See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
See accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO UNAUDITED 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. This Exchange Agreement was terminated and the proposed acquisition was cancelled in November
2019 after Zhejiang Xiao’s business activities were found in violation of China’s laws and regulations.
In April 2020, the Company acquired Hubei Rongentang
Wine Co., Ltd and Hubei Rongentang Herbal Wine Co., Ltd., (“RET”) and Xiamen DL Medical Technology Co, Ltd., (“DL
Medical”) which are incorporated and located in China to expand its business. RET is engaged in the business of manufacturing
and selling rice liquor products and herbal rice wine products. DL Medical’s core business includes engineering and technical
research and experimental development in and production of medical protective masks, non-medical daily protective masks, cotton
spinning processing (Refer to Note 5 for the detail of these acquisitions).
2. Liquidity and Going Concern
As reflected in the Company’s consolidated
financial statements, the Company had negative working capital of $19.1 million and $28.6 million as of June 30, 2020 and March
31, 2020, respectively. The Company had negative equity of $2.6 million as of March 31, 2020. For the year ended March 31, 2020,
the Company had operating losses of $8.3 million. The Company did not meet certain financial covenants required in the credit agreement
with KeyBank National Association (“KeyBank”). As of June 30, 2020, the Company has outstanding loan facilities of
approximately $20.1 million due to KeyBank. Failure to maintain these loan facilities will have a significant impact on the Company’s
operations.
In assessing its liquidity, management monitors
and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future and its operating
and capital expenditure commitments. iFresh had funded working capital and other capital requirements in the past primarily by
equity contribution from shareholders, cash flow from operations, and bank loans. As of June 30, 2020, the Company also has $5.9
million of advances and receivable from the related parties we intend to collect. In April and May 2020, the Company received Paycheck
Protection Program loan (“PPP loan”) of approximately $1.77 million. For the quarter ended June 30, 2020, the Company
has net operating income of $3.6 million due to the effort of cutting expense, closing stores with low performance. In addition,
the Company had positive net equity through the acquisition of two business in China.
The Company was in default under the Credit
Agreement as of June 30, 2020 and March 31, 2020. 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 June 30, 2020 and March
31, 2020, this ratio was greater than 3.00 to 1.00, and the Company was therefore not in compliance with the financial covenants
of the KeyBank loan. In addition, the Company violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the
Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited, representing 51% of the total issued and
outstanding shares of the Company as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of
the change of ownership. KeyBank has notified the Company in February that it has not waived the default and reserves all
of its rights, power, privileges, and remedies under the Credit Agreement. effective as of March 1, 2019, interest was accrued
on all loans at the default rate.
On May 20, 2019 (the “Effective Date”),
the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant to which KeyBank
has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of the events of shares
transfer defaults for certain period of time. The Forbearance Agreement contains customary forbearance covenants and other
forbearance covenants and defined certain events of defaults. Starting from May 2019, the monthly payment decreased to $142,842
as originally required per the credit facility agreements.
From January to June 2020, non-payment
of amount due by the Company was $1,194,878. Also, the Company is not incompliance with certain loan covenants. On August 6, 2020
the Company received 3rd forbearance agreement from Key Bank, which includes the following terms:
|
●
|
All delinquent regular
interest paid at or before settlement.
|
|
●
|
August and September
required payments will be regular interest amounts
|
|
●
|
Default interest will be deferred until September 25, 2020
|
|
●
|
Store valuations will
be ordered by the lender.
|
|
●
|
Continue to provide
weekly cash flow reports
|
|
●
|
Provide quarterly financial
statements of NYM, iFresh and newly acquired businesses.
|
|
●
|
Monthly financial projections
|
|
●
|
Cost/work detail on
the completion of the CT store
|
|
●
|
Pledge of the equity
and guarantee of newly acquired businesses.
|
|
●
|
File a UCC-1 financing
statement for iFresh Inc.
|
If agreement cannot be reached, KeyBank
is fully prepared to pursue legal remedies. As of the date of this filing, the Forbearance Agreement is still under negotiation.
On December 17, 2019, the Company received
a letter from the Listing Qualifications Staff (the “Staff’) of the Nasdaq Stock Market LLC (“Nasdaq”),
which stated that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2), which requires an issuer to maintain
a minimum closing bid price of $1.00 per share (the “Bid Price Rule”). In accordance with the Nasdaq Listing Rules,
the Company was provided with a 180-day grace period to regain compliance with the Bid Price Rule, through June 15, 2020. The
notice has no immediate impact on the listing or trading of the Company’s securities on Nasdaq. The Company has received
a written notice from the Listing Qualifications Staff of Nasdaq on May 4, 2020, indicating that the Company has regained compliance
with Nasdaq’s continued listing requirements and that its common stock will continue to be listed on Nasdaq Stock Market.
The Company was impacted by the COVID-19
outbreak as it operates in area under stay-at-home orders since mid-March 2020. The Company had to operate under reduced hours
including temporary closure of the stores located in in Brooklyn, New York and in Flushing, New York, where are with high population
and at high risk of infection during the end of March and April peak period. Sales decreased by $1.0 million due to the lockdown
for the quarter ended June 30, 2020.
The Company’s principal liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The Company’s
ability to fund these needs will depend on its future performance, which will be subject in part to general economic, competitive
and other factors beyond its control. These conditions raise substantial doubt as to the Company’s ability to remain a going
concern.
3. Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
three months ended June 30, 2020 and 2019 are not necessarily indicative of the results that may be expected for the full year.
The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended March 31, 2020 filed with the SEC on August 13, 2020.
The Company has four reportable and operating
segments. The Company’s Chief Executive Officer is the Chief Operating Decision Maker (“CODM”). The CODM bears
ultimate responsibility for, and is actively engaged in, the allocation of resources and the evaluation of the Company’s
operating and financial results.
4. Summary of Significant Accounting Policies
Significant Accounting Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting
estimates included, but are not limited to: allowance for estimated uncollectible receivables, inventory valuations, lease assumptions,
impairment of long-lived assets, impairment of intangible assets, and income taxes. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable consist primarily of
uncollected amounts from customer purchases (primarily from the Company’s two distribution operations), credit card receivables,
and food stamp vouchers, and are presented net of an allowance for estimated uncollectible amounts.
The Company periodically assesses its accounts
receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance
is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against
the allowance.
Inventories
Inventories in our supermarket and trading
business 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). Inventories in our business consist raw material, working in progress and finished products.
