10-Q 1 f10q1219_ifreshinc.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE) 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended December 31, 2019

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____to ____

 

Commission file number: 001-38013

 

iFresh Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   82-066764
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

2-39 54th Avenue
Long Island City, New York

(Address of principal executive offices)

 

(718) 628 6200

 (Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001   IFMK   Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒ 

 

As of February 13, 2020, 18,371,498 shares of the registrant’s common stock, par value $0.0001 per share, (the “Common Stock”) were issued and outstanding. 

   

 

 

 

 

iFRESH, INC.

FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

 

    Page
Part I. Financial Information 1
  Item 1. Financial Statements 1
  Condensed Balance Sheets 1
  Condensed Statements of Operations 2
  Condensed Statements of Cash Flows 3
  Condensed Statements of Shareholder’s Equity 4
  Notes to Unaudited Condensed Financial Statements 5
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
  Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 40
  Item 4. Controls and Procedures 40
Part II. Other Information 41
  Item 1. Legal Proceedings 41
  Item 1A. Risk Factors 43
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
  Item 3. Defaults Upon Senior Securities 43
  Item 4. Mine Safety Disclosure 44
  Item 5. Other Information 44
  Item 6. Exhibits 44
Signatures 45

 

i

 

   

PART I – FINANCIAL INFORMATION

 

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  $652,642   $1,048,090 
Accounts receivable, net   3,150,523    4,027,909 
Inventories, net   9,255,420    10,411,366 
Prepaid expenses and other current assets   3,880,795    3,721,262 
Total current assets   16,939,380    19,208,627 
Advances and receivables - related parties   4,832,796    5,220,547 
Property and equipment, net   19,562,408    20,287,186 
Intangible assets, net   933,338    1,033,337 
Security deposits   1,264,353    1,236,073 
Right of use assets-lease   59,839,700    - 
Deferred income taxes   -    115,589 
Total assets  $103,371,975   $47,101,359 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)          
Current liabilities:          
Accounts payable  $11,337,507   $14,177,700 
Deferred revenue   1,378,418    802,392 
Borrowings against lines of credit, current, net   20,113,172    21,285,314 
Notes payable, current   78,835    98,475 
Finance lease obligations, current   136,639    148,778 
Accrued expenses   1,204,862    1,393,973 
Operating lease liabilities, current   5,796,913    - 
Other payables, current   3,105,380    2,926,101 
Total current liabilities   43,151,726    40,832,733 
           
Notes payable, non-current   65,779    130,068 
Finance lease obligations, non-current   314,980    413,225 
Deferred rent   -    6,659,412 
Other payables, non-current   87,901    97,900 
Long term operating lease liabilities   60,757,979    - 
Total liabilities   104,378,365    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, 18,371,498 and 16,737,685 shares issued and outstanding as of December 31, 2019 and  March 31, 2019, respectively   1,837    1,674 
Additional paid-in capital   21,285,373    14,933,829 
Accumulated deficit   (22,293,600)   (15,967,482)
Total shareholders’ deficiency   (1,006,390)   (1,031,979)
Total liabilities and shareholders’ equity (deficiency)  $103,371,975   $47,101,359 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

1

 

 

iFRESH INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the three months ended December 31,   For the nine months ended December 31, 
   2019   2018   2019   2018 
                 
Net sales  $20,546,584   $30,397,501   $65,005,079   $89,490,417 
Net sales-related parties   346,196    906,565    1,576,985    3,186,593 
Total net sales   20,892,780    31,304,066    66,582,064    92,677,010 
Cost of sales   14,789,482    22,610,419    46,446,352    66,665,211 
Cost of sales-related parties   313,231    753,392    1,293,919    2,726,605 
Retail Occupancy costs   1,475,420    2,276,924    4,982,329    6,118,410 
Gross profit   4,314,647    5,663,331    13,859,464    17,166,784 
                     
Selling, general and administrative expenses   5,615,974    7,429,877    20,043,647    24,608,895 
Loss from operations   (1,301,327)   (1,766,546)   (6,184,183)   (7,442,111)
Interest expense, net   (326,339)   (357,301)   (1,285,559)   (1,002,127)
Impairment loss   (1,100,000)   -    (1,100,000)   - 
Other income   708,494    321,538    2,359,213    913,678 
Loss before income taxes   (2,019,172)   (1,802,309)   (6,210,529)   (7,530,560)
Income tax provision   52,096    -    115,589    313,833 
Net Loss  $(2,071,268)  $(1,802,309)  $(6,326,118)  $(7,844,393)
                     
Net loss per share:                    
Basic  $(0.11)  $(0.11)  $(0.35)  $(0.52)
Diluted  $(0.11)  $(0.11)  $(0.35)  $(0.52)
Weighted average shares outstanding:                    
Basic   18,370,628    16,154,392    18,307,728    15,080,794 
Diluted   18,370,628    16,154,392    18,307,728    15,080,794 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

2

 

 

iFRESH INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the nine months ended December 31, 
   2019   2018 
Cash flows from operating activities        
Net loss  $(6,326,118)  $(7,844,393)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   1,590,632    1,432,173 
Amortization expense   236,874    236,874 
Lease amortization   6,022,761      
Impairment loss   1,100,000      
Share based compensation   506,066    837,354 
Bad debt reserve   85,546    233,448 
Deferred income taxes   115,589    313,832 
Changes in operating assets and liabilities:          
Accounts receivable   791,840    558,521 
Inventories   1,155,946    (1,416,932)
Prepaid expenses and other current assets   (159,533)   (1,195,868)
Security deposits   (28,280)   12,333 
Accounts payable   (2,840,190)   (735,941)
Deferred revenue   576,026    273,933 
Accrued expenses   (189,111)   1,040,767 
Taxes payable   -    (1,606,504)
Deferred rent   -    276,345 
Operating lease liabilities   (5,966,981)   - 
Other liabilities   169,277    476,446 
Net cash used in operating activities   (3,159,656)   (7,107,612)
Cash flows from investing activities          
Cash advances to related parties   387,751    (1,341,521)
Cash received from repayment of related party receivable   -    4,790,380 
Acquisition of property and equipment   (1,965,854)   (3,441,064)
Net cash provided by (used in) investing activities   (1,578,103)   7,795 
Cash flows from financing activities          
Borrowings against Term loan   -    3,950,000 
Borrowings against lines of credit   -    1,750,000 
Repayments on term loan   (1,309,017)   (1,213,268)
Repayments on notes payable   (83,928)   (104,548)
Payments on capital lease obligations   (110,385)   (103,588)
Cash received from capital contribution   4,394,841    - 
Cash received from issuance of stock   1,450,800    3,754,021 
Net cash provided by financing activities   4,342,311    8,032,617 
Net increase (decrease) in cash and cash equivalents   (395,448)   932,800 
Cash and cash equivalents at beginning of the period   1,048,090    640,915 
Cash and cash equivalents at the end of the period  $652,642   $1,573,715 
Supplemental disclosure of cash flow information          
Cash paid for interest  $1,285,559   $985,771 
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  $-   $779,837 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3

 

 

iFRESH INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the nine months ended December 31, 2019 and 2018

 

   Common Stock   Additional Paid-in   Accumulated     
   Shares   amount   Capital   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 
                          
Net income   -    -    -    (1,802,309)   (1,802,309)
Common stock issued in connection of equity finance   1,382,000    138    2,753,219    -    2,753,357 
Stock issued for service   33,187    3    92,920    -    92,923 
                          
Balances at December 31, 2018   16,264,685    1,626   $14,019,265   $(11,808,432)  $2,212,459 
                          
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)
Balances at September 30, 2019   18,351,498    1,835   $18,620,442   $(20,222,332)  $(1,600,055)
                          
Capital contribution   -    -    2,629,309    -    2,629,309 
Net loss   -    -    -    (2,071,268)   (2,071,268)
Stock issued for service   20,000    2    35,622    -    35,624 
Balances at December 31, 2019   18,371,498    1,837   $21,285,373   $(22,293,600)  $(1,006,390)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4

 

 

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. iFresh issued written notice to Xiaotai International and Xiaotai Shareholders to terminate the Exchange Agreement effective immediately. Meanwhile, the Spin-off has been cancelled.

