Item 1. Financial Statements.
iFRESH INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
March 31,
|
|
|
2019
|
|
2019
|
|
|
(UNAUDITED)
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
854,610
|
|
|
$
|
1,048,090
|
|
Accounts receivable, net
|
|
|
3,289,899
|
|
|
|
4,027,909
|
|
Inventories, net
|
|
|
9,240,449
|
|
|
|
10,411,366
|
|
Prepaid expenses and other current assets
|
|
|
3,836,768
|
|
|
|
3,721,262
|
|
Total current assets
|
|
|
17,221,726
|
|
|
|
19,208,627
|
|
Advances and receivables - related parties
|
|
|
4,307,657
|
|
|
|
5,220,547
|
|
Property and equipment, net
|
|
|
19,776,226
|
|
|
|
20,287,186
|
|
Intangible assets, net
|
|
|
966,671
|
|
|
|
1,033,337
|
|
Security deposits
|
|
|
1,252,303
|
|
|
|
1,236,073
|
|
Right of use assets-lease
|
|
|
61,211,020
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
52,096
|
|
|
|
115,589
|
|
Total assets
|
|
$
|
104,787,699
|
|
|
$
|
47,101,359
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,353,067
|
|
|
$
|
14,177,700
|
|
Deferred revenue
|
|
|
1,274,810
|
|
|
|
802,392
|
|
Borrowings against lines of credit, current,net
|
|
|
20,545,084
|
|
|
|
21,285,314
|
|
Notes payable, current
|
|
|
84,554
|
|
|
|
98,475
|
|
Finance lease obligations, current
|
|
|
140,440
|
|
|
|
148,778
|
|
Accrued expenses
|
|
|
1,216,870
|
|
|
|
1,393,973
|
|
Operating lease liabilities, current
|
|
|
5,682,327
|
|
|
|
|
|
Other payables, current
|
|
|
3,347,756
|
|
|
|
2,926,101
|
|
Total current liabilities
|
|
|
43,644,908
|
|
|
|
40,832,733
|
|
|
|
|
|
|
|
|
|
|
Notes payable, non-current
|
|
|
85,146
|
|
|
|
130,068
|
|
Finance lease obligations, non-current
|
|
|
348,452
|
|
|
|
413,225
|
|
Deferred rent
|
|
|
-
|
|
|
|
6,659,412
|
|
Other payables, non-current
|
|
|
87,901
|
|
|
|
97,900
|
|
Long term operating lease liabilities
|
|
|
62,221,347
|
|
|
|
-
|
|
Total liabilities
|
|
|
106,387,754
|
|
|
|
48,133,338
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity (deficiency)
|
|
|
|
|
|
|
|
|
Preferred shares, $.0001 par value, 1,000,000 shares authorized; none issued.
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 100,000,000 shares authorized, 18,351,497 and 16,737,685 shares issued and outstanding as of September 30, 2019 and March 31, 2019, respectively
|
|
|
1,835
|
|
|
|
1,674
|
|
Additional paid-in capital
|
|
|
18,620,442
|
|
|
|
14,933,829
|
|
Accumulated deficit
|
|
|
(20,222,332
|
)
|
|
|
(15,967,482
|
)
|
Total shareholders’ deficiency
|
|
|
(1,600,055
|
)
|
|
|
(1,031,979
|
)
|
Total liabilities and shareholders’ equity (deficiency)
|
|
$
|
104,787,699
|
|
|
$
|
47,101,359
|
|
See accompanying notes to unaudited condensed
consolidated financial statements
iFRESH INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
For the
three months ended
September 30,
|
|
|
For the
six months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
21,373,820
|
|
|
$
|
29,421,093
|
|
|
$
|
44,458,495
|
|
|
$
|
59,092,916
|
|
Net sales-related parties
|
|
|
487,682
|
|
|
|
863,710
|
|
|
|
1,230,789
|
|
|
|
2,280,028
|
|
Total net sales
|
|
|
21,861,502
|
|
|
|
30,284,803
|
|
|
|
45,689,284
|
|
|
|
61,372,944
|
|
Cost of sales
|
|
|
15,140,772
|
|
|
|
22,451,875
|
|
|
|
31,656,870
|
|
|
|
44,054,792
|
|
Cost of sales-related parties
|
|
|
398,118
|
|
|
|
744,809
|
|
|
|
980,688
|
|
|
|
1,973,213
|
|
Retail Occupancy costs
|
|
|
1,576,290
|
|
|
|
2,010,412
|
|
|
|
3,506,909
|
|
|
|
3,841,486
|
|
Gross profit
|
|
|
4,746,322
|
|
|
|
5,077,707
|
|
|
|
9,544,817
|
|
|
|
11,503,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
5,851,779
|
|
|
|
9,103,577
|
|
|
|
14,427,673
|
|
|
|
17,179,018
|
|
Loss from operations
|
|
|
(1,105,457
|
)
|
|
|
(4,025,870
|
)
|
|
|
(4,882,856
|
)
|
|
|
(5,675,565
|
)
|
Interest expense, net
|
|
|
(349,475
|
)
|
|
|
(399,123
|
)
|
|
|
(959,220
|
)
|
|
|
(644,826
|
)
|
Other income
|
|
|
729,639
|
|
|
|
259,571
|
|
|
|
1,650,720
|
|
|
|
592,140
|
|
Loss before income taxes
|
|
|
(725,293
|
)
|
|
|
(4,165,422
|
)
|
|
|
(4,191,356
|
)
|
|
|
(5,728,251
|
)
|
Income tax provision
|
|
|
161,430
|
|
|
|
-
|
|
|
|
63,493
|
|
|
|
313,833
|
|
Net Loss
|
|
$
|
(886,723
|
)
|
|
$
|
(4,165,422
|
)
|
|
$
|
(4,254,849
|
)
|
|
$
|
(6,042,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.42
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.42
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,351,498
|
|
|
|
14,874,431
|
|
|
|
17,868,254
|
|
|
|
14,543,995
|
|
Diluted
|
|
|
18,351,498
|
|
|
|
14,874,431
|
|
|
|
17,868,254
|
|
|
|
14,543,995
|
|
See accompanying notes to unaudited condensed
consolidated financial statements
iFRESH INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the six months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,254,849
|
)
|
|
$
|
(6,042,084
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
1,093,572
|
|
|
|
943,485
|
|
Amortization expense
|
|
|
249,166
|
|
|
|
135,103
|
|
Lease amortization
|
|
|
3,994,896
|
|
|
|
-
|
|
Share based compensation
|
|
|
1,921,081
|
|
|
|
744,413
|
|
Bad debt reserve
|
|
|
233,448
|
|
|
|
233,448
|
|
Deferred income taxes
|
|
|
63,493
|
|
|
|
313,832
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
504,562
|
|
|
|
7,778
|
|
Inventories
|
|
|
1,170,917
|
|
|
|
(13,548
|
)
|
Prepaid expenses and other current assets
|
|
|
(115,506
|
)
|
|
|
(292,702
|
)
|
Security deposits
|
|
|
(16,230
|
)
|
|
|
13,505
|
|
Accounts payable
|
|
|
(2,824,630
|
)
|
|
|
(2,016,792
|
)
|
Deferred revenue
|
|
|
472,418
|
|
|
|
260,714
|
|
Accrued expenses
|
|
|
(177,103
|
)
|
|
|
1,067,841
|
|
Taxes payable
|
|
|
-
|
|
|
|
(1,606,504
|
)
|
Deferred rent
|
|
|
-
|
|
|
|
170,789
|
|
Operating lease liabilities
|
|
|
(3,961,654
|
)
|
|
|
-
|
|
Other liabilities
|
|
|
411,652
|
|
|
|
217,215
|
|
Net cash used in operating activities
|
|
|
(1,234,767
|
)
|
|
|
(5,863,507
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Cash advances to related parties
|
|
|
912,891
|
|
|
|
3,299,949
|
|
Acquisition of property and equipment
|
|
|
(582,612
|
)
|
|
|
(2,927,698
|
)
|
Net cash provided by investing activities
|
|
|
330,279
|
|
|
|
372,251
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings against Term loan
|
|
|
-
|
|
|
|
3,950,000
|
|
Borrowings against lines of credit
|
|
|
-
|
|
|
|
1,750,000
|
|
Repayments on term loan
|
|
|
(922,730
|
)
|
|
|
(772,625
|
)
|
Repayments on notes payable
|
|
|
(58,843
|
)
|
|
|
(70,877
|
)
|
Payments on capital lease obligations
|
|
|
(73,112
|
)
|
|
|
(75,056
|
)
|
Cash received from issuance of stock
|
|
|
-
|
|
|
|
1,000,621
|
|
Net proceeds received from capital contribution
|
|
|
1,765,693
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
711,008
|
|
|
|
5,782,063
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(193,480
|
)
|
|
|
290,807
|
|
Cash and cash equivalents at beginning of the period
|
|
|
1,048,090
|
|
|
|
640,915
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
854,610
|
|
|
$
|
931,722
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
959,220
|
|
|
$
|
620,248
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
1,606,504
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Capital expenditures funded by capital lease obligations and notes payable
|
|
$
|
-
|
|
|
$
|
772,675
|
|
Stock issued for business acquisition
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to unaudited condensed
consolidated financial statements
iFRESH INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
For the three and six months ended September 30, 2019 and 2018
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
ammount
|
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balances at March 31, 2018
|
|
|
14,220,548
|
|
|
$
|
1,422
|
|
|
$
|
9,428,093
|
|
|
$
|
(3,964,039
|
)
|
|
$
|
5,465,476
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,876,662
|
)
|
|
|
(1,876,662
|
)
|
Balances at June 30, 2018
|
|
|
14,220,548
|
|
|
$
|
1,422
|
|
|
$
|
9,428,093
|
|
|
$
|
(5,840,701
|
)
|
|
$
|
3,588,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,165,422
|
)
|
|
|
(4,165,422
|
)
|
Common stock issued in connection of equity finance
|
|
|
451,000
|
|
|
|
45
|
|
|
|
1,000,620
|
|
|
|
-
|
|
|
|
1,000,665
|
|
Stock issued for service
|
|
|
177,950
|
|
|
|
18
|
|
|
|
744,413
|
|
|
|
-
|
|
|
|
744,431
|
|
Balances at September 30, 2018
|
|
|
14,849,498
|
|
|
$
|
1,485
|
|
|
$
|
11,173,126
|
|
|
$
|
(10,006,123
|
)
|
|
$
|
1,168,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2019
|
|
|
16,737,685
|
|
|
$
|
1,674
|
|
|
$
|
14,933,829
|
|
|
$
|
(15,967,482
|
)
|
|
$
|
(1,031,979
|
)
|
Capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
1,119,421
|
|
|
|
-
|
|
|
|
1,119,421
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,368,127
|
)
|
|
|
(3,368,127
|
)
|
Common stock issued in connection of warrants exercise
|
|
|
1,170,000
|
|
|
|
117
|
|
|
|
1,450,683
|
|
|
|
-
|
|
|
|
1,450,800
|
|
Stock issued for service
|
|
|
443,813
|
|
|
|
44
|
|
|
|
470,398
|
|
|
|
-
|
|
|
|
470,442
|
|
Balances at June 30, 2019
|
|
|
18,351,498
|
|
|
$
|
1,835
|
|
|
$
|
17,974,331
|
|
|
$
|
(19,335,609
|
)
|
|
$
|
(1,359,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
646,111
|
|
|
|
-
|
|
|
|
646,111
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(886,723
|
)
|
|
|
(886,723
|
)
|
Common stock issued in connection of warrants exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock issued for service
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances at September 30, 2019
|
|
|
18,351,498
|
|
|
$
|
1,835
|
|
|
$
|
18,620,442
|
|
|
$
|
(20,222,332
|
)
|
|
$
|
(1,600,055
|
)
|
See accompanying notes to unaudited condensed
consolidated financial statements
iFRESH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Organization and Description of Business
Organization and General
iFresh (herein referred
to collectively with its subsidiaries as the “Company”) is an Asian/Chinese supermarket chain with multiple retail
locations and its own distribution operations, currently all located along the East Coast of the United States. The Company offers
seafood, vegetables, meat, fruit, frozen goods, groceries, and bakery products through its retail stores.
