Item 1. Business
We were formerly a special purpose company
incorporated under the laws of the Cayman Islands on September 23, 2014 under the name E-Compass Acquisition Corp. (“E-Compass”)
in order to serve as a vehicle for the acquisition of an operating business in the e-commerce and consumer retail industry. On
February 10, 2017, pursuant to the terms of a merger agreement, dated as of July 25, 2016 (the “Merger Agreement”),
through a series of transactions, we merged with our wholly owned subsidiary to reincorporate into Delaware and then acquired NYM
Holding, Inc. (“NYM”), and as a result, NYM became our direct wholly-owned subsidiary (the “Transactions”).
As a result of the Transactions, as of immediately after the Transactions, the former stockholders of NYM owned approximately 83.9%
of our outstanding common stock and the former stockholders of E-Compass owned the remaining 16.1%.
The Merger Agreement is described more fully
in the sections entitled “
The Business Combination Proposal
” and “
The Acquisition Agreement
”
beginning at pages 38 and 60, respectively, of the final prospectus contained in the Registration Statement on
Form S-4
and definitive
proxy statement (the “Proxy Statement/Prospectus”) filed with the Securities and Exchange Commission (the “Commission”)
on December 16, 2016 by iFresh and E-Compass, and such description is incorporated herein by reference.
Upon the closing of the Transactions, E-Compass’s
common stock, rights and units ceased trading and our common stock began trading on the NASDAQ Capital Market under the symbol
“IFMK”.
Recent Development
On May 20, 2019 (the “Effective Date”),
the Company, NYM, certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association entered into a forbearance agreement
(the “Forbearance Agreement”) with respect to that certain Credit Agreement, dated as of December 23, 2016, as amended,
pursuant to which KeyBank National Association, “Keybank” the or “Lender”, made available to NYM, the “Borrower”,
a revolving credit facility, a term loan facility, and other credit accommodations. Pursuant to that certain Guaranty Agreement,
dated as of December 26, 2016, as amended by several joinder agreements, the Company, certain subsidiaries of NYM and Mr. Long
Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to
guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
The Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain
events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on
the 90th day from Effective Date; and (b) a Forbearance Event of Default.
On June 1 and June 5, 2019, respectively,
the Company, and two holders (the “Holders”) of the Company’s warrants (the “Existing Warrants”)
issued pursuant to that certain Securities Purchase Agreement dated October 19, 2018, entered into certain Exchange Agreements
(the “Agreements”), whereby the Company agreed to issue to the Holders an aggregate of 1,170,000 shares (“Exchange
Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) and warrant to
purchase an aggregate of 1,170,000 shares of Common Stock (the “Exchange Warrants”) as the negotiated purchase price
for the Existing Warrants based on the Black Scholes Value as a result of a certain transaction which was deemed as a Fundamental
Transaction (as defined in the Existing Warrants) pursuant to Section 3(e) of the Existing Warrants.
On June 7, 2019, we entered into a share
exchange agreement (the “Exchange Agreement”) with Xiaotai and the equity holders of Xiaotai (the “Xiaotai Sellers”),
pursuant to which, among other things and subject to the terms and conditions contained therein, we will acquire all of the outstanding
issued shares and other equity interests in Xiaotai from the Xiaotai Sellers (the “Acquisition”). Pursuant to the Exchange
Agreement, in exchange for all of the outstanding shares of Xiaotai, we will issue 254,813,383 shares of common stock (the “Exchange
Shares”) to the Xiaotai Sellers. The Exchange Shares will be allocated among the Xiaotai Sellers pro-rata based on each such
seller’s ownership of Xiaotai prior to the closing.
On June 7, 2019, we and NYM Holding, Inc.,
entered into a share purchase agreement (the “Purchase Agreement”) with Go Fresh 365 Inc. (“Go Fresh”),
solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the
equity interest in NYM to Go Fresh for cash consideration of $9.1 million (the “Spin-off”). The transactions contemplated
by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing
of the Acquisition. We refer to the Acquisition and Spin-off as (the “Restructure”).
Upon completion of the Acquisition and the
simultaneous Spin-Off, we will own 100% of Xiaotai, and will be a financial services group operating in both smart financing as
well as microfinance sectors in China. It is anticipated immediately upon completion of the Restructure, our existing shareholders
will retain an ownership interest of approximately 6% and the Xiaotai Sellers will own approximately 94% of the Company assuming
issuance of additional 254,813,383 shares by IFMK prior to closing of the Acquisition.
The Company will hold a special meeting
in 2019 to seek stockholders’ approval of several items, including:
(1) to adopt the Exchange Agreement and
to approve the Acquisition of Xiaotai contemplated by such agreement;
(2) to adopt the Purchase Agreement and
to approve the Spin-off of Company’s existing assets contemplated by such agreement;
(3)
to approve and adopt an amendment to our Certificate of Incorporation (“Charter Amendment”)to affect a reverse stock
split of the Company’s issued and outstanding common stock, par value $0.0001 (“Common Stock”) by a ratio of
not less than one-for-two and not more than one-for-ten, and then a forward stock split of our then issued and outstanding common
stock by a ratio of not less than one-for-two and not more than one-for-ten immediately following the reverse split (the “Reverse
Split”) prior to a time to be determined
,
with
the exact ratios to be set at a whole number within this range, as determined by the Board in its sole discretion;
(4) to approve and adopt an amendment to
the Company’s Certificate of Incorporation to increase the number of shares of common stock that the Company has authority
to issue from 100,000,000 to 1,000,000,000 and the number of shares of Preferred Stock that the Company has authority to issue
from 1,000,000 to 10,000,000; and consequently, to increase the total number of shares of all classes of capital stock that the
Company has authority to issue from 101,000,000 to 1,010,000,000; and
(5) approval of the Charter Amendment to
change the Company’s corporate name to “Terran Financial Services Group.”
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 ten 10 retail supermarkets across New York, Massachusetts and Florida, with over 6,224,500 sales transactions
in the fiscal year ended March 31, 2019. NYM also has two 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 65.2% of iFresh’s total retail sales during the fiscal year ended March 31, 2019.
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 store opened in January, 2019.
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 2020
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 third quarter of 2019.
iFresh currently operates ten (10) 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;
|
|
●
|
iFresh has established a merchandising system backed by an in-house wholesale business and by long-standing relationships with farms;
|
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|
iFresh maintains an in-house cooling system with unique hibernation technology that has developed over 20 years to preserve perishables, especially produce and seafood;
|
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|
iFresh capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable competitors; and
|
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iFresh has a proven and replicable track record of management, operation, acquisition and organic growth.
|
iFresh’s
net sales were $125.4 million and $136.7 million for the years ended March 31, 2019 and 2018, respectively. iFresh’s net
loss was $12 million for the year end March 31, 2019, a decrease of $11.2 million, or 1416 %, from $0.8 million of net loss for
the year end March 31, 2018. Adjusted EBITDA was $(7.8) million for the year end March 31, 2019, a decrease of $9.8 million, or
496%, from $2 million for the year end March 31, 2018. 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
65.2% of iFresh’s total annual retail sales during the fiscal year ended March 31, 2019. Within this category, vegetables
and seafood constituted 37.9% 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, 2019:
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 48.0% to iFresh’s total sales as of March 31, 2019.