 

2. Liquidity and Going Concern

 

As reflected in the Company’s unaudited condensed consolidated financial statements, the Company had operating losses for the nine months ended December 31, 2019 and in fiscal year 2019 and had negative working capital of $26.2 million and $21.6 million as of December 31, 2019 and March 31, 2019, respectively. The Company had deficiency of $1.0 million and $1.0 million as of December 31, 2019 and March 31, 2019. The Company did not meet certain financial covenants required in the credit agreement with Keybank National Association (“Keybank”). As of December 31, 2019, 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 contributions from shareholders, cash flow from operations, and bank loans. As of December 31, 2019, the Company also has $4.8 million of advances and receivable from the related parties we intend to collect.

 

5

 

 

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 December 31, 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 December 31, 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. This second forbearance period has expired and discussion between Key Bank and the new counsel of NYM Holding is in process.

 

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’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.

 

6

 

 

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 December 31, 2019 and for the nine months ended December 31, 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 $59,839,700 of operating lease assets and $66,554,892 operating lease liabilities on the consolidated balance sheet as of December 31, 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.

 

7

 

 

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 December 31, 2019and 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.

 

8

 

 

We had no material contract assets, contract liabilities, or costs to obtain and fulfill contracts recorded on the Consolidated Balance Sheet as of December 31, 2019 and March 31, 2019. For the nine months ended December 31, 2019 and 2018, revenue recognized from performance obligations related to prior periods were $802,392 and $326,459, respectively.

 

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 Nine months ended 
   December 31,
2019
   December 31,
2018
 
Grocery  $27,953,116   $36,561,550 
Perishable goods   38,628,948    56,115,460 
Total  $66,582,064   $92,677,010 

   

   For the three months ended 
   December 31,
2019
   December 31,
2018
 
Grocery  $7,522,433   $11,333,857 
Perishable goods   13,370,347    19,970,209 
Total  $20,892,780   $31,304,066 

 

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, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its 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.

 

9

 

 

5. Accounts Receivable

 

A summary of accounts receivable, net is as follows:

 

   December 31,   March 31, 
   2019   2019 
Customer purchases  $3,647,757   $4,008,747 
Credit card receivables   155,983    532,369 
Food stamps   45,298    99,762 
Others   2,518    2,518 
Total accounts receivable   3,851,556    4,643,396 
Allowance for bad debt   (701,033)   (615,487)
Accounts receivable, net  $3,150,523   $4,027,909 

 

6. Inventories

 

A summary of inventories, net is as follows:

 

   December 31,   March 31, 
   2019   2019 
Non-perishables  $8,004,875   $8,762,634 
Perishables   1,300,192    1,723,882 
Inventories   9,305,067    10,486,516 
Allowance for slow moving or defective inventories   (49,647)   (75,150)
Inventories, net  $9,255,420   $10,411,366 

 

7. Advances and receivables - related parties

 

A summary of advances and receivables - related parties is as follows:

 

   December 31,   March 31, 
Entities  2019   2019 
Pacific Supermarkets Inc.   -    437,863 
NY Mart MD Inc.   616,131    335,374 
Advances - related parties  $616,131   $773,237 
           
New York Mart, Inc.   605,265    605,265 
Pacific Supermarkets Inc.   -    428,237 
NY Mart MD Inc.   3,363,049    3,181,011 
iFresh Harwin Inc.   248,351    232,797 
Receivables – related parties   4,126,665    4,447,310 
Total advances and receivables – related parties  $4,832,796   $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.

 

10

 

 

8. Property and Equipment

 

   December 31,   March 31, 
   2019   2019 
Furniture, fixtures and equipment  $20,825,384   $19,957,600 
Automobiles   2,155,595    2,214,306 
Leasehold improvements   10,006,203    8,849,422 
Software   6,735    6,735 
Total property and equipment   32,993,917    31,028,063 
Accumulated depreciation and impairment   (13,431,509)   (10,740,877)
Property and equipment, net  $19,562,408   $20,287,186 

 

Depreciation expense for the nine months ended December 31, 2019 and 2018 was $1,590,632 and $1,432,173, respectively. For the three months ended December 31, 2019 and 2018, the depreciation expense was $497,060 and $488,688, respectively. As of December 31, 2019, the Company charged impairment loss of $1,100,000 for the leasehold improvement for a closed stores in New York area.

 

9. Intangible Assets

 

A summary of the activities and balances of intangible assets are as follows:

 

   Balance at
March 31,
       Balance at
December 31,
 
   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)  $(99,999)  $(1,566,662)
Intangible assets, net  $1,033,337   $(99,999)  $933,338 

 

Amortization expense was $99,999 and $99,999 for the nine months ended December 31, 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   266,673 
Total  $933,338 

 

10. Debt

 

A summary of the Company’s debt is as follows:

   

   December 31,   March 31, 
   2019   2019 
Revolving Line of Credit-KeyBank National Association  $4,950,000   $4,950,000 
Delayed Term Loan-KeyBank National Association   4,119,983    4,494,983 
Term Loan-KeyBank National Association   11,408,189    12,342,206 
Less: Deferred financing cost   (365,000)   (501,875)
Total  $20,113,172   $21,285,314 

 

11

 

 

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 December 31, 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 December 31, 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. This second forbearance period has expired and discussion between Key Bank and the new counsel of NYM Holding is in process.

 

12

 

 

Maturities of borrowings against the term loan under this credit facility for each of the next five years are as follows:

 

Year Ending December 31    
2020  $1,548,793 
2021   1,604,485 
2022   16,959,894 
Total  $20,113,172 

 

11. Notes Payable

 

Notes payables consist of the following:

 

   December 31,   March 31, 
   2019   2019 
Triangle Auto Center, Inc.        
Secured by vehicle, 4.02%, principal and interest of $890 due monthly through January 28, 2021   11,292    18,823 
Colonial Buick GMC          
Secured by vehicle, 8.64%, principal and interest of $736 due monthly through February 1, 2020   -    6,350 
Koeppel Nissan, Inc.          
Secured by vehicle, 3.99%, principal and interest of $612 due monthly through January 18, 2021   -    12,378 
Secured by vehicle, 0.9%, principal and interest of $739 due monthly through March 14, 2020   -    8,826 
Secured by vehicle, 7.86%, principal and interest of $758 due monthly through September 1, 2022   20,576    25,415 
Silver Star Motors          
Secured by vehicle, 4.22%, principal and interest of $916 due monthly through June 1, 2021   15,945    23,546 
BMO          
Secured by vehicle, 5.99%, principal and interest of $1,924 due monthly through July 1, 2020   34,802    50,172 
           
Wells Fargo          
Secured by vehicle, 4.01%, principal and interest of $420 due monthly through December 1, 2021   9,666    13,096 
Toyota Finance          
Secured by vehicle, 0%, principal and interest of $632 due monthly through August, 2022   20,237    25,928 
Secured by vehicle, 4.87%, principal and interest of $761 due monthly through July, 2021   18,339    24,031 
Secured by vehicle, 0%, principal and interest of $633 due monthly through April 1, 2022   13,757    19,978 
Total Notes Payable  $144,614   $228,543 
Current notes payable   (78,835)   (98,475)
Long-term notes payable, net of current maturities  $65,779   $130,068 

 

All notes payables are secured by the underlying financed automobiles.

