
Income tax provision (benefit)
|
|
$
|
344,340
|
|
|
$
|
446,525
|
)
|
|
$
|
(102,185
|
)
|
Segment assets
|
|
$
|
11,794,456
|
|
|
$
|
37,147,276
|
|
|
$
|
48,941,732
|
|
|
|
Year ended March 31, 2017
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
24,096,957
|
|
|
$
|
106,779,803
|
|
|
$
|
130,876,760
|
|
Cost of sales
|
|
|
18,698,776
|
|
|
|
77,073,922
|
|
|
|
95,772,698
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
7,219,860
|
|
|
|
7,219,860
|
|
Gross profit
|
|
$
|
5,398,181
|
|
|
$
|
22,486,021
|
|
|
$
|
27,884,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(150,376
|
)
|
|
$
|
(153,518
|
)
|
|
$
|
(303,894
|
)
|
Depreciation and amortization
|
|
$
|
235,098
|
|
|
$
|
1,505,902
|
|
|
$
|
1,741,000
|
|
Capital expenditure
|
|
$
|
357,347
|
|
|
$
|
6,733,627
|
|
|
$
|
7,090,974
|
|
Segment income before income tax provision
|
|
$
|
761,900
|
|
|
$
|
2,091,156
|
|
|
$
|
2,853,056
|
|
Income tax provision
|
|
$
|
388,863
|
|
|
$
|
1,267,471
|
|
|
$
|
1,656,334
|
|
Segment assets
|
|
$
|
10,179,969
|
|
|
$
|
35,834,995
|
|
|
$
|
46,014,964
|
|
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. The valuation allowance for deferred tax assets was approximately $486,730
and $788,039 as of March 31, 2018 and 2017.
The
Company has approximately $2,429,079and $2,318,000 of US NOL carry forward of which approximately $2,317,760 and $2,318,000 are
SRLY NOL as of March 31, 2018 and March 31, 2017, respectively. For income tax purpose, those NOLs will expire in the year 2031
through 2035.
Income
Tax Provision (Benefit)
The
provision (benefit) for income taxes consists of the following components:
|
|
For the year ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
1,230,772
|
|
State
|
|
|
124,849
|
|
|
|
591,783
|
|
|
|
|
124,849
|
|
|
|
1,822,555
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(71,093
|
)
|
|
|
(162,976
|
)
|
State
|
|
|
(155,941
|
)
|
|
|
(3,245
|
)
|
|
|
|
(227,034
|
)
|
|
|
(166,221
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(102,185
|
)
|
|
$
|
1,656,334
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
Expected tax at U.S. statutory income tax rate
|
|
|
31
|
%
|
|
|
34
|
%
|
State and local income taxes, net of federal income tax effect
|
|
|
7
|
%
|
|
|
14
|
%
|
Other non-deductible fees and expenses
|
|
|
(19
|
%)
|
|
|
1
|
%
|
Impact of change of federal income tax rate on deferred tax
|
|
|
(4
|
%)
|
|
|
-
|
|
Other
|
|
|
(4
|
%)
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
11
|
%
|
|
|
52
|
%
|
Deferred
Taxes
The
effect of temporary differences included in the deferred tax accounts as follows:
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
Tax Assets/ (Liabilities):
|
|
|
|
|
|
|
Deferred
expenses
|
|
$
|
68,124
|
|
|
$
|
123,260
|
|
Sec
263A Inventory Cap
|
|
|
189,100
|
|
|
|
215,248
|
|
Deferred
rent
|
|
|
1,983,213
|
|
|
|
2,467,259
|
|
Depreciation
and amortization
|
|
|
(1,971,247
|
)
|
|
|
(2,718,968
|
)
|
Net
operating losses
|
|
|
531,372
|
|
|
|
788,039
|
|
Valuation
allowance
|
|
|
(486,730
|
)
|
|
|
(788,039
|
)
|
Net
Deferred Tax Assets
|
|
$
|
313,832
|
|
|
$
|
86,799
|
|
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, 2018 and 2017 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, 2018 and 2017 were included in advances and receivables – related parties (see Note 7).