On June 7, 2019, the Company,
entered into certain Share Exchange Agreement (“Exchange Agreement”) with Xiaotai International Investment Inc. (“Xiaotai”),
a Cayman Island Company, and certain shareholders of Xiaotai (collectively with Xiaotai, “Seller”), pursuant to which,
among other things and subject to the terms and conditions contained therein, the Company will acquire all of the outstanding issued
shares and other equity interests in Xiaotai from certain shareholders of Xiaotai (such transactions, collectively, the “Acquisition”).
The Company agreed to issue to the sellers an aggregate of 254,813,383 shares of the Company’s common stock, par value $0.0001.
On the same day, the Company
and its wholly owned subsidiary NYM Holding Inc. entered into a Share Purchase Agreement (the “Purchase Agreement”)
with Go Fresh 365 Inc., (“Go Fresh”) a Florida company 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, in exchange for cash consideration
of $9.1 million (the “Spin-off”). The transactions contemplated by the Purchase Agreement would take place contemporaneously
with the closing of the Acquisition. It is anticipated that, following completion of the Spin-off, Go Fresh will receive 100% of
the equity interest of NYM, and that the Company’s business upon completion of the Acquisition and the Spin-off will be that
of Xiaotai and its subsidiaries. Closing of the acquisition had been pending subject to regulatory approval by NASDAQ
In November 5, 2019, Zhejiang
Xiaotai is alleged to have conducted illegal fundraising in China and several executives of Xiaotai are currently detained and
held in custody by the local police. The Company’s management and board of directors are closely monitoring and actively
assessing the situation. iFresh issued written notice to Xiaotai International and Xiaotai Shareholders to terminate the Exchange
Agreement effective immediately.
2. Liquidity and Going Concern
As reflected in the Company’s
unaudited condensed consolidated financial statements, the Company had operating losses for the six months ended September 30,
2019 and in fiscal year 2019 and had negative working capital of $26.4 million and $21.6 million as of September 30, 2019 and March
31, 2019, respectively. The Company had deficiency of $1.6 million and $1.0 million as of September 30, 2019 and March 31, 2019,
respectively. The Company did not meet certain financial covenants required in the credit agreement with Keybank National Association
(“Keybank”). As of September 30, 2019, the Company has outstanding loan facilities of approximately $20.5 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 September 30, 2019, the
Company also has $4.3 million of advances and receivable from the related parties we intend to collect.
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 September 30, 2019 and March 31, 2019. Specifically, the financial covenants of the Credit Agreement require the Company to
maintain a senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio for
the trailing 12 month period of less than 3.00 to 1.00 at the last day of each fiscal quarter. As of September 30, 2019 and March
31, 2019 , this ratio was greater than 3.00 to 1.00, and the Company was therefore not in compliance with the financial covenants
of the KeyBank loan. In addition, the Company violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company
sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited, representing 51% of the total issued and outstanding
shares of the Company as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of the change
of ownership. KeyBank has notified the Company in February that it has not waived the default and reserves all of its rights,
power, privileges, and remedies under the Credit Agreement. effective as of March 1, 2019, interest was accrued on all loans at
the default rate.
On May 20, 2019 (the “Effective
Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant
to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of
the events of shares transfer defaults for certain period of time. The Forbearance Agreement contains customary forbearance
covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment
decreased to $142,842 as originally required per the credit facility agreements.
The Company failed to
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance
agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016,
as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh
and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”)
have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
Key Bank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain
events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on
the November 29, 2019; and (b) a Forbearance Event of Default.
The Company’s principal
liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The
Company’s ability to fund these needs will depend on its future performance, which will be subject in part to general economic,
competitive and other factors beyond its control. These conditions raise substantial doubt as to the Company’s ability to
remain a going concern.
3. Basis of Presentation and Principles
of Consolidation
The Company’s unaudited
condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). The unaudited condensed consolidated financial statements include the financial statements
of iFresh and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The unaudited interim
financial information as of September 30, 2019 and for the six months ended September 30, 2019 and 2018 have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote
disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted
pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction
with the audited consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2019.
The Company has two reportable
and operating segments. The Company’s Chief Executive Officer is the Chief Operating Decision Maker (“CODM”).
The CODM bears ultimate responsibility for, and is actively engaged in, the allocation of resources and the evaluation of the Company’s
operating and financial results.
4. Summary of Significant Accounting
Policies
Significant Accounting Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting
estimates included, but are not limited to: allowance for estimated uncollectible receivables, inventory valuations, allowance
for deferred tax assets, lease assumptions, impairment of long-lived assets, impairment of intangible assets, and income taxes.
Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable consist
primarily of uncollected amounts from customer purchases (primarily from the Company’s two distribution operations), credit
card receivables, and food stamp vouchers, and are presented net of an allowance for estimated uncollectible amounts.
The Company periodically
assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes
unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable
is written off against the allowance.
Inventories
Inventories consist of
merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for wholesale and retail
perishable inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts).
The Company’s wholesale
and retail non-perishable inventory is valued at the lower of cost or market using weighted average method.
Leases
On April 1, 2019 the Company
adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date
of ASC 842, we elected to apply the package of practical expedients. Based on this guidance we will not reassess the following:
(1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases;
and (3) initial direct costs for any existing leases. The adoption of Topic 842 resulted in the presentation of $61,211,020 of
operating lease assets and $67,903,674 operating lease liabilities on the consolidated balance sheet as of September 30, 2019.
See Note 12 for additional information.
The Company determines
if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets,
current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s
consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital
leases, and obligations under capital leases, non-current on our consolidated balance sheets.
Operating lease ROU assets
and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term
at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do
not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement
date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and
excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate
the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term.
Deferred financing costs
The Company presents deferred
financing costs as a reduction of the carrying amount of the debt rather than as an asset. Deferred financing costs are amortized over
the term of the related debt using the effective interest method and reported as interest expense in the consolidated financial
statements.
Fair Value Measurements
The Company records its
financial assets and liabilities in accordance with the framework for measuring fair value in accordance with U.S GAAP. This framework
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices
for identical instruments in active markets.
Level 2: Quoted prices
for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived
from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements
of nonfinancial assets and non-financial liabilities are primarily used in the impairment analysis of intangible assets and long-lived
assets.
Cash and cash equivalents,
restricted cash, accounts receivable, prepaid expenses and other current assets, advances to related parties, accounts payable,
deferred revenue and accrued expenses approximate fair value because of the short maturity of those instruments. Based on comparable
open market transactions, the fair value of the lines of credit and other liabilities, including current maturities, approximated
their carrying value as of September 30, 2019 and March 31, 2019, respectively. The Company’s estimates of the fair value
of line of credit and other liabilities (including current maturities) were classified as Level 2 in the fair value hierarchy.
Revenue Recognition
In accordance with Topic
606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise
or delivery is made to our wholesale customers. Payment terms are established for our wholesale customers based on the Company’s
pre-established credit requirements. Payment terms vary depending on the customer. Based on the nature of receivables, no significant
financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns
and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical
return experience.
Topic 606 defines a performance
obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account.
The majority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately
identifiable from other promises in the contracts and is, therefore, not distinct.
We had no material contract
assets, contract liabilities, or costs to obtain and fulfill contracts recorded on the Consolidated Balance Sheet as of September
30, 2019 and March 31, 2019. For the six months ended September 30, 2019 and 2018, revenue recognized from performance obligations
related to prior periods was insignificant.
Revenue expected to be
recognized in any future periods related to remaining performance obligations is insignificant.
The following table summarizes
disaggregated revenue from contracts with customers by product group:
|
|
For the six months ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Grocery
|
|
$
|
20,430,683
|
|
|
$
|
25,227,693
|
|
Perishable goods
|
|
|
25,258,601
|
|
|
|
36,145,251
|
|
Total
|
|
$
|
45,689,284
|
|
|
$
|
61,372,944
|
|
|
|
For the three months ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Grocery
|
|
$
|
9,861,690
|
|
|
$
|
12,765,277
|
|
Perishable goods
|
|
|
11,999,812
|
|
|
|
17,519,526
|
|
Total
|
|
$
|
21,861,502
|
|
|
$
|
30,284,803
|
|
Recently Issued Accounting Pronouncements
In June 2018, the FASB
issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for
share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees
would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies
for fiscal years starting after December. 15, 2018, including interim periods within that fiscal year. For all other entities,
the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. On April
1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s unaudited condensed
consolidated financial statements.
No other new accounting
pronouncements issued or effective had, or are expected to have, a material impact on the Company’s condensed consolidated
financial statements.
5. Accounts Receivable
A summary of accounts
receivable, net is as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Customer purchases
|
|
$
|
3,716,324
|
|
|
$
|
4,008,747
|
|
Credit card receivables
|
|
|
142,555
|
|
|
|
532,369
|
|
Food stamps
|
|
|
43,989
|
|
|
|
99,762
|
|
Others
|
|
|
2,518
|
|
|
|
2,518
|
|
Total accounts receivable
|
|
|
3,905,386
|
|
|
|
4,643,396
|
|
Allowance for bad debt
|
|
|
(615,487
|
)
|
|
|
(615,487
|
)
|
Accounts receivable, net
|
|
$
|
3,289,899
|
|
|
$
|
4,027,909
|
|
6. Inventories
A summary of inventories,
net is as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Non-perishables
|
|
$
|
7,794,654
|
|
|
$
|
8,762,634
|
|
Perishables
|
|
|
1,497,412
|
|
|
|
1,723,882
|
|
Inventories
|
|
|
9,292,066
|
|
|
|
10,486,516
|
|
Allowance for slow moving or defective inventories
|
|
|
(51,617
|
)
|
|
|
(75,150
|
)
|
Inventories, net
|
|
$
|
9,240,449
|
|
|
$
|
10,411,366
|
|
7. Advances and receivables - related parties
A summary of advances
and receivables - related parties is as follows:
|
|
September 30,
|
|
|
March 31,
|
|
Entities
|
|
2019
|
|
|
2019
|
|
New York Mart Elmhurst Inc
|
|
$
|
-
|
|
|
$
|
-
|
|
Pacific Supermarkets Inc.
|
|
|
-
|
|
|
|
437,863
|
|
NY Mart MD Inc.
|
|
|
-
|
|
|
|
335,374
|
|
Advances - related parties
|
|
$
|
-
|
|
|
$
|
773,237
|
|
|
|
|
|
|
|
|
|
|
New York Mart, Inc.
|
|
|
605,265
|
|
|
|
605,265
|
|
Pacific Supermarkets Inc.
|
|
|
-
|
|
|
|
428,237
|
|
NY Mart MD Inc.
|
|
|
3,478,240
|
|
|
|
3,181,011
|
|
iFresh Harwin Inc
|
|
|
224,152
|
|
|
|
232,797
|
|
Receivables – related parties
|
|
|
4,307,657
|
|
|
|
4,447,310
|
|
Total advances and receivables – related parties
|
|
$
|
4,307,657
|
|
|
$
|
5,220,547
|
|
The Company has advanced
funds to related parties and accounts receivable due from the related parties with the intention of converting some of these advances
and receivables into deposits towards the purchase price upon planned acquisitions of some of these entities, which are directly
or indirectly owned, in whole or in part, by Mr. Long Deng, the shareholder the Chief Executive Officer of the Company. Accounts
receivable due from related parties relate to the sales to these related parties (see Note 16). The advances and receivables are
interest free, repayable on demand, and guaranteed by Mr. Long Deng.
8. Property and Equipment
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Furniture, fixtures and equipment
|
|
$
|
20,037,919
|
|
|
$
|
19,957,600
|
|
Automobiles
|
|
|
2,184,345
|
|
|
|
2,214,306
|
|
Leasehold improvements
|
|
|
9,381,676
|
|
|
|
8,849,422
|
|
Software
|
|
|
6,735
|
|
|
|
6,735
|
|
Total property and equipment
|
|
|
31,610,675
|
|
|
|
31,028,063
|
|
Accumulated depreciation
|
|
|
(11,834,449
|
)
|
|
|
(10,740,877
|
)
|
Property and equipment, net
|
|
$
|
19,776,226
|
|
|
$
|
20,287,186
|
|
Depreciation expense for
the six months ended September 30, 2019 and 2018 was $1,093,572 and $943,485, respectively. For the three months ended September
30, 2019 and 2018, the depreciation expense was $531,928 and $483,540, respectively.