 

13

 

 

Maturities of the notes payables for each of the next five years are as follows:

 

Year Ending December 31,    
2020  $78,835 
2021   53,115 
2022   12,664 
Total  $144,614 

 

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 December 31, 2019 was as follows:

 

   As of
December 31,
2019
 
Operating Lease Assets:    
Operating Lease  $59,839,700 
Total operating lease assets   59,839,700 
Operating lease obligations:     
Current operating lease liabilities   5,796,913 
Non-current operating lease liabilities   60,757,979 
Total Lease liabilities  $66,554,892 
      
Weighted Average Remaining Lease Term Operating Lease   13.65 years 
Weighted Average discount rate   4.3%

 

   December 31,   March 31, 
   2019   2019 
Finance lease Assets        
Vehicles under finance lease  $1,033,131   $1,033,131 
Accumulated depreciation   352,517    244,116 
Finance lease assets, net  $680,614   $789,115 

 

   December 31,   March 31, 
   2019   2019 
Finance lease obligations:        
Current  $136,639   $148,778 
Long-term   314,980    413,225 
Total obligations  $451,619   $562,003 
           
Weighted Average Remaining Lease Term Finance Lease        2.13 years 
Weighted Average discount rate        7.1%

 

Supplemental cash flow information related to leases was as follows:

 

   As of
December 31,
2019
 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating Lease  $5,966,981 
Finance lease   110,385 

 

14

 

 

The estimated future lease payments under the operating and finance leases are as follows:

 

   Capital   Operating, 
   Lease   lease 
2020   174,863    8,544,127 
2021   153,823    8,262,061 
2022   146,831    8,302,992 
2023   45,948    8,062,637 
2024   -    7,612,489 
Thereafter   -    47,641,309 
Total minimum lease payments  $521,465   $88,425,615 
Less: Amount representing interest   (69,846)   (21,870,723)
Total  $451,619   $66,554,892 

 

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 nine months ended December 31, 2019 and 2018, respectively:

  

   Nine months ended December 31, 2019 
   Wholesale   Retail   Total 
Net sales  $12,262,443   $54,319,621   $66,582,064 
Cost of sales   9,213,881    38,526,390    47,740,271 
Retail occupancy costs   -    4,982,329    4,982,329 
Gross profit  $3,048,562   $10,810,902   $13,859,464 
                
Interest expense, net  $(9,178)  $(1,276,381)  $(1,285,559)
Depreciation and amortization  $439,691   $7,456,201   $7,895,892 
Capital expenditures  $-   $2,163,761   $2,163,761 
Segment loss before income tax provision  $641,258   $(6,851,787)  $(6,210,529)
Income tax provision  $11,935   $103,654   $115,589 
Segment assets  $14,838,292   $88,533,683   $103,371,975 

  

15

 

 

   Nine months ended December 31, 2018 
   Wholesale   Retail   Total 
             
Net sales  $13,940,908   $78,736,102   $92,677,010 
Cost of sales   10,469,830    58,921,986    69,391,816 
Retail occupancy costs   -    6,118,410    6,118,410 
Gross profit  $3,471,078   $13,695,706   $17,166,784 
                
Interest expense, net  $(11,334)  $(990,793)  $(1,002,127)
Depreciation and amortization  $181,380   $1,487,667   $1,669,047 
Capital expenditures  $28,613   $4,192,288   $4,220,901 
Segment income (loss) before income tax provision (benefit)  $36,983   $(7,567,539)  $(7,530,556)
Income tax provision (benefit)  $43,831   $270,002   $313,833 
Segment assets  $11,236,146   $39,175,016   $50,411,162 

 

   Three months ended December 31, 2019 
   Wholesale   Retail   Total 
Net sales  $3,839,292   $17,053,488   $20,892,780 
Cost of sales   3,168,722    11,933,991    15,102,713 
Retail occupancy costs   -    1,475,420    1,475,420 
Gross profit  $670,570   $3,644,077   $4,314,647 
                
Interest expense, net  $(3,951)  $(322,388)  $(326,339)
Depreciation and amortization  $55,113   $2,503,145   $2,558,258 
Capital expenditures  $-   $1,383,242   $1,383,242 
Segment income (loss) before income tax provision  $(46,261)  $(1,972,911)  $(2,019,172)
Income tax provision  $1,520   $50,576   $52,096 
Segment assets  $14,838,292   $88,533,683   $103,371,975 

 

   Three months ended December 31, 2018 
   Wholesale   Retail   Total 
             
Net sales  $4,323,321   $26,980,745   $31,304,066 
Cost of sales   3,129,400    20,234,411    23,363,811 
Retail occupancy costs   -    2,276,924    2,276,924 
Gross profit  $1,193,921   $4,469,410   $5,663,331 
                
Interest expense, net  $(3,368)  $(353,933)  $(357,301)
Depreciation and amortization  $63,990   $526,469   $590,459 
Capital expenditures  $10,300   $510,228   $520,528 
Segment loss before income provision (benefit)  $(95,459)  $(1,706,850)  $(1,802,309)
Income tax provision  $-   $-   $- 
Segment assets  $11,236,146   $39,175,016   $50,411,162 

 

16

 

 

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.

 

On December 11, 2019, iFresh Inc. (the “Company”) entered into the following agreements:

 

An agreement (the “Acquisition Agreement”) between the Company and Long Deng, the Chief Executive Officer and Chairman of the Company, pursuant to which Mr. Deng will sell his 70% interest in Dragon Seeds LLC to the Company in exchange for the Company’s common stock. The closing of the acquisition is contingent on receiving stockholder approval for the transaction and the Company’s receipt of a valuation opinion demonstrating that the fair market value of the Interest is equal to or greater than the aggregate fair market value of the consideration to be paid by the Company. Dragon Seeds LLC makes certain customary representations and warranties to the Company in connection with the Acquisition Agreement

 

An agreement (the “Purchase Agreement”) with Jian Chen pursuant to which Jian Chen agreed to purchase 6,578,948 shares of the Company’s common stock in exchange for $2,500,000. The closing of the transactions contemplated by the Purchase Agreement are contingent on the closing of the acquisition of Dragon Seeds LLC by the Company.

 

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.

 

All of the issuances and conversions of the Company’s common stock in the foregoing agreements were at a price per share of $0.38, the closing price of the Company’s common stock on December 10, 2019. As of the date of the report, these transactions are still contingent on stockholders’ approval.

 

17

 

 

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 $5,582,580 and $4,166,595 as of December 31, 2019 and March 31, 2019.

 

The Company has approximately $17,041,393 and $10,715,275 of US NOL carry forward as of December 31, 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 nine months ended 
   December 31 
   2019   2018 
Current:        
Federal  $-   $- 
State   -    - 
    -    - 
Deferred:          
Federal   86,692    235,375 
State   28,897    78,458 
    115,589    313,833 
           
Total  $115,589   $313,833 

 

18

 

 

Tax Rate Reconciliation

 

Following is a reconciliation of the Company’s effective income tax rate to the United State federal statutory tax rate:

 

   Nine months ended
December 31,
 
   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   2.8%   3%
Change of deferred tax reserve   (27.8)%   (44.5)%
Other   (4.9)%   2.3%
Effective tax rate   (1.9)%   (4.2)%

 

Deferred Taxes

 

The effect of temporary differences included in the deferred tax accounts as follows:

 

   December 31,  March 31,
   2019  2019
Deferred Tax Assets/ (Liabilities):      
Deferred expenses  $179,522   $101,829 
Sec 263A Inventory Cap   253,932    208,514 
Leasing liabilities/Deferred rent   2,109,994    2,092,128 
Depreciation and amortization   (2,570,437)   (2,305,164)
Net operating losses   5,329,692    3,898,744 
163 (j) business interest   279,877    286,133 
Impairment Loss   308,000    -   
Valuation allowance   (5,890,580)   (4,166,595)
Net Deferred Tax Assets  $-     $115,589 

 

 

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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 nine months ended December 31, 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 December 31, 2019 and March 31, 2019 were included in advances and receivables – related parties (see Note 8).