Costs include the cost of raw materials, freight, direct labor and related production overhead. The cost of inventories is calculated
using the weighted average method.
Any excess of the cost over the net realizable value of each
item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated
selling price in the normal course of business less any costs to complete and sell products. Allowances for obsolescence are also
assessed based on expiration dates, as applicable, taking into consideration historical and expected future product sales.
Leases
On April 1, 2019 the Company adopted Accounting
Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, we
elected to apply the package of practical expedients. Based on this guidance we will not reassess the following: (1) whether any
expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial
direct costs for any existing leases. The adoption of Topic 842 resulted in the presentation of $65.6 million of operating lease
assets and $72.3 operating lease liabilities on the consolidated balance sheet as of April 1, 2019(See Note 13 for additional information).
The Company determines if an arrangement
is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion
of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated
balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases,
and obligations under capital leases, non-current on our consolidated balance sheets.
Operating lease ROU assets and operating
lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining
the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives
and initial direct costs incurred. The Company’s terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line
basis over the lease term.
Fair Value Measurements
The Company records its financial assets
and liabilities in accordance with the framework for measuring fair value in accordance with U.S GAAP. This framework establishes
a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments
in active markets.
Level 2: Quoted prices for similar instruments
in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation
techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements of nonfinancial
assets and non-financial liabilities are primarily used in the impairment analysis of intangible assets and long-lived assets.
Cash and cash equivalents, accounts receivable,
prepaid expenses and other current assets, advances to related parties, accounts payable, deferred revenue and accrued expenses
approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair
value of the lines of credit, PPP loans and other liabilities, including current maturities, approximated their carrying value
as of June 30, 2020 and March 31, 2020, 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.
Paycheck Protection Program Loans (PPP) Loans
The Company’s policy is to account for
the PPP loan (See Note 11) as debt. The Company will continue to record the loan as debt until either (1) the loan is partially
or entirely forgiven and the Company has been legally released, at which point the amount forgiven will be recorded as income or
(2) the Company pays off the loan.
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 June 30, 2020 and
March 31, 2020. For the three months ended June 30, 2020 and 2019, revenue recognized from performance obligations related to
prior periods was insignificant.
Revenue expected to be recognized in any
future periods related to remaining performance obligations is insignificant.
The following table summarizes disaggregated
revenue from contracts with customers by geographical group:
|
|
For the three months ended
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
The United States
|
|
$
|
21,316,863
|
|
|
$
|
23,827,782
|
|
China
|
|
|
217,052
|
|
|
|
-
|
|
Total
|
|
$
|
21,533,915
|
|
|
$
|
23,827,782
|
|
Business Combinations
The Company accounts for its business combinations
using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), “Business Combinations”.
The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately
identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in
an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred,
and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition
date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value
as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of
acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest
in the acquiree , (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition
is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.
The Company estimates the fair value of
assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to
accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject
to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues
and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions
and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and
information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which
may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s
consolidated statements of income.
Goodwill
The Company early adopted ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent
measurement of goodwill by removing Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price
allocation. Under the new standard, an impairment loss will be recognized in the amount by which a reporting unit’s carrying value
exceeds its fair value, not to exceed the carrying amount of goodwill.
Goodwill represents the excess of the purchase
price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least
annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired.
The Company reviews the carrying values
of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not
be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350, Intangibles — Goodwill
and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more
likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis.
If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any
goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed
the total amount of goodwill allocated to that reporting unit.
Intangible Assets
Intangible assets are carried at cost and
amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its
intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets
are as follows:
|
|
Estimated useful lives (years)
|
|
Business license
|
|
|
15
|
|
Land use right
|
|
|
46
|
|
Backlog
|
|
|
1
|
|
Recently Issued Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07,
“Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments
granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be
aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for
fiscal years starting after December. 15, 2018, including interim periods within that fiscal year. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. On April
1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s unaudited condensed
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial
assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the
information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively
or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss,
which will be more decision useful to users of the financial statements. This ASU is effective for annual and interim periods
beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers. Early adoption is permitted for all entities
for annual periods beginning after December 15, 2018, and interim periods therein. In May 2019, the FASB issued ASU 2019-05, Financial
Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities
to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability
of similar financial assets. The updates should be applied through a cumulative-effect adjustment to retained earnings as of the
beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). In November
19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years beginning after December
15, 2022 and interim periods therein. The Company does not believe this guidance will have a material impact on its consolidated
financial statements.
In December 2019, the FASB issued ASU 2019-12
(“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify
various aspects related to managerial accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles
in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company
is currently assessing the impact of adopting this standard, and does not believe this guidance will have a material impact on
its consolidated financial statements.
No other new accounting pronouncements
issued or effective had, or are expected to have, a material impact on the Company’s condensed consolidated financial statements.
5. Acquisitions
Hubei Rongentang Wine Co., Ltd and Hubei Rongentang Herbal
Wine Co., Ltd. (“RET”)
On March 26, 2020, the Company entered
into an agreement (the “Acquisition Agreement”) with Kairui Tong and Hao Huang (collectively, the “Sellers”)
and Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd., pursuant to which the Sellers will sell their
100% interest in Hubei Rongentang Wine Co., Ltd. and Hubei Rongentang Herbal Wine Co., Ltd. (collectively, the “Target Companies”)
to the Company in exchange for 3,852,372 shares of the Company’s common stock and 1,000 shares of the Company’s Series
B Convertible Preferred Stock (the “Series B Preferred Stock”). Upon approval of the Company’s shareholders,
the 1,000 shares of Series B Preferred Stock will be converted into 3,834,796 shares of the Company’s common stock. The
Series B Preferred will rank on parity with the Series A Convertible Preferred Stock of the Company.
On April 22, 2020, the Company consummated
the above transactions. The aggregate fair value of the consideration paid by the Company in the acquisition is approximately
$9.8 million and is based on the closing price of the Company’s common stock at the date of closing. The excess of total
cost of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill.
The transaction was accounted for as a business combination
using the purchase method of accounting. The preliminary purchase price allocation of the transaction was determined by the Company
with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquired and liabilities
assumed as of the acquisition date.