9. Intangible Assets
A summary of the activities
and balances of intangible assets are as follows:
|
|
Balance at
March 31,
|
|
|
|
|
|
Balance at
September 30,
|
|
|
|
2019
|
|
|
Additions
|
|
|
2019
|
|
Gross Intangible Assets
|
|
|
|
|
|
|
|
|
|
Acquired leasehold rights
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
Total intangible assets
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
$
|
(1,466,663
|
)
|
|
$
|
(66,666
|
)
|
|
$
|
(1,533,329
|
)
|
Intangible assets, net
|
|
$
|
1,033,337
|
|
|
$
|
(66,666
|
)
|
|
$
|
966,671
|
|
Amortization expense was
$66,666 and $66,666 for the six months ended September 30, 2019 and 2018, respectively. Future amortization associated with the
net carrying amount of definite-lived intangible assets is as follows:
Year Ending September 30,
|
|
|
|
2020
|
|
$
|
133,333
|
|
2021
|
|
|
133,333
|
|
2022
|
|
|
133,333
|
|
2023
|
|
|
133,333
|
|
2024
|
|
|
133,333
|
|
Thereafter
|
|
|
300,006
|
|
Total
|
|
$
|
966,671
|
|
10. Debt
A summary of the Company’s
debt is as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Revolving Line of Credit-KeyBank National Association
|
|
$
|
4,950,000
|
|
|
|
4,950,000
|
|
Delayed Term Loan-KeyBank National Association
|
|
|
4,244,983
|
|
|
|
4,494,983
|
|
Term Loan-KeyBank National Association
|
|
|
11,760,726
|
|
|
|
12,342,206
|
|
Less: Deferred financing cost
|
|
|
(410,625
|
)
|
|
|
(501,875
|
)
|
Total
|
|
|
20,545,084
|
|
|
|
21,285,314
|
|
KeyBank National Association (“KeyBank”)
– Senior Secured Credit Facilities
On December 23, 2016,
NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank
National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit
of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000
of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the
Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term loans are December
23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit Facility and 0.25%
of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of September 30, 2019.
$15,000,000 of the term
loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments of
principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid principal
balance of the term loan, plus accrued interest on the maturity date. On December 23, 2016, the Company used the proceeds from
the loan term to pay off the outstanding balance under the Bank of America credit line agreement and HSBC line of credit.
The Delayed Draw Term
Loan shall be advanced on the Delayed Draw Funding date, which is no later than December 23, 2021.
The senior secured credit
facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains financial
and restrictive covenants. The financial covenants require NYM to deliver audited condensed consolidated financial statements within
one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior
funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at
the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. As of September 30, 2019 and March
31, 2019, the Company has negative EBITDA, thus the ratio was negative and the Company was not in compliance with the financial
covenants of the KeyBank loan. Except as stated below, the senior secured credit facility is subject to customary events of default.
It will be an event of default if Mr. Long Deng resigns, is terminated, or is no longer actively involved in the management of
NYM and a replacement reasonably satisfactory to the Lender is not made within sixty (60) days after such event takes place. The
Company violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989
restricted shares to HK Xu Ding Co., Limited on January 23, 2019, representing 51% of the total issued and outstanding shares of
the Company as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of the change of ownership.
As a result, effective as of March 1, 2019, interest was accrued on all loans at the default rate and the monthly principal and
interest payment due under the effective date term loan will be $155,872 instead of $142,842.
On May 20, 2019 (the “Effective
Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant
to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of
the events of shares transfer defaults for certain period of time. The Forbearance Agreement contains customary forbearance
covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment
decreased to $142,842 as originally required per the credit facility agreements.
The Company failed to
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance
agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016,
as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh
and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”)
have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
Key Bank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain
events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on
the November 29, 2019; and (b) a Forbearance Event of Default.
Maturities of borrowings
against the term loan under this credit facility for each of the next five years are as follows:
Year Ending June 30
|
|
|
|
2020
|
|
$
|
1,535,255
|
|
2021
|
|
|
1,590,334
|
|
2022
|
|
|
17,419,495
|
|
Total
|
|
$
|
20,545,084
|
|
11. Notes Payable
Notes payables consist
of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Triangle Auto Center, Inc.
|
|
|
|
|
|
|
Secured by vehicle, 4.02%, principal and interest of $890 due monthly through January 28, 2021
|
|
|
13,828
|
|
|
|
18,823
|
|
Colonial Buick GMC
|
|
|
|
|
|
|
|
|
Secured by vehicle, 8.64%, principal and interest of $736 due monthly through February 1, 2020
|
|
|
2,085
|
|
|
|
6,350
|
|
Koeppel Nissan, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 3.99%, principal and interest of $612 due monthly through January 18, 2021
|
|
|
-
|
|
|
|
12,378
|
|
Secured by vehicle, 0.9%, principal and interest of $739 due monthly through March 14, 2020
|
|
|
4,423
|
|
|
|
8,826
|
|
Secured by vehicle, 7.86%, principal and interest of $758 due monthly through September 1, 2022
|
|
|
21,810
|
|
|
|
25,415
|
|
Silver Star Motors
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.22%, principal and interest of $916 due monthly through June 1, 2021
|
|
|
18,506
|
|
|
|
23,546
|
|
BMO
|
|
|
|
|
|
|
|
|
Secured by vehicle, 5.99%, principal and interest of $1,924 due monthly through July 1, 2020
|
|
|
40,002
|
|
|
|
50,172
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.01%, principal and interest of $420 due monthly through December 1, 2021
|
|
|
10,821
|
|
|
|
13,096
|
|
Toyota Finance
|
|
|
|
|
|
|
|
|
Secured by vehicle, 0%, principal and interest of $632 due monthly through August, 2022
|
|
|
22,134
|
|
|
|
25,928
|
|
Secured by vehicle, 4.87%, principal and interest of $761 due monthly through July, 2021
|
|
|
20,236
|
|
|
|
24,031
|
|
Secured by vehicle, 0%, principal and interest of $633 due monthly through April 1, 2022
|
|
|
15,855
|
|
|
|
19,978
|
|
Total Notes Payable
|
|
$
|
169,700
|
|
|
$
|
228,543
|
|
Current notes payable
|
|
|
(84,554
|
)
|
|
|
(98,475
|
)
|
Long-term notes payable, net of current maturities
|
|
$
|
85,146
|
|
|
$
|
130,068
|
|
All notes payables are
secured by the underlying financed automobiles.
Maturities of the notes
payables for each of the next five years are as follows:
Year Ending September 30,
|
|
|
|
2020
|
|
$
|
84,554
|
|
2021
|
|
|
65,992
|
|
2022
|
|
|
19,154
|
|
Total
|
|
$
|
169,700
|
|
12. Lease
The Company’s material
leases consist of store, warehouse, parking lots and its offices with expiration dates through 2027. In general, the leases have
remaining terms of 1-20 years, most of which include options to extend the leases. The lease term is generally the minimum
noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably
certain of exercising the option at inception or when a triggering event occurs.
Balance sheet information
related to the Company’s operating and finance leases (noting the financial statement caption each is included with) as of September
30, 2019 was as follows:
|
|
As of
September 30,
2019
|
|
Operating Lease Assets:
|
|
|
|
Operating Lease
|
|
$
|
61,211,020
|
|
Total operating lease assets
|
|
|
61,211,020
|
|
Operating lease obligations:
|
|
|
|
|
Current operating lease liabilities
|
|
|
5,682,327
|
|
Non-current operating lease liabilities
|
|
|
62,221,347
|
|
Total Lease liabilities
|
|
$
|
67,903,674
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Operating Lease
|
|
|
12.39 years
|
|
Weighted Average discount rate
|
|
|
4.3
|
%
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Finance lease Assets
|
|
|
|
|
|
|
Vehicles under finance lease
|
|
$
|
1,033,131
|
|
|
$
|
1,033,131
|
|
Accumulated depreciation
|
|
|
316,383
|
|
|
|
244,116
|
|
Finance lease assets, net
|
|
$
|
716,748
|
|
|
$
|
789,115
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Finance lease obligations:
|
|
|
|
|
|
|
Current
|
|
$
|
140,440
|
|
|
$
|
148,778
|
|
Long-term
|
|
|
348,452
|
|
|
|
413,225
|
|
Total obligations
|
|
$
|
488,892
|
|
|
$
|
562,003
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Operating Lease
|
|
|
|
|
|
|
2.38 years
|
|
Weighted Average discount rate
|
|
|
|
|
|
|
7.1
|
%
|
Supplemental cash flow
information related to leases was as follows:
|
|
As of
September 30,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating Lease
|
|
$
|
3,961,651
|
|
Finance lease
|
|
|
73,112
|
|
The estimated future lease
payments under the operating and finance leases are as follows:
|
|
Capital
|
|
|
Operating,
|
|
|
|
Lease
|
|
|
lease
|
|
2020
|
|
|
180,900
|
|
|
|
8,423,619
|
|
2021
|
|
|
158,841
|
|
|
|
8,324,077
|
|
2022
|
|
|
146,831
|
|
|
|
8,307,546
|
|
2023
|
|
|
82,710
|
|
|
|
8,131,147
|
|
2024
|
|
|
-
|
|
|
|
7,829,764
|
|
Thereafter
|
|
|
-
|
|
|
|
49,414,791
|
|
Total minimum lease payments
|
|
$
|
569,282
|
|
|
$
|
90,430,944
|
|
Less: Amount representing interest
|
|
|
(80,390
|
)
|
|
|
(22,527,270
|
)
|
Total
|
|
$
|
488,892
|
|
|
$
|
67,903,674
|
|
13. Segment Reporting
ASC 280, “Segment
Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s
internal organizational structure as well as information about geographical areas, business segments and major customers in financial
statements for details on the Company’s business segments. The Company uses the “management approach” in determining
reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
CODM for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
Management, including the CODM, reviews operation results by the revenue of different products or services. Based on management’s
assessment, the Company has determined that it has two operating segments as defined by ASC 280, consisting of wholesale and retail
operations.
The primary financial
measures used by the Company to evaluate performance of individual operating segments are sales and income before income tax provision.