  

Nine months ended December 31, 2019
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
Dragon Seeds Inc.   3,650    -    - 
NY Mart MD Inc.   59,300    8,920    822,200 
NYM Elmhurst Inc.   69,599    4,102    644,753 
Spring Farm Inc.   6,050    -    58,134 
Pine Court Chinese Bistro   -    -    51,897 
Others   30,750    -    - 
   $169,349   $13,022   $1,576,985 

 

Nine months ended December 31, 2018
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
New York Mart, Inc.  $11,651   $880   $     193,741 
Pacific Supermarket Inc.   77,998    14,040    1,314,938 
NY Mart MD Inc.   72,119    10,920    1,622,255 
New York Mart El Monte Inc.   4,944    1,600    - 
iFresh Harwin Inc.   2,862    2,600    9,677 
Spring Farm Inc.   3,702    -    2,708 
Spicy Bubbles, Inc.   -    -    - 
NYM Tampa Seafood Inc.   550         - 
Pine Court Sunrise, Inc.   -    -    43,274 
Elhurst   8,877    860    - 
   $182,703   $30,900   $3,186,592 

 

Three months ended December 31, 2019
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
Dragon Seeds Inc.   850    -    - 
NY Mart MD Inc.   15,000    2,600    181,286 
NYM Elmhurst Inc.   22,441    812    159,055 
Spring Farm Inc.   750    -    - 
Pine Court Chinese Bistro   -    -    5,854 
Others   30,750    -    - 
   $69,791   $3,412   $346,195 

 

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Three months ended December 31, 2018
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
New York Mart, Inc.  $-   $-   $- 
Pacific Supermarket Inc.   21,945    1,530    295,344 
NY Mart MD Inc.   32,836    3,560    600,776 
Pine Court Sunrise, Inc.   -    -    9,647 
Elhurst   8,877    860      
Spring Farm Inc.   3,702         797 
   $67,360   $5,950   $906,564 

 

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 $605,492 and $877,381 for the nine months ended on December 31, 2019 and 2018 respectively, and $201,831 and $292,460 for the three months ended on December 31, 2019 and 2018, respectively.

 

17. Contingent Liabilities

 

The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that the Company believes best serves the interests of its stakeholders. These matters have not resulted in any material losses to date.

 

Leo J. Motsis, as Trustee of the 140-148 East Berkeley Realty Trust v. Ming’s Supermarket, Inc.

 

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 testified 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.

 

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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 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.

 

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.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.

 

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18. Subsequent Event

 

On December 11, 2019, iFresh Inc. (the “Company”) entered into the following agreements:

 

An agreement (the “Acquisition Agreement”) between the Company and Long Deng, the Chief Executive Officer and Chairman of the Company, pursuant to which Mr. Deng will sell his 70% interest in Dragon Seeds LLC to the Company in exchange for the Company’s common stock. The closing of the acquisition is contingent on receiving stockholder approval for the transaction and the Company’s receipt of a valuation opinion demonstrating that the fair market value of the Interest is equal to or greater than the aggregate fair market value of the consideration to be paid by the Company. Dragon Seeds LLC makes certain customary representations and warranties to the Company in connection with the Acquisition Agreement

 

An agreement (the “Purchase Agreement”) with Jian Chen pursuant to which Jian Chen agreed to purchase 6,578,948 shares of the Company’s common stock in exchange for $2,500,000. The closing of the transactions contemplated by the Purchase Agreement are contingent on the closing of the acquisition of Dragon Seeds LLC by the Company.

 

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.

 

All of the issuances and conversions of the Company’s common stock in the foregoing agreements were at a price per share of $0.38, the closing price of the Company’s common stock on December 10, 2019. As of the date of the report, these transactions are still contingent on stockholders’ approval

 

On January 9, 2020, the Company and Mr. Deng amended the Conversion Agreement to extend the date on which it could be completed to January 15, 2020 (see note 14). On January 13, 2020, the Company filed a Certificate of Designation creating the class of Preferred Stock required by the Conversion Agreement, and around 3 million liabilities owed to Mr. Deng were converted into 1,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”). The Preferred Stock has no voting rights, 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 around 3 million over the Company’s common stock. The 1,000 shares of preferred stock has been issued on January 13, 2020.

 

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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.

 

Recent Developments

 

Termination of Acquisition

 

On June 7, 2019, iFresh Inc. entered into a Share Exchange Agreement (the “Exchange Agreement”) with Xiaotai International Investment Inc. (“Xiaotai International”) and the equity holders of Xiaotai International (the “Xiaotai Shareholders”), pursuant to which, among other things and subject to the terms and conditions contained therein, iFresh would acquire all of the outstanding issued shares and other equity interests in Xiaotai International from the Xiaotai Shareholders (the “Acquisition”). Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Xiaotai International, iFresh agreed to issue 254,813,383 shares of its common stock to the Xiaotai Shareholders. Xiaotai International operates through its variable interest entity, Zhejiang Xiaotai Technology Co. Ltd. (“Zhejiang Xiaotai”), in China.

 

As disclosed in a current report on Form 8-K filed on November 5, 2019, we received news regarding an ongoing investigation of Zhejiang Xiaotai by the Hangzhou Police Department, Binjiang Branch (“Hangzhou Police”) through a public notice released by the Hangzhou Police on November 3, 2019 (the “Police Report”). Zhejiang Xiaotai is alleged to have conducted illegal fundraising from the public. The report also stated that several executives of Zhejiang Xiaotai have been detained and are being held in custody.

 

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On November 5, 2019 (the “Termination Date”), iFresh issued written notice to Xiaotai International and Xiaotai Shareholders to terminate the Exchange Agreement pursuant to section 9.1(c), (e) and (f) of the Exchange Agreement, effective immediately.

 

From and after the Termination Date, the Exchange Agreement will be of no further force or effect, and the rights and obligations of each party thereunder shall terminate, except for (a) any rights and obligations of the parties that are expressly designated thereunder to survive the termination of the Exchange Agreement and (b) any other rights and obligations of the parties that come into being or effect upon the termination of the Exchange Agreement.

 

In conjunction with the Acquisition, on June 7, 2019, iFresh and NYM Holding, Inc. (“NYM”) entered into a Share Purchase Agreement (the “Purchase Agreement”) with Go Fresh 365 Inc. (“Go Fresh”), a corporation solely owned by Mr. Long Deng, iFresh’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to Go Fresh for cash consideration of $9.1 million (the “Spin-off”). Pursuant to the Purchase Agreement, one of the closing conditions of the Spin-off is that all the conditions to the obligations of each party to consummate the Acquisition described in the Exchange Agreement shall have been satisfied.

 

As a result of the termination of the Exchange Agreement, on November 5, 2019, iFresh, NYM and Go Fresh mutually agreed to terminate the Purchase Agreement, effective immediately.

 

The board of directors of the Company approved the termination of both the Exchange Agreement and the Purchase Agreement on November 5, 2019.

 

Nasdaq Delisting Notice

 

On November 6, 2019, iFresh Inc. received a letter from the Listing Qualifications Staff (the “Staff’) of The Nasdaq Stock Market LLC (“Nasdaq”), which stated that, based upon the Company’s continued non-compliance with Nasdaq Listing Rule 5550(b), which requires stockholders’ equity of $2.5 million, or a market value of listed securities of $35 million, or net income from continuing operations of $500,000, the Staff had determined not to grant an extension to allow the Company to demonstrate compliance, the Company’s securities would be subject to delisting from Nasdaq unless the Company timely requests a hearing before a Nasdaq Hearings Panel (the “Panel”). The Company timely requested a hearing before the Panel, and, on December 18, 2019, the Company received a letter from the Panel granting the Company’s request for continued listing on Nasdaq pursuant to an extension to evidence compliance with the Stockholder’s Equity Requirement. The Company’s continued listing on Nasdaq is subject to the Company’s timely compliance with certain interim milestones and, ultimately, the Company evidencing compliance with the Stockholders’ Equity Requirement by no later than April 15, 2020.

 

Forbearance Agreement

 

On May 20, 2019, iFresh, NYM (or the “Borrower”), certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank” or the “Lender”) entered into the first forbearance agreement (the “First Forbearance Agreement”) with respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank made available to NYM a revolving credit facility, a term loan facility, and other credit accommodations (the “Loan Agreements”). The Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreements based on the existence of certain events of default until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the First Forbearance Agreement (the “First Forbearance Period”); and (b) a Forbearance Event of Default. Reference is made to the current report on Form 8-K filed with the SEC on May 21, 2019.

 

The Borrower did not meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings ascribed to them in the Second Forbearance Agreement.