Table 1 Asian-American Consumption of Perishables
2
Asian-American Fresh Category Consumption (Index vs. Total Population of 100)
|
|
$ Volume
Index
|
|
|
Purchasing
Frequency
Index
|
|
Fresh Fruits
|
|
|
127
|
|
|
|
111
|
|
Fresh Meats
|
|
|
106
|
|
|
|
103
|
|
Prepared Foods
|
|
|
143
|
|
|
|
115
|
|
Takeout
|
|
|
121
|
|
|
|
102
|
|
Fresh Vegetables
|
|
|
162
|
|
|
|
126
|
|
Fresh Poultry
|
|
|
108
|
|
|
|
103
|
|
Fresh Seafood
|
|
|
247
|
|
|
|
150
|
|
1
|
Culturally Connected and Forging the Future: The Asian-American Consumer 2015 Report. The Nielsen Company.
|
Unique Species and Cuisines
— Asian cuisines incorporate many perishables that are hard to find in traditional U.S. supermarkets. Many cuisines require
vegetables not commonly planted in the U.S. or meat not widely used by mass market consumers. The following two examples help illustrate
the unique foods used in Asian cuisines:
Example 1: Unique vegetable species
Vegetables make up the bulk of daily consumption
by Asian Americans. Asian American consumers usually buy a variety of vegetables in large quantities and use unique vegetable species
such as bitter melons, Chinese yams, vine spinaches, Chinese cabbages and winter melon. Asian Americans therefore value supermarkets
that provide fresh vegetable offerings at affordable prices.
Example 2: Unique fish species and cooking styles
Asian American consumers consume fish not
commonly sold in mainstream supermarkets. Unlike many mainstream supermarkets, iFresh offers consumers live fish in fish tanks
and has fish experts readily available to provide fish cleaning services free of charge.
In addition, Asian American consumers use
many more parts of the fish than do non-Asian American consumers. For example, fish head soup and fish tail soup are two popular
dishes that require only the fish head or fish tail as ingredients. Asian Americans also buy live fish and ask fish experts to
cut them in thin slices as an ingredient of boiled fish in hot sauce or fish hot pot. iFresh organizes the seafood section according
to the needs of its customers, which iFresh believes not only attracts customers, but effectively boosts sales of seafood.
In addition to vegetables and fish, Asian
Americans look for the following additional specialty products:
Fruits
— Mainstream
supermarkets rarely have pitaya, longyan, lychee and star fruit available. Such unavailability motivates Asian Americans to shop
at Chinese and Asian grocery stores on a regular basis to purchase such specialty fruits.
Meat
— Mainstream supermarkets
generally offer meats in cuts such as cubes, steaks, slices and ribs. However, such supermarkets rarely offer super-thinly sliced
hot-pot meat, organ meat or chicken feet. Chinese and Asian cuisines use various kinds of meat for different purposes. Asian specialty
supermarkets such as iFresh understand such Asian cuisines and dietary needs, and fill the market gap in offering hot-pot meat,
organ meat, chicken feet and other rare cuts of meat on a regular basis.
Snacks, Seasonings and Other
— Asian specialty supermarkets offer various snacks, seasonings, cooking utensils and other items not generally found in
mainstream U.S. supermarkets. Chinese and Asian seasonings and spices include peanut oil, cooking wine, vinegars, dark soy sauce,
black bean sauce, pepper oil and chilly oil. Some seasoning or spice can include sub-types, each of which has its own target customers.
For example, people from the northern and southern parts of China usually shop for different type of vinegars.
Consequently, we believe that the uniqueness
in the shopping habits of iFresh’s target customers evidences the importance of Asian American specialty supermarkets such
as iFresh. iFresh’s understanding of Asian American culture and eating habits fill a market gap and distinguishes Asian supermarkets
from mainstream competitors.
Current Industry Landscape
Highly Fragmented and unsophisticated
competitors —
We consider the markets we participate in to be highly fragmented. There is no recognized industry
leader nationwide. Most market participants are small players with a single store run by family members catering to the local 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. The reality of
low market concentration and unsophisticated competitors gives iFresh the opportunity to consolidate the market and cement its
dominant market position.
Unsatisfied Customers
—
As previously mentioned, there are an increasing number of younger Chinese that choose to reside out of traditional Chinese communities
for better working, educational and environmental opportunities. However, large-scale comprehensive Chinese groceries tend to exist
only in Chinatowns. The weekly shopping for this group of Asian Americans involves either long distance travel or a compromise
at local small grocery stores with limited selections and high prices. iFresh will try to meet their demand as well as reshape
the market by increasing the number of stores and via its online-shopping initiatives.
Limited Vendors —
Many
of the products that stock iFresh’s shelves can rarely be sourced from the typical U.S. vendors. Most vendors of U.S. Chinese
and Asian supermarkets are individually owned and small in size. Securing a sufficient and stable supply of core perishables, therefore,
is a recognized challenge in this niche market. Observing the challenge and through years of effort, iFresh has established long-standing
relationships with several large farms. We believe that the relationships with these farms is symbiotic — on one hand, cooperative
farms provide iFresh with priority when supplying core produce popular with Asian American customers; on the other hand, iFresh
communicates the latest market trends and customer preference to cooperating farms, ensuring the farms’ produce selection
and activities closely target the market demand.
Fast Growing Market —
The growing population and increasing purchasing power cultivate a promising market prospect in good momentum
.
According
to The US Census Bureau — American Community Survey 2011 – 2015, the Chinese population had a growth rate of 17.43%
from 2011 to 2015, far beyond the 3.07% growth rate of US population and even the 8.77% Hispanic population growth rate. New York,
New Jersey, Pennsylvania, Florida and Maryland alone have a total Chinese population of 1,139136, making up more than 27.56% of
total Chinese American population nationwide.
In sum, we see a great opportunity for market
consolidation and significant potential for improvement in this market. We believe iFresh has all the right ingredients to address
the current market imperfections and we are ready to catch the wave to make iFresh a national leader in the niche market.
iFresh’s Business Model
iFresh’s
business model features a vertically integrated structure covering upstream supply and downstream retail supermarkets. iFresh has
its own wholesale businesses, Strong America and New York Mart Group (“NYMG”), which supply one thirdof the items sold
in its retail supermarkets with nine self-owned brands, including Family Elephant, Feiyan and Green Acre, and an exclusive distributorship
for seven famous foreign brands such as Shuang Deng, You Joy, Bai Lu and Gu Yue Long Shan
.
For many years, iFresh has worked with farms that mainly grow Chinese specialty vegetables and fruits and supply the most popular
yet hard-to-source vegetables and fruits directly to iFresh supermarkets and maintains long-term and stable relationships with
them. iFresh centralizes purchases through one of its wholesale facilities by making quarterly purchase plans and placing weekly
order with farms. The long-term relationships with farms and the central purchase management system secure its supply of the most
popular vegetables and fruits, even though iFresh doesn’t have any long-term contractual relationships with its farm suppliers.
Working with its vendors, iFresh can respond to market trends to avoid supply interruption in high seasons. iFresh has a diversified
vendor base and has established sustainable relationships during its 20-year history in this niche market sector.
iFresh’s
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, and it will also focus 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
ten 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 6.2 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 10 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 the most use
of its infrastructure and distribution network.
ii. Strong negotiation power with vendors
and competitors
iFresh is often approached by third party
vendors and capable of getting competitive price due to its chain store structure and sustainably strong sales performance. iFresh’s
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 nine self-owned brands and obtained the exclusive
distributorship for 8 famous Chinese brands, as listed in Table 3 and Table 2 below, respectively. In addition, iFresh has built
and maintained relationships with retailers of various sizes. In other words, iFresh’s advantages in market familiarity,
established infrastructure, scale, sourcing management capability and well-recognized brand reputation shape a high barrier protecting
it from immediate impact of new entrants.
Track Record in Operation
and Expansion
i. Record of acquisitions in different
locations
Since
2009, iFresh successfully acquired four stores, one in New York, one in Florida, and two in Massachusetts. In July and October
2017, iFresh acquired iFresh Glen Cove Inc. (“Glen Cove”), New York Mart CT, Inc. (“NYM CT”) and New York
Mart N. Miami Inc. (“NYM N. Miami”) from Long Deng, the Company’s Chairman and Chief Executive Officer. iFresh
targeted stores in desirable locations, especially under-performers that iFresh could acquire at an advantageous cost. iFresh then
utilized its well-developed in-house distribution networks, corporate infrastructure and long-term relationship with farm partners
and third-party vendors to boost performance. All three acquired stores realized enhanced and stabilized profit the first year
after acquisition.
ii. Adoption of scalable small-box format
iFresh brands itself as a player in the
specialty store sector and adopts the small-box format generally adopted in this sector. We believe the small-box format fits into
iFresh’s business model and enables it to boost profitability from structural synergy and efficiency.
Compared with iFresh’s mainstream
competitors whose average store size normally ranges from 40,000 — 60,000 square feet, the average store size of iFresh is
approximately 19,000 square feet with average selling space of approximately 14,000 square feet. iFresh’s adoption of small-box
model is rooted on its understanding that customers shop with iFresh mainly for unique produce, seafood and groceries that are
difficult to find elsewhere. The small-box format forces iFresh to focus on products that cover the target customer’s unique
needs. In addition, the small-box format ensures flexibility, makes it easier for iFresh to discontinue individual products and
react quickly to market changes.
Strong Vendor Management
i. Capability to source globally
iFresh has global sourcing capability mainly
through Strong America 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 19.6% 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 seven famous overseas brands, covering cooking wine, yellow wine, rice noodles, seasonings and spices and snacks. They
are all famous daily food staple brands in China and are familiar to iFresh’s target customers. We believe that the exclusive
distributorship strengthens iFresh brand and its negotiation power among current competitors, new market entrants and consumers.
The table below lists the details of iFresh’s exclusive distributorship:
Table
2 Exclusive Distributorship
Company
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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
|
Strong America
|
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Gu Yue
Long Shan
(2)
|
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Yellow Wine
|
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North America
|
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
|
Strong America
|
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You Joy
(5)
|
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Seasonings and spices
|
|
East Coast of the U.S., Midwestern U.S. and Central and South America
|
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
|
Strong America
|
|
Da Hong Pao
(6)
|
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|
Seasonings and spices
|
|
U.S. East Coast
|
Strong America
|
|
Bei Da Huang
(7)
|
|
|
|
Beans
|
|
U.S. East Coast
|
(1)
|
Strong America has an exclusive distribution agreement with Fujian International Trade Development Company, Ltd., which granted Strong America exclusive distribution rights for the products registered under the brands of “Shuang Deng” and “Bai Lu” for East America, Central America and South America for a period of five years from October 1, 2015 to September 30, 2020. The agreement can be renewed six months before expiration with the consent of both parties.
|
(2)
|
Strong America entered an exclusive distribution agreement with Zhejiang Gu Yue Long Shan Wine Co., Ltd. since January 1, 2015, which granted Strong America exclusive distribution rights for the products registered under the brand of “Gu Yue Long Shan” for North America. Under the consent of both parties, Strong America is currently the sole distributor of “Gu Yue Long Shan” within the North America Region.
|
|
|
(3)
|
Strong
America has an exclusive distribution agreement with Sichuan Youjia Foodstuffs Co., Ltd., which granted Strong America exclusive
distribution right for the products registered under the brand of “You Joy” for the East Coast of the U.S., Midwestern
U.S. and Central and South America 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.
|
|
|
(4)
|
Strong America has an exclusive distribution agreement with Sichuan Teway Food Group Co., Ltd., which granted Strong America exclusive distribution rights for the products registered under the brands of “Hao Ren Jia” and “Da Hong Pao” for the region of East Coast of America for a period of three years from July 1, 2014 to July 31, 2019. The agreement can be renewed six months before expiration with consents of both parties
.
|
|
|
(5)
|
Strong
America has extended the exclusive distribution agreement with Beidahuang (Dalian) Ouya International Trade Co., Ltd. (CHINA),
which granted Strong America exclusive distribution rights for the products registered under the brands of “Bei Da Huang”
for the East Coast of America for 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
|
iFresh Inc.
|
|
I FRESH
|
|
|
|
Supermarkets
|
|
N/A
|
|
Pending
|
iFresh Inc.
|
|
I FRESH
|
|
|
|
Supermarkets
|
|
N/A
|
|
Pending
|
Proprietary and in-house Cold
Chain System
Since Mr. Long Deng established Strong America
in 1995, iFresh has strived to build a proprietary cold-chain logistics system which evolved with the expansion of iFresh. Based
on years of experience, iFresh’s logistics team is now capable of delivering frozen goods to more than 20 states in the Eastern
U.S. using its unique packing and temperature control technology.
Live Seafood
— All live
seafood is collected daily from wharfs or markets at midnight, and immediately distributed via in-house logistics to all retail
supermarkets. For different species, iFresh maintains different water temperatures and oxygen density in its tanks and containers.
Hibernation technology is widely used in the in-house cold-chain system for long distance distribution to best ensure freshness
and quality. The hibernation technology even enables iFresh to deliver live lobsters to China with an over 95% survival rate.
Fruit& Vegetables
—
iFresh adopts different storage technologies based on characteristics of different fruits and vegetables, the knowledge only obtained
from years of experience. All vegetables and fruits are delivered and sold on a daily basis, to lower worn rate, lower human cost
and keep up the high quality.
Growth Strategy
Stores Site Selection
—
For new stores, iFresh has an established procedure to select new stores sites. First, iFresh contacts local real estate brokers
and appraisers for demographic reports for a group of locations it is interested in. After reading the reports carefully, it narrows
down the alternatives for further study. Next, it interviews with a diverse selection of influential local groups, including but
not limited to, local Chinese associations, Chinese schools and local 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 $10 million
of capital in addition to its cash flow in place for the year ended March 31, 2020 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, 2019, the
perishable categories contributed approximately 65.2% to iFresh’s total net sales, similar to 64.5% for the year ended March
31, 2018, 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, 2019, the non-perishable grocery category contributed approximately 34.8% to iFresh’s
total Net Sales and realized a markup of 36.0% on average for the year ended March 31, 2019.
The table below depicts the components of
net sales and gross margin in detail as of March 31, 2019:
Table 4 Contribution of Categories
Category
|
|
Net Sales
%
|
|
|
Markup
%
|
|
Vegetables
|
|
|
20.0
|
%
|
|
|
38.3
|
%
|
Seafood
|
|
|
17.9
|
%
|
|
|
21.0
|
%
|
Meat
|
|
|
14.1
|
%
|
|
|
40.0
|
%
|
Fruit
|
|
|
10.1
|
%
|
|
|
32.2
|
%
|
Hot Food
|
|
|
3.1
|
%
|
|
|
61.1
|
%
|
Perishable Total/Average
|
|
|
65.2
|
%
|
|
|
32.7
|
%
|
|
|
|
|
|
|
|
|
|
Grocery
|
|
|
34.8
|
%
|
|
|
36.0
|
%
|
Management and sale of Perishables
Vegetables
— All iFresh
stores receive deliveries of vegetables every day and are required to sell out all vegetables on daily basis. iFresh discounts
its vegetables after 7:00 p.m., which significantly lowers the storage cost and worn-and-torn rate and improves profitability.
In addition, to lower the worn-out rate of green-leaf vegetables due to customer rummage, iFresh usually packs and sells such vegetables
in bags. iFresh also displays and sells different kinds of vegetables according to their characteristics. For example, Chinese
yams need to be displayed on wood shreds to keep them fresh, while winter melons are typically sold in pieces due to their large
size.
Seafood —
As an established
procedure, in-house merchants of iFresh collect live seafood from wharfs and markets at midnight on a daily basis. The purchases
are immediately distributed to all retailing stores via iFresh’s in-house cold chain systems in which hibernation technology
keeps seafood alive and ensures their freshness and high-quality. iFresh discounts remaining stock after 7pm, to make space for
new deliveries, reduce storage costs and maintain its standard for freshness and quality.
Meat
—
Since iFresh can
sell more body parts of an animal than a mainstream grocery store, the sales it generates from a whole pig, chicken or cattle are
much higher than that of mainstream groceries, which leads to higher margin in meat and meat products sales.
Fruit
—
Almost all of
the iFresh’s unique fruit species are seasonal offerings and the quality and price are decisive to customer traffic during
high season. Financially, the unique fruit species are sold at higher unit prices and generally offer higher profit margins. iFresh
benefits from its long-standing relationship with farm vendors to stay competitive in high seasons and enjoy better sourcing price
and higher profit margin from fruit sales.
Hot Food
— Hot food
options vary among iFresh’s different store locations. iFresh provides prepared Chinese cuisines which require specific cooking
utensils and are thus not easily made at home by customers, such as Char Siu, qingtuan, roasted duck, roasted goose, as well as
an assortment of dim sums. In addition, iFresh adjusts its hot food offerings periodically based on the responses from customers.
As a commitment to freshness and quality, all prepared food in iFresh are made and sold on a daily basis. Leftovers are sold at
a discount after 7:00 p.m.
Pricing Strategy
In general, iFresh’s pricing strategy
is to provide premium products at reasonable prices. iFresh believes pricing should be based on the quality of products and the
shopping experience rather than promotional pricing to drive sales. Its goal is to deliver a sense of value to and foster a relationship
of trust with its target and loyal customers.
iFresh adopts different pricing strategies
for different food categories. For best sellers such as seafood and core produce such as swimming shrimp and bok choy, iFresh prices
competitively and aims to attract consumer traffic. For groceries and dry foods which are usually imported and have a long shelf
life, iFresh prices at a premium (average markup of 36.0%). Due to changes in market conditions and seasonal supply, iFresh’s
pricing for seafood and produce are more volatile when compared with other categories. Despite the effects of seasonality, iFresh
is able to maintain competitive pricing even in high seasons thanks to its long-standing relationship with its farm partners.
Marketing and advertising
iFresh believes its unique offerings, competitive
price of popular produce, and word-of–mouth are major drivers of store sales. Apart from word-of-mouth, iFresh advertises
using in-store tastings, in-store weekly promotion signage, cooking demonstrations and product sampling. iFresh also promotes its
stores on its official website, uses an electronic newsletter, and/or inserts sales flyers in local Chinese newspapers or magazines
on a monthly or weekly basis. iFresh’s online business is marketed mainly on its official website and on WeChat, the most
widely-used mobile social app among Chinese immigrant. As of the fiscal years ended March 31, 2019 and 2018, iFresh recognized
$410,671 and $143,824 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.
ITEM 1A. Risk Factors
An investment in our Common Stock is speculative and involves
a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information
contained in this report, including the consolidated financial statements and notes thereto, before deciding to invest in our Common
Stock. Any of the risk factors described below could significantly and adversely affect iFresh’s business, prospects, sales,
revenues, gross profit, cash flows, financial condition, and results of operations.
Risks Related to the Company
We are currently in default under our Credit Facility
with Key Bank, which limits our liquidity and could result in Key Bank accelerating amounts we owe to it under the facility.
On December 23, 2016, NYM, as borrower,
entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank National Association
(“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit of $5,000,000 for making
advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000 of delayed draw term loan.
The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the Adjusted LIBOR rate plus 1.95%.
As reflected in the Company’s consolidated financial statements, the Company had operating losses in fiscal year 2019 and
had negative working capital of $21.7 million and $18.4 million as of March 31, 2019 and 2018, respectively. The Company had negative
equity of $1.0 million as of March 31, 2019. The Company did not meet the financial covenant required in the credit agreement
with Keybank. As of March 31, 2019, the Company has outstanding loan facilities of approximately $21.3 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, 2019, the Company also has $5.9
million of advances and receivable from the related parties we intend to collect. On June 7, 2019, the Company entered into certain
Share Exchange Agreement and Share Purchase Agreement to spin off its Asia supermarket business and switch to internet lending
business primarily located in China through the acquisition (refer to Note 19). The acquisition is expected to improve the Company’s
liquidity and cash flow
Although the Company has been timely repaying
the KeyBank facility in accordance with its terms, the Company was in default under the Credit Agreement as of March 31, 2019 and
2018. Specifically, the financial covenants of the Credit Agreement require the Company to maintain a senior funded debt to earnings
before interest, tax, depreciation and amortization (“EBITDA”) ratio for the trailing 12 month period of less than
3.00 to 1.00 at the last day of each fiscal quarter. As of March 31, 2019 and 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 KeyBank loan. In addition, the Company violated
the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares
to HK Xu Ding Co., Limited, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018.
The Company failed to obtain a written consent for the occurrence of the change of ownership. KeyBank has notified the Company
that it has not waived the default and reserves all of its rights, power, privileges, and remedies under the Credit Agreement.
effective as of March 1, 2019, interest was accrued on all loans at the default rate.
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.
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 65.2% of iFresh’s net sales in fiscal year ended March
31, 2019. 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 seven famous oversea brands. If iFresh can’t renew its exclusive distribution contracts relating to those brands, iFresh’s
sales, both retail and wholesale, may be adversely affected. Furthermore, importing products from other countries is subject to
the impact of various international factors, including international trading policies, shipping costs, currency fluctuations, tariffs
and customs procedures for imports, which may affect the supply and purchase prices of the products to be imported by iFresh’s
wholesale distributors and sold by them to iFresh. If iFresh fails to obtain or maintain a sustainable supply of these products
from its vendors, its financial conditions and operating results will be adversely impacted.
The operation of new stores and online sales may cannibalize
sales in iFresh’s stores and its financial results can be affected by economic and competitive conditions in this area.
All of iFresh’s existing stores are
located in the Northeastern United States and it intends to grow its store base in this area. New stores are expected to be opened
in the Greater New York City and Boston metropolitan areas. As iFresh opens new stores in closer proximity to its customers who
currently travel longer distances to shop at iFresh’s stores, iFresh expects some of these customers to take advantage of
the convenience of iFresh’s new locations. Simultaneously, iFresh will develop online sales to cover the customers living
in a 2.5-hour drive radius, which may satisfy the demand from those Chinese customers living in the suburbs.
Some sales volume may transfer from iFresh’s
existing stores to its new stores as some of its existing customers switch to these new, closer locations, or convenient online
shopping. Consequently, iFresh’s new stores and online sales may adversely impact sales at iFresh’s existing stores.
Disruption of relationships with vendors could negatively
affect iFresh’s business.
iFresh purchases vegetables and fruits directly
from farms and other vendors and maintains stable relationships with the vendors to ensure reliable supplies of popular seasonal
Chinese specialty of vegetables and fruits. iFresh also depends on third-party suppliers for exclusive third-party brands. The
cancellation of iFresh’s supply arrangement with any of its suppliers or the disruption, delay or inability in supply from
its suppliers could adversely affect iFresh’s sales. If iFresh’s suppliers fail to comply with food safety or other
laws and regulations, or face allegations of non-compliance, their operations may be disrupted. iFresh cannot assure you that it
would be able to find replacement suppliers on commercially reasonable terms.
iFresh may be unable to protect or maintain its intellectual
property, which could result in customer confusion, a negative perception of its brand and adversely affect its business.
iFresh believes that its intellectual property
has substantial value and has contributed significantly to the success of iFresh’s business. In particular, iFresh’s
trademarks, including New York Mart, are valuable assets that reinforce iFresh’s customers’ favorable perception of
its stores.
From time to time, third parties have used
names similar to iFresh’s, have applied to register trademarks similar to iFresh’s and, as iFresh believes, have infringed
or misappropriated iFresh’s intellectual property rights. iFresh responds to these actions on a case-by-case basis, including,
where appropriate, by sending cease and desist letters and commencing opposition actions and litigation. The outcomes of these
actions have included both negotiated out-of-court settlements as well as litigation. iFresh cannot assure you that the steps it
has taken to protect its intellectual property rights are adequate, that its intellectual property rights can be successfully defended
and asserted in the future or that third parties will not infringe upon or misappropriate any such rights. In addition, iFresh’s
trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect
iFresh’s trademark rights could prevent iFresh in the future from challenging third parties who use names and logos similar
to iFresh’s trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of iFresh’s
brand and products, and eventually adversely affect iFresh’s sales and profitability. Moreover, intellectual property disputes
and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may
not be recoverable regardless of whether iFresh is successful. Such proceedings may be protracted with no certainty of success,
and an adverse outcome could subject iFresh to liabilities, force iFresh to cease use of certain trademarks or other intellectual
property or force iFresh to enter into licenses with others. Any one of these occurrences may have a material adverse effect on
iFresh’s business, results of operations and financial condition.
If iFresh experiences a data security breach and confidential
customer information is disclosed, iFresh may be subject to penalties and experience negative publicity, which could affect iFresh’s
customer relationships and have a material adverse effect on its business.
iFresh and its customers could suffer harm
if customer information was accessed by third parties due to a security failure in iFresh’s systems. The collection of data
and processing of transactions requires iFresh to receive, transmit and store a large amount of personally identifiable and transaction
related data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches
suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal
legislative proposals addressing data privacy and security. If some of the current proposals are adopted, iFresh may be subject
to more extensive requirements to protect the customer information that it processes in connection with the purchases of iFresh’s
products. iFresh may become exposed to potential liability with respect to the data that it collects, manages and processes, and
may incur legal costs if its information security policies and procedures are not effective or if it is required to defend its
methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to
iFresh’s methods of handling personal data could adversely affect its business, results of operations, financial condition
and cash flows due to the costs and negative market reaction relating to such developments. Additionally, if iFresh suffers data
breaches, one or more of the credit card processing companies that it relies on may refuse to allow it to continue to participate
in their network, which would limit iFresh’s ability to accept credit cards at its stores and could adversely affect its
business, results of operations, financial condition and cash flows.
Data theft, information espionage or other
criminal activity directed at the retail industry or computer or communications systems may materially adversely affect iFresh’s
business by causing iFresh to implement costly security measures in recognition of actual or potential threats, by requiring iFresh
to expend significant time and expense developing, maintaining or upgrading its information technology systems and by causing it
to incur significant costs to reimburse third parties for damages. Such activities may also materially adversely affect iFresh’s
financial condition, results of operations and cash flows by reducing consumer confidence in the marketplace and by modifying consumer
spending habits.
If iFresh is unable to renew or replace current store
leases or if it is unable to enter into leases for additional stores on favorable terms, or if one or more of its current leases
are terminated prior to expiration of their stated term, and it cannot find suitable alternate locations, iFresh’s growth
and profitability could be negatively impacted.
iFresh currently leases all of its store
locations. Many of iFresh’s current leases provide unilateral option to renew for several additional rental periods at specific
rental rates. iFresh’s ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a
suitable alternate location, and iFresh’s ability to negotiate favorable lease terms for additional store locations, could
depend on conditions in the real estate market, competition for desirable properties, its relationships with current and prospective
landlords, or other factors that are not within iFresh’s control. Any or all of these factors and conditions could negatively
impact iFresh’s growth and profitability.
iFresh leases certain of its stores and related properties
from related parties.
Long Deng, one of iFresh’s directors
and executive officers, owns 50% of Dragon Development LLC, which leases to iFresh the premises at which Strong America, one of
iFresh’s wholesale subsidiaries, is located. During fiscal year ended March 31, 2019, rental payments (excluding maintenance
and taxes that iFresh is obligated to pay) under the leases from Dragon Development LLC were $1,359,821. 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.
Changes in U.S. trade policies, including the imposition
of tariffs on various goods and a potential resulting trade war with China and other countries, could have a material adverse
impact on our business.
Some of our merchandise is produced in foreign countries, primarily
in China, making the price and availability of our merchandise susceptible to international trade risks and other international
conditions. The imposition of tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also
result in the adoption of new or increased tariffs or other trade restrictions by other countries. Recently, the current U.S. administration
and China have imposed significant tariffs on goods imported from the other's country, and more recently, the United States has
proposed the imposition of additional tariffs on various goods. If the current administration follows through with such
tariffs, or if additional tariffs or trade restrictions are implemented by the United States or other countries, the resulting
trade barriers could have a significant adverse impact on the cost of our goods, the prices at which we offer them for sale and
our overall financial performance. We are not able to predict future trade policy of the United States, China, or of any foreign
countries in which we operate or purchase goods, or the terms of any renegotiated trade agreements, or their impact on our business.
The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war, or other governmental
action related to tariffs or trade agreements or policies, has the potential to adversely impact the cost of and demand for our
products, our overall costs, our customers, our suppliers and the world economy, which in turn could have a material adverse effect
on our business, operational results, financial position and cash flows.
Litigation may materially adversely affect iFresh’s
business, financial condition and results of operations.
iFresh’s operations are characterized
by a high volume of customer traffic and by transactions involving a wide variety of product selections. These operations carry
a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries.
Consequently, iFresh may be a party to individual personal injury, product liability and other legal actions in the ordinary course
of its business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits
and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large
or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial
periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation
that may decrease consumer confidence in iFresh’s businesses, regardless of whether the allegations are valid or whether
iFresh is ultimately found liable. As a result, litigation may materially adversely affect iFresh’s businesses, financial
condition, results of operations and cash flows.
Increased commodity prices and availability may impact
profitability.
Many of iFresh’s products include
ingredients such as wheat, corn, oils, milk, sugar, cocoa and other commodities. Commodity prices worldwide have been increasing.
While commodity price inputs do not typically represent the substantial majority of iFresh’s product costs, any increase
in commodity prices may cause its vendors to seek price increases from iFresh. Although iFresh is typically able to mitigate vendor
efforts to increase its costs, it may be unable to continue to do so, either in whole or in part. In the event iFresh is unable
to continue mitigating potential vendor price increases, it may in turn consider raising its prices, and its customers may be deterred
by any such price increases. iFresh’s profitability may be impacted through increased costs to it which may impact gross
margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.
Severe weather, natural disasters and adverse climate
changes may materially adversely affect iFresh’s financial condition and results of operations.
Severe weather conditions and other natural
disasters in areas where iFresh has stores or from which iFresh obtains the products it sells may materially adversely affect its
retail operations or its product offerings and, therefore, its results of operations. Such conditions may result in physical damage
to, or temporary or permanent closure of, one or more of iFresh’s stores, an insufficient workforce in iFresh’s markets
and/or temporary disruption in the supply of products, including delays in the delivery of goods to iFresh’s stores or a
reduction in the availability of products in its stores. In addition, adverse climate conditions and adverse weather patterns,
such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect
the availability or cost of certain products within its supply chain. Any of these factors may disrupt iFresh’s businesses
and materially adversely affect its financial condition, results of operations and cash flows.
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, 2019 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, 2019 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.
Our Chief Financial Officer may be
subject to conflicts of interest.
Our Chief Financial Officer, Mr. Long Yi,
provides his services on a non-exclusive, part-time basis, and may therefore become subject to conflicts of interest resulting
from his other activities. Because Mr. Yi works only part-time, instances may occur where he may not be immediately available to
provide solutions to problems or address concerns that arise in the course of us conducting our business and thus adversely affect
our business. In addition, Mr. Yi can become subject to conflicts of interest because he devotes part of his working time to other
business endeavors, including serving as chief executive officer of Urban Tea Inc. (NASDAQ: MYT) and have responsibilities to these
other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities
should be presented to us. Because of these relationships, Mr. Yi could be subject to conflicts of interest.
The directors and officers
of our company, including Mr. Yi, are aware of the existence of laws governing the accountability of directors and officers for
corporate opportunity and requiring disclosures by the directors and officers of conflicts of interest, and we will rely upon such
laws in respect of any conflicts of interest or in respect of any breaches of duty by any of our directors and officers. All such
conflicts are to be disclosed by such directors or officers in accordance with applicable laws and the directors and officers are
to govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.
Currently, we have no policy in place to address such conflicts of interest. In the event Mr. Yi fails to comply with these laws,
our business and results of operations could be materially adversely affected.
There is no assurance that the Company
will be able to comply with the requirements in the Forbearance Agreement. If KeyBank elects to exercise its rights and remedies
under the Forbearance Agreement with respect to any event of default, then it will have a material adverse effect on us and create
substantial doubt about the Company’s ability to continue as a going concern.
On May 20, 2019 (the “Effective Date”),
the Company, NYM, certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association entered into a forbearance agreement
(the “Forbearance Agreement”) with respect to that certain Credit Agreement, dated as of December 23, 2016, as amended,
pursuant to which KeyBank National Association, “KeyBank” the or “Lender”, made available to NYM, the “Borrower”,
a revolving credit facility, a term loan facility, and other credit accommodations. Pursuant to that certain Guaranty Agreement,
dated as of December 26, 2016, as amended by several joinder agreements, the Company, certain subsidiaries of NYM and Mr. Long
Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to
guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
Terms used but not otherwise defined herein have the meanings ascribed to them in the Forbearance Agreement.
Under the Forbearance Agreement, the Lender
has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of
default (the “Specified Events of Default”) until the earlier to occur of (the “Termination Date”): (a)
5:00 p.m. Eastern Time on August 18, 2019; and (b) a Forbearance Event of Default.
Under the Forbearance Agreement, the Loan
Parties shall, and shall cause the Chief Restructuring Officer to, immediately and diligently pursue, and use commercially reasonable
efforts to consummate, a refinance, sale, and/or capital contribution transaction(s) on such terms and conditions, and with proceeds
in sufficient amount(s), that will enable the repayment in full of the outstanding Obligations in immediately available funds (a
“Repayment Transaction”). On or prior to the 89th day following the Effective Date, the Loan Parties shall deliver
to the Lender a copy of a final, definitive, and executed term sheet, commitment, letter of intent, offer, or other written expression
of interest (“Preliminary Transaction Document”) evidencing a binding commitment for one or more transactions that,
collectively, would constitute a Repayment Transaction, which Preliminary Transaction Document(s) shall be in form and substance
reasonably satisfactory to the Lender.
Upon the occurrence of an event of default
(other than the Specified Defaults), or the expiration or termination of the forbearance period under the Forbearance Agreement,
KeyBank may declare the entire unpaid principal balance, together with all accrued interest and other amounts payable to KeyBank
thereunder, immediately due and payable.
On the Termination Date, the KeyBank will
have, and may exercise, any and all of its rights and remedies set forth herein or in any Loan Document, at law, or in equity.
Conditioned only on the occurrence of the Termination Date, KeyBank will be entitled to, and the Loan Parties consent to, the appointment
of a state or federal court receiver with respect to any or all of the Loan Parties (excluding Mr. Deng) and/or any or all of the
Collateral with notice to the Loan Parties, and the Loan Parties shall not oppose or otherwise interfere with such a receiver or
the Lender’s ability to obtain the appointment of such a receiver.
The Company does not know which rights
and remedies, if any, KeyBank may choose to exercise under the Loan Documents upon the occurrence of an event of default (other
than the Specified Defaults) or the expiration or termination of the forbearance period under the Forbearance Agreement. If KeyBank
elects to foreclose on significant assets of the Company, then it will have a material adverse effect on the Company’s liquidity,
cash flows, financial condition and results of operations, and the Company’s ability to continue operations will be materially
jeopardized.
There is no assurance that the Company
will be able to comply with the requirements in the Loan Documents, including the Forbearance Agreement, or otherwise modify the
requirements thereof. Such compliance depends, in part, on the Company’s ability to obtain the cooperation of outside parties,
which is not within the Company’s control. If KeyBank were to exercise its default-related rights and remedies, then it will
have a material adverse consequence on the Company’s ability to meet its obligations arising within the next twelve months,
and create substantial doubt about the Company’s ability to continue as a going concern.
Risks Related to the Restructure
On June 7, 2019, we entered into an Exchange
Agreement with Xiaotai and the Xiaotai Sellers, pursuant to which, among other things and subject to the terms and conditions contained
therein, we will acquire all of the outstanding issued shares and other equity interests in Xiaotai from the Xiaotai Sellers. On
June 7, 2019, we and NYM entered into a Purchase Agreement with Go Fresh, solely owned by Mr. Long Deng, IFMK’s Chief Executive
Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh for cash consideration
of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and
would take place contemporaneously with the closing of the Acquisition. Risks related to the Restructure include:
Subsequent to the consummation of the Restructure, we
may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant
negative effect on our financial condition, results of operations and share price, which could cause you to lose some or all of
your investment.
Although we have conducted
due diligence on Xiaotai, we cannot assure you that this diligence revealed all material issues that may be present in Xiaotai’s
business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors
outside of our and Xiaotai’s control will not later arise. As a result, we may be forced to later write-down or write-off
assets, restructure its operations, or incur impairment or other charges that could result in losses. Even if our due diligence
successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent
with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity,
the fact that we report charges of this nature could contribute to negative market perceptions about the Company or its securities.
In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all.
We will have limited protection in
the event that any of the representations and warranties made by Sellers or Xiaotai in the Exchange Agreement ultimately proves
to be inaccurate or incorrect.
IFMK and its shareholders
will have limited protection if any representation or warranty made by Sellers or Xiaotai in the Exchange Agreement proves to be
inaccurate or incorrect. Accordingly, to the extent such representations or warranties are incorrect, IFMK would have limited indemnification
claims with respect thereto and its financial condition or results of operations could be adversely affected.
We may waive one or more of the conditions
to the Acquisition.
We may agree to waive,
in whole or in part, some of the conditions to our obligations to complete the Acquisition, to the extent permitted by our charter
and applicable laws. For example, it is a condition of our obligation to close the Acquisition and that Xiaotai’s representations
and warranties are true and correct in all respects as of the closing date, except for such inaccuracies that, individually or
in the aggregate, would not result in a Material Adverse Effect (as defined in the Exchange Agreement). However, if the Board determines
that it is in the shareholders’ best interest to waive any such breach, then the board may elect to waive that condition
and close the Acquisition.
Our ability to successfully
effect the Restructure and successfully operate the business thereafter will be largely dependent upon the efforts of certain
key personnel, including certain executive officers of IFMK and the key personnel of Xiaotai, all of whom we expect to join
IFMK following the Acquisition. The loss of such key personnel could negatively impact the operations and profitability of
the post-combination business.
Our ability to successfully effect the Acquisition and successfully operate the business is dependent
upon the efforts of certain key personnel including Mr. Long Deng, the Chief Executive Officer of IFMK and Mr. Long Yi, the Chief
Financial Officer of IFMK and key personnel of Xiaotai. The unexpected loss of the services of one or more of our directors or
executive officers could adversely impact our ability to complete the Restructure.
A market for our common stock may not
continue after the restructure, which would adversely affect the liquidity and price of our common stock.
Following the Restructure, as well as the
anticipated concurrent reverse split, the price of our common stock may fluctuate significantly due to the market’s reaction
to the Restructure and general market and economic conditions. An active trading market for our common stock following the Restructure
may never develop or, if developed, it may not be sustained. In addition, the price of our common stock after the Restructure can
vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports.