The following table presents the preliminary purchase price
allocation to the assets acquired and liabilities assumed at the date of this acquisition:
Cash
|
|
$
|
371,310
|
|
Accounts receivable, net
|
|
|
84,260
|
|
Inventories, net
|
|
|
2,099,306
|
|
Advances to suppliers, net
|
|
|
76,476
|
|
Other current assets
|
|
|
910,435
|
|
Property and equipment, net
|
|
|
4,310,878
|
|
Total tangible assets acquired
|
|
$
|
7,852,665
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,260
|
|
Advance from customers
|
|
|
386,119
|
|
Accrued expenses and other payables
|
|
|
703,060
|
|
Deferred tax liability
|
|
|
954,173
|
|
Total liability assumed
|
|
|
2,052,612
|
|
Net tangible assets acquired
|
|
|
5,800,053
|
|
Intangible assets
|
|
|
3,013,272
|
|
Goodwill
|
|
|
1,026,250
|
|
|
|
|
|
|
Total consideration
|
|
$
|
9,839,575
|
|
The Company recorded acquired intangible
assets of $3,013,272. These intangible assets include land use right of $2,745,289 and business license of $208,756. The associated
goodwill and intangible assets are not deductible for tax purposes.
The amounts of revenue and earnings of RET included in the Company’s
condensed consolidated statement of operations and comprehensive income (loss) from the acquisition date to June 30, 2020 are as
follows:
|
|
From acquisition date to
June 30,
2020
|
|
Revenue
|
|
$
|
192,749
|
|
Net Loss
|
|
|
(22,597
|
)
|
Xiamen DL Medical Technology Co, Ltd.
(“DL Medical”)
On March 17, 2020, the Company entered
into a purchase agreement (the “Acquisition Agreement”) with Guo Hui Ji, a citizen of the People’s Republic
of China (the “Seller”) and Xiamen DL Medical Technology Co, Ltd., a People’s Republic of China company, pursuant
to which the Seller will sell his 70% equity interests in Xiamen DL Medical Technology Co, Ltd. to the Company (the “Equity
Interests”). In consideration for the Equity Interests, the Company shall pay to the Seller $600,000 in cash and issue 900,000
shares of common stock of the Company to the Seller.
On April 28, 2020, the Company consummated
the above transactions. The aggregate fair value of the consideration paid by the Company in the acquisition is approximately
$1.7 million and is based on the closing price of the Company’s common stock at the date of closing.
The transaction was accounted for as a business combination
using the purchase method of accounting. The preliminary purchase price allocation of the transaction was determined by the Company
with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquired and liabilities
assumed as of the acquisition date.
The following table presents the preliminary purchase price
allocation to the assets acquired and liabilities assumed at the date of this acquisition:
Cash
|
|
$
|
22,577
|
|
Inventories, net
|
|
|
28,975
|
|
Advances to suppliers, net
|
|
|
1,341,604
|
|
Property and equipment, net
|
|
|
69,780
|
|
Total tangible assets acquired
|
|
$
|
1,462,936
|
|
|
|
|
|
|
Advance from customers
|
|
$
|
703,321
|
|
Accrued expenses and other payables
|
|
|
59,880
|
|
Deferred tax liability
|
|
|
129,590
|
|
Total liability assumed
|
|
|
892,791
|
|
Net tangible assets acquired
|
|
|
570,145
|
|
Intangible assets
|
|
|
518,362
|
|
Goodwill
|
|
|
1,214,548
|
|
Net assets acquired
|
|
|
2,303,055
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
579,855
|
|
Total consideration
|
|
$
|
1,723,200
|
|
The Company recorded acquired intangible asset of $518,362.
These intangible asset includes backlog list. The associated goodwill and intangible assets are not deductible for tax purposes.
The estimated fair value of the non-controlling interest was determined based on the preliminary purchase price allocation report
prepared by an independent third-party appraiser by using discount cash flow model.
The amounts of revenue and earnings of DL Medical included in
the Company’s condensed consolidated statement of operations and comprehensive income (loss) from the acquisition date to
June 30, 2020 are as follows:
|
|
From acquisition date to
June 30,
2020
|
|
Revenue
|
|
$
|
24,303
|
|
Net Loss
|
|
|
(19,725
|
)
|
The following table presents the Company’s
unaudited pro forma results for the three months ended June 30, 2020 and 2019, respectively, as if the RET and DL Medical Acquisition
had occurred on April 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related
to the amortization of acquired intangible assets, and Statutory rates were used to calculate income taxes.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Pro forma revenue
|
|
$
|
21,364,676
|
|
|
$
|
24,290,654
|
|
Pro forma net income (loss)
|
|
|
3,529,731
|
|
|
|
(3,257,360
|
)
|
Pro forma earnings per common share-basic and diluted
|
|
|
0.14
|
|
|
|
(0.15
|
)
|
Weighted average shares-basic and diluted
|
|
|
25,017,729
|
|
|
|
21,894,114
|
|
6. Accounts Receivable
A summary of accounts receivable, net is
as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Customer purchases
|
|
$
|
3,927,986
|
|
|
$
|
3,975,414
|
|
Credit card receivables
|
|
|
270,346
|
|
|
|
143,851
|
|
Food stamps
|
|
|
25,410
|
|
|
|
26,407
|
|
Others
|
|
|
1,052
|
|
|
|
2,518
|
|
Total accounts receivable
|
|
|
4,224,794
|
|
|
|
4,148,190
|
|
Allowance for bad debt
|
|
|
(844,557
|
)
|
|
|
(742,849
|
)
|
Accounts receivable, net
|
|
$
|
3,380,237
|
|
|
$
|
3,405,341
|
|
7. Inventories
A summary of inventories, net is as follows:
|
|
June 30,
|
|
|
March 31,
|
|
Inventories in US entities
|
|
2020
|
|
|
2020
|
|
Non-perishables
|
|
$
|
7,569,408
|
|
|
$
|
5,396,152
|
|
Perishables
|
|
|
1,092,723
|
|
|
|
820,761
|
|
Subtotal
|
|
|
8,662,131
|
|
|
|
6,216,913
|
|
Inventories in Chinese entities
|
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
976,068
|
|
|
$
|
-
|
|
Work-in-process
|
|
$
|
548,236
|
|
|
$
|
-
|
|
Finished goods
|
|
$
|
734,689
|
|
|
$
|
-
|
|
Subtotal
|
|
|
2,258,993
|
|
|
|
-
|
|
Allowance for slow moving or defective inventories
|
|
|
(42,701
|
)
|
|
|
(31,811
|
)
|
Inventories, net
|
|
$
|
10,878,423
|
|
|
$
|
6,185,102
|
|
8. Advances and receivables - related parties
A summary of advances and receivables -
related parties is as follows:
|
|
June 30,
|
|
|
March 31,
|
|
Entities
|
|
2020
|
|
|
2020
|
|
New York Mart, Inc.