 

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The Lender agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the November 29, 2019; and (b) a Forbearance Event of Default. No subsequent agreements or amendments have been entered into.

 

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 $66.6 million and $92.7 million for the nine months ended December 31, 2019 and 2018, respectively. In terms of sales by category, Perishables constituted approximately 58% of the total sales for the nine months ended December 31, 2019. iFresh’s net loss was $6.3 million for the nine months ended December 31, 2019, a decrease of $1.5 million, or 19.4%, from $7.8 million of net loss for the nine months ended December 31, 2018. Adjusted EBITDA was $-3.1 million for the nine months ended December 31, 2019, a decrease of $1.8 million, or 36.3%, from $-4.9 million for the nine months ended December 31, 2018.

 

An acquisition agreement (the “Acquisition Agreement”) was entered on December 11, 2019 between the Company and Long Deng, the Chief Executive Officer and Chairman of the Company, pursuant to which Mr. Deng will sell his 70% interest in Dragon Seeds LLC to the Company in exchange for the Company’s common stock. The closing of the acquisition is contingent on receiving stockholder approval for the transaction and the Company’s receipt of a valuation opinion demonstrating that the fair market value of the Interest is equal to or greater than the aggregate fair market value of the consideration to be paid by the Company.

 

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.

 

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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 $1.2 million, or 7.7% for the year ended March 31, 2019 compared the year ended March 31, 2018. Due to close of one store and change of operations in 2 stores in MA (see discussion in “net sales” section below), payroll and related expenses decreased by $2.5 million or 24% for the nine months ended December 31, 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 nine months ended December 31, 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 December 31, 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.

 

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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.

 

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Results of Operations for the nine months ended December 31, 2019 and 2018

 

   For the nine months ended December 31,   Changes 
   2019   2018   $   % 
Net sales-third parties  $65,005,079   $89,490,417   $(24,485,338)   (27.4)%
Net sales-related parties   1,576,985    3,186,593    (1,609,608)   (50.5)%
Total Sales   66,582,064    92,677,010    (26,094,946)   (28.2)%
Cost of sales-third parties   46,446,352    66,665,211    (20,218,859)   (30.3)%
Cost of sales-related parties   1,293,919    2,726,605    (1,432,686)   (52.5)%
Occupancy costs   4,982,329    6,118,410    (1,136,081)   (18.6)%
Gross Profit   13,859,464    17,166,784    (3,307,320)   (19.3)%
Selling, general, and administrative expenses   20,043,647    24,608,895    (4,565,248)   (18.6)%
Income from operations   (6,184,183)   (7,442,111)   1,257,928    (16.9)%
Interest expense   (1,285,559)   (1,002,127)   (283,432)   28.3%
Impairment loss   (1,100,000)   -    (1,100,000)   (100)%
Other income   2,359,213    913,678    1,445,535    158.2%
Loss before income tax provision   (6,210,529)   (7,530,560)   1,320,031    (17.5)%
Income tax provision   115,589    313,833    (198,244)   (63.2)%
Net loss   (6,326,118)   (7,844,393)   1,518,275    (19.4)%
Net loss attributable to common shareholders  $(6,326,118)  $(7,844,393)  $1,518,275    (19.4)%

   

Net Sales

 

   For the nine months ended December 31,   Changes 
   2019   2018   $   % 
Net sales of retail-third parties  $54,319,621   $78,736,102   $(24,416,481)   (31.0)%
Net sales of wholesale-third parties   10,685,458    10,754,315    (68,857)   (0.6)%
Net sales of wholesale-related parties   1,576,985    3,186,593    (1,609,608)   (50.5)%
Total Net Sales  $66,582,064   $92,677,010   $(26,094,946)   (28.2)%

 

iFresh’s net sales were $66.6 million for the nine months ended December 31, 2019, a decrease of $26.1 million, or 28.2 %, from $ 92.7 million for the nine months ended December 31, 2018. 

 

Net retail sales to third parties decreased by $24.4 million, or 31%, from $78.7 million for the nine months ended December 31, 2018 to $54.3 million for the nine months ended December 31, 2019. The decrease resulted mainly from our Quincy (Zen Store) and Boston (Ming Store), Massachusetts stores. Ming and Zen contributed $16.2 million of retail sales for the nine months ended December 31, 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 $420,000 for the nine months ended December 31, 2019. In addition, sales from our stores in New York City decreased by $8.9 million because 1) we closed store in Avenue U2 in early September, which contributed $5.8 million of sales for the nine months ended December 31, 2018, compared to $2.9 million of sales for the nine months ended December 31, 2019; 2), 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 $1.7 million from $13.9 million for the nine months ended December 31, 2018 to $12.3 million for the nine months ended December 31, 2019, attributable that our sales to related parties decreased by $1.6 million from the nine months ended December 31, 2018 to the nine months ended December 31, 2019, attributable to that New York Mart Group Inc. is going out of business.

 

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Cost of sales, Occupancy costs and Gross Profit

 

Retail Segment  For the nine months ended December 31,   Changes 
   2019   2018   $   % 
Cost of sales  $38,526,390   $58,921,986   $(20,395,596)   (34.6)%
Occupancy costs   4,982,329    6,118,410    (1,136,081)   (18.6)%
Gross profit   10,810,902    13,695,706    (2,884,801)   (21.1)%
Gross margin   19.9%   17.4%   2.5%   - 

 

For the retail segment, cost of sales decreased by $20.4 million, from $58.9 million for the nine months ended December 31, 2018, to $38.5 million for the nine months ended December 31, 2019. The decrease was consistent with the decreased sales and mainly due to changes we made to Ming and Zen store in MA and close of store in Avenue U2 mentioned above. Costs decreased by 34.6%, compared to a sales decrease of 31%, 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 $1.1 million, which was mainly attributable to the decreased rent from Ming and Zen stores which are operated by third parties as mentioned above and 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 $10.8 and $13.7 million for the nine months ended December 31, 2019 and 2018, respectively. Gross margin was 19.9% and 17.4% for the nine months ended December 31, 2019 and 2018, respectively. The gross margin for the nine months ended December 31, 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 nine months ended December 31,   Changes 
   2019   2018   $   % 
Cost of sales  $9,213,881   $10,469,830   $(1,255,949)   (12)%
Gross profit   3,048,562    3,471,078    (422,516)   (12.2)%
Gross margin   24.9%   24.9%   -%   - 

  

For our wholesale segment, the cost of sales for the nine months ended December 31, 2019 decreased by $1.3 million, or 12%, from $10.5 million for the nine months ended December 31, 2018 to $9.2 million for the nine months ended December 31, 2019. The decrease is consistent with the significant decrease of sales from the wholesale segment in 2019.

 

Gross profit for the nine months ended December 31, 2019 decreased by around $423,000, or 12.2%, from $3.5 million for the nine months ended December 31, 2018 to $3.1 million for the nine months ended December 31, 2019. Gross margin was consistent in these two periods.

 

Selling, General and Administrative Expenses

 

Selling, general, and administrative expenses were $20.0 million for the nine months ended December 31, 2019, a decrease of $4.6 million, or 18.6%, compared to $24.6 million for the nine months ended December 31, 2018, which was mainly attributable to the $3.5 million expense decrease from two stores in MA since we contracted these two stores in MA and we do not operate these two stores ourselves, as well as close down of one store in New York city.  In addition, one of our wholesale company is going out of business and selling, general, and administrative expenses decreased by $1.2 million.

 

Interest Expense

 

Interest expense was $1.3 million for the nine months ended December 31, 2019, an increase of $0.3 million, or 28.3%, from $ 1.0 million for the nine months ended December 31, 2018, attributable to the increased average outstanding loan balance from $19.4 from nine months ended December 31, 2018 to $20.7 for the nine months ended December 31, 2019. In addition, the Company paid approximately $150,000 of forbearance fee to Key Bank in May due to the violation of covenant.

 

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Impairment Loss and Other income

 

The Company charged $1.1 million impairment loss related leasehold improvements in one closed store in New York area.

 

Other income was $2.4 million for the nine months ended December 31, 2019, which included management and advertising fee income, rental income, lottery sales, and other miscellaneous income. Other income increased $1.4 million, 158.2%, from $0.9 million for the nine months ended December 31, 2018. For the nine months ended December 31, 2019, the Company collected $0.5 million of management fee from contracting Ming and Zen in MA to third parties for operation, net of rental expense the Company for these two stores. In addition, the Company has subleased some spaces in its stores for small vendors to sell prepared foods. Rental income increased by $0.6 million.

 

Income Taxes Provision

 

We are subject to U.S. federal and state income taxes. Income tax expense was around $116,000 for the nine months ended December 31, 2019, compared to $314,000 of income tax expense for the nine months ended December 31, 2018. The effective income tax rate was -1.9% and -4% for the nine months ended December 31, 2019 and 2018, respectively. For the nine months ended December 31, 2019 and 2018, the Company made reserve for deferred tax asset due to the significant loss incurred.

 

Net Income (loss)

 

   For the nine months ended December 31,   Changes 
   2019   2018   $   % 
Net loss  $(6,326,118)  $(7,844,393)  $1,518,275    -19.4%
Net Loss Margin   -9.5%   -8.46%   -1.04%     

 

Net loss was $6.3 million for the nine months ended December 31, 2019, a decrease of $1.5 million, or 19.4%, from $7.8 million of net loss for the nine months ended December 31, 2018, mainly attributable to the decreased selling, general, and administrative expenses, increased other income described above, offset by decrease of gross margin. Net loss as a percentage of sales was -9.5% and -8.46% for the nine months ended December 31, 2019 and 2018, respectively.

 

Adjusted EBITDA

 

   For the nine months ended December 31,   Changes 
   2019   2018   $   % 
Net income  $(6,326,118)  $(7,844,393)  $1,518,275    (19.4)%
Interest expense   1,285,559    1,002,127    283,432    28.3%
Income tax provision   115,589    313,833    (198,244)   (63.2)%
Depreciation   1,590,632    1,432,173    158,459    11.1%
Amortization   236,874    236,874    -    -%
Adjusted EBITDA  $(3,097,464)  $(4,859,386)  $1,761,922    (36.3)%
Percentage of sales   -4.7%   -5.2%   0.6%     

 

Loss before income tax, depreciation, and amortization was $3.1 million for the nine months ended December 31, 2019, a decrease of $1.8 million, as compared to income before income tax, depreciation, and amortization of $4.9 million for the nine months ended December 31, 2018, mainly attributable to the decrease in net loss resulting from decreased selling, general, and administrative expenses, increased other income described above, offset by decrease of gross margin and increased impairment loss.

 

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Results of Operations for the three months ended December 31, 2019 and 2018

 

   For the three months ended
December 31,
   Changes 
   2019   2018   $   % 
Net sales-third parties  $20,546,584   $30,397,501   $(9,850,917)   (32.4)%
Net sales-related parties   346,196    906,565    (560,369)   (61.8)%
Total Sales   20,892,780    31,304,066    (10,411,286)   (33.3)%
Cost of sales-third parties   14,789,482    22,610,419    (7,820,937)   (34.6)%
Cost of sales-related parties   313,231    753,392    (440,161)   (58.4)%
Occupancy costs   1,475,420    2,276,924    (801,504)   (35.2)%
Gross Profit   4,314,647    5,663,331    (1,348,684)   (23.8)%
Selling, general and administrative expenses   5,615,974    7,429,877    (1,813,903)   (24.4)%
Loss from operations   (1,301,327)   (1,766,546)   465,219    (26.3)%
Interest expense   (326,339)   (357,301)   30,962    (8.7)%
Impairment loss   (1,100,000)   -    (1,100,000)   (100)%
Other income   708,494    321,538    386,956    120.3%
Loss before income tax provision   (2,019,172)   (1,802,309)   216,863    (12)%
Income tax provision   52,096    -    52,096    100%
Net Loss  $(2,071,268)  $(1,802,309)  $268,959    14.9%
Net Loss attributable to common shareholders  $(2,071,268)  $(1,802,309)  $268,959    14.9%

 

Net Sales

 

   For the three months ended
December 31,
   Changes 
   2019   2018   $   % 
Net sales of retail  $17,053,488   $26,980,745   $(9,927,257)   (36.8)%
Net sales of wholesale-third parties   3,493,096    3,416,756    76,340    2.2%
Net sales of wholesale-related parties   346,196    906,565    (560,369)   (61.8)%
Total Net Sales  $20,892,780   $31,304,066   $(10,411,286)   (33.3)%

  

iFresh’s net sales were $20.9 million for the three months ended December 31, 2019, a decrease of $10.4 million, or 33.3%, from $31.3 million for the three months ended December 31, 2018.

 

The decrease resulted mainly from our Quincy (Zen Store) and Boston (Ming Store), Massachusetts stores. Ming and Zen contributed $5.6 million of retail sales for the three months ended December 31, 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 $140,000 for the three months ended December 31, 2019. In addition, sales from our stores in New York City decreased by $4.9 million because 1) we closed store in Avenue U2 in early September, which contributed $5.8 million of sales for the nine months ended December 31, 2018, compared to $2.9 million of sales for the nine months ended December 31, 2019; 2), we contracted part of vegetables and fruits business to third parties in our store to improve our margin.

  

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Our total net wholesale sales decreased by $0.5 million from $4.3 million for the three months ended December 31, 2018 to $3.8 million for the three months ended December 31, 2019, attributable that our sales to related parties decreased by $0.4 million from the three months ended December 31, 2018 to the three months ended December 31, 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
December 31,
   Changes 
   2019   2018   $   % 
Cost of sales  $11,933,991   $20,234,411   $(8,300,420)   (41)%
Occupancy costs   1,475,420    2,276,924    (801,504)   (35.2)%
Gross profit   3,644,077    4,469,410    (825,333)   (18.5)%
Gross margin   21.4%   16.6%   4.8%     

 

For the retail segment, cost of sales decreased by $8.3 million, from $20.2 million for the three months ended December 31, 2018, to $11.9 million for the three months ended December 31, 2019. The decrease was consistent with the sales decreased and mainly due to changes we made to Ming and Zen store in MA and close of store in Avenue U2 mentioned above. The cost decreased by 41%, compared to sales decrease of 36.8%, 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 $0.8 million, which was mainly attributable to decreased rent from Ming and Zen stores which are operated by third parties as mentioned above and 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 $3.6 and $4.5 million for the three months ended December 31, 2019 and 2018, respectively. Gross margin was 21.4% and 16.6% for the three months ended December 31, 2019 and 2018, respectively. The gross margin for the three months ended December 31, 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
December 31,
   Changes 
   2019   2018   $   % 
Cost of sales  $3,168,722   $3,129,400   $39,322    1.3%
Gross profit  $670,570    1,193,921    (523,351)   (43.8)%
Gross margin   17.5%   27.6%   -10%     

 

For our wholesale segment, the cost of sales for the three months ended December 31, 2019 increased by $39,000, or 1.3%, from $3.13 million for the three months ended December 31, 2018 to $3.17 million for the three months ended December 31, 2019. The decrease is due to the increase tariff on imports from China, which is our main purchase coming from.

 

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Gross profit for the three months ended December 31, 2019 decreased by around $523,000, or 43.8%, from $1.2 million for the three months ended December 31, 2018 to $0.7 million for the three months ended December 31, 2019. Gross margin decreased by 10.1% from 27.6% to 17.5%. The increase was due to the significant increase of tariff for imports from China as mentioned above.

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses was $5.6 million for the three months ended December 31, 2019, a decrease of $1.8 million, or 24.4%, compared to $7.4 million for the three months ended December 31, 2018, which was mainly attributable to the $1.6 million expense decrease from two stores in MA since we contracted these two stores and we do not operate these two stores ourselves, as well as close down of one store in New York city.  One of our wholesale company is going out of business and selling, general, and administrative expenses decreased by $0.3 million.

 

Interest Expense

 

Interest expense was $326,339 for the three months ended December 31, 2019, a decrease of $30,962, or 8.7%, from $357,301 for the three months ended December 31, 2018, primarily attributable to the decreased average loan balance from $21.9 million for the three months ended December 31, 2018 to $20.3 million for the three months ended December 31, 2019.

 

Impairment loss and Other income

 

The Company charged $1.1 million impairment loss related leasehold improvements in one closed store in New York area.

 

Other income was $0.7 million for the three months ended December 31, 2019, an increase of $0.4 million, or 120.3%, from $0.3 million for the three months ended December 31, 2018. For the three months ended December 31, 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 $52,096 for the three months ended December 31, 2019, an increase of $52,096, or 100%, compared to $0 of tax for the three months ended December 31, 2018. For the three months ended December 31, 2019, the Company made reserve for deferred tax asset due to the significant loss incurred.

 

Net Income (loss)

 

   For the three months ended
December 31,
   Changes 
   2019   2018   $   % 
Net loss  $(2,071,268)  $(1,802,309)  $(268,959)   14.9%
Net Profit Margin   (9.91)%   (5.76)%   (4.15)%     

  

Net loss was $2.1 million for the three months ended December 31, 2019, a decrease of $0.27 million, or 14.9%, from $1.8 million of net loss for the three months ended December 31, 2018, mainly attributable to the increase in gross margin and decrease in selling, general, and administrative expenses and lower interest expenses, as described above.

 

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Adjusted EBITDA

 

   For the three month ended
December 31,
   Changes 
   2019   2018   $   % 
Net loss  $(2,071,268)  $(1,802,309)  $(268,959)   14.9%
Interest expense   326,339    357,301    (30,962)   (8.7)%
Income tax provision   52,096    -    52,096    100%
Depreciation   497,060    488,688    8,372    1.7%
Amortization   78,958    101,771    (22,813)   (22.4)%
Adjusted EBITDA  $(1,116,815)  $(854,549)  $(262,266)   31%
Percentage of sales   (5.3)%   (2.7)%   (2.6)%     

 

Adjusted EBITDA loss was $1.1 million for the three months ended December 31, 2019, an increase of $0.3 million, or 31%, as compared to $0.9 million of EBITDA loss for the three months ended December 31, 2018, mainly attributable to increased net loss of approximately $0.3 million. The ratio of Adjusted EBITDA to sales was (5.3)% and (2.7)% for the three months ended December 31, 2019 and 2018, respectively.

 

Liquidity and Capital Resources

 

As of December 31, 2019, iFresh had cash and cash equivalents of approximately $0.7 million. iFresh had operating losses for the nine months ended December 31, 2019 and had negative working capital of $26.1 million and $21.6 million as of December 31, 2019 and March 31, 2019, respectively. iFresh had negative equity of $1.0 million as of December 31, 2019 and March 31, 2019. The long-term KeyBank loan of $20.1 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 December 31, 2019, 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. 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 December 31, 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 $4.8 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 December 31, 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 nine months ended December 31, 2019 and 2018.

  

   For the nine months
ended December 31,
 
   2019   2018 
Net cash used in operating activities  $(3,159,656)  $(7,107,612)
Net cash provided by (used in) investing activities   (1,578,103)   7,795 
Net cash provided by financing activities   4,342,311    8,032,617 
Net Increase (decrease) in cash and cash equivalents  $(395,448)  $932,800 

 

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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 $3.2 million for the nine months ended December 31, 2019, a decrease of $4.0 million, or 56%, compared to $ 7.1 million used in operating activities for the nine months ended December 31, 2018. The decrease was a result of a decrease of net loss of $1.5 million, impairment loss of $1.1 million and an increase of $1.7 million from change of working capital mainly resulting from decrease from inventory and tax payable.

 

Investing Activities

 

Net cash used in investing activities was approximately $1.6 million for the nine months ended December 31, 2019, an increase of approximately $1.6 million, compared to approximately $8,000 provided by investing activities for the nine months ended December 31, 2018. The increase was primarily attributable to the decrease of $3.0 million net cash collected from related party, offset by decrease of in acquisition of property and equipment in 2019 of $1.5 million.

 

Financing Activities

 

Net cash provided by financing activities was approximately $4.3 million for the nine months ended December 31, 2019, which mainly consisted of cash received from capital contribution of $4.4 million, and cash received from issuance of stock of $1.5 million, offset by net cash paid for bank loans of $1.3 million, $194,000 cash paid notes payable, and capital leases. Net cash provided from financing activities was $8.0 million for the nine months ended December 31, 2018, which mainly consisted of net cash flow from bank loans of $5.7 million, cash received from issuance of stock of $3.7 million, offset by $208,000 cash paid for notes payable and capital leases and repayment on term loan of $1.2 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 December 31, 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 December 31, 2019.

 

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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. This second forbearance period has expired and discussion between Key Bank and the new counsel of NYM Holding is in process.

 

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 December 31, 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 December 31, 2019:

 

Contractual Obligations (unaudited)  Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
Bank Loans  $20,113,172   $1,548,793   $18,564,379   $     
Estimated interest payments on bank loans   1,072,046    496,351    575,695         
Notes payable   144,614    78,835    65,779          
Capital lease obligations including interest   521,465    174,863    300,654    45,948     
Operating Lease Obligations(1)   88,425,615    8,544,127    16,565,053    15,675,125    47,641,310 
   $110,276,912   $10,842,969   $36,071,560   $15,721,073   $47,641,310 

    

  (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.

 

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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.

 

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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 $59,839,700 of operating lease assets and $66,554,892 operating lease liabilities on the consolidated balance sheet as of December 31, 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.

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.    

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As of December 31, 2019, we were not subject to material market or interest rate risk.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2019, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2019, due to our lack of experience being a public company and lack of professional staff with adequate knowledge of SEC’s rules and requirements.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, contractual disputes, premises claims, and employment, environmental, health, safety and intellectual property matters. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations, and claims asserted against the Company, we do not believe any currently pending legal proceedings to which the Company is a party will have a material adverse effect on the Company’s business, prospects, financial condition, cash flows, or results of operations other than the following:

 

Leo J. Motsis, as Trustee of the 140-148 East Berkeley Realty Trust v. Ming’s Supermarket, Inc.

 

Ming’s Supermarket, Inc. (“Ming”), the subsidiary of the Company, is a tenant at a building located at 140-148 East Berkeley Street, Boston, MA (the “Property”), pursuant to a lease dated September 24, 1999 (the “Lease”). The Lease had a 10-year initial term, followed by an option for two additional 10-year terms. Ming has exercised that first option and the Lease has approximately 15 years remaining to run if the second option is also exercised. The Lease also gives Ming a right of first refusal on any sale of the building.

 

On February 22, 2015, a sprinkler pipe burst in the Property. This caused the Inspectional Services Department of the City of Boston (“ISD”) to inspect the Property. The ISD found a number of problems which have prevented further use of the Property. The ISD notified both landlord and tenant that the Property was only permitted for use as an elevator garage and that its use as a warehouse was never permitted and that a conditional use permit must be obtained from the City of Boston to make such use lawful. Moreover, the Property was found to have major structural issues requiring repair, as well as issues with the elevator and outside glass. The result of the ISD’s findings are that Ming was ordered not to use the Property for any purpose unless and until the structural and other repairs are completed and its use as a warehouse is permitted by the Boston Zoning Board.

 

While the Lease provides that the elevator (approximate cost $400,000) and glass repairs (approximate cost $30,000) are the responsibility of the tenant, the structural repairs (approximate cost $500,000) are the landlord’s responsibility under the Lease, unless the structural damage was caused by the tenant’s misuse of the Property. In this regard Ming has retained an expert who will testify the structural damage to the building was caused by long term water infiltration and is not the result of anything Ming did. Ming initially sought for the landlord to perform the structural repairs and agreed that upon completion of those repairs, Ming would repair the elevator and the broken glass. In addition, Ming asked the landlord to cooperate in permitting use of the Property as a warehouse. 

 

The landlord refused to either perform structural repairs or to cooperate on the permitting. As a result, as of April 2015, Ming began withholding rent, since Ming was barred from using the Property by order of the ISD. The landlord then sued Ming for breach of the Lease and unpaid rent, and Ming counterclaimed for constructive eviction and for damages resulting from the landlord’s breach of its duty to perform structural repairs under the Lease.

 

The case was tried before a jury in August 2017. The jury awarded Ming judgment against the landlord in the amount of $795,000, plus continuing damages of $2,250 per month until the structural repairs are completed. The court found that the landlord’s actions violated the Massachusetts unfair and deceptive acts and practices statute and therefore doubled the amount of damages to $1,590,000 and further ruled that Ming should also recover costs and attorneys’ fees of approximately $250,000. The result is a judgment in favor of Ming and against the landlord that will total approximately $1.85 million. The judgment requires the landlord to repair the premises and obtain an occupancy permit. The landlord is responsible to Ming for damages in the amount of $2,250 per month until an occupancy permit is issued. The judgment also accrues interest at the rate of 12% per year until paid.

 

The landlord filed a Notice of Appeal, which will delay ultimate resolution of this matter for potentially one year or more. Ming has filed a lien against the landlord’s real estate as security for the judgment.

 

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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 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.

  

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. On November 21, 2019, the Company consented to a final judgment of possession in favor of Winking Group LLC in the amount of $400,000, with $50,867 being waived by the landlord. $400,000 have been paid as of December 31, 2019.

 

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Regulatory Compliance

 

On November 6, 2019, iFresh Inc. received a letter from the Listing Qualifications Staff (the “Staff’) of The Nasdaq Stock Market LLC (“Nasdaq”), which stated that, based upon the Company’s continued non-compliance with Nasdaq Listing Rule 5550(b), which requires stockholders’ equity of $2.5 million, or a market value of listed securities of $35 million, or net income from continuing operations of $500,000, the Staff had determined not to grant an extension to allow the Company to demonstrate compliance, the Company’s securities would be subject to delisting from Nasdaq unless the Company timely requests a hearing before a Nasdaq Hearings Panel (the “Panel”). The Company timely requested a hearing before the Panel, and, on December 18, 2019, the Company received a letter from the Panel granting the Company’s request for continued listing on Nasdaq pursuant to an extension to evidence compliance with the Stockholder’s Equity Requirement. The Company’s continued listing on Nasdaq is subject to the Company’s timely compliance with certain interim milestones and, ultimately, the Company evidencing compliance with the Stockholders’ Equity Requirement by no later than April 15, 2020.

 

Item 1A. Risk Factors.

 

There have been no changes with respect to risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2018 and the Quarterly Reports on Form 10-Q for June 30, 2019 and September 30, 2019 (the “Previous Reports”). Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described in our Previous Reports, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this Quarterly Report on Form 10-Q, our consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other information in our Previous Reports. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities. 

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

On December 23, 2016, a wholly-owned subsidiary of the Company, NYM Holding, Inc. (“NYM”), as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with KeyBank National Association (“KeyBank” or “Lender”). The Credit Agreement provides for (1) a revolving credit of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000 of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the Adjusted LIBOR rate plus 1.95%.

 

Although the Company has been timely repaying the KeyBank facility in accordance with its terms, the Company failed to timely pay federal income taxes in the aggregate principal amount of $1,187,693, which resulted in the IRS imposing a tax lien on the Company on June 11, 2018 in the amount of $1,236,831. Although the Company subsequently paid the tax liabilities in full in June 2018 and the IRS released the tax lien by July 30, 2018, the Company was in default under the KeyBank Credit Agreement as of March 31, 2018 for having failed to timely pay federal taxes and because the IRS imposed a tax lien.

  

Additionally, the financial covenants of the KeyBank loan 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 3.0 to 1.0 as of the last day of each fiscal quarter. As of December 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. In addition, on February 7, 2019, the Company received a notice from Keybank indicating Keybank does not consent to the transaction contemplated by the Share Purchase Agreement by and between Long Deng and HK Xu Ding Co. Limited and that the monthly principal and interest payment amount shall be adjusted to $155,872.35 to fully amortize the current outstanding principal balance of the loan over the number of months remaining on the original ten year amortization period at the interest rate now in effect. 

 

Due to the Company’s failure to timely pay federal taxes, the IRS’s imposition of a tax lien, the Company’s failure to satisfy the financial covenants of the Credit Agreement, the Company is currently in default under the Credit Agreement. The Company has advised KeyBank of the default, and while KeyBank has not yet acted to accelerate payment of the facility, KeyBank does consider the Company to be in default and will not make any further advances under the Credit Facility until the Company complies with its obligations under the Credit Agreement. Keybank indicated in its notice to the Company on February 7, 2019 that as a result of the events of default occurred so far, effective March 1, 2019, interest will accrue on all loans at the default rate. The Company’s inability to draw down amounts under the credit facility significantly impairs the Company’s growth plans and limits its liquidity. In addition, if KeyBank were to decide to accelerate repayment of the Credit Facility, the Company’s financial condition and operations would be negatively impacted. Although the Company anticipates being able to obtain a waiver from KeyBank regarding the Company’s default, there is no guarantee that the Company will be successful in doing so. 

  

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On May 20, 2019, iFresh, NYM (or the “Borrower”), certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association (“Keybank” or the “Lender”) entered into the first forbearance agreement (the “First Forbearance Agreement”) with respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank made available to NYM a revolving credit facility, a term loan facility, and other credit accommodations (the “Loan Agreements”). The Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreements based on the existence of certain events of default until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from the date of the First Forbearance Agreement (the “First Forbearance Period”); and (b) a Forbearance Event of Default. Reference is made to the current report on Form 8-K filed with the SEC on May 21, 2019.

 

The Borrower did not meet its obligations under the Loan Agreements by the end of the First Forbearance Period. On October 17, 2019 (the “Effective Date”), the Company, NYM, certain subsidiaries of NYM, Go Fresh 365, Inc. (“Go Fresh”), Mr. Long Deng and Keybank entered into the second forbearance agreement (the “Second Forbearance Agreement”). Pursuant to certain Guaranty Agreement dated as of December 26, 2016, as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”). Terms used but not otherwise defined herein have the meanings ascribed to them in the Second Forbearance Agreement.

 

The Lender 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. No subsequent agreement or amendment was entered into.

 

Item 4. Mine Safety Disclosure.

 

Not applicable.

 

Item 5. Other Information.

 

On February 12, 2020, the Board of Directors of iFresh Inc, (the “Company”) appointed Chang Kao (Eddie) Chiang to be the Company’s Chief Financial Officer.

 

Mr. Chang Kao Chiang served as the Chief Executive Officer of Royal Dynasty International Holding Company Limited, which is a company of chain catering management platform and its subordinate companies, from September, 2016 to the present. From February 2012 to December 2017 he also served as the Chief Executive Officer of La Kaffa International CO., LTD., a Taiwan-based company principally engaged in provision of chain catering services. He has served as the president of several listed companies DELTAMAC (TAIWAN) CO., LTD (from October 2007 to December 2011), and Asia One home video (from September 2006 to December 2011),. Mr.Chiang obtained a Master of Business Administration in the United Kingdom from Dartley University and a Bachelor of Economics from University of Chicago.

 

Item 6. Exhibits.

 

Exhibit 
No.
  Description
     
10.1   Acquisition Agreement dated December 11, 2019 between iFresh Inc., Long Deng and Dragon Seeds LLC
     
10.2   Stock Purchase Agreement dated December 11, 2019 between iFresh Inc. and Jian Chen
     
10.3   Debt Conversion Agreement dated December 11, 2019 between iFresh Inc. and Long Deng
     
10.4   Amendment to Debt Conversion Agreement, dated January 9, 2020
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
   
101.SCH   XBRL Taxonomy Extension Schema Document
   
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  iFresh, Inc.
     
Date: February 14, 2020 By: /s/ Long Deng
    Long Deng
    Chairman of the Board and 
Chief Executive Officer
(Principal executive officer)
     
  By: /s/ Chang Kao Chiang
    Chang Kao Chiang
    Chief Financial Officer
(Principal financial and accounting officer)

 

 

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