Additionally, if our common stock is not listed on, or become delisted from, the NASDAQ for any reason, and are quoted on the OTC
Bulletin Board (an inter-dealer automated quotation system for equity securities that is not a national securities exchange), the
liquidity and price of our common stock may be more limited than if we were quoted or listed on the NASDAQ or another national
securities exchange. You may be unable to sell your common stock unless a market can be established or sustained.
Although we expect that our common stock will remain listed
on the NASDAQ after the Restructure, there can be no assurance that our common stock will continue to be so listed or, if listed,
that we will be able to comply with the continued listing standards of the NASDAQ.
We intend to apply for the continued listing
of our common stock on the NASDAQ subsequent to the closing of the Restructure. To continue listing our common stock on the NASDAQ
subsequent to the closing of the Restructure, we will be required to demonstrate compliance with NASDAQ’s initial listing
standards, which are more rigorous than NASDAQ’s continued listing requirements, including that our common stock trade at
a minimum of $4.00 per common stock unless we qualify the $3.00 closing price alternative requirement. We cannot assure you that
we will be able to meet those initial listing standards at that time.
If, after the Restructure, the NASDAQ delists
our common stock from trading on its exchange due to our failure to meet the NASDAQ’s initial and/or continued listing standards,
we and our shareholders could face significant material adverse consequences including:
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limited availability of market quotations for our securities;
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a
determination that our ordinary shares are a “penny stock,” which will require brokers trading in our ordinary shares
to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for
our ordinary shares;
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a
limited amount of analyst coverage; and
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a
decreased ability to issue additional securities or obtain additional financing in the future.
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If the Restructure benefits do not
meet the expectations of investors, shareholders or financial analysts, the market price of our securities may decline.
If the benefits of the Restructure do not
meet the expectations of investors or securities analysts, the market price of the Company’s common stock prior to the closing
of the Restructure may decline. The market values of our securities at the time of the Restructure may vary significantly from
their prices on the date the Exchange Agreement and the Purchase Agreement were executed, or the date on which our shareholders
vote on the Restructure.
In addition, following the Restructure,
fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. Prior to the Restructure,
there has not been a public market for Xiaotai’s securities. Accordingly, the valuation ascribed to Xiaotai and our common
stock in the Restructure may not be indicative of the price that will prevail in the trading market following the Restructure.
If an active market for our common stock develops and continues, the trading price of our common stock following the Restructure
could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of
the factors listed below could have a material adverse effect on your investment in our common stock and our common stock may trade
at prices significantly below the price you paid for them. In such circumstances, the trading price of our common stock may not
recover and may experience a further decline.
Broad market and industry
factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general,
and the NASDAQ in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our
securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies
which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial
conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to
issue additional securities and our ability to obtain additional financing in the future.
Following the Restructure, the Company’s
business and share prices may suffer as a result of its lack of public company operating experience of new management. Furthermore,
if securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or
its market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our
ordinary shares could decline.
Prior to the completion of the Restructure,
Xiaotai has been a privately-held company. Most members of Xiaotai’s management team have limited experience managing a publicly-traded
company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies.
The management team may not successfully or efficiently manage Xiaotai’s transition to be a division of a public company
that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous
scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from Xiaotai’s
senior management and could divert their attention away from the day-to-day management of Xiaotai’s business, which could
harm Xiaotai’s business, results of operations and financial condition.
The obligation to disclose information
publicly may put Xiaotai at a disadvantage to competitors that are private companies.
Upon completion of
this acquisition, Xiaotai will become a member of a consolidated group of a publicly listed company in the United States. Xiaotai
will need to disclose occurrence of matters that are material to the reporting company and its shareholders that Xiaotai would
not be required to disclose if Xiaotai were a private company. Xiaotai’s competitors may have access to this information,
which would otherwise be confidential. This may give them advantages in competing with Xiaotai. To the extent compliance with U.S.
laws increases expenses or decreases Xiaotai’s competitiveness against such companies, the public listing could affect Xiaotai’s
results of operations.
Xiaotai will incur additional costs
as a result of becoming a subsidiary of a public company, which could negatively impact its net income and liquidity.
Upon completion of
this acquisition, Xiaotai will become a subsidiary of a public company in the United States. As a result, Xiaotai will incur additional
legal, accounting and other expenses that Xiaotai did not incur as a private company. Xiaotai expects that the rules and regulations
will increase its legal, accounting and financial compliance costs and will make many corporate activities more time-consuming
and costly. If Xiaotai fails to comply with these rules and regulations, Xiaotai could become the subject of a governmental enforcement
action, investors may lose confidence in its public parent company and the share price could suffer.
The transition to becoming a division
of a public company will require changes in the way Xiaotai operates its business.
Private companies often
have less regulated methods of operation than public companies. This results in less transparency and presents greater risks of
noncompliance with rules and regulations. In anticipation of the proposed transaction, Xiaotai management has begun to implement
a variety of measures to ensure that the company follows the rules applicable to public companies in the United States. To the
extent these new procedures and policies could not change historical behaviors that might be inconsistent with the rules regulating
U.S. public company, Xiaotai could be at risk of violation or poor reporting as a public company following this transaction.
Completion of the Reverse Split
and the Restructure is subject to a number of conditions and if these conditions are not satisfied or waived, such
transactions will not be completed.
IFMK’s obligation
and the obligation of Xiaotai to complete the Acquisition are subject to satisfaction or waiver of a number of conditions, including,
among others:
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approval
and completion of the Reverse Split;
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approval of the Acquisition by IFMK’s stockholders;
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unconditional written consent from KeyBank simultaneously
with consummation of the transaction contemplated in the Exchange Agreement;
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satisfaction of all the conditions to the obligations of
each party to consummate the Spin-off described in the Purchase Agreement;
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receipt
of opinions of counsel;
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absence
of injunctions or certain legal impediments;
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approval for the listing on NASDAQ of the shares of Xiaotai’s
common stock to be issued in the Acquisition; and
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accuracy of the representations and warranties with respect
to each of the foregoing transactions, subject to certain materiality thresholds
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There can be no assurance
that the conditions to closing of the Exchange Agreement will be satisfied or waived or that the Acquisition itself will be completed.
IFMK’s
obligation and the obligation of Go Fresh to complete the Spin-off are subject to satisfaction or waiver of a number of
conditions, including, among others:
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the approval of the Purchase Agreement and the transactions
contemplated thereby (including the Spin-off) by a majority of votes cast by our shareholders that are present in person or by
proxy at our special meeting;
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the receipt of any other required Board, governmental and
regulatory approvals and consents;
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the receipt of any other required third person approvals
in order to consummate the Spin-off;
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there is no applicable law or order in effect which makes
illegal or prevents or prohibits the transactions contemplated by the Purchase Agreement, and there is no pending third party
non-Affiliate legal proceeding to enjoin or otherwise restrict the closing;
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all of the conditions to the obligations of each party
to consummate the Acquisition described in the Exchange Agreement shall have been satisfied;
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the written consent of KeyBank to the Spin-Off;
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No pending action shall have been brought by third parties
to enjoin or otherwise restrict the consummation of the closing.
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There can be no assurance that the conditions
to closing of the Purchase Agreement will be satisfied or waived or that the Spin-off itself will be completed.
NASDAQ may not list or continue to
list our shares and the Exchange Shares on its exchange, which could prevent consummation of the Acquisition or could limit investors’
ability to make transactions in our securities. Consequently, we may be subject to additional trading restrictions.
IFMK intends to apply
to have the Exchange Shares listed on NASDAQ in connection with consummation of the Acquisition, and it is a closing condition
of the Acquisition that our shares continue to be listed on NASDAQ. The post-Acquisition entity will be required to meet the initial
listing requirements to be listed. We may not be able to meet those initial listing requirements. Even if our securities are so
listed, we may be unable to maintain the listing of our securities in the future. If we fail to meet the initial listing requirements
and NASDAQ does not list our securities on its exchange, neither IFMK nor Xiaotai would be required to consummate the Acquisition.
In the event that each of IFMK and Xiaotai elected to waive this condition, IFMK and its stockholders could face significant material
adverse consequences, including:
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a limited availability of market quotations for its securities;
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a limited amount of news coverage for the company; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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Failure to complete the Restructure
could negatively impact IFMK’s stock price, future business or operations.
If the Restructure is not completed, IFMK,
Xiaotai and Go Fresh may be subject to a number of material risks, including the following:
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IFMK may be required under certain circumstances to pay Xiaotai a termination fee;
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the price of IFMK’s common stock may decline to the extent that the relevant current market price reflects a market assumption that the Acquisition will be completed;
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IFMK may not have sufficient working capital to fund its operation on an ongoing basis;
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IFMK may not have sufficient time to regain compliance under NASDAQ continued Listing Rule 5810(c)(3)(A) in order to avoid being delisted from the Nasdaq Capital Market; and
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costs
related to the Restructure, such as legal, accounting, certain financial advisory and financial printing fees, must be paid
even if the Restructure is not completed.
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Furthermore, if the Restructure is terminated and either company’s
board of directors determines to seek another Restructure or business combination, there can be no assurance that it will be able
to find a partner on terms as attractive as those provided for in the Exchange Agreement and the Purchase Agreement. In addition,
while the Exchange Agreement and the Purchase Agreement are in effect and subject to very narrowly defined exceptions, IFMK is
prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale
of assets or other business combination (except with Xiaotai and Go Fresh).
The exercise of IFMK’s directors’
and officers’ discretion in agreeing to changes or waivers in the terms of Acquisition may result in a conflict of interest
when determining whether such changes to the terms of the Acquisition or waivers of conditions are appropriate and in IFMK’s
stockholders’ best interest.
In the period leading
up to the closing of the Acquisition, events may occur that, pursuant to the Exchange Agreement, would require IFMK to agree to
amend the Exchange Agreement, to consent to certain actions taken by Xiaotai or to waive rights that IFMK is entitled to under
the Exchange Agreement. Such events could arise because of changes in the course of Xiaotai’s business, a request by Xiaotai
to undertake actions that would otherwise be prohibited by the terms of the Exchange Agreement or the occurrence of other events
that would have a material adverse effect on Xiaotai’s business. In any of such circumstances, it would be at IFMK’s
discretion, acting through its board of directors, to grant its consent or waive those rights. The existence of the financial and
personal interests of the directors of IFMK described in the preceding risk factors may result in a conflict of interest on the
part of one or more of the directors between what he or they may believe is best for IFMK and its stockholders and what he or they
may believe is best for himself or themselves in determining whether or not to take the requested action.
As of the date of this
Annual Report, IFMK does not believe there will be any changes or waivers that IFMK’s directors and officers would be likely
to make after stockholder approval of the Acquisition Proposal has been obtained. While certain changes could be made without
further stockholder approval, IFMK will circulate a new or amended proxy statement and resolicit IFMK’s stockholders if
changes to the terms of the transaction that would have a material impact on its stockholders are required prior to the vote on
the Acquisition Proposal.
The post-Restructure Company may not
realize anticipated growth opportunities.
Xiaotai expects that it will realize growth
opportunities and other financial and operating benefits as a result of the Restructure. Xiaotai cannot predict with certainty
if or when these growth opportunities and benefits will occur, or the extent to which they actually will be achieved. For example,
the benefits from the Restructure may be offset by costs incurred in obtaining or attempting to obtain regulatory approvals for
the Restructure, or as a result of being a public company.
The Company, Xiaotai and Go Fresh will incur significant
transaction-related costs in connection with the Restructure.
The Company, Xiaotai and Go Fresh expect
to incur a number of nonrecurring costs associated with the Restructure before, at, and after closing the Restructure. The Company,
Xiaotai and Go Fresh will also incur transaction fees and costs related to formulating and implementing post-Restructure plans,
including facility and system implementation costs and employment-related costs. The Company, Xiaotai and Go Fresh will continue
to assess the magnitude of these costs. Additional unanticipated costs may be incurred in the Restructure and Xiaotai, in particular,
will assess these costs in relation to post-Restructure activities.
Upon consummation of the Restructure, Mr. Baofeng Pan,
will beneficially own approximately 53.2% of the then issued and outstanding shares of common stock and exert significant influence
on our operations.
Upon the consummation of
the Restructure, Mr. Baofeng Pan, our chairman and director upon closing of the Restructure, will own approximately 53.2% of
the then issued and outstanding shares of common stock. Accordingly, Mr. Pan, by virtue of his beneficial ownership of
these shares, will be able to exercise substantial influence over our operations upon completion of the Restructure. He may
have significant influence over election of directors and other matters requiring shareholder approval. Such concentration of
voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination,
which may, in turn, have an adverse effect on the market price of our stock or prevent our shareholders from realizing a
premium over the then-prevailing market price for their stock.
Mr. Baofeng Pan, as the principal shareholders of the post-Restructure Company,
have potential conflicts of interest with us, which may adversely affect our business.
Baofeng Pan, our Chairman and Director upon
closing of the Restructure, is a significant shareholder of Xiaotai, one of the VIE entities from which the majority of our revenue
is expected upon closing of the Restructure. Conflicts of interests between his duty to our Company and Xiaotai may arise. For
example, Mr. Pan could cause Xiaotai to fail to take actions that are in the best interests of our Company. As Ms. Pan will be
also CEO, Chairman and Director of our Company, he has duties of loyalty and care to us under Delaware law when there are any potential
conflicts of interests between our company and Xiaotai. We cannot assure you, however, that if conflicts of interest arise, he
will act completely in our interests or that conflicts of interests will be resolved in our favor. In addition, Mr. Pan could violate
his employment agreement with us or his legal duties by diverting business opportunities from us to others. If we cannot resolve
any conflicts of interest between us and Mr. Pan, as applicable, we would have to rely on legal proceedings, which could result
in the disruption of our business.
We will have limited protection in the event that any
of the representations and warranties made by Go Fresh in the Purchase Agreement ultimately proves to be inaccurate or incorrect.
IFMK and its shareholders will have limited
protection if any representation or warranty made by Go Fresh in the Purchase Agreement proves to be inaccurate or incorrect. Accordingly,
to the extent such representations or warranties are incorrect, IFMK would have limited indemnification claims with respect thereto
and its financial condition or results of operations could be adversely affected.
We may waive one or more of the conditions
to the Spin-off.
We may agree to waive, in whole or in part, some of the conditions
to our obligations to complete the Spin-off, to the extent permitted by our charter and applicable laws. For example, it is a condition
of our obligation to complete the Spin-off and that Go Fresh’s representations and warranties are true and correct in all
respects as of the closing date. However, if the Board determines that it is in the shareholders’ best interest to waive
any such breach, then the board may elect to waive that condition and complete the Spin-off.
We might have been able to receive
better terms from unaffiliated third-parties than the terms we receive in our agreements with Go Fresh.
Our agreements
with Go Fresh related to the Spin-off, including the Purchase Agreement, were negotiated with Go Fresh in the context of our anticipated
separation from NYM Holdings Inc. and the subsequent acquisition of Xiaotai. Although the agreement is intended to be on an arm’s-length
basis, it may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third-parties.
The terms of the agreement being negotiated in the context of our separation concern, among other things, allocations of assets,
liabilities, rights, indemnifications and other obligations among Go Fresh and us.