|
|
$
|
2,092
|
|
|
$
|
2092
|
|
New York Mart Elmhurst Inc.
|
|
|
450,908
|
|
|
|
-
|
|
NY Mart MD Inc.
|
|
|
770,701
|
|
|
|
363,296
|
|
iFresh Harwin Inc.
|
|
|
85
|
|
|
|
-
|
|
Advances – related parties
|
|
$
|
1,223,786
|
|
|
$
|
365,388
|
|
|
|
|
|
|
|
|
|
|
New York Mart, Inc.
|
|
|
605,265
|
|
|
|
605,265
|
|
New York Mart Elmhurst Inc.
|
|
|
53,390
|
|
|
|
-
|
|
NY Mart MD Inc.
|
|
|
3,731,511
|
|
|
|
3,841,237
|
|
iFresh Harwin Inc.
|
|
|
248,480
|
|
|
|
248,480
|
|
Receivables – related parties
|
|
|
4,638,646
|
|
|
|
4,694,982
|
|
Total advances and receivables – related parties
|
|
$
|
5,862,432
|
|
|
$
|
5,060,370
|
|
The Company has advanced funds to related
parties and accounts receivable due from the related parties with the intention of converting some of these advances and receivables
into deposits towards the purchase price upon planned acquisitions of some of these entities, which are directly or indirectly
owned, in whole or in part, by Mr. Long Deng, the majority shareholder and the Chief Executive Officer of the Company. Accounts
receivable due from related parties relate to the sales to these related parties (see Note 17). The advances and receivables are
interest free, repayable on demand, and guaranteed by Mr. Long Deng.
9. Property and Equipment
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Buildings and properties
|
|
$
|
4,333,245
|
|
|
$
|
-
|
|
Furniture, fixtures and equipment
|
|
|
23,204,560
|
|
|
|
21,023,715
|
|
Automobiles
|
|
|
2,089,597
|
|
|
|
1,997,925
|
|
Leasehold improvements
|
|
|
9,594,296
|
|
|
|
9,442,401
|
|
Software
|
|
|
11,435
|
|
|
|
6,735
|
|
Total property and equipment
|
|
|
39,233,133
|
|
|
|
32,470,776
|
|
Accumulated depreciation and amortization
|
|
|
(14,971,405
|
)
|
|
|
(12,701,624
|
)
|
Property and equipment, net
|
|
$
|
24,261,728
|
|
|
$
|
19,769,152
|
|
In connection with the Business Acquisition as disclosed in
Note 5 above, the Company acquired approximately $4.3 million buildings and properties, of which depreciation period is 15 years
Depreciation expense for the three months
ended June 30, 2020 and 2019 was $573,872 and $561,644, respectively.
10. Intangible Assets
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Acquired leasehold rights
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Business license
|
|
|
208,756
|
|
|
|
-
|
|
Land use right
|
|
|
2,804,539
|
|
|
|
-
|
|
Backlog
|
|
|
518,362
|
|
|
|
-
|
|
Total Intangible assets
|
|
|
6,031,657
|
|
|
|
2,500,000
|
|
Accumulated amortization
|
|
|
(1,736,628
|
)
|
|
|
(1,599,995
|
)
|
Intangible assets, net
|
|
$
|
4,295,029
|
|
|
$
|
900,005
|
|
In connection with the Business Acquisition as disclosed in
Note 5, the Company acquired $3,531,657 of intangible assets. Business license , land use right and backlog has an estimated weighted-average
amortization period of approximately 15 years, 46 years and 12 months respectively.
Amortization expense was $136,333 and $33,333
for the three months ended June, 2020 and 2019, respectively. Future amortization associated with the net carrying amount of definite-lived
intangible assets is as follows:
Year Ending June 30,
|
|
|
|
2021
|
|
$
|
666,737
|
|
2022
|
|
|
234,763
|
|
2023
|
|
|
234,763
|
|
2024
|
|
|
234,763
|
|
2025
|
|
|
234,763
|
|
Thereafter
|
|
|
2,689,240
|
|
Total
|
|
$
|
4,295,029
|
|
11.
Debt
A
summary of the Company’s debt is as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
PPP loans from government
|
|
$
|
1,768,212
|
|
|
$
|
-
|
|
Revolving Line of Credit-KeyBank National Association
|
|
|
4,950,000
|
|
|
|
4,950,000
|
|
Delayed Term Loan-KeyBank National Association
|
|
|
4,102,483
|
|
|
|
4,102,483
|
|
Term Loan-KeyBank National Association
|
|
|
11,408,189
|
|
|
|
11,408,189
|
|
Less: Deferred financing cost
|
|
|
(319,375
|
)
|
|
|
(319,375
|
)
|
Total
|
|
$
|
21,909,509
|
|
|
$
|
20,141,297
|
|
PPP Loans from government
In April and May 2020, the Company applied for
and received funding for a loan of $1,768,212 provided by US Small Business Administration (“SBA”) Paycheck Protection
Program, which is part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”), enacted on March 27, 2020.
Under the terms of the SBA PPP loan, up to 100% of the principal and accrued interest may be forgiven if certain criteria are met
and the loan proceeds are used for qualifying expenses such as payroll costs, benefits, rent, and utilities as described in the
CARES Act. These loans have an interest rate of 1% with a maturity of 2 years.
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 June 30, 2020.
$15,000,000 of the term loan was fully funded
by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments of principal and interest
in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid principal balance of the
term loan, plus accrued interest on the maturity date. On December 23, 2016, the Company used the proceeds from the loan term to
pay off the outstanding balance under the Bank of America credit line agreement and HSBC line of credit.
The Delayed Draw Term Loan shall be advanced
on the Delayed Draw Funding date, which is no later than December 23, 2021.
The senior secured credit facility is secured
by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains financial and restrictive
covenants. The financial covenants require NYM to deliver audited consolidated financial statements within one hundred twenty days
after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior funded debt to earnings
before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at the last day of each fiscal
quarter, beginning with the fiscal quarter ending March 31, 2017. As of June 30, 2020 and March 31, 2020, these ratios were failed,
and the Company was therefore not in compliance with the financial covenants of the KeyBank loan. Except as stated below, the senior
secured credit facility is subject to customary events of default. It will be an event of default if Mr. Long Deng resigns, is
terminated, or is no longer actively involved in the management of NYM and a replacement reasonably satisfactory to the Lender
is not made within sixty (60) days after such event takes place. The Company violated the loan covenant when Mr. Long Deng, CEO
and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited on January 23,
2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to
obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March 1, 2019, interest was
accrued on all loans at the default rate and the monthly principal and interest payment due under the effective date term loan
will be $155,872 instead of $142,842.