Year ended March 31, 2018
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
New York Mart, Inc.
|
|
$
|
62,357
|
|
|
$
|
29,793
|
|
|
$
|
2,188,562
|
|
Pacific Supermarkets Inc.
|
|
|
89,116
|
|
|
|
32,913
|
|
|
|
3,442,263
|
|
NY Mart MD Inc.
|
|
|
64,053
|
|
|
|
10,501
|
|
|
|
3,588,064
|
|
El Monte
|
|
|
21,751
|
|
|
|
3,400
|
|
|
|
134,870
|
|
iFresh Harwin Inc
|
|
|
4,240
|
|
|
|
3,405
|
|
|
|
163, 507
|
|
Spring Farm Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
12,131
|
|
Spicy Bubbles, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
95,418
|
|
Tampa Seafood
|
|
|
4,050
|
|
|
|
|
|
|
|
6,703
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
182,248
|
|
|
|
$
|
245,567
|
|
|
$
|
80,012
|
|
|
$
|
9,813,766
|
|
Year ended March 31, 2017
|
Related Parties
|
|
Management Fees
|
|
|
Advertising Fees
|
|
|
Non-Perishable & Perishable Sales
|
|
New York Mart, Inc.
|
|
$
|
46,170
|
|
|
$
|
31,289
|
|
|
$
|
2,832,018
|
|
Pacific Supermarkets Inc.
|
|
|
57,669
|
|
|
|
34,230
|
|
|
|
3,201,198
|
|
NY Mart MD Inc.
|
|
|
45,647
|
|
|
|
-
|
|
|
|
2,634,650
|
|
Spring Farm Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
6,114
|
|
Spicy Bubbles, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
102,580
|
|
NYM Milford, LLC
|
|
|
|
|
|
|
|
|
|
|
100,390
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
173,603
|
|
|
|
|
149,486
|
|
|
$
|
65,519
|
|
|
$
|
9,050,553
|
|
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 $1,208,000 and $698,000 for the year ended on March
31, 2018 and 2017.
17.
Operating Lease Commitments
The
Company’s leases include stores, office and warehouse buildings. These leases have an average remaining lease term of approximately
9 years as of March 31, 2018.
Rent
expense charged to operations under operating leases in the year ended March 31, 2018 and 2017 amounted to $8,519,190 and
$7,933,525, respectively.
Future
minimum lease obligations for operating leases with initial terms in excess of one year at March 31, 2018 are as follows:
|
|
Non-related
parties
|
|
|
Related
party
|
|
|
Total
|
|
2019
|
|
$
|
7,145,101
|
|
|
$
|
1,273,051
|
|
|
$
|
8,418,152
|
|
2020
|
|
|
7,414,529
|
|
|
|
1,586,133
|
|
|
|
9,000,662
|
|
2021
|
|
|
7,472,106
|
|
|
|
1,598,213
|
|
|
|
9,070,319
|
|
2022
|
|
|
7,213,766
|
|
|
|
1,649,721
|
|
|
|
8,863,487
|
|
2023
|
|
|
7,346,811
|
|
|
|
1,669,036
|
|
|
|
9,015,848
|
|
Thereafter
|
|
|
51,905,771
|
|
|
|
11,412,833
|
|
|
|
63,318,604
|
|
Total payments
|
|
$
|
88,498,084
|
|
|
$
|
19,188,987
|
|
|
$
|
107,687,071
|
|
18.
Contingent Liability
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.