The following table presents
summary information by segment for the six months ended September 30, 2019 and 2018, respectively:
|
|
Six months ended September
30, 2019
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Net sales
|
|
$
|
8,423,151
|
|
|
$
|
37,266,133
|
|
|
$
|
45,689,284
|
|
Cost of sales
|
|
|
6,045,159
|
|
|
|
26,592,399
|
|
|
|
32,637,558
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
3,506,909
|
|
|
|
3,506,909
|
|
Gross profit
|
|
$
|
2,377,992
|
|
|
$
|
7,166,825
|
|
|
$
|
9,544,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(5,227
|
)
|
|
$
|
(953,993
|
)
|
|
$
|
(959,220
|
)
|
Depreciation and amortization
|
|
$
|
384,578
|
|
|
$
|
4,953,056
|
|
|
$
|
5,337,634
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
780,519
|
|
|
$
|
780,519
|
|
Segment loss before income tax provision
|
|
$
|
687,519
|
|
|
$
|
(4,878,874
|
)
|
|
$
|
(4,191,355
|
)
|
Income tax provision
|
|
$
|
10,415
|
|
|
$
|
53,078
|
|
|
$
|
63,493
|
|
Segment assets
|
|
$
|
15,351,959
|
|
|
$
|
89,435,740
|
|
|
$
|
104,787,699
|
|
|
|
Six months ended September 30, 2018
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Net sales
|
|
$
|
9,617,587
|
|
|
$
|
51,755,357
|
|
|
$
|
61,372,944
|
|
Cost of sales
|
|
|
7,340,430
|
|
|
|
38,687,575
|
|
|
|
46,028,005
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
3,841,486
|
|
|
|
3,841,486
|
|
Gross profit
|
|
$
|
2,277,157
|
|
|
$
|
9,226,296
|
|
|
$
|
11,503,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(7,966
|
)
|
|
$
|
(636,860
|
)
|
|
$
|
(644,826
|
)
|
Depreciation and amortization
|
|
$
|
117,390
|
|
|
$
|
961,198
|
|
|
$
|
1,078,588
|
|
Capital expenditures
|
|
$
|
18,313
|
|
|
$
|
3,682,060
|
|
|
$
|
3,700,373
|
|
Segment income (loss) before income tax provision
|
|
$
|
132,442
|
|
|
$
|
(5,860,693
|
)
|
|
$
|
(5,728,251
|
)
|
Income tax provision
|
|
$
|
43,831
|
|
|
$
|
270,002
|
|
|
$
|
313,833
|
|
Segment assets
|
|
$
|
10,189,704
|
|
|
$
|
37,972,889
|
|
|
$
|
48,162,593
|
|
|
|
Three months ended September
30, 2019
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Net sales
|
|
$
|
3,891,046
|
|
|
$
|
17,970,456
|
|
|
$
|
21,861,502
|
|
Cost of sales
|
|
|
2,851,504
|
|
|
|
12,687,386
|
|
|
|
15,538,890
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
1,576,290
|
|
|
|
1,576,290
|
|
Gross profit
|
|
$
|
1,039,542
|
|
|
$
|
3,706,780
|
|
|
$
|
4,746,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(2,187
|
)
|
|
$
|
(347,288
|
)
|
|
$
|
(349,475
|
)
|
Depreciation and amortization
|
|
$
|
57,735
|
|
|
$
|
2,360,412
|
|
|
$
|
2,418,147
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
301,123
|
|
|
$
|
301,123
|
|
Segment income (loss) before income tax provision
|
|
$
|
321,668
|
|
|
$
|
(1,046,961
|
)
|
|
$
|
(725,293
|
)
|
Income tax provision
|
|
$
|
77
|
|
|
$
|
161,353
|
|
|
$
|
161,430
|
|
Segment assets
|
|
$
|
15,351,959
|
|
|
$
|
89,435,740
|
|
|
$
|
104,787,699
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
Net sales
|
|
$
|
4,429,042
|
|
|
$
|
25,855,761
|
|
|
$
|
30,284,803
|
|
Cost of sales
|
|
|
3,508,533
|
|
|
|
19,688,151
|
|
|
|
23,196,684
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
2,010,412
|
|
|
|
2,010,412
|
|
Gross profit
|
|
$
|
920,509
|
|
|
$
|
4,157,198
|
|
|
$
|
5,077,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(4,573
|
)
|
|
$
|
(394,550
|
)
|
|
$
|
(399,123
|
)
|
Depreciation and amortization
|
|
$
|
58,306
|
|
|
$
|
469,973
|
|
|
$
|
528,279
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
624,331
|
|
|
$
|
624,331
|
|
Segment loss before income tax benefit
|
|
$
|
(24,097
|
)
|
|
$
|
(4,141,325
|
)
|
|
$
|
(4,165,422
|
)
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Segment assets
|
|
$
|
10,189,704
|
|
|
$
|
37,972,889
|
|
|
$
|
48,162,593
|
|
14. Shareholder’s Equity
On October 19, 2018, the
Company and certain institutional investors entered into a securities purchase agreement (the “Purchase Agreement”),
pursuant to which the Company agreed to sell to such investors an aggregate of 1,275,000 shares of common stock (the “Common
Stock”) in a registered direct offering and warrants to purchase up to approximately 1,170,000 shares of the Company’s
Common Stock in a concurrent private placement, for gross proceeds of approximately $2.55 million (the “Financing”).
The warrants will be exercisable immediately following the date of issuance and have an exercise price of $2.25. The warrants will
expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon exercise of the warrants may be sold
pursuant to an effective registration statement or may be exercised on a cashless basis and be immediately sold pursuant to Rule
144. The purchase price for each share of Common Stock and the corresponding warrant is $2.00. Each warrant is subject to anti-dilution
provisions that require adjustment of the number of shares of Common Stock that may be acquired upon exercise of the warrant, or
to the exercise price of such shares, or both, to reflect stock dividends and splits, subsequent rights offerings, pro-rata distributions,
and certain fundamental transactions.
Management determined
that these warrants are equity instruments because the warrants are both a) indexed to its own stock; and b) classified in stockholders’
equity. The warrants were recorded at their fair value on the date of grant as a component of stockholders’ equity. On June
5, 2019, these warrants have been exchanged to new warrants with exercise price of $1.35 and the new warrants will expire on June
5, 2023.
15. Income Taxes
iFresh is a Delaware holding
company that is subject to the U.S. income tax.
NYM is taxed as a corporation
for income tax purposes and as a result of the “Contribution Agreement” entered into in December 31, 2014 NYM has elected
to file a consolidated federal income tax return with its eleven subsidiaries. NYM and the shareholders of the eleven entities,
as parties to the Contribution Agreement, entered into a tax-free transaction under Section 351 of the Internal Revenue Code of
1986 whereby the eleven entities became wholly owned subsidiaries of the Company. As a result of the tax-free transaction and the
creation of a consolidated group, the subsidiaries are required to adopt the tax year-end of its parent, NYM. NYM was incorporated
on December 30, 2014 and has adopted a tax-year end of March 31.
Certain of the subsidiaries
have incurred net operating losses (“NOL”) in tax years ending prior to the Contribution Agreement. The net operating
losses are subject to the Separate Return Limitation Year (“SRLY”) rules which limit the utilization of the losses
to the subsidiaries who generated the losses. The SRLY losses are not available to offset taxable income generated by members of
the consolidated group.
Based upon management’s
assessment of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets, will not
be fully realizable. The valuation allowance for deferred tax assets was approximately $5,281,154 and $4,166,595 as of September
30, 2019 and March 31, 2019.
The Company has approximately
$14,970,124 and $10,715,275 of US NOL carry forward as of September 30, 2019 and March 31, 2019, respectively. For income tax purpose,
those NOLs will expire in the year 2032 through 2038.
Income Tax Provision (Benefit)
The provision (benefit)
for income taxes consists of the following components:
|
|
For the six months ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
47,620
|
|
|
|
235,375
|
|
State
|
|
|
15,873
|
|
|
|
78,458
|
|
|
|
|
63,493
|
|
|
|
313,833
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,493
|
|
|
$
|
313,833
|
|
Tax Rate Reconciliation
Following is a reconciliation
of the Company’s effective income tax rate to the United State federal statutory tax rate:
|
|
Six months ended
September 30,
|
|
|
2019
|
|
2018
|
Expected tax at U.S. statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State and local income taxes, net of federal income tax effect
|
|
|
7
|
%
|
|
|
14
|
%
|
Other non-deductible fees and expenses
|
|
|
(2.91
|
%)
|
|
|
3
|
%
|
Valuation allowance
|
|
|
(26.59
|
%)
|
|
|
(43.5
|
%)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(1.5
|
%)
|
|
|
(5.5
|
%)
|
Deferred Taxes
The effect of temporary
differences included in the deferred tax accounts as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Deferred Tax Assets/ (Liabilities):
|
|
|
|
|
|
|
Deferred expenses
|
|
$
|
182,342
|
|
|
$
|
101,829
|
|
Sec 263A Inventory Cap
|
|
|
254,520
|
|
|
|
208,514
|
|
Leasing liabilities/Deferred rent
|
|
|
2,102,776
|
|
|
|
2,092,128
|
|
Depreciation and amortization
|
|
|
(2,487,542
|
)
|
|
|
(2,305,164
|
)
|
Net operating losses
|
|
|
5,072,324
|
|
|
|
3,898,744
|
|
163 (j) business interest
|
|
|
208,830
|
|
|
|
286,133
|
|
Valuation allowance
|
|
|
(5,281,154
|
)
|
|
|
(4,166,595
|
)
|
Net Deferred Tax Assets
|
|
$
|
52,096
|
|
|
$
|
115,589
|
|
16. Related-Party Transactions
Management Fees, Advertising Fees and
Sale of Non-Perishable and Perishable Products to Related Parties
The following is a detailed
breakdown of significant management fees, advertising fees and sale of products for the six months ended September 30, 2019 and
2018 to related parties, which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, shareholder and the CEO,
and not eliminated in the unaudited condensed consolidated financial statements. In addition, the outstanding receivables due from
these related parties as of September 30, 2019 and March 31, 2019 were included in advances and receivables – related parties
(see Note 8).
Six months ended September 30, 2019
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
Dragon Seeds Inc
|
|
|
2,800
|
|
|
|
-
|
|
|
|
-
|
|
NY Mart MD Inc.
|
|
|
44,300
|
|
|
|
6,320
|
|
|
|
640,914
|
|
NYM Elmhurst Inc.
|
|
|
47,158
|
|
|
|
3,290
|
|
|
|
485,698
|
|
Spring Farm Inc.
|
|
|
5,300
|
|
|
|
-
|
|
|
|
58,134
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
46,043
|
|
|
|
$
|
99,558
|
|
|
$
|
9,610
|
|
|
$
|
1,230,789
|
|
Six months ended September 30, 2018
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
New York Mart, Inc.
|
|
$
|
11,651
|
|
|
$
|
7,360
|
|
|
$
|
193,741
|
|
Pacific Supermarket Inc.
|
|
|
56,053
|
|
|
|
12,510
|
|
|
|
1,019,594
|
|
NY Mart MD Inc.
|
|
|
39,283
|
|
|
|
880
|
|
|
|
1,021,479
|
|
New York Mart El Monte Inc.
|
|
|
4,944
|
|
|
|
1,600
|
|
|
|
-
|
|
iFresh Harwin Inc.
|
|
|
2,862
|
|
|
|
2,600
|
|
|
|
9,677
|
|
Spring Farm Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
1,910
|
|
Spicy Bubbles, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NYM Tampa Seafood Inc.
|
|
|
550
|
|
|
|
|
|
|
|
-
|
|
Pine Court Sunrise, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
33,627
|
|
|
|
$
|
115,343
|
|
|
$
|
24,950
|
|
|
$
|
2,280,028
|
|
Three months ended September 30, 2019
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
Dragon Seeds Inc
|
|
|
1,150
|
|
|
|
-
|
|
|
|
-
|
|
NY Mart MD Inc.
|
|
|
15,000
|
|
|
|
2,640
|
|
|
|
185,537
|
|
NYM Elmhurst Inc.
|
|
|
22,546
|
|
|
|
1,080
|
|
|
|
206,694
|
|
Spring Farm Inc.
|
|
|
2,000
|
|
|
|
-
|
|
|
|
58,134
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
37,317
|
|
|
|
$
|
40,696
|
|
|
$
|
3,720
|
|
|
$
|
487,682
|
|
Three months ended September 30, 2018
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
New York Mart, Inc.
|
|
$
|
-
|
|
|
$
|
3,580
|
|
|
$
|
-
|
|
Pacific Supermarket Inc.
|
|
|
27,996
|
|
|
|
6,740
|
|
|
|
359,310
|
|
NY Mart MD Inc.
|
|
|
20,522
|
|
|
|
-
|
|
|
|
494,745
|
|
New York Mart El Monte Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
iFresh Harwin Inc
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
Spring Farm Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
552
|
|
Spicy Bubbles, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NYM Tampa Seafood Inc.
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Pine Court Sunrise, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
9,103
|
|
|
|
$
|
49,101
|
|
|
$
|
10,320
|
|
|
$
|
863,710
|
|
Long-Term Operating Lease Agreement
with a Related Party
The Company leases warehouse
and stores from related parties that is owned by Mr. Long Deng, the CEO of the Company, and will expire on April 30, 2026. Rent
incurred to the related party was $403,661 and $584,920 for the six months ended on September 30, 2019 and 2018 respectively, and
$111,201 and $292,460 for the three months ended on September 30, 2019 and 2018, respectively.
17. Contingent Liability
The Company is exposed
to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in
a manner that the Company believes best serves the interests of its stakeholders. These matters have not resulted in any material
losses to date.
Leo J. Motsis,
as Trustee of the 140-148 East Berkeley Realty Trust v. Ming’s Supermarket, Inc.
Ming’s Supermarket,
Inc. (“Ming”), the subsidiary of the Company, is a tenant at a building located at 140-148 East Berkeley Street, Boston,
MA (the “Property”), pursuant to a lease dated September 24, 1999 (the “Lease”). The Lease had a 10-year
initial term, followed by an option for two additional 10-year terms. Ming has exercised that first option and the Lease has approximately
15 years remaining to run if the second option is also exercised. The Lease also gives Ming a right of first refusal on any sale
of the building.
On February 22, 2015,
a sprinkler pipe burst in the Property. This caused the Inspectional Services Department of the City of Boston (“ISD”)
to inspect the Property. The ISD found a number of problems which have prevented further use of the Property. The ISD notified
both landlord and tenant that the Property was only permitted for use as an elevator garage and that its use as a warehouse was
never permitted and that a conditional use permit must be obtained from the City of Boston to make such use lawful. Moreover, the
Property was found to have major structural issues requiring repair, as well as issues with the elevator and outside glass. The
result of the ISD’s findings are that Ming was ordered not to use the Property for any purpose unless and until the structural
and other repairs are completed and its use as a warehouse is permitted by the Boston Zoning Board.
While the Lease provides
that the elevator (approximate cost $400,000) and glass repairs (approximate cost $30,000) are the responsibility of the tenant,
the structural repairs (approximate cost $500,000) are the landlord’s responsibility under the Lease, unless the structural
damage was caused by the tenant’s misuse of the Property. In this regard Ming has retained an expert who will testify the
structural damage to the building was caused by long term water infiltration and is not the result of anything Ming did. Ming initially
sought for the landlord to perform the structural repairs and agreed that upon completion of those repairs, Ming would repair the
elevator and the broken glass. In addition, Ming asked the landlord to cooperate in permitting use of the Property as a warehouse.
The landlord refused to
either perform structural repairs or to cooperate on the permitting. As a result, as of April 2015, Ming began withholding rent,
since Ming was barred from using the Property by order of the ISD. The landlord then sued Ming for breach of the Lease and unpaid
rent, and Ming counterclaimed for constructive eviction and for damages resulting from the landlord’s breach of its duty
to perform structural repairs under the Lease.
The case was tried before
a jury in August 2017. The jury awarded Ming judgment against the landlord in the amount of $795,000, plus continuing damages of
$2,250 per month until the structural repairs are completed. The court found that the landlord’s actions violated the Massachusetts
unfair and deceptive acts and practices statute and therefore doubled the amount of damages to $1,590,000 and further ruled that
Ming should also recover costs and attorneys’ fees of approximately $250,000. The result is a judgment in favor of Ming and
against the landlord that will total approximately $1.85 million. The judgment requires the landlord to repair the premises and
obtain an occupancy permit. The landlord is responsible to Ming for damages in the amount of $2,250 per month until an occupancy
permit is issued. The judgment also accrues interest at the rate of 12% per year until paid.
The landlord filed a Notice
of Appeal, which will delay ultimate resolution of this matter for potentially one year or more. Ming has filed a lien against
the landlord’s real estate as security for the judgment.
On May 31, 2018, the ISD
issued an occupancy permit, triggering Ming’s requirement to resume regular rental payments. The result is a judgment in
favor of Ming and against the landlord that will total approximately $1.85 million.
The appeal hearing
was held in July 12, 2019 and judge concluded that the landloard should be required both to perform the relevant obligations of
the lease in the future and to pay damages caused by his previous failoure to do so and for any period of delay in completing specific
performance. No guaranties or predictions can be made at this time as to ultimate final outcome of this case.
Hartford Fire Insurance
Company v. New York Mart Group Inc
On November 28, 2018,
a lawsuit was filed against New York Mart Group, Inc. by Hartford Fire Insurance Company (“Hartford”), who seeks contractual
indemnification from the Company and other defendants relating to certain supersedeas bonds issued by Hartford in connection with
the unsuccessful appeal of state court litigation by iFresh’s codefendant. Hartford alleges that iFresh guaranteed performance
of the bonds and therefore seeks to enforce the indemnification terms thereof against iFresh in addition to the other defendants.
On June 14, 2019, Hartford filed a motion for summary judgment against iFresh, arguing that Hartford is entitled to judgment as
a matter of law. On July 29, 2019, the Court granted judgment against iFresh in a consented amount of $458,497.81for its alleged
loss under the .The Court is still having a hearing on Hartford’s entitlement to attorneys’ fees/costs. The Company
has accrued $500,000 for the potential loss and expense associated with this case.
Winking Group LLC
v. New York Supermarket E. Broadway Inc
A subsidiary of the Company,
New York Supermarket E. Broadway Inc., entered into a lease with Winking Group LLC for the Company’s store located at 75
East Broadway, NY, 10002. The landlord sued the Company for failing to pay rent and additional fee of $450,867. The Company is
currently negotiating an agreement with the landlord to settle the case. A trial has been scheduled on November 21, 2019. All unpaid
rent has been fully accrued as of September 30, 2019.
18. Subsequent Event
In November 5, 2019, Zhejiang
Xiaotai is alleged to have conducted illegal fundraising in China and several executives of Xiaotai are currently detained and
held in custody by the local police. The Company’s management and board of directors are closely monitoring and actively
assessing the situation. iFresh issued written notice to Xiaotai International and Xiaotai Shareholders to terminate the Exchange
Agreement effective immediately.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This report includes forward-looking
statements. We have based these forward-looking statements on our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “should,” “could,” “would,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative
of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited
to, those described in our other Securities and Exchange Commission (“SEC”) filings. References to “we”,
“us”, “our,” “iFresh” or the “Company” are to iFresh Inc., except where the context
requires otherwise. The following discussion should be read in conjunction with our unaudited condensed financial statements
and related notes thereto included elsewhere in this report.
Overview
iFresh Inc. (“we,”
“us,” “our,” or “iFresh” or the “Company”) is a Delaware company incorporated in
July 2016 in order to reincorporate E-Compass Acquisition Corp. (“E-Compass”) to Delaware pursuant to the Merger Agreement
(as defined below). Immediately following the reincorporation, we acquired NYM Holding, Inc (“NYM”). E-Compass was
a blank check company formed for the purpose of entering into a share exchange, asset acquisition, share purchase, recapitalization,
reorganization or other similar business combination with one or more businesses or entities. NYM is a fast growing Asian/Chinese
grocery supermarket chain in the north-eastern U.S. providing food and other merchandise hard to find in mainstream grocery stores.
Since NYM was formed in 1995, NYM has been targeting the Chinese and other Asian population in the U.S. with its in-depth cultural
understanding of its target customer’s unique consumption habits. iFresh currently has ten retail supermarkets across New
York, Massachusetts and Florida, with in excess of 6,224,500 sales transactions in its stores in the fiscal year ended March 31,
2019. It currently has one in-house wholesale businesses, Strong America Limited (“Strong America”) covering more than
6,000 wholesale products and servicing both NYM retail supermarkets and over 1,000 external clients that range from wholesalers
to retailing groceries and restaurants. NYM has a stable supply of food from farms in New Jersey and Florida, ensuring reliable
supplies of the most popular vegetables, fruits and seafood. Its wholesale business and long term relationships with farms insulate
NYM from supply interruptions and sales declines, allowing it to remain competitive even during difficult markets.
Outlook
iFresh
is an Asian Chinese supermarket chain in the U.S. northeastern region with nine retail super markets and two wholesale facilities.
iFresh plans to strategically expand along the I-95 corridor and its goal is to cover all states on the east coast.
|
a.
|
iFresh provides unique products to meet the demands of the Asian/Chinese American Market;
|
|
b.
|
iFresh has established a merchandising system backed by an in-house wholesale business and by long-standing relationships with farms;
|
|
c.
|
iFresh maintains an in-house cooling system with unique hibernation technology that is has developed over 20 years to preserve perishables, especially produce and seafood;
|
|
d.
|
iFresh capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable competitors; and
|
|
e.
|
iFresh has a proven and replicable track record of management, operation, acquisition and organic growth.
|
iFresh’s
net sales were $45.7 million and $61.4 million for the six months ended September 30, 2019 and 2018, respectively. In terms of
sales by category, Perishables constituted approximately 55.3% of the total sales for the six months ended September 30, 2019.
iFresh’s net loss was $4.3 million for the six months ended September 30, 2019, a decrease of $1.8 million, or 29.6%, from
$6.0 million of net loss for the six months ended September 30, 2018. Adjusted EBITDA was $-1.9 million for the six months ended
September 30, 2019, an increase of $2.1 million, or 52.8%, from $-4.0 million for the six months ended September 30, 2018.
Factors
Affecting iFresh’s Operating Results
Seasonality
iFresh’s business
shows seasonal fluctuations. Sales in its first and second fiscal quarters (ending June 30 and September 30, respectively) are
usually 5% to 10% lower than in third and fourth quarters (ending December 31 and March 31, respectively). In its third fiscal
quarter, customers make holiday purchases for Thanksgiving and Christmas. In its fourth quarter, customers make purchases for traditional
Chinese holidays, such as the Spring Festival (Chinese New Year, in January or February).
Competition
The Company faces competition
from other Asian supermarkets. In the fiscal year 2019, two of our stores located in Boston and New York experienced significantly
decreased sales due to competition from newly opened grocery stores. In first quarter of fiscal year 2020, the Company contracted
these two stores to third party to operate and are collecting contracting fees. The gross margin was low in these stores since
the Company’s distribution center in New York area could not lower the purchase cost of the stores in MA. The Company’s
retail sales decreased significantly due to the change of operations of these two stores.
Payroll
Minimum wage rates in
some states increased. For example, the minimum wage rose from $13 to $15 per hour in New York City. Payroll and related expenses
decreased by $1.2million, or 7.7% for the year ended March 31, 2019 and decreased by $0.7 million or 11.1% for the six months ended
September 30, 2019 as compared to the same period of last year as a result of workforce reduction to reduce costs.
Vendor and Supply Management
iFresh believes that a
centralized and efficient vendor and supply management system are the keys to profitability. iFresh operates its own wholesale
facilities, which supplied about 19.6 % and 12.8% of its procurement for the fiscal year ended March 31, 2019 and six months ended
September 30, 2019, respectively. iFresh believes that its centralized vendor management enhances iFresh’s negotiating power
and improves its ability to turnover inventory and vendor payables. Any changes to the vendor and supply management could affect
iFresh’s purchasing costs and operating expenses. Starting from Q4 of fiscal year 2019, the Company’s wholesale business
gradually slows down and the retail stores are heavily relied on third party vendors for inventory supplies instead of centralized
supply system.
Store Maintenance and Renovation
From time to time, iFresh
conducts maintenance on the fixtures and equipment for its stores. Any maintenance or renovations could interrupt the operation
of our stores and result in a decline of customer volume, and therefore sales volume, but will, in the opinion of management, boost
sales after they are completed. Significant maintenance or renovation would affect our operation and operating results. As of September
30, 2019, two iFresh stores are under renovation and have not opened yet. iFresh incurred $449,948 in expenses for these stores
for the year ended March 31, 2019. One store was under renovation for 10 months in the year of 2019 and incurred $871,709 in expense.
Because these stores are being renovated, sales are affected.
Store Acquisitions and Openings
iFresh expects the new
stores it acquires or opens to be the primary driver of its sales, operating profit and market share gains. iFresh’s results
will be materially affected by the timing and number of new store additions and the amount of new store opening costs. For example,
iFresh would incur rental, utilities and employee expenses during any period of renovation, which would be recorded as expenses
on the income statement and would decrease iFresh’s profit when a store opens. iFresh may incur higher than normal employee
costs associated with setup, hiring, training, and other costs related to opening a new store. Operating margins are also affected
by promotional discounts and other marketing costs and strategies associated with new store openings, primarily due to overstocking,
and costs related to hiring and training new employees. Additionally, promotional activities may result in higher than normal net
sales in the first several weeks following a new store opening. A new store builds its sales volume and its customer base over
time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales, than our more mature
stores. A new store could take more than a year to achieve a level of operating performance comparable to our existing stores.
How to Assess iFresh’s Performance
In assessing performance,
iFresh’s management considers a variety of performance and financial measures, including principal growth in net sales, gross
profit and Adjusted EBITDA. The key measures that we use to evaluate the performance of our business are set forth below:
Net Sales
iFresh’s net sales
comprise gross sales net of coupons and discounts. We do not record sales taxes as a component of retail revenues as it considers
it a pass-through conduit for collecting and remitting sales taxes.
Gross Profit
iFresh calculates gross
profit as net sales less cost of sales and occupancy costs. Gross margin represents gross profit as a percentage of its net sales.
Occupancy costs include store rental costs and property taxes. The components of our cost of sales and occupancy costs may not
be identical to those of its competitors. As a result, our gross profit and gross margin may not be comparable to similar data
made available by our competitors.
Cost of sales includes
the cost of inventory sold during the period, including the direct costs of purchased merchandise (net of discounts and allowances),
distribution and supply chain costs, buying costs and supplies. iFresh recognizes vendor allowances and merchandise volume related
rebate allowances as a reduction of inventories during the period when earned and reflects the allowances as a component of cost
of sales as the inventory is sold. Shipping and handling for inventories purchased are included in cost of goods sold.
Selling, General and Administrative
Expenses
Selling, general and administrative
expenses primarily consist of retail operational expenses, administrative salaries and benefits costs, marketing, advertising and
corporate overhead.
Adjusted EBITDA
iFresh believes that Adjusted
EBITDA is a useful performance measure and can be used to facilitate a comparison of NYM’s operating performance on a consistent
basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than
GAAP measures alone can provide. iFresh also uses Adjusted EBITDA as one of the primary methods for planning and forecasting overall
expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance
evaluation metric in determining achievement of certain compensation programs and plans for employees, including senior executives.
Other companies in the industry may calculate Adjusted EBITDA differently than iFresh does, limiting its usefulness as a comparative
measure.
iFresh’s management
defines Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, store opening
costs, and non-recurring expenses. All of the omitted items are either (i) non-cash items or (ii) items that we do not consider
in assessing its ongoing operating performance. Because it omits non-cash items, iFresh’s management believes that Adjusted
EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges
and more reflective of other factors that affect its operating performance. iFresh’s management believes that the use of
these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and
trends and in comparing the company’s financial measures with other specialty retailers, many of which present similar non-GAAP
financial measures to investors.
Results
of Operations for the six months ended September 30, 2019 and 2018
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net sales-third parties
|
|
$
|
44,458,495
|
|
|
$
|
59,092,916
|
|
|
$
|
(14,634,421
|
)
|
|
|
(24.8
|
)%
|
Net sales-related parties
|
|
|
1,230,789
|
|
|
|
2,280,028
|
|
|
|
(1,049,239
|
)
|
|
|
(46.0
|
)%
|
Total Sales
|
|
|
45,689,284
|
|
|
|
61,372,944
|
|
|
|
(15,683,660
|
)
|
|
|
(25.6
|
)%
|
Cost of sales-third parties
|
|
|
31,656,870
|
|
|
|
44,054,792
|
|
|
|
(12,397,921
|
)
|
|
|
(28.1
|
)%
|
Cost of sales-related parties
|
|
|
980,688
|
|
|
|
1,973,213
|
|
|
|
(992,526
|
)
|
|
|
(50.3
|
)%
|
Occupancy costs
|
|
|
3,506,909
|
|
|
|
3,841,486
|
|
|
|
(334,577
|
)
|
|
|
(8.7
|
)%
|
Gross Profit
|
|
|
9,544,817
|
|
|
|
11,503,453
|
|
|
|
(1,958,636
|
)
|
|
|
(17.0
|
)%
|
Selling, general, and administrative expenses
|
|
|
14,427,673
|
|
|
|
17,179,018
|
|
|
|
(2,751,345
|
)
|
|
|
(16.0
|
)%
|
Income from operations
|
|
|
(4,882,856
|
)
|
|
|
(5,675,565
|
)
|
|
|
792,709
|
|
|
|
(14.0
|
)%
|
Interest expense
|
|
|
(959,220
|
)
|
|
|
(644,826
|
)
|
|
|
(314,394
|
)
|
|
|
48.8
|
%
|
Other income
|
|
|
1,650,720
|
|
|
|
592,140
|
|
|
|
1,058,580
|
|
|
|
178.8
|
%
|
Loss before income tax provision
|
|
|
(4,191,356
|
)
|
|
|
(5,728,251
|
)
|
|
|
1,536,895
|
|
|
|
(26.8
|
)%
|
Income tax provision
|
|
|
63,493
|
|
|
|
313,833
|
|
|
|
(250,340
|
)
|
|
|
(79.8
|
)%
|
Net loss
|
|
|
(4,254,849
|
)
|
|
|
(6,042,084
|
)
|
|
|
1,787,235
|
|
|
|
(29.6
|
)%
|
Net loss attributable to common shareholders
|
|
$
|
(4,254,849
|
)
|
|
$
|
(6,042,084
|
)
|
|
$
|
1,787,235
|
|
|
|
(29.6
|
)%
|
Net Sales
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net sales of retail-third parties
|
|
$
|
37,266,133
|
|
|
$
|
51,755,357
|
|
|
$
|
(14,489,224
|
)
|
|
|
(28.0
|
)%
|
Net sales of wholesale-third parties
|
|
|
7,192,362
|
|
|
|
7,337,559
|
|
|
|
(145,197
|
)
|
|
|
(2.0
|
)%
|
Net sales of wholesale-related parties
|
|
|
1,230,789
|
|
|
|
2,280,028
|
|
|
|
(1,046,239
|
)
|
|
|
(46.0
|
)%
|
Total Net Sales
|
|
$
|
45,689,284
|
|
|
$
|
61,372,944
|
|
|
$
|
(15,683,660
|
)
|
|
|
(25.6
|
)%
|
iFresh’s net sales
were $45.7 million for the six months ended September 30, 2019, a decrease of $15.7 million, or 25.6 %, from $ 61.4 million for
the six months ended September 30, 2018.
Net retail sales to third parties decreased
by $14.5 million, or 28 %, from $51.8 million for the six months ended September 30, 2018 to $37.3 million for the six months ended
September 30, 2019. The decrease resulted mainly from our Quincy (Zen Store) and Boston (Ming Store), Massachusetts stores.
Ming and Zen contributed $10.6 million of retail sales for the six months ended September 30, 2018. Starting from the fiscal year
2019, these two stores experienced significantly decreased sales due to competition from newly opened grocery stores. On April
1, 2019, the Company entered into an agreement for the two stores with third parties to operate those stores, and the Company is
collecting management fees from the third parties. Management fees are $40,000 per month for the first six months and $50,000 after
the first six months, and the term of the agreements is 36 months. In addition, the Company bills the other party for rent and
utilities expense incurred and the other party will be responsible for payroll and employee benefits. The Company sold all inventory
at net book value of $1.5 million, but retains ownership of all property and equipment. The depreciation and amortization expense
were approximately $280,000 for the six months ended September 30, 2019. In addition, sales from our stores in New York City decreased
by $3.8 million because we contracted part of vegetables and fruits business to third parties in our store to improve our margin.
Our total net
wholesale sales decreased by $1.2 million from $9.6 million for the six months ended September 30, 2018 to $8.4 million for
the six months ended September 30, 2019, attributable that our sales to related parties decreased by $1.0 million from the
six months ended September 30, 2018 to the six months ended September 30, 2019, attributable to that New York Mart Group. Inc
is going out of business.
Cost
of sales, Occupancy costs and Gross Profit
Retail Segment
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
26,592,399
|
|
|
$
|
38,687,575
|
|
|
$
|
(12,095,176
|
)
|
|
|
(31.3
|
)%
|
Occupancy costs
|
|
|
3,506,909
|
|
|
|
3,841,486
|
|
|
|
(334,577
|
)
|
|
|
(8.7
|
)%
|
Gross profit
|
|
|
7,166,825
|
|
|
|
9,226,296
|
|
|
|
(2,059,471
|
)
|
|
|
(22.3
|
)%
|
Gross margin
|
|
|
19.2
|
%
|
|
|
17.8
|
%
|
|
|
1.4
|
%
|
|
|
-
|
|
For the retail segment, cost of sales decreased
by $12.1 million, from $38.7 million for the six months ended September 30, 2018, to $26.6 million for the six months ended September
30, 2019. The decrease was consistent with the decreased sales and mainly due to changes we made to Ming and Zen store in MA mentioned
above. Costs decreased by 31.3%, compared to a sales decrease of 28%, leading to a higher margin, which was calculated before adding
the occupancy cost to the total cost. This is expected when the strategic decision was made to contract the stores to third parties
to operate.
Occupancy costs consist
of store-level expenses such as rental expenses, property taxes, and other store specific costs. Occupancy costs decreased by approximately
$0.3million, which was mainly attributable to the cancellation of one of the lease signed between New York Market Group with the
Company’s affiliates since New York Market Group is going out of business .
Gross profit was $7.2
and $9.2 million for the six months ended September 30, 2019 and 2018, respectively. Gross margin was 19.2% and 17.8% for the six
months ended September 30, 2019 and 2018, respectively. The gross margin for the six months ended September 30, 2018 was lower
than usual is because, in the last summer, our retail stores increased purchases from local farms instead of purchasing directly
from our wholesalers, which increased our cost of sales.
Wholesale Segment
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
6,045,159
|
|
|
$
|
7,340,430
|
|
|
$
|
(1,295,271
|
)
|
|
|
(17.6
|
)%
|
Gross profit
|
|
|
2,377,992
|
|
|
|
2,277,157
|
|
|
|
100,835
|
|
|
|
4.4
|
%
|
Gross margin
|
|
|
28.2
|
%
|
|
|
23.7
|
%
|
|
|
4.5
|
%
|
|
|
-
|
|
For our wholesale segment,
the cost of sales for the six months ended September 30, 2019 decreased by $1.3 million, or 17.6%, from $7.3 million for the six
months ended September 30, 2018 to $6.0 million for the six months ended September 30, 2019. The decrease is consistent with the
significant decrease of sales from the wholesale segment in 2019.
Gross profit for the six
months ended September 30, 2019 increased by around $101,000, or 4.4%, from $2.3 million for the six months ended September 30,
2018 to $2.4 million for the six months ended September 30, 2019. Gross margin increased by 4.5% from 23.7% to 28.2%. The increase
was due to the significant sales decrease to its related parties, of which the margin is lower than sales made to third parties.
Selling, General and Administrative
Expenses
Selling, general, and
administrative expenses were $14.4 million for the six months ended September 30, 2019, a decrease of $2.8 million, or 16.0%, compared
to $17.2 million for the six months ended September 30, 2018, which was mainly attributable to the $1.9 million expense decrease
from two stores in MA since we contracted these two stores and we do not operate these two stores ourselves. In addition,
one of our wholesale company is going out of business and selling, general, and administrative expenses decreased by $1.3 million.
Interest Expense
Interest expense was $1.0
million for the six months ended September 30, 2019, an increase of $0.3 million, or 48.8%, from $ 0.6 million for the six months
ended September 30, 2018, attributable to the increased average outstanding loan balance from $19.5 from six months ended September
30, 2018 to $21.1 for the six months ended September 30, 2019, as well as increased interest rate from 5.7% for the six months
ended September 30, 2018 to 6.45% for the six months ended September 30, 2019. In addition, the Company paid approximately $150,000
of forbearance fee to Key Bank in May due to the violation of covenant.
Other income
Other income was $1.7
million for the six months ended September 30, 2019, which included management and advertising fee income, rental income, lottery
sales, and other miscellaneous income. Other income increased $1.1 million, 179%, from $0.6 million for the six months ended September
30, 2018. For the six months ended September 30, 2019, the Company collected $0.5 million of management fee from contracting Ming
and Zen in MA to third parties for operation. In addition, the Company has subleased some spaces in its stores for small vendors
to sell prepared foods. Rental income increased by $0.6 million.
Income Taxes Provision
We are subject to U.S.
federal and state income taxes. Income tax expense was around $64,000 for the six months ended September 30, 2019, compared to
$314,000 of income tax expense for the six months ended September 30, 2018. The effective income tax rate was -1.5% and -5% for
the six months ended September 30, 2019 and 2018, respectively. For the six months ended September 30, 2019 and 2018, the Company
made reserve for deferred tax asset due to the significant loss incurred.
Net Income (loss)
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net income
|
|
$
|
(4,254,849
|
)
|
|
$
|
(6,042,084
|
)
|
|
$
|
1,787,235
|
|
|
|
-29.6
|
%
|
Net Loss Margin
|
|
|
-9.31
|
%
|
|
|
-9.84
|
%
|
|
|
0.53
|
%
|
|
|
|
|
Net loss was $4.3 million
for the six months ended September 30, 2019, a decrease of $1.8 million, or 29.6%, from $6.0 million of net loss for the six months
ended September 30, 2018, mainly attributable to the decreased selling, general, and administrative expenses described above. Net
loss as a percentage of sales was -9.31% and -9.84% for the six months ended September 30, 2019 and 2018, respectively.
Adjusted EBITDA
|
|
For the six months
ended September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net income
|
|
$
|
(4,254,849
|
)
|
|
$
|
(6,042,084
|
)
|
|
$
|
1,787,235
|
|
|
|
(29.6
|
)%
|
Interest expense
|
|
|
959,220
|
|
|
|
644,826
|
|
|
|
314,394
|
|
|
|
48.8
|
%
|
Income tax provision
|
|
|
63,493
|
|
|
|
313,833
|
|
|
|
(250,340
|
)
|
|
|
(79.8
|
)%
|
Depreciation
|
|
|
1,093,572
|
|
|
|
943,485
|
|
|
|
150,087
|
|
|
|
15.9
|
%
|
Amortization
|
|
|
249,166
|
|
|
|
135,103
|
|
|
|
114,063
|
|
|
|
84.4
|
%
|
Adjusted EBITDA
|
|
$
|
(1,889,398
|
)
|
|
$
|
(4,004,837
|
)
|
|
$
|
2,115,439
|
|
|
|
(52.8
|
)%
|
Percentage of sales
|
|
|
-4.1
|
%
|
|
|
-6.5
|
%
|
|
|
2.4
|
%
|
|
|
|
|
Loss before income tax,
depreciation, and amortization was $1.9 million for the six months ended September 30, 2019, a decrease of $2.1 million, as compared
to income before income tax, depreciation, and amortization of $4.0 million for the six months ended September 30, 2018, mainly
attributable to the decrease in net loss resulting from decreased selling, general, and administrative expenses described above.
Results of Operations for the three
months ended September 30, 2019 and 2018
|
|
For the three months ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net sales-third parties
|
|
$
|
21,373,820
|
|
|
$
|
29,421,093
|
|
|
$
|
(8,047,273
|
)
|
|
|
(27.4
|
)%
|
Net sales-related parties
|
|
|
487,682
|
|
|
|
863,710
|
|
|
|
(376,028
|
)
|
|
|
(43.5
|
)%
|
Total Sales
|
|
|
21,861,502
|
|
|
|
30,284,803
|
|
|
|
(8,423,301
|
)
|
|
|
(27.8
|
)%
|
Cost of sales-third parties
|
|
|
15,140,772
|
|
|
|
22,451,875
|
|
|
|
(7,311,103
|
)
|
|
|
(32.6
|
)%
|
Cost of sales-related parties
|
|
|
398,118
|
|
|
|
744,809
|
|
|
|
(346,691
|
)
|
|
|
(46.5
|
)%
|
Occupancy costs
|
|
|
1,576,290
|
|
|
|
2,010,412
|
|
|
|
(434,122
|
)
|
|
|
(21.6
|
)%
|
Gross Profit
|
|
|
4,746,322
|
|
|
|
5,077,707
|
|
|
|
(331,385
|
)
|
|
|
(6.5
|
)%
|
Selling, general and administrative expenses
|
|
|
5,851,779
|
|
|
|
9,103,577
|
|
|
|
(3,251,798
|
)
|
|
|
(35.7
|
)%
|
Loss from operations
|
|
|
(1,105,457
|
)
|
|
|
(4,025,870
|
)
|
|
|
2,920,413
|
|
|
|
(72.5
|
)%
|
Interest expense
|
|
|
(349,475
|
)
|
|
|
(399,123
|
)
|
|
|
49,648
|
|
|
|
(12.4
|
)%
|
Other income
|
|
|
729,639
|
|
|
|
259,571
|
|
|
|
470,068
|
|
|
|
181.1
|
%
|
Loss before income tax provision
|
|
|
(725,293
|
)
|
|
|
(4,165,422
|
)
|
|
|
3,440,129
|
|
|
|
(82.6
|
)%
|
Income tax provision
|
|
|
161,430
|
|
|
|
-
|
|
|
|
161,430
|
|
|
|
100
|
%
|
Net Loss
|
|
$
|
(886,723
|
)
|
|
$
|
(4,165,422
|
)
|
|
$
|
3,278,699
|
|
|
|
(78.7
|
)%
|
Net Loss attributable to common shareholders
|
|
$
|
(886,723
|
)
|
|
$
|
(4,165,422
|
)
|
|
$
|
3,278,699
|
|
|
|
(78.7
|
)%
|
Net Sales
|
|
For the three months ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net sales of retail
|
|
$
|
17,970,456
|
|
|
$
|
25,855,761
|
|
|
$
|
(7,885,305
|
)
|
|
|
(30.5
|
)%
|
Net sales of wholesale-third parties
|
|
|
3,403,364
|
|
|
|
3,565,332
|
|
|
|
(161,968
|
)
|
|
|
(4.5
|
)%
|
Net sales of wholesale-related parties
|
|
|
487,682
|
|
|
|
863,710
|
|
|
|
(376,028
|
)
|
|
|
(43.5
|
)%
|
Total Net Sales
|
|
$
|
21,861,502
|
|
|
$
|
30,284,803
|
|
|
$
|
(8,423,301
|
)
|
|
|
(27.8
|
)%
|
iFresh’s net
sales were $21.9 million for the three months ended September 30, 2019, a decrease of $8.4 million, or 27.8%, from $30.3 million
for the three months ended September 30, 2018.
The decrease resulted mainly from our Quincy
(Zen Store) and Boston (Ming Store), Massachusetts stores. Ming and Zen contributed $5.4 million of retail sales for the three
months ended September 30, 2018. Starting from the fiscal year 2019, these two stores experienced significantly decreased sales
due to competition from newly opened grocery stores. On April 1, 2019, the Company entered into an agreement for the two stores
with third parties to operate those stores, and the Company is collecting management fees from the third parties. Management fees
are $40,000 per month for the first six months and $50,000 after the first six months, and the term of the agreements is 36 months.
In addition, the Company bills the other party for rent and utilities expense incurred and the other party will be responsible
for payroll and employee benefits. The Company sold all inventory at net book value of $1.5 million, but retains ownership of all
property and equipment. The depreciation and amortization expense were approximately $280,000 for the six months ended September
30, 2019. In addition, sales from our stores in New York City decreased by $3.1 million because we contracted part of vegetables
and fruits business to third parties in our store to improve our margin.
Our total net wholesale
sales decreased by $0.5 million from $4.4 million for the three months ended September 30, 2018 to $3.9 million for the three months
ended September 30, 2019, attributable that our sales to related parties decreased by $0.4 million from the three months ended
September 30, 2018 to the three months ended September 30, 2019, attributable to that New York Mart Group. Inc is going out of
business.
Cost of sales, Occupancy costs and
Gross profit
Retail Segment
|
|
For the three months ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
12,687,386
|
|
|
$
|
19,688,151
|
|
|
$
|
(7,000,765
|
)
|
|
|
(35.6
|
)%
|
Occupancy costs
|
|
|
1,576,290
|
|
|
|
2,010,412
|
|
|
|
(434,122
|
)
|
|
|
(21.6
|
)%
|
Gross profit
|
|
|
3,706,780
|
|
|
|
4,157,198
|
|
|
|
(450,418
|
)
|
|
|
(10.8
|
)%
|
Gross margin
|
|
|
20.6
|
%
|
|
|
16.1
|
%
|
|
|
4.5
|
%
|
|
|
|
|
For the retail
segment, cost of sales decreased by $7.0 million, from $19.7 million for the three months ended September 30, 2018, to $12.7
million for the three months ended September 30, 2019. The decrease was consistent with the sales decreased and mainly due to
changes we made to Ming and Zen store in MA mentioned above. The cost decreased by 35.6 %, compared to sales decrease of
30.5%, lead to higher margin which was calculated before adding the occupancy cost in the total cost. This was expected when
the strategic decision was made to contract the stores to third parties to operate.
Occupancy costs consist
of store-level expenses such as rental expenses, property taxes, and other store specific costs. Occupancy costs decreased by approximately
$0.4 million, which was mainly attributable to the cancellation of one of the lease signed between New York Market Group with the
Company’s affiliates since New York Market Group is going out of business .
Gross profit was $3.7
and $4.2 million for the three months ended September 30, 2019 and 2018, respectively. Gross margin was 20.6% and 16.1% for the
three months ended September 30, 2019 and 2018, respectively. The gross margin for the three months ended September 30, 2018 was
lower than usual is because, in the last summer, our retail stores increased purchases from local farms instead of purchasing directly
from our wholesalers, which increased our cost of sales.
Wholesale Segment
|
|
For the three months ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
2,851,504
|
|
|
$
|
3,508,533
|
|
|
$
|
(657,029
|
)
|
|
|
(18.7
|
)%
|
Gross profit
|
|
$
|
1,039,542
|
|
|
|
920,509
|
|
|
|
119,033
|
|
|
|
12.9
|
%
|
Gross margin
|
|
|
26.7
|
%
|
|
|
20.8
|
%
|
|
|
5.9
|
%
|
|
|
|
|
For our wholesale segment,
the cost of sales for the three months ended September 30, 2019 decreased by $0.7 million, or 18.7%, from $3.5 million for the
three months ended September 30, 2018 to $2.9 million for the three months ended September 30, 2019. The decrease is consistent
with the significant decrease of sales from the wholesale segment in 2019.
Gross profit for the three
months ended September 30, 2019 increased by around $119,000, or 12.9%, from $0.9 million for the three months ended September
30, 2018 to $1.0 million for the three months ended September 30, 2019. Gross margin increased by 5.9% from 20.8% to 26.7%. The
increase was due to the significant sales decrease to its related parties, of which the margin is lower than sales made to third
parties.
Selling, General, and Administrative
Expenses
Selling, general, and
administrative expenses was $5.9 million for the three months ended September 30, 2019, a decrease of $3.3 million, or 35.7%, compared
to $9.1 million for the three months ended September 30, 2018, which was mainly attributable to the $0.9 million expense decrease
from two stores in MA since we contracted these two stores and we do not operate these two stores ourselves. One of our wholesale
company is going out of business and selling, general, and administrative expenses decreased by $0.7 million. In addition, for
the three months ended September 30, 2018, we accrued $0.7 million of litigation loss and $0.7 million of stock based compensation
for stock issued to employees.
Interest Expense
Interest expense was
$349,475 for the three months ended September 30, 2019, a decrease of $49,648, or 12.4%, from $399,123 for the three months ended
September 30, 2018, primarily attributable to the decreased average loan balance from $22.2 million for the three months ended
September 30, 2018 to $20.8 million for the three months ended September 30, 2019.
Other income
Other income was $0.7
million for the three months ended September 30, 2019, an increase of $0.5 million, or 181%, from $0.3 million for the three months
ended September 30, 2018 For the three months ended September 30, 2019, the Company collected $0.3 million of management fee from
contracting Ming and Zen in MA to third parties for operation. In addition, the Company has subleased some spaces in its stores
for small vendors to sell prepared foods. Rental income increased by $0.2 million.
Income Taxes Provision
The Company is subject
to U.S. federal and state income taxes. Income tax was $161,000 for the three months ended September 30, 2019, an increase of $161,000,
or 100%, compared to $- of tax for the three months ended September 30, 2018. For the three months ended September 30, 2019 and
2018, the Company made reserve for deferred tax asset due to the significant loss incurred.
Net Income (loss)
|
|
For the three months ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net loss
|
|
$
|
(886,723
|
)
|
|
$
|
(4,165,422
|
)
|
|
$
|
(3,278,699
|
)
|
|
|
(78.7
|
)%
|
Net Profit Margin
|
|
|
(4.06
|
)%
|
|
|
(13.75
|
)%
|
|
|
(9.69
|
)%
|
|
|
|
|
Net loss was $0.9 for
the three months ended September 30, 2019, a decrease of $3.3 million, or 78.7%, from $4.2 million of net loss for the three months
ended September 30, 2018, mainly attributable to the increase in gross margin and decrease in selling, general, and administrative
expenses and higher interest expenses, as described above.