On May 20, 2019 (the “Effective Date”),
the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant to which KeyBank
has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of the events of shares
transfer defaults for certain period of time. The Forbearance Agreement contains customary forbearance covenants and other
forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment decreased to $142,842
as originally required per the credit facility agreements.
The Company failed to meet its obligations
under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective Date”), the
Company, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance agreement (the
“Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016, as amended by
several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh and Mr. Long
Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to
guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”).
Key Bank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain
events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on
the November 29, 2019; and (b) a Forbearance Event of Default.
From Jan to June 2020, non-payment of amount
due by the Company was $1,194,878. Also, the Company has failed certain loan covenants. On August 6, 2020 the Company received 3rd
forbearance agreement from Key Bank, which includes the following terms:
|
●
|
All delinquent regular interest paid at or before settlement.
|
|
●
|
July and August required payments will be regular interest amounts.
|
|
●
|
Default interest will be deferred until 9/25/2020
|
|
●
|
Store valuations will be ordered immediately.
|
|
●
|
Continue to provide weekly cash flow reports.
|
|
●
|
Provide quarterly financial statements of NYM, iFresh and newly acquired businesses.
|
|
●
|
Monthly financial projections.
|
|
●
|
Cost/work detail on the completion of the CT store.
|
|
●
|
Pledge of the equity and guarantee of newly acquired businesses.
|
|
●
|
File a UCC-1 financing statement for iFresh Inc.
|
If agreement cannot be reached, KeyBank
is fully prepared to pursue legal remedies. As of the date of this report, the Forbearance Agreement is still under negotiation.
12. Notes Payable
Notes payables consist of the following:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Triangle Auto Center, Inc.
|
|
|
|
|
|
|
Secured by vehicle, 4.02%, principal and interest of $890 due monthly through January 28, 2021
|
|
|
6,142
|
|
|
|
8,730
|
|
Koeppel Nissan, Inc.
|
|
|
|
|
|
|
|
|
Secured by vehicle, 7.86%, principal and interest of $758 due monthly through June 1, 2022
|
|
|
16,776
|
|
|
|
18,707
|
|
Silver Star Motors
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.22%, principal and interest of $916 due monthly through June 1, 2021
|
|
|
10,741
|
|
|
|
13,357
|
|
BMO
|
|
|
|
|
|
|
|
|
Secured by vehicle, 5.99%, principal and interest of $1,924 due monthly through July 1, 2021
|
|
|
24,165
|
|
|
|
29,532
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo
|
|
|
|
|
|
|
|
|
Secured by vehicle, 4.01%, principal and interest of $420 due monthly through December 1, 2021
|
|
|
7,322
|
|
|
|
8,500
|
|
Toyota Finance
|
|
|
|
|
|
|
|
|
Secured by vehicle, 0%, principal and interest of $632 due monthly through August, 2022
|
|
|
16,442
|
|
|
|
18,340
|
|
Secured by vehicle, 4.87%, principal and interest of $761 due monthly through July, 2021
|
|
|
9,483
|
|
|
|
11,633
|
|
Secured by vehicle, 0%, principal and interest of $633 due monthly through April 1, 2022
|
|
|
14,547
|
|
|
|
15,810
|
|
Total Notes Payable
|
|
$
|
105,618
|
|
|
$
|
124,609
|
|
Current notes payable
|
|
|
(76,068
|
)
|
|
|
(77,903
|
)
|
Long-term notes payable, net of current maturities
|
|
$
|
29,550
|
|
|
$
|
46,706
|
|
All notes payables are secured by the underlying financed vehicles.
Maturities of the notes payables for each
of the next five years are as follows:
Year Ending June 30,
|
|
|
|
2021
|
|
$
|
76,070
|
|
2022
|
|
|
28,284
|
|
2023
|
|
|
1,264
|
|
Total
|
|
$
|
105,618
|
|
13. Leases
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 non-cancellable 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 June 30,
2020 was as follows:
|
|
As of
June 30,
2020
|
|
Operating Lease Assets:
|
|
|
|
Operating Lease
|
|
$
|
58,408,630
|
|
Total operating lease assets
|
|
|
58,408,630
|
|
Operating lease obligations:
|
|
|
|
|
Current operating lease liabilities
|
|
|
5,441,020
|
|
Non-current operating lease liabilities
|
|
|
59,546,344
|
|
Total Lease liabilities
|
|
$
|
64,987,364
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Operating Lease
|
|
|
13.64 years
|
|
Weighted Average discount rate
|
|
|
4.3
|
%
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Finance lease Assets
|
|
|
|
|
|
|
Vehicles under finance lease
|
|
$
|
874,698
|
|
|
$
|
874,698
|
|
Accumulated depreciation
|
|
|
234,614
|
|
|
|
219,679
|
|
Finance lease assets, net
|
|
$
|
640,084
|
|
|
$
|
655,019
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Finance lease obligations:
|
|
|
|
|
|
|
Current
|
|
$
|
133,733
|
|
|
$
|
137,243
|
|
Long-term
|
|
|
245,314
|
|
|
|
277,350
|
|
Total obligations
|
|
$
|
379,047
|
|
|
$
|
414,593
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term Finance Lease
|
|
|
|
|
|
|
2.67 years
|
|
Weighted Average discount rate
|
|
|
|
|
|
|
7.1
|
%
|
Supplemental cash flow information related
to leases was as follows:
|
|
As of
June 30,
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating Lease
|
|
$
|
1,969,181
|
|
Finance lease
|
|
$
|
35,546
|
|
The estimated future lease payments under
the operating and finance leases are as follows:
|
|
Capital
|
|
|
Operating,
|
|
Twelve months ending June 30,
|
|
Lease
|
|
|
lease
|
|
2021
|
|
|
162,551
|
|
|
|
7,903,304
|
|
2022
|
|
|
146,831
|
|
|
|
8,122,465
|
|
2023
|
|
|
118,289
|
|
|
|
8,563,378
|
|
2024
|
|
|
2,259
|
|
|
|
8,117,492
|
|
2025
|
|
|
-
|
|
|
|
7,364,547
|
|
Thereafter
|
|
|
-
|
|
|
|
46,140,193
|
|
Total minimum lease payments
|
|
$
|
429,930
|
|
|
$
|
86,211,379
|
|
Less: Amount representing interest
|
|
|
(50,883
|
)
|
|
|
(21,224,015
|
)
|
Total
|
|
$
|
379,047
|
|
|
$
|
64,987,364
|
|
14. Segment Reporting
ASC 280, “Segment Reporting”,
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal
organizational structure as well as information about geographical areas, business segments and major customers in financial statements
for details on the Company’s business segments. The Company uses the “management approach” in determining reportable
operating segments. The management approach considers the internal organization and reporting used by the Company’s CODM
for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
Management, including the CODM, reviews operation results by the revenue of different products or services. Based on management’s
assessment, the Company has determined that it has four operating segments as defined by ASC 280, consisting of wholesale, retail,
liquor business and medical product business for the three months ended June 30, 2020. For the three months ended June 30, 2019,
the Company determined it has two operation segments consisting of wholesale and retail.
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 three months ended June 30, 2020 and 2019, respectively:
|
|
For the three months ended
June 30, 2020
|
|
|
|
US wholesale
|
|
|
US retail
|
|
|
Liquor Products
|
|
|
Mask products
|
|
|
Total
|
|
Net sales
|
|
$
|
4,227,311
|
|
|
$
|
17,089,552
|
|
|
$
|
192,749
|
|
|
$
|
24,303
|
|
|
$
|
21,533,915
|
|
Cost of sales (including retail occupancy cost)
|
|
|
2,761,865
|
|
|
|
12,645,555
|
|
|
|
70,554
|
|
|
|
12,283
|
|
|
|
15,490,257
|
|
Gross profit
|
|
$
|
1,465,446
|
|
|
$
|
4,443,997
|
|
|
$
|
122,195
|
|
|
$
|
12,020
|
|
|
$
|
6,043,658
|
|
Interest expense, net
|
|
$
|
910
|
|
|
$
|
360,316
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
361,226
|
|
Depreciation and amortization
|
|
$
|
50,313
|
|
|
$
|
480,604
|
|
|
$
|
78,431
|
|
|
$
|
101,157
|
|
|
$
|
710,505
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
196,987
|
|
|
$
|
6,795
|
|
|
$
|
468,118
|
|
|
$
|
671,900
|
|
Segment income (loss) before income tax provision
|
|
$
|
353,414
|
|
|
$
|
3,399,266
|
|
|
$
|
(49,088
|
)
|
|
$
|
(106,122
|
)
|
|
$
|
3,597,470
|
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Segment assets
|
|
$
|
15,084,531
|
|
|
$
|
91,828,072
|
|
|
$
|
10,857,470
|
|
|
$
|
3,578,753
|
|
|
$
|
121,348,826
|
|
|
|
Three months ended
June 30, 2019
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,532,105
|
|
|
$
|
19,295,677
|
|
|
$
|
23,827,782
|
|
Cost of sales
|
|
|
3,193,655
|
|
|
|
13,905,013
|
|
|
|
17,098,668
|
|
Retail occupancy costs
|
|
|
-
|
|
|
|
1,930,619
|
|
|
|
1,930,619
|
|
Gross profit
|
|
$
|
1,338,450
|
|
|
$
|
3,460,045
|
|
|
$
|
4,798,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(3,040
|
)
|
|
$
|
(606,705
|
)
|
|
$
|
(609,745
|
)
|
Depreciation and amortization
|
|
$
|
326,843
|
|
|
$
|
2,592,644
|
|
|
$
|
2,354,881
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
479,396
|
|
|
$
|
479,396
|
|
Segment income (loss) before income tax provision
|
|
$
|
365,856
|
|
|
$
|
(3,831,919
|
)
|
|
$
|
(3,466,063
|
)
|
Income tax provision (benefit)
|
|
$
|
10,338
|
|
|
$
|
(108,275
|
)
|
|
$
|
(97,937
|
)
|
Segment assets
|
|
$
|
17,638,285
|
|
|
$
|
91,914,715
|
|
|
$
|
109,553,000
|
|
15. Shareholder’s Equity
On October 19, 2018, the Company and certain
institutional investors entered into a securities purchase agreement (the “Purchase Agreement”), pursuant to which
the Company agreed to sell to such investors an aggregate of 1,275,000 shares of common stock (the “Common Stock”)
in a registered direct offering and warrants to purchase up to approximately 1,170,000 shares of the Company’s Common Stock
in a concurrent private placement, for gross proceeds of approximately $2.55 million (the “Financing”). The warrants
will be exercisable immediately following the date of issuance and have an exercise price of $2.25. The warrants will expire 5
years from the earlier of the date on which the shares of Common Stock issuable upon exercise of the warrants may be sold pursuant
to an effective registration statement or may be exercised on a cashless basis and be immediately sold pursuant to Rule 144. The
purchase price for each share of Common Stock and the corresponding warrant is $2.00. Each warrant is subject to anti-dilution
provisions that require adjustment of the number of shares of Common Stock that may be acquired upon exercise of the warrant, or
to the exercise price of such shares, or both, to reflect stock dividends and splits, subsequent rights offerings, pro-rata distributions,
and certain fundamental transactions.
Management determined that these warrants
are equity instruments because the warrants are both a) indexed to its own stock; and b) classified in stockholders’ equity.
The warrants were recorded at their fair value on the date of grant as a component of stockholders’ equity. On June 5, 2019,
the Company agreed to issue to the Holders an aggregate of 1,170,000 shares (“Exchange Shares”) of the Company’s
common stock, par value $0.0001 per share and warrant to purchase an aggregate of 1,170,000 shares of Common Stock (the “Exchange
Warrants”) as the negotiated purchase price for the Existing Warrants based on the Black Scholes Value as a result of a certain
transaction which was deemed as a Fundamental Transaction as defined in purchase agreement. On March 23, 2020, 585,000 warrants
has been cashless exercised to 287,049 shares of common stock.
On December 11, 2019, iFresh Inc. (the “Company”)
entered into an agreement (the “Conversion Agreement”) between Mr. Deng and the Company, pursuant to which the Mr.
Deng agreed to convert debt owed to him by the Company into 1,000 preferred shares of the Company’s common stock. Upon receiving
stockholder approval for the conversion, the 1,000 shares of preferred stock will automatically convert into shares of the Company’s
common stock.