Ming’s Supermarket, Inc. (“Ming”),
the subsidiary of the Company, is a tenant at a building located at 140-148 East Berkeley Street, Boston, MA (the “Property”),
pursuant to a lease dated September 24, 1999 (the “Lease”). The Lease had a 10-year initial term, followed by an option
for two additional 10-year terms. Ming has exercised that first option and the Lease has approximately 15 years remaining to run
if the second option is also exercised. The Lease also gives Ming a right of first refusal on any sale of the building.
On February 22, 2015, a sprinkler pipe burst
in the Property. This caused the Inspectional Services Department of the City of Boston (“ISD”) to inspect the Property.
The ISD found a number of problems which have prevented further use of the Property. The ISD notified both landlord and tenant
that the Property was only permitted for use as an elevator garage and that its use as a warehouse was never permitted and that
a conditional use permit must be obtained from the City of Boston to make such use lawful. Moreover, the Property was found to
have major structural issues requiring repair, as well as issues with the elevator and outside glass. The result of the ISD’s
findings are that Ming was ordered not to use the Property for any purpose unless and until the structural and other repairs are
completed and its use as a warehouse is permitted by the Boston Zoning Board.
While the Lease provides
that the elevator (approximate cost $400,000) and glass repairs (approximate cost $30,000) are the responsibility of the tenant,
the structural repairs (approximate cost $500,000) are the landlord’s responsibility under the Lease, unless the structural
damage was caused by the tenant’s misuse of the Property. In this regard Ming has retained an expert who will testify the
structural damage to the building was caused by long term water infiltration and is not the result of anything Ming did. Ming initially
sought for the landlord to perform the structural repairs and agreed that upon completion of those repairs, Ming would repair the
elevator and the broken glass. In addition, Ming asked the landlord to cooperate in permitting use of the Property as a warehouse.
The landlord refused to either perform structural
repairs or to cooperate on the permitting. As a result, as of April 2015, Ming began withholding rent, since Ming was barred from
using the Property by order of the ISD. 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 a Notice of Appeal, which
will delay ultimate resolution of this matter for potentially one year or more. Ming has filed a lien against the landlord’s
real estate as security for the judgment.
On May 31, 2018, the ISD issued an occupancy
permit, triggering Ming’s requirement to resume regular rental payments. Ming paid rent for June 2018 to the landlord.
No guaranties or predictions
can be made at this time as to ultimate final outcome of this case.
SKKR Trading LLC d/b/a 38 Live Bait v. New Sunshine
Group LLC and New York Mart Group Inc.
A lawsuit has been filed against New York
Mart Group, Inc. (“NYMG”), a subsidiary of iFresh, and New Sunshine Group, LLC (“New Sunshine”), by SKKR
Trading, LLC (“Plaintiff”) for breach of contract and failure to pay. The plaintiff is seeking from NYMG and New Sunshine
for principal damages the amount of $116,878 for the total amount of invoices allegedly past due, a penalty of $256,000, and attorney’s
fees estimated to be $80,000 to $90,000.
The Plaintiff claimed that NYMG and New
Sunshine failed to pay for an order of shrimp. NYMG and New Sunshine have raised various defenses, most of which center on the
arguments that NYMG and New Sunshine abandoned the Distribution Agreement and did not order, receive, or benefit from the shrimp
at issue. Rather, the shrimp was ordered by a tenant of NYMG, Hong Hai, who was a completely separate entity than NYMG or New Sunshine.
The case went to trial on March 12 to 15,
2017. On April 17, 2017, the Count ruled in favor of Plaintiff and against NYMG and New Sunshine in the amount of $385,492. NYMG
hired a new law firm to appeal the case. The appeal process will take approximately 1 year. During the appeal, NYMG will not be
required to pay the amount under the Final Judgment. While discovery is ongoing and no guaranties or predictions can be made
at this time as to ultimate outcome, the Company and its attorney believe a fair estimate of the chance the Company will prevail
on the appeal of the Final Judgment is approximately 50%.