Adjusted EBITDA
|
|
For the three month ended
September 30,
|
|
|
Changes
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Net loss
|
|
$
|
(886,723
|
)
|
|
$
|
(4,165,422
|
)
|
|
$
|
3,278,699
|
|
|
|
(78.7
|
)%
|
Interest expense
|
|
|
349,475
|
|
|
|
399,123
|
|
|
|
(49,648
|
)
|
|
|
(12.4
|
)%
|
Income tax provision
|
|
|
161,430
|
|
|
|
-
|
|
|
|
161,430
|
|
|
|
100
|
%
|
Depreciation
|
|
|
531,928
|
|
|
|
483,540
|
|
|
|
48,388
|
|
|
|
10
|
%
|
Amortization
|
|
|
33,333
|
|
|
|
101,770
|
|
|
|
(68,437
|
)
|
|
|
(67.2
|
)%
|
Adjusted EBITDA
|
|
$
|
189,443
|
|
|
$
|
(3,180,989
|
)
|
|
$
|
3,370,432
|
|
|
|
(106
|
)%
|
Percentage of sales
|
|
|
0.9
|
%
|
|
|
(10.5
|
)%
|
|
|
11.4
|
%
|
|
|
|
|
Adjusted EBITDA was
$0.2 million for the three months ended September 30, 2019, an increase of $3.4 million, or 106%, as compared to $3.2 million of
EBITDA loss for the three months ended September 30, 2018, mainly attributable to decreased net loss of approximately $3.3 million.
The ratio of Adjusted EBITDA to sales was 0.9% and (10.5)% for the three months ended September 30, 2019 and 2018, respectively.
Liquidity and Capital Resources
As of September
30, 2019, iFresh had cash and cash equivalents of approximately $0.9 million. iFresh had operating losses for the six months
ended September 30, 2019 and had negative working capital of $26.4 million and $21.6 million as of September 30, 2019 and
March 31, 2019, respectively. iFresh had negative equity of $1.6 million as of September 30, 2019. The long-term KeyBank loan
of $20.5 million has been presented as short-term because the Company is not in compliance with the KeyBank loan covenants
and KeyBank has the option to accelerate payment at any time. The Company did not meet certain financial covenants required
in the credit agreement with KeyBank National Association (“KeyBank”). As of September 30, 2019, the Company has
outstanding loan facilities of approximately $20.5 million due to KeyBank. Failure to maintain these loan facilities will
have a significant impact on the Company’s operations. iFresh had funded working capital and other capital requirements
in the past primarily by equity contribution from shareholders, cash flow from operations, and bank loans. Cash is required
to pay purchase costs for inventory, rental, salaries, office rental expenses, income taxes, other operating expenses and
repay debts. iFresh’s ability to repay its current obligation will depend on the future realization of its current
assets. iFresh’s management has considered the historical experience, the economy, trends in the retail industry, the
expected collectability of the accounts receivables and the realization of the inventories as of September 30, 2019.
iFresh’s ability to continue to fund these items may be affected by general economic, competitive and other factors,
many of which are outside of our control.
We have $4.3 million of
advances and receivables from related parties that we intend to collect or acquire, and these advances and receivables will be
used to offset part of the acquisition consideration for such related parties.
The Company’s principal
liquidity needs are to meet its working capital requirements, operating expenses, and capital expenditure obligations. As
of September 30, 2019, the Company remains in noncompliance with the financial covenants of the KeyBank Loan. These conditions
continue to raise doubt as to the Company’s ability to remain a going concern.
The following table summarizes
iFresh’s cash flow data for the six months ended September 30, 2019 and 2018.
|
|
For the six months
ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(1,234,767
|
)
|
|
$
|
(5,863,507
|
)
|
Net cash provided by investing activities
|
|
|
330,279
|
|
|
|
372,251
|
|
Net cash provided by financing activities
|
|
|
711,008
|
|
|
|
5,782,063
|
|
Net Increase (decrease) in cash and cash equivalents
|
|
$
|
(193,480
|
)
|
|
$
|
290,807
|
|
Operating Activities
Net cash used in operating
activities consists primarily of net income adjusted for non-cash items, including depreciation, changes in deferred income taxes,
loss on early extinguishment of debt, and the effect of working capital changes. Net cash used in operating activities was approximately
$1.2 million for the six months ended September 30, 2019, a decrease of $4.5 million, or 79%, compared to $ 5.8 million used in
operating activities for the six months ended September 30, 2018. The decrease was a result of a decrease of net loss of $1.8 million
and an increase of $2.7 million from change of working capital mainly resulting from decrease from inventory and tax payable.
Investing Activities
Net cash provided by investing
activities was approximately $330,000 for the six months ended September 30, 2019, an increase of approximately $40,000, compared
to approximately $290,000 provided by investing activities for the six months ended September 30, 2018. The increase was primarily
attributable to the decrease of $2.4 million in acquisition of property and equipment in 2019, offset by decrease of collection
from related party receivable of $2.3 million.
Financing Activities
Net cash provided by financing
activities was approximately $0.7 million for the six months ended September 30, 2019, which mainly consisted of cash received
from capital contribution of $1.7 million, offset by net cash paid for bank loans of $1 million, $131,000 cash paid notes payable,
and capital leases. Net cash provided from financing activities was $5.8 million for the six months ended September 30, 2018, which
mainly consisted of net cash flow from bank loans of $5.7 million, cash received from issuance of stock of $1.0 million, offset
by $145,000 cash paid for notes payable and capital leases and repayment on term loan of $0.8 million.
KeyBank National Association – Senior
Secured Credit Facilities
On December 23, 2016,
NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank
National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit
of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000
of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the
Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term loans are December
23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit Facility and 0.25%
of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of September 30, 2019.
$15,000,000 of the term
loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments of
principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid principal
balance of the term loan, plus accrued interest on the maturity date.
A Delayed Draw Term Loan
was available and would be advanced on the Delayed Draw Funding date (as defined in the Credit Agreement, which is no later than
December 23, 2021. A withdrawal of $5 million under the Delayed Draw Term Loan was made as of September 30, 2019.
The senior secured credit
facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains financial
and restrictive covenants. The financial covenants require NYM to deliver audited consolidated financial statements within one
hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior
funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at
the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. Except as stated below, the senior
secured credit facility is subject to customary events of default. It will be an event of default if Mr. Long Deng resigns, is
terminated, or is no longer actively involved in the management of NYM and a replacement reasonably satisfactory to the Lender
is not made within sixty (60) days after such event takes place. The Company violated the loan covenant when Mr. Long Deng, CEO
and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited on January 23,
2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to
obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March 1, 2019, interest was
accrued on all loans at the default rate and the monthly principal and interest payment due under the effective date term loan
will be $155,872 instead of $142,842.
On May 20, 2019 (the “Effective
Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant
to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of
the events of defaults for certain period of time. The Forbearance Agreement contains customary forbearance covenants and
other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment decreased to $142,842
as originally required per the credit facility agreements.
The Company failed to
meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective
Date”), the Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance
agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016,
as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh
and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”)
have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
Key Bank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain
events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on
the November 29, 2019; and (b) a Forbearance Event of Default.
The Company has been repaying
this facility in accordance with its terms. 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 September 30, 2019 and March 31, 2019, the Company
has negative EBITDA, thus the ratio was negative and the Company was not in compliance with the financial covenants of the KeyBank
loan.
While KeyBank has not
yet acted to accelerate payment of the facility, KeyBank considers the Company to be in default and will not make any further advances
under the Credit Facility until the Company comes into compliance with the Credit Agreement.
Commitments and Contractual Obligations
The following table presents
the Company’s material contractual obligations as of September 30, 2019:
Contractual Obligations (unaudited)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Bank Loans
|
|
$
|
20,545,084
|
|
|
$
|
1,535,255
|
|
|
$
|
19,009,829
|
|
|
$
|
—
|
|
|
|
—
|
|
Estimated interest payments on bank loans
|
|
|
1,072,046
|
|
|
|
496,351
|
|
|
|
575,695
|
|
|
|
—
|
|
|
|
—
|
|
Notes payable
|
|
|
169,700
|
|
|
|
84,554
|
|
|
|
85,146
|
|
|
|
|
|
|
|
—
|
|
Capital lease obligations including interest
|
|
|
569,282
|
|
|
|
180,900
|
|
|
|
305,672
|
|
|
|
82,710
|
|
|
|
—
|
|
Operating Lease Obligations(1)
|
|
|
90,430,944
|
|
|
|
8,423,619
|
|
|
|
16,631,623
|
|
|
|
15,960,911
|
|
|
|
49,414,791
|
|
|
|
$
|
112,787,056
|
|
|
$
|
10,720,679
|
|
|
$
|
36,607,965
|
|
|
$
|
16,043,621
|
|
|
$
|
49,414,791
|
|
|
(1)
|
Operating
lease obligations do not include common area maintenance, utility and tax payments to which iFresh is obligated, which is estimated
to be approximately 50% of operating lease obligation.
|
Off-balance Sheet Arrangements
iFresh is not a party
to any off-balance sheet arrangements.
Critical Accounting Estimates
The discussion and analysis
of iFresh’s financial condition and results of operations are based upon its financial statements, which have been prepared
in accordance with GAAP. These principles require iFresh’s management to make estimates and judgments that affect the reported
amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. The
estimates include, but are not limited to, revenue recognition, inventory valuation, impairment of long-lived assets, lease, and
income taxes. iFresh bases its estimates on historical experience and on various other assumptions that it believes to be reasonable
under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between
these estimates and the actual results, future financial statements will be affected.
iFresh’s management
believes that among their significant accounting policies, which are described in Note 3 to the unaudited condensed consolidated
financial statements of iFresh included in this Form 10-Q, the following accounting policies involve a greater degree of judgment
and complexity. Accordingly, iFresh’s management believes these are the most critical to fully understand and evaluate its
financial condition and results of operations.
Revenue Recognition
In accordance with Topic
606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise
or delivery is made to our wholesale customers. Payment terms are established for our wholesale customers based on the Company’s
pre-established credit requirements. Payment terms vary depending on the customer. Based on the nature of receivables no significant
financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns
and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical
return experience.
Topic 606 defines a performance
obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account.
The majority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately
identifiable from other promises in the contracts and is, therefore, not distinct.
We had no material contract
assets, contract liabilities or costs to obtain and fulfill contracts recorded on the Condensed Consolidated Balance Sheet as of September
30, 2019. Revenue recognized from performance obligations related to prior periods was insignificant.
Inventories
Inventories consist of
merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for wholesale and retail
perishable inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts).
The Company’s wholesale
and retail non-perishable inventory is valued at the lower of cost or market using weighted average method.
Impairment of Long-Lived Assets
iFresh assesses its long-lived
assets, including property and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be recoverable. The Company groups and evaluates long-lived assets
for impairment at the individual store level, which is the lowest level at which independent identifiable cash flows are available.
Factors which may indicate potential impairment include a significant underperformance relative to the historical or projected
future operating results of the store or a significant negative industry or economic trend. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated
by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value
of the asset group. The fair value is estimated based on the discounted future cash flows or comparable market values, if available.
Leases
On April 1, 2019 the Company
adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date
of ASC 842, we elected to apply the package of practical expedients. Based on this guidance we will not reassess the following:
(1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases;
and (3) initial direct costs for any existing leases. The adoption of Topic 842 resulted in the presentation of $61,211,020 of
operating lease assets and $67,903,674 operating lease liabilities on the consolidated balance sheet as of September 30, 2019.
See Note 12 for additional information.
The Company determines
if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets,
current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s
consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital
leases, and obligations under capital leases, non-current on our consolidated balance sheets.
Operating lease ROU assets
and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term
at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do
not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement
date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and
excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate
the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term.
Income Taxes
iFresh must make certain
estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable
or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities for a change in income tax rates is recognized in income in the period
that includes the enactment date.
iFresh apply the provisions
of the authoritative guidance on accounting for uncertainty in income taxes that was issued by the Financial Accounting Standards
Board, or FASB. Pursuant to this guidance, and may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits
of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based
on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance
also addresses other items related to uncertainty in income taxes, including derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
Recently Issued Accounting Pronouncements
In June 2018, the FASB
issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for
share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees
would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies
for fiscal years starting after Dec. 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments
are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company expects that
the adoption of this ASU would not have a material impact on the Company’s consolidated financial statements.