On January 13, 2020, the Company filed a
Certificate of Designation creating the class of Preferred Stock required by the Conversion Agreement, and $3,500,000 of capital
Mr. Deng contributed to the Company were converted into 1,000 shares of Series A Convertible Preferred Stock (the “Preferred
Stock”). The Preferred Stock has no voting rights, no dividend, no redemption right and will convert automatically into 9,210,526
shares of the Company’s common stock once the conversion is approved by the Company’s stockholders. In the event of
the liquidation of the Company, the Preferred Stock has a preference equal to $3,500,000 over the Company’s common stock.
On March 25, 2020, the Company entered into
an agreement (the “Purchase Agreement”) with two third party individuals, Dengrong Zhou and Qiang Ou (the “Investors”),
pursuant to which the Investors agreed to purchase 1,783,167 shares of the Company’s common stock in exchange for $2,500,000.
Subsequently on April 9, 2020, these shares were issued and the transaction was closed.
In April 2020, the Company issued 3,852,372
shares of the Company’s common stock and 1,000 shares of the Company’s series B convertible preferred stock., which
will be converted to 3,834,796 shares of the Company’s common stock to acquire RET and DL Medical. The Series B Preferred
will rank on parity with the Series A Convertible Preferred Stock of the Company. See Note 5 for the details of the transactions.
The noncontrolling interest represents the 30% of equity interest in DL Medical owned by noncontrolling interest holders.
16. Income Taxes
The Company is subject to income taxes
on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. 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.
RET and DL Medical are incorporated in the
PRC and subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Under the Corporate
Income Tax Law of PRC, current corporate income tax rate of 25% is applicable to all companies, including both domestic and foreign-invested
companies.
Certain of the subsidiaries have incurred
net operating losses (“NOL”) in tax years ending prior to the Contribution Agreement. The net operating losses are
subject to the Separate Return Limitation Year (“SRLY”) rules which limit the utilization of the losses to the subsidiaries
who generated the losses. The SRLY losses are not available to offset taxable income generated by members of the consolidated group.
Based upon management’s assessment
of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets, primarily for certain
of the subsidiaries SRLY NOL carry-forwards will not be realizable; and therefore, a full valuation allowance is established for
SRLY NOL carry-forwards. Pursuant to The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, NOLs
from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years (beginning with the earliest year first)
and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate
refund of taxes paid in prior years. The valuation allowance for deferred tax assets was $7,749,248 and $7,643,963 as of June 30,
2020 and March 31, 2020.
The Company has approximately $26,743,963
and $30,496,643 of US NOL carry forward of which approximately $2,749,947 and $3,135,816 are SRLY NOL as of June 30, 2020 and March
31, 2020, respectively. The Company also has $4,789,759 NOL from its Chinese entities, which was fully reserved as valuation allowance.
For income tax purposes, those NOLs will expire in the year 2033 through 2037.
Income Tax Provision (Benefit)
The provision (benefit) for income taxes
consists of the following components:
|
|
For the three months ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
(73,453
|
)
|
State
|
|
|
-
|
|
|
|
(24,484
|
)
|
|
|
|
-
|
|
|
|
(97,937
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(97,937
|
)
|
Tax Rate Reconciliation
Following is a reconciliation of the Company’s
effective income tax rate to the United State federal statutory tax rate:
|
|
For the three months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Expected tax at U.S. statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State and local income taxes, net of federal income tax effect
|
|
|
7
|
%
|
|
|
7
|
%
|
Other non-deductible fees and expenses
|
|
|
-
|
%
|
|
|
(0.8
|
)%
|
Changes in deferred tax allowance
|
|
|
(28
|
)%
|
|
|
(24.4
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
2.8
|
%
|
Deferred Taxes
The effect of temporary differences included
in the deferred tax accounts in the two tax jurisdiction in US and China are as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Deferred Tax Assets/ (Liabilities) in US
|
|
|
|
|
|
|
Deferred expenses
|
|
$
|
200,697
|
|
|
$
|
164,434
|
|
Sec 263A Inventory Cap
|
|
|
136,304
|
|
|
|
38,207
|
|
Deferred rent/Lease obligation
|
|
|
2,217,905
|
|
|
|
2,215,294
|
|
Depreciation and amortization
|
|
|
(3,186,433
|
)
|
|
|
(3,008,058
|
)
|
Net operating losses
|
|
|
7,826,452
|
|
|
|
8,305,813
|
|
Valuation allowance
|
|
|
(6,551,809
|
)
|
|
|
(7,643,963
|
)
|
Net Deferred Tax Assets (Liabilities) in US
|
|
$
|
643,116
|
|
|
$
|
643,116
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
Deferred Tax Assets/ (Liabilities) in China
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
(838,784
|
)
|
|
$
|
-
|
|
Property and equipment
|
|
|
(244,979
|
)
|
|
|
-
|
|
Net operating losses
|
|
|
1,197,440
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(1,197,440
|
)
|
|
|
-
|
|
Net Deferred Tax Assets (Liabilities) in China
|
|
$
|
(1,083,763
|
)
|
|
$
|
-
|
|
17. 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 three months ended June 30, 2020 and 2019 to related
parties, which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, a majority shareholder, and not eliminated
in the consolidated financial statements. In addition, the outstanding receivables due from these related parties as of June 30,
2020 and March 31, 2020 were included in advances and receivables – related parties (see Note 8).
Three months ended June 30, 2020
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
Tampa Seafood
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NY Mart MD Inc.
|
|
|
16,750
|
|
|
|
-
|
|
|
|
167,003
|
|
NYM Elmhurst Inc.
|
|
|
6,000
|
|
|
|
-
|
|
|
|
98,318
|
|
Spring Farm Inc.
|
|
|
2,750
|
|
|
|
-
|
|
|
|
293
|
|
|
|
$
|
27,500
|
|
|
$
|
-
|
|
|
$
|
265,614
|
|
Three months ended June 30, 2019
|
Related Parties
|
|
Management
Fees
|
|
|
Advertising
Fees
|
|
|
Non-Perishable & Perishable
Sales
|
|
Dragon Seeds Inc.
|
|
|
1,650
|
|
|
|
-
|
|
|
|
-
|
|
NY Mart MD Inc.
|
|
|
29,300
|
|
|
|
3,680
|
|
|
|
455,377
|
|
NYM Elmhurst Inc.
|
|
|
24,612
|
|
|
|
2,210
|
|
|
|
279,004
|
|
Spring Farm Inc.
|
|
|
3,300
|
|
|
|
-
|
|
|
|
-
|
|
Pine Court Chinese Bistro
|
|
|
-
|
|
|
|
-
|
|
|
|
8,726
|
|
|
|
$
|
58,862
|
|
|
$
|
5,890
|
|
|
$
|
743,107
|
|
Long-Term Operating Lease Agreement with a Related Party
The Company leases warehouse and stores
from related parties that is owned by Mr. Long Deng, the majority shareholder of the Company, and will expire on April 30, 2026.
Rent incurred to the related party was $201,830 and $292,460 for the three months ended on June 30, 2020 and 2019.
18. Contingent Liabilities
The Company is exposed to claims and litigation
matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that the Company
believes best serves the interests of its stakeholders. These matters have not resulted in any material losses to date.
Leo J. Motsis, as Trustee of the 140-148
East Berkeley Realty Trust v. Ming’s Supermarket, Inc.
This case relates to a dispute between Ming’s
Supermarket, Inc. (“Ming”), the subsidiary of the Company and the landlord of the building located at 140-148 East
Berkeley Street, Boston, MA (the “Property”), under a long-term operating lease (“Lease”). Since February
2015, Ming was unable to use the premise of the property due to a structure damage assessed by the Inspectional Services Department
of the City of Boston (“ISD”), and stopped paying the rent since April 2015 after the landlord refused to perform structural
repairs. The landlord then sued Ming for breach of the Lease and unpaid rent, and Ming counterclaimed for constructive eviction
and for damages resulting from the landlord’s breach of its duty to perform structural repairs under the Lease.
The case was tried before a jury in August
2017. The jury awarded Ming judgment against the landlord in the amount of $795,000, plus continuing damages of $2,250 per month
until the structural repairs are completed. The court found that the landlord’s actions violated the Massachusetts unfair
and deceptive acts and practices statute and therefore doubled the amount of damages to $1,590,000 and further ruled that Ming
should also recover costs and attorneys’ fees of approximately $250,000. The result is a judgment in favor of Ming and against
the landlord that will total approximately $1.85 million. The judgment requires the landlord to repair the premises and obtain
an occupancy permit. The landlord is responsible to Ming for damages in the amount of $2,250 per month until an occupancy permit
is issued. The judgment also accrues interest at the rate of 12% per year until paid.
The landlord filed an appeal, the appeal
hearing was held in July 12, 2019 and judge concluded that the landlord should be required both to perform the relevant obligations
of the lease in the future and to pay damages caused by his previous failure to do so and for any period of delay in completing
specific performance. On November 5, 2019, the Appeal Count issued a full decision affirming the judgment was entered and transmitted
a rescript of the affirmance of the judgment to the superior count.
The final judgment was entered after rescript
on May 7, 2020. On June 29, 2020, the landlord executed the final judgment finally and made the payment of $2,536,142 to Ming,
which included in other income.
Hartford Fire Insurance Company v.
New York Mart Group Inc.
On November 28, 2018, a lawsuit was filed
against New York Mart Group, Inc. by Hartford Fire Insurance Company (“Hartford”), who seeks contractual indemnification
from the Company and other defendants relating to certain supersedeas bonds issued by Hartford in connection with the unsuccessful
appeal of state court litigation by iFresh’s codefendant. Hartford alleges that iFresh guaranteed performance of the bonds
and therefore seeks to enforce the indemnification terms thereof against iFresh in addition to the other defendants. On June 14,
2019, Hartford filed a motion for summary judgment against iFresh, arguing that Hartford is entitled to judgment as a matter of
law. On July 29, 2019, the Court granted judgment against iFresh in a consented amount of $458,498 for the alleged loss. The Court
is still having a hearing on Hartford’s entitlement to attorneys’ fees/costs. The Company has accrued $500,000 for
the potential loss and expense associated with this case.
Winking Group LLC v. New York Supermarket
E. Broadway Inc.
A subsidiary of the Company, New York Supermarket
E. Broadway Inc., entered into a lease with Winking Group LLC for the Company’s store located at 75 East Broadway, NY, 10002.
The landlord sued the Company for failing to pay rent and additional fee of $450,867. The Company is currently negotiating an agreement
with the landlord to settle the case. On November 21, 2019, the Company consented to a final judgement of possession in favor of
Winking Group LLC in the amount of $400,000, with $50,867 being waived by the landlord. $400,000 was paid as of December 31, 2019.
JD Prroduce Maspeth LLC v. iFresh,
Inc. alt.
On September 16, 2019, the JD Produce Maspeth
(“plaintiff”) seeks $178,953 in unpaid goods purchased by the Company. The legal process was just initiated and interrupted
by the outbreak of COVID-19. The Company has recorded the purchase and payable on the financial statements.
Don Rick Associates LLC. v. New York
Mart Roosevelt Inc.
One of the subsidiaries of the Company, New
York Mart Roosevelt Inc., has failed to pay the rents on time. The landlord has sued the Company for nonpayment. On May 31, 2019,
a motion for summary Judgement was filed for unpaid rent in the amount of $102,792 and $14,984 for attorney fees. These amounts
have been fully accrued as of March 31, 2020.
19. Subsequent Events
Key Bank Loans
From Jan to June 2020, the Company failed
to make loan payments of $1,194,878. On August 6, 2020 the Company received 3rd forbearance agreement from Key Bank. Please refer
to Note 11 for key terms. It’s still under negotiations.
Acquisitions
On August 6, 2020, the Company entered into
an agreement (the “Acquisition Agreement”) with Zhang Fei and Liu Meng (collectively, the “Sellers”) and
Jiuxiang Blue Sky Technology (Beijing) Co., Ltd. (the “Target Company”), pursuant to which the Sellers will sell their
100% interest in the Target Company to the Company in exchange for 5,036,298 shares of the Company’s common stock and 1,000
shares of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred Stock”). Upon approval
of the Company’s shareholders, the 1,000 shares of Series C Preferred Stock will be converted into 1,916,781 shares of the
Company’s common stock. The Series C Preferred Stock will rank on parity with the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock of the Company. All of the issuances and conversions of the Company’s common stock in
the foregoing Acquisition Agreement were at a price per share of $1.402. The closing of the acquisition as contemplated by the
Acquisition Agreement is subject to customary closing terms and conditions.