Most recently, on August 11, 2017,
approximately $196,000 in funds held in one of New York Mart’s bank accounts at TD Bank was ordered by the Court to be frozen
until the appeal has been concluded, after Plaintiff tried to seize these funds to enforce the aforementioned judgement.
Once the appeal is concluded, the ownership
of the $196,000 will be determined. SKKR is not permitted to take any other action to enforce the judgment, including attempting
to seize any other funds in the TD Bank accounts, any other funds, or any assets owned by NYM. Accordingly, NYM is able to continue
to use all bank accounts at TD Bank (with the exception of the frozen $196,000 which has been set aside) without the threat of
those accounts being seized by SKKR.
The principal shareholder of the Company, Mr. Long Deng, made a personal pledge to pay for the entire
amount of the damage if the appeal is ruled against NYMG. The Company did not accrue any of this potential liability.
Jendo Ermi, LP v iFresh Inc.; iFresh Inc. v.
Jendo Ermi LP
On October 20, 2017, Jendo Ermi, LP filed
an unlawful detainer action against iFresh, Inc. (Los Angeles Superior Court Case No.: KC069728). The case involved a dispute over
property leased to iFresh, Inc. to operate a grocery store in El Monte, California. Jendo Ermi, LP claimed that iFresh, Inc. had
not properly paid rents as required by the lease. On March 29, 2018, the court entered judgment in favor of Jendo and against iFresh
for possession of the Premises, forfeiture of the lease, and damages in the preliminary amount of $309,009, with the final amount
to be determined by the court. On April 23, 2018, iFresh filed a Notice of Appeal of the judgment. On April 26, 2018, the court
entered an amended judgment in favor of Jendo and against iFresh for possession of the Premises, forfeiture of the lease, and damages
in the amount of $952,691.56, with attorneys’ fees and costs to be determined by the court.
On November 27, 2017, iFresh, Inc. filed
a complaint against Jendo Ermi, LP for, among other things, fraud and breach of contract associated with the lease (Los Angeles
Superior Court Case No.: BC684617). iFresh, Inc. alleged that Jendo Ermi (1) overstated the square footage of the property to obtain
higher rents; (2) failed to provide certain furniture, fixtures, and equipment (FF&E) valued at approximately $300,000 that
were promised under the lease; and (3) failed to disclose that parts of the building were not habitable.
On May 31, 2018, the Company entered into
a settlement agreement with Jendo Ermi, LP whereby iFresh agreed to transfer possession of the premises to Jendo and pay Jendo
the total amount of $652,038.73 in satisfaction of all disputes between the parties. The Company timely transferred possession
of the premises to Jendo. New York Mart El Monte, Inc., a third party, timely paid the full settlement amount on behalf of iFresh.
Pursuant to the parties’ settlement agreement, iFresh dismissed with prejudice its action against Jendo and dismissed its
appeal of the unlawful detainer judgment. Pursuant to the parties’ settlement agreement, Jendo shall file an Acknowledgment
of Satisfaction of Judgment with respect to the unlawful detainer judgment on or around September 17, 2018.
19.
Subsequent Event
For
purpose of preparing these consolidated financial statements, the Company considered events through June 30, 2018, which is the
date the consolidated financial statements were available for issuance.
On May 31, 2018, the Company entered into a
settlement agreement with Jendo Ermi, LP whereby iFresh agreed to transfer possession of the premises to Jendo and pay Jendo the
total amount of $652,038.73 in satisfaction of all disputes between the parties. The Company timely transferred possession of
the premises to Jendo. New York Mart El Monte, Inc., a third party, timely paid the full settlement amount on behalf of iFresh.
Pursuant to the parties’ settlement agreement, iFresh dismissed with prejudice its action against Jendo and dismissed its
appeal of the unlawful detainer judgment. Pursuant to the parties’ settlement agreement, Jendo shall file an Acknowledgment
of Satisfaction of Judgment with respect to the unlawful detainer judgment on or around September 17, 2018.
There
were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements.