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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 June 30, 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)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 August 14, 2019, 18,351,497 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 JUNE 30, 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 21
  Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 33
  Item 4. Controls and Procedures 33
Part II. Other Information 34
  Item 1. Legal Proceedings 34
  Item 1A. Risk Factors 36
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
  Item 3. Defaults Upon Senior Securities 37
  Item 4. Mine Safety Disclosure 38
  Item 5. Other Information 38
  Item 6. Exhibits 38
Signatures 39

  

i

 

   

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

iFRESH INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   March 31, 
   2019   2019 
   (UNAUDITED)     
ASSETS        
Current assets:        
Cash and cash equivalents  $1,309,616   $1,048,090 
Accounts receivable, net   3,975,866    4,027,909 
Inventories, net   8,815,365    10,411,366 
Prepaid expenses and other current assets   3,509,978    3,721,262 
Total current assets   17,610,825    19,208,627 
Advances and receivables - related parties   4,609,810    5,220,547 
Property and equipment, net   20,007,031    20,287,186 
Intangible assets, net   1,000,004    1,033,337 
Security deposits   1,230,428    1,236,073 
Right of use assets-lease   64,881,376    - 
Deferred income taxes   213,526    115,589 
Total assets  $109,553,000   $47,101,359 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)          
Current liabilities:          
Accounts payable  $11,540,086   $14,177,700 
Deferred revenue   1,116,090    802,392 
Borrowings against lines of credit, current,net   20,960,215    21,285,314 
Notes payable, current   95,130    98,475 
Finance lease obligations, current   146,679    148,778 
Accrued expenses   1,392,616    1,393,973 
Operating lease liabilities, current   5,767,554    - 
Other payables, current   3,454,132    2,926,101 
Total current liabilities   44,472,502    40,832,733 
           
Notes payable, non-current   108,599    130,068 
Finance lease obligations, non-current   380,901    413,225 
Deferred rent   -    6,659,412 
Other payables, non-current   97,900    97,900 
Long term operating lease liabilities   65,852,541    - 
Total liabilities   110,912,443    48,133,338 
           
Commitments and contingencies          
           
Shareholders’ equity (deficiency)          
Preferred shares, $.0001 par value, 1,000,000 shares authorized; none issued.   -    - 
Common stock, $0.0001 par value; 100,000,000 shares authorized, 18,351,497 and 16,737,685  shares issued and outstanding as of June 30, 2019 and  March 31, 2019, respectively   1,835    1,674 
Additional paid-in capital   17,974,331    14,933,829 
Accumulated deficit   (19,335,609)   (15,967,482)
Total shareholders’ deficiency   (1,359,443)   (1,031,979)
Total liabilities and shareholders’ equity (deficiency)  $109,553,000   $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 June 30,
 
   2019   2018 
         
Net sales  $23,084,675   $29,671,823 
Net sales-related parties   743,107    1,416,318 
Total net sales   23,827,782    31,088,141 
Cost of sales   16,516,099    21,602,917 
Cost of sales-related parties   582,569    1,228,404 
Retail Occupancy costs   1,930,619    1,831,074 
Gross profit   4,798,495    6,425,746 
           
Selling, general and administrative expenses   8,575,894    8,075,441 
Loss from operations   (3,777,399)   (1,649,695)
Interest expense, net   (609,745)   (245,703)
Other income   921,080    332,569 
Loss before income taxes   (3,466,064)   (1,562,829)
Income tax provision (benefit)   (97,937)   313,833 
Net Loss  $(3,368,127)  $(1,876,662)
           
Net loss per share:          
Basic  $(0.19)  $(0.13)
Diluted  $(0.19)  $(0.13)
Weighted average shares outstanding:          
Basic   17,385,010    14,220,548 
Diluted   17,385,010    14,220,548 

  

See accompanying notes to unaudited condensed consolidated financial statements

  

2

 

 

iFRESH INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the three months
ended June 30,
 
   2019   2018 
Cash flows from operating activities        
Net loss  $(3,368,127)  $(1,876,662)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   561,644    459,945 
Amortization expense   215,833    90,364 
Share based compensation   1,921,081    297,529 
Lease amortization   2,142,010    - 
Bad debt reserve   233,448    - 
Deferred income taxes (Benefit)   (97,937)   313,832 
Changes in operating assets and liabilities:          
Accounts receivable   (181,405)   356,623 
Inventories   1,596,001    (950,780)
Prepaid expenses and other current assets   211,284    (73,010)
Security deposits   5,645    (17,385)
Accounts payable   (2,637,611)   (1,154,137)
Deferred revenue   313,698    52,480 
Accrued expenses   (1,357)   502,610 
Taxes payable   -    (1,427,387)
Deferred rent   -    58,790 
Operating lease liabilities   (2,062,703)   - 
Other liabilities   528,028    (99,697)
Net cash used in operating activities   (620,468)   (3,466,885)
Cash flows from investing activities          
Cash advances to (received from) related parties   610,738    670,136 
Acquisition of property and equipment   (281,489)   (2,478,796)
Net cash provided by (used in) investing activities   329,249    (1,808,660)
Cash flows from financing activities          
Borrowings against Term loan   -    3,950,000 
Borrowings against lines of credit   -    1,750,000 
Repayments on term loan   (507,599)   (432,656)
Repayments on notes payable   (24,814)   (35,450)
Payments on capital lease obligations   (34,424)   (39,026)
Net proceeds received from capital contribution   1,119,582    - 
Net cash provided by financing activities   552,745    5,192,868 
Net increase (decrease) in cash and cash equivalents   261,526    (82,677)
Cash and cash equivalents at beginning of the period   1,048,090    640,915 
Cash and cash equivalents at the end of the period  $1,309,616   $558,238 
Supplemental disclosure of cash flow information          
Cash paid for interest  $609,745   $235,590 
Cash paid for income taxes  $-   $1,424,387 
           
Supplemental disclosure of non-cash investing and financing activities          
Capital expenditures funded by capital lease obligations and notes payable  $-   $597,246 
Stock issued for business acquisition  $-   $645,500 

 

See accompanying notes to unaudited condensed consolidated financial statements

  

3

 

   

iFRESH INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2019 and 2018

 

           Additional         
   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   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 
                                    
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)

 

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.

 

2. Liquidity and Going Concern

 

As reflected in the Company’s unaudited condensed consolidated financial statements, the Company had operating losses for the three months ended June 30, 2019 and in fiscal year 2019 and had negative working capital of $26.9 million and $21.6 million as of June 30, 2019 and March 31, 2019, respectively. The Company had deficiency of $1.4 million and $1.0 million as of June 30, 2019 and March 31, 2019, respectively. The Company did not meet certain financial covenants required in the credit agreement with Keybank National Association (“Keybank”). As of June 30, 2019, the Company has outstanding loan facilities of approximately $21.0 million due to Keybank. Failure to maintain these loan facilities will have a significant impact on the Company’s operations.

  

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future and its operating and capital expenditure commitments. iFresh had funded working capital and other capital requirements in the past primarily by equity contribution from shareholders, cash flow from operations, and bank loans. As of June 30, 2019, the Company also has $4.6 million of advances and receivable from the related parties we intend to collect. On June 7, 2019, the Company entered into certain Share Exchange Agreement and Share Purchase Agreement to spin off its Asia supermarket business and switch to internet lending business primarily located in China through the acquisition (refer to Note 1). The acquisition is expected to improve the Company’s liquidity and cash flow.

 

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 June 30, 2019 and March 31, 2019. Specifically, the financial covenants of the Credit Agreement require the Company to maintain a senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio for the trailing 12 month period of less than 3.00 to 1.00 at the last day of each fiscal quarter. As of June 30 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’s principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The Company’s ability to fund these needs will depend on its future performance, which will be subject in part to general economic, competitive and other factors beyond its control. These conditions raise substantial doubt as to the Company’s ability to remain a going concern.

 

3. Basis of Presentation and Principles of Consolidation

 

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The unaudited condensed consolidated financial statements include the financial statements of iFresh and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

 

The unaudited interim financial information as of June 30, 2019 and for the three months ended June 30, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2019. 

 

The Company has two reportable and operating segments. The Company’s Chief Executive Officer is the Chief Operating Decision Maker (“CODM”). The CODM bears ultimate responsibility for, and is actively engaged in, the allocation of resources and the evaluation of the Company’s operating and financial results.

 

4. Summary of Significant Accounting Policies

 

Significant Accounting Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting estimates included, but are not limited to: allowance for estimated uncollectible receivables, inventory valuations, allowance for deferred tax assets, lease assumptions, impairment of long-lived assets, impairment of intangible assets, and income taxes. Actual results could differ from those estimates.

 

6

 

 

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 $64,881,376 of operating lease assets and $71,620,095 operating lease liabilities on the consolidated balance sheet as of June 30, 2019. See Note 12 for additional information.

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 

 

Deferred financing costs

 

The Company presents deferred financing costs as a reduction of the carrying amount of the debt rather than as an asset. Deferred financing costs are amortized over the term of the related debt using the effective interest method and reported as interest expense in the consolidated financial statements.

 

7

 

 

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 June 30, 2019 and March 31, 2019, respectively. The Company’s estimates of the fair value of line of credit and other liabilities (including current maturities) were classified as Level 2 in the fair value hierarchy.

 

Revenue Recognition

 

In accordance with Topic 606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise or delivery is made to our wholesale customers. Payment terms are established for our wholesale customers based on the Company’s pre-established credit requirements. Payment terms vary depending on the customer. Based on the nature of receivables, no significant financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical return experience.

 

Topic 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account. The majority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct.

  

We had no material contract assets, contract liabilities, or costs to obtain and fulfill contracts recorded on the Consolidated Balance Sheet as of June 30, 2019 and March 31, 2019. For the three months ended June 30, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

 

Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant.

  

The following table summarizes disaggregated revenue from contracts with customers by product group:

 

   For the three months ended 
   June 30, 2019   June 30, 2018 
Grocery  $10,568,993   $12,462,416 
Perishable goods   13,258,789    18,625,725 
Total  $23,827,782   $31,088,141 

   

8

 

 

Recently Issued Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December. 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. On April 1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements. 

 

No other new accounting pronouncements issued or effective had, or are expected to have, a material impact on the Company’s condensed consolidated financial statements.

  

5. Accounts Receivable

 

A summary of accounts receivable, net is as follows: 

 

   June 30,   March 31, 
   2019   2019 
Customer purchases  $4,168,204   $4,008,747 
Credit card receivables   319,345    532,369 
Food stamps   101,286    99,762 
Others   2,518    2,518 
Total accounts receivable   4,591,353    4,643,396 
Allowance for bad debt   (615,487)   (615,487)
Accounts receivable, net  $3,975,866   $4,027,909 

 

6. Inventories

 

A summary of inventories, net is as follows:  

 

   June 30,   March 31, 
   2019   2019 
Non-perishables  $7,415,357   $8,762,634 
Perishables   1,455,389    1,723,882 
Inventories   8,870,746    10,486,516 
Allowance for slow moving or defective inventories   (55,381)   (75,150)
Inventories, net  $8,815,365   $10,411,366 

 

7. Advances and receivables - related parties

 

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

 

   June 30,   March 31, 
Entities  2019   2019 
New York Mart Elmhurst Inc  $59,357   $- 
Pacific Supermarkets Inc.   -    437,863 
NY Mart MD Inc.   244,932    335,374 
Advances - related parties  $304,289   $773,237 
           
New York Mart, Inc.   605,265    605,265 
Pacific Supermarkets Inc.   273,873    428,237 
NY Mart MD Inc.   3,197,344    3,181,011 
iFresh Harwin Inc   229,039    232,797 
Receivables – related parties   4,305,521    4,447,310 
Total advances and receivables – related parties  $4,609,810   $5,220,547 

 

9

 

 

The Company has advanced funds to related parties and accounts receivable due from the related parties with the intention of converting some of these advances and receivables into deposits towards the purchase price upon planned acquisitions of some of these entities, which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, the shareholder the Chief Executive Officer of the Company. Accounts receivable due from related parties relate to the sales to these related parties (see Note 16). The advances and receivables are interest free, repayable on demand, and guaranteed by Mr. Long Deng.

  

8. Property and Equipment 

 

   June 30,   March 31, 
   2019   2019 
Furniture, fixtures and equipment  $19,980,983   $19,957,600 
Automobiles   2,222,506    2,214,306 
Leasehold improvements   9,099,328    8,849,422 
Software   6,735    6,735 
Total property and equipment   31,309,552    31,028,063 
Accumulated depreciation   (11,302,521)   (10,740,877)
Property and equipment, net  $20,007,031   $20,287,186 

 

Depreciation expense for the three months ended June 30, 2019 and 2018 was $561,644 and $459,945, respectively.

 

9. Intangible Assets

 

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

 

   Balance at
March 31,
       Balance at
June 30,
 
   2019   Additions   2019 
Gross Intangible Assets            
Acquired leasehold rights  $2,500,000   $-   $2,500,000 
Total intangible assets  $2,500,000   $-   $2,500,000 
Accumulated Amortization               
Total accumulated amortization  $(1,466,663)  $(33,333)  $(1,499,996)
Intangible assets, net  $1,033,337   $(33,333)  $1,000,004 

 

10

 

  

Amortization expense was $33,333 and $33,333 for the three months ended June 30, 2019 and 2018, respectively. Future amortization associated with the net carrying amount of definite-lived intangible assets is as follows: 

 

Year Ending June 30,    
2020  $133,333 
2021   133,333 
2022   133,333 
2023   133,333 
2024   133,333 
Thereafter   333,339 
Total  $1,000,004 

  

10. Debt

 

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

   

   June 30,   March 31, 
   2019   2019 
Revolving Line of Credit-KeyBank National Association  $4,950,000    4,950,000 
Delayed Term Loan-KeyBank National Association   4,369,983    4,494,983 
Term Loan-KeyBank National Association   12,096,482    12,342,206 
Less: Deferred financing cost   (456,250)   (501,875)
Total   20,960,215    21,285,314 

 

KeyBank National Association (“KeyBank”) – Senior Secured Credit Facilities

 

On December 23, 2016, NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with Key Bank National Association (“Key Bank” or “Lender”). The Credit Agreement provides for (1) a revolving credit of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000 of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the Adjusted LIBOR rate plus 1.95%. Both the termination date of the revolving credit and the maturity date of the term loans are December 23, 2021. The Company will pay a commitment fee equal to 0.25% of the undrawn amount of the Revolving Credit Facility and 0.25% of the unused Delayed Draw Term Loan Facility. $4,950,000 of the revolving credit was used as of June 30, 2019.

 

$15,000,000 of the term loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments of principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid principal balance of the term loan, plus accrued interest on the maturity date. On December 23, 2016, the Company used the proceeds from the loan term to pay off the outstanding balance under the Bank of America credit line agreement and HSBC line of credit.

 

The Delayed Draw Term Loan shall be advanced on the Delayed Draw Funding date, which is no later than December 23, 2021.

 

The senior secured credit facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains financial and restrictive covenants. The financial covenants require NYM to deliver audited condensed consolidated financial statements within one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. As of June 30, 2019 and March 31, 2019, the Company has negative EBITDA, thus the ratio was negative and the Company was not in compliance with the financial covenants of the KeyBank loan. Except as stated below, the senior secured credit facility is subject to customary events of default. It will be an event of default if Mr. Long Deng resigns, is terminated, or is no longer actively involved in the management of NYM and a replacement reasonably satisfactory to the Lender is not made within sixty (60) days after such event takes place. The Company violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited on January 23, 2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March 1, 2019, interest was accrued on all loans at the default rate and the monthly principal and interest payment due under the effective date term loan will be $155,872 instead of $142,842.

 

11

 

 

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. 

 

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

 

Year Ending June 30    
2020  $1,521,862 
2021   1,576,334 
2022   17,862,019 
Total  $20,960,215 

 

11. Notes Payable

 

Notes payables consist of the following:

 

   June 30,   March 31, 
   2019   2019 
Triangle Auto Center, Inc.        
Secured by vehicle, 4.02%, principal and interest of $890 due monthly through January 28, 2021   16,338    18,823 
Colonial Buick GMC          
Secured by vehicle, 8.64%, principal and interest of $736 due monthly through February 1, 2020   4,248    6,350 
Koeppel Nissan, Inc.          
Secured by vehicle, 3.99%, principal and interest of $612 due monthly through January 18, 2021   10,663    12,378 
Secured by vehicle, 0.9%, principal and interest of $739 due monthly through March 14, 2020   6,628    8,826 
Secured by vehicle, 7.86%, principal and interest of $758 due monthly through September 1, 2022   23,630    25,415 
Silver Star Motors          
Secured by vehicle, 4.22%, principal and interest of $916 due monthly through June 1, 2021   21,040    23,546 
BMO          
Secured by vehicle, 5.99%, principal and interest of $1,924 due monthly through July 1, 2020   45,125    50,172 
           
Wells Fargo          
Secured by vehicle, 4.01%, principal and interest of $420 due monthly through December 1, 2021   11,964    13,096 
Toyota Finance          
Secured by vehicle, 0%, principal and interest of $632 due monthly through August, 2022   24,031    25,928 
Secured by vehicle, 4.87%, principal and interest of $761 due monthly through July, 2021   22,134    24,031 
Secured by vehicle, 0%, principal and interest of $633 due monthly through April 1, 2022   17,928    19,978 
Total Notes Payable  $203,729   $228,543 
Current notes payable   (95,130)   (98,475)
Long-term notes payable, net of current maturities  $108,599   $130,068 

 

12

 

  

All notes payables are secured by the underlying financed automobiles. 

  

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

 

Year Ending June 30,    
2020  $95,130 
2021   79,749 
2022   27,585 
2023   1,265 
Total  $203,729 

 

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 June 30, 2019  was as follows:

 

   As of
June 30,
2019
 
Operating Lease Assets:     
Operating Lease  $64,881,376 
Total operating lease assets   64,881,376 
Operating lease obligations:     
Current operating lease liabilities   5,767,554 
Non-current operating lease liabilities   65,852,541 
Total Lease liabilities  $71,620,095 

 

Weighted Average Remaining Lease Term Operating Lease  $ 13.78 years 
Weighted Average discount rate  $4.3%

 

13

 

 

   June 30,   March 31, 
   2019   2019 
Finance lease Assets        
Vehicles under finance lease  $1,033,131   $1,033,131 
Accumulated depreciation   280,250    244,116 
Finance lease assets, net  $752,881   $789,115 

 

   June 30,   March 31, 
   2019   2019 
Finance lease obligations:        
Current  $146,679   $148,778 
Long-term   380,901    413,225 
Total obligations  $527,580   $562,003 

  

Weighted Average Remaining Lease Term Operating Lease  2.63 years 
Weighted Average discount rate   7.1%

 

Supplemental cash flow information related to leases was as follows:

 

   As of
June 30,
2019
 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating Lease  $2,062,703 
Finance lease   34,424 

 

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

 

   Capital   Operating, 
   Lease   lease 
2020   188,028    8,599,004 
2021   163,061    8,757,803 
2022   146,831    8,628,318 
2023   120,645    8,604,784 
2024   1,564    8,233,773 
Thereafter   -    52,434,190 
Total minimum lease payments  $620,129   $95,257,872 
Less: Amount representing interest   (92,549)   (23,637,775)
Total  $527,580   $71,620,095 

 

14

 

 

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 three months ended June 30, 2019 and 2018, respectively:

  

   Three months ended
June 30, 2019
 
   Wholesale   Retail   Total 
             
Net sales  $4,532,105   $19,295,677   $23,827,782 
Cost of sales   3,193,655    13,905,013    17,098,668 
Retail occupancy costs   -    1,930,619    1,930,619 
Gross profit  $1,338,450   $3,460,045   $4,798,495 
                
Interest expense, net  $(3,040)  $(606,705)  $(609,745)
Depreciation and amortization  $326,843   $2,592,644   $2,354,881 
Capital expenditures  $-   $479,396   $479,396 
Segment loss before income tax provision  $365,856   $(3,831,919)  $(3,466,063)
Income tax provision (benefit)  $10,338   $(108,275)  $(97,937)
Segment assets  $17,638,285   $91,914,715   $109,553,000 

  

   Three months ended
June 30, 2018
 
   Wholesale   Retail   Total 
             
Net sales  $5,188,545   $25,899,596   $31,088,141 
Cost of sales   3,831,897    18,999,424    22,831,321 
Retail occupancy costs   -    1,831,074    1,831,074 
Gross profit  $1,356,648   $5,069,098   $6,425,746 
                
Interest expense, net  $(3,393)  $(242,310)  $(245,703)
Depreciation and amortization  $59,084   $491,225   $550,309 
Capital expenditures  $18,313   $3,057,729   $3,076,042 
Segment income (loss) before income tax provision (benefit)  $156,539   $(1,719,368)  $(1,562,829)
Income tax provision (benefit)  $43,831   $270,002   $313,833 
Segment assets  $11,817,248   $38,829,721   $50,646,969 

  

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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. As of June 30, 2019, all warrants have been exercised.

 

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 $5,099,925 and $4,166,595 as of June 30, 2019 and March 31, 2019.

 

The Company has approximately $14,181,339 and $10,715,275 of US NOL carry forward as of June 30, 2019 and March 31, 2019, respectively. For income tax purpose, those NOLs will expire in the year 2032 through 2038.

  

16

 

 

Income Tax Provision (Benefit)

 

The provision (benefit) for income taxes consists of the following components: 

 

   For the three months ended 
   June 30 
   2019   2018 
Current:        
Federal  $-   $- 
State   -    - 
    -    - 
Deferred:          
Federal   (73,453)   235,375 
State   (24,484)   78,458 
    (97,937)   313,833 
           
Total  $(97,937)  $313,833 

 

Tax Rate Reconciliation

 

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

  

   Three months ended
June 30,
 
   2019   2018 
Expected tax at U.S. statutory income tax rate   21%   21%
State and local income taxes, net of federal income tax effect   7%   14%
Other non-deductible fees and expenses   (0.8%)   3%
Valuation allowance   (24.4%)   (58%)
           
Effective tax rate   2.8%   (20%)

  

Deferred Taxes

 

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

 

   June 30,   March 31, 
   2019   2019 
Deferred Tax Assets/ (Liabilities):          
Deferred expenses  $223,604   $101,829 
Sec 263A Inventory Cap   271,221    208,514 
Leasing liabilities/Deferred rent   2,117,531    2,092,128 
Depreciation and amortization   (2,398,831)   (2,305,164)
Net operating losses   4,869,241    3,898,744 
163 (j) business interest   132,748    286,133 
Valuation allowance   (5,001,988)   (4,166,595)
Net Deferred Tax Assets  $213,526   $115,589 

 

17

 

 

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 three months ended June 30, 2019 and 2018 to related parties, which are directly or indirectly owned, in whole or in part, by Mr. Long Deng, shareholder and the CEO, and not eliminated in the unaudited condensed consolidated financial statements. In addition, the outstanding receivables due from these related parties as of June 30, 2019 and March 31, 2019 were included in advances and receivables – related parties (see Note 8).  

  

Three months ended June 30, 2019
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
Dragon Seeds Inc   1,650    -    - 
NY Mart MD Inc.   29,300    3,680    455,377 
NYM Elmhurst Inc.   24,612    2,210    279,004 
Spring Farm Inc.   3,300    -    - 
Pine Court Chinese Bistro   -    -    8,726 
   $58,862   $5,890   $743,107 

 

Three months ended June 30, 2018
Related Parties  Management
Fees
   Advertising
Fees
   Non-Perishable & Perishable
Sales
 
New York Mart, Inc.  $11,651   $3,780   $193,741 
Pacific Supermarkets Inc.   28,057    5,770    660,284 
NY Mart MD Inc.   18,761    880    526,734 
El Monte   4,944    1,600    - 
iFresh Harwin Inc   2,279    2,600    9,677 
Spring Farm Inc.   -    -    1,358 
Tampa Seafood   550         - 
Pine Court Chinese Bistro   -    -    24,524 
   $66,242   $14,630   $1,416,318 

 

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 $292,460and $292,460 for the three months ended on June 30, 2019 and 2018.

 

18

 

    

17. Contingent Liability

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On May 31, 2018, the ISD issued an occupancy permit, triggering Ming’s requirement to resume regular rental payments. The result is a judgment in favor of Ming and against the landlord that will total approximately $1.85 million.  

 

The appeal hearing was held in July 12, 2019 and a decision is expected to be made within 90 days. No guaranties or predictions can be made at this time as to ultimate final outcome of this case.

 

19

 

 

HDH, LLC v. New York Mart Group Inc.

 

A subsidiary of the Company, New York Mart Group, Inc., entered into a lease with HDH, LLC for a warehouse located at 55-01 2nd Street, Long Island City, New York 11101 for the period March 15, 2011 through February 28, 2021. The landlord sued the tenant for breaching the lease by altering the premises without the landlord’s permission and without obtaining necessary government permits. The landlord also sued the tenant for failing to pay rent and additional fee. The trial court entered a judgment on September 28, 2018. The landlord claims it is entitled to $372,667 in damages and other related fees. On July 8, final stipulation was signed and the petitioner agreed to waive $222,667 of the arrears, leaving a balance due of $150,000. The Company has previously accrued $200,000 for the potential loss and expense associated with this case.

 

Voice Road Plaza, LLC v. New York Mart Group Inc

 

A subsidiary of the Company, New York Mart Group, Inc., entered into a lease with Voice Road Plaza, LLC for the Company’s new store Glen Cov located at Carle Place, NY 11514. The landlord sued the Company for failing to pay rent and additional fee. In April 2019, landlord was awarded money judgment of $207,975 and judgment of passion and warrant of eviction. The landlord has also requested legal order to withhold the Company’s bank account for $415,950 on May 3, 2019. On June 19, 2019, the Company signed Stipulation of Settlement with landlord to pay for the unpaid rent and execute warrant of eviction by July, 24, 2019. The Company has accrued around $210,000 expense associated with this case. The Company is planning to file a notice of appeal to sue the landlord not timely provide documents requested in order for the Company to obtain required license to operate.

 

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. The deadline for iFresh to respond to that motion has not yet occurred. In view of the uncertainties inherent in litigation, we are unable to form a judgment as to the likelihood of an unfavorable outcome. If the plaintiff was to prevail on the merit, it could obtained a judgment against iFresh in the amount of its alleged loss under the bonds for the amount of $424,772, in addition to attorney’s fee, costs and interest. 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 around $355,000. The Company is currently negotiating an agreement with the landlord to settle the case. A hearing will be held on August 20, 2019. All unpaid rent has been fully accrued as of June 30, 2019.

 

18. Subsequent Event

 

The Company’s management reviewed all material events that have occurred after the balance sheet date through the date which these financial statements were issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

  

20

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

Forward-Looking Statements

 

This report includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”) filings.  References to “we”, “us”, “our,” “iFresh” or the “Company” are to iFresh Inc., except where the context requires otherwise.  The following discussion should be read in conjunction with our unaudited condensed financial statements and related notes thereto included elsewhere in this report.

  

Overview

  

iFresh Inc. (“we,” “us,” “our,” or “iFresh” or the “Company”) is a Delaware company incorporated in July 2016 in order to reincorporate E-Compass Acquisition Corp. (“E-Compass”) to Delaware pursuant to the Merger Agreement (as defined below). Immediately following the reincorporation, we acquired NYM Holding, Inc (“NYM”). E-Compass was a blank check company formed for the purpose of entering into a share exchange, asset acquisition, share purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities. NYM is a fast growing Asian/Chinese grocery supermarket chain in the north-eastern U.S. providing food and other merchandise hard to find in mainstream grocery stores. Since NYM was formed in 1995, NYM has been targeting the Chinese and other Asian population in the U.S. with its in-depth cultural understanding of its target customer’s unique consumption habits. iFresh currently has ten retail supermarkets across New York, Massachusetts and Florida, with in excess of 6,224,500 sales transactions in its stores in the fiscal year ended March 31, 2019. It currently has one in-house wholesale businesses, Strong America Limited (“Strong America”) covering more than 6,000 wholesale products and servicing both NYM retail supermarkets and over 1,000 external clients that range from wholesalers to retailing groceries and restaurants. NYM has a stable supply of food from farms in New Jersey and Florida, ensuring reliable supplies of the most popular vegetables, fruits and seafood. Its wholesale business and long term relationships with farms insulate NYM from supply interruptions and sales declines, allowing it to remain competitive even during difficult markets.

 

Outlook

 

iFresh is an Asian Chinese supermarket chain in the U.S. northeastern region with nine retail super markets and two wholesale facilities. iFresh plans to strategically expand along the I-95 corridor and its goal is to cover all states on the east coast.

 

  a. iFresh provides unique products to meet the demands of the Asian/Chinese American Market;
  b. iFresh has established a merchandising system backed by an in-house wholesale business and by long-standing relationships with farms;
  c. iFresh maintains an in-house cooling system with unique hibernation technology that is has developed over 20 years to preserve perishables, especially produce and seafood;
  d. iFresh capitalizes on economies of scale, allowing strong negotiating power with upstream vendors, downstream customers and sizable competitors; and
  e. iFresh has a proven and replicable track record of management, operation, acquisition and organic growth.

 

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iFresh’s net sales were $23.8 million and $31.1 million for the three months ended June 30, 2019 and 2018, respectively. In terms of sales by category, Perishables constituted approximately 55.6% of the total sales for the three months ended June 30, 2019. iFresh’s net loss was $3.4 million for the three months ended June 30, 2019, an increase of $1.5 million, or 80%, from $1.9 million of net loss for the three months ended June 30, 2018. Adjusted EBITDA was $-2.3 million for the three months ended June 30, 2019, an decrease of $1.4 million, or 175%, from $-0.8 million for the three months ended June 30, 2018.

 

Factors Affecting iFresh’s Operating Results

 

Seasonality

 

iFresh’s business shows seasonal fluctuations. Sales in its first and second fiscal quarters (ending June 30 and September 30, respectively) are usually 5% to 10% lower than in third and fourth quarters (ending December 31 and March 31, respectively). In its third fiscal quarter, customers make holiday purchases for Thanksgiving and Christmas. In its fourth quarter, customers make purchases for traditional Chinese holidays, such as the Spring Festival (Chinese New Year, in January or February).

  

Competition

 

The Company faces competition from other Asian supermarkets. In the fiscal year 2019, two of our stores located in Boston and New York experienced significantly decreased sales due to competition from newly opened grocery stores. In first quarter of fiscal year 2020, the Company contracted these two stores to third party to operate and are collecting contracting fees. The gross margin was low in these stores since the Company’s distribution center in New York area could not lower the purchase cost of the stores in MA For the three months ended June 30, 2019, the Company’s retail sales decreased significantly due to the change of operations of these two stores.

 

Payroll

 

Minimum wage rates in some states increased. For example, the minimum wage rose from $13 to $15 per hour in New York City. Payroll and related expenses decreased by $1.2million, or 7.7% for the year ended March 31, 2019 and decreased by $0.9 million or 22.9% for the three months ended June 30, 2019 as compared to the same period of last year as a result of workforce reduction to reduce costs.

  

Vendor and Supply Management 

 

iFresh believes that a centralized and efficient vendor and supply management system are the keys to profitability. iFresh operates its own wholesale facilities, which supplied about 19.6 % and 14.8% of its procurement for the fiscal year ended March 31, 2019 and three months ended June 30, 2019, respectively. iFresh believes that its centralized vendor management enhances iFresh’s negotiating power and improves its ability to turnover inventory and vendor payables. Any changes to the vendor and supply management could affect iFresh’s purchasing costs and operating expenses. Starting from Q4 of fiscal year 2019, the Company’s wholesale business gradually slows down and the retail stores are heavily relied on third party vendors for inventory supplies instead of centralized supply system.

 

Store Maintenance and Renovation

 

From time to time, iFresh conducts maintenance on the fixtures and equipment for its stores. Any maintenance or renovations could interrupt the operation of our stores and result in a decline of customer volume, and therefore sales volume, but will, in the opinion of management, boost sales after they are completed. Significant maintenance or renovation would affect our operation and operating results. As of June 30, 2019, two iFresh stores are under renovation and have not opened yet. iFresh incurred $449,948 in expenses for these stores for the year ended March 31, 2019. One store was under renovation for 10 months in the year of 2019 and incurred $871,709 in expense. Because these stores are being renovated, sales are affected.  

 

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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. In January 2019, one of our Glen Cove has been fully operated and started to generate revenue.

 

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.

 

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iFresh’s management defines Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, store opening costs, and non-recurring expenses. All of the omitted items are either (i) non-cash items or (ii) items that we do not consider in assessing its ongoing operating performance. Because it omits non-cash items, iFresh’s management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect its operating performance. iFresh’s management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the company’s financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.

 

Results of Operations for the three months ended June 30, 2019 and 2018

 

   For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Net sales-third parties  $23,084,675   $29,671,823   $(6,587,148)   (22.2)%
Net sales-related parties   743,107    1,416,318    (673,211)   (47.5)%
Total Sales   23,827,782    31,088,141    (7,260,359)   (23.4)%
Cost of sales-third parties   16,516,099    21,602,917    (5,086,818)   (23.5)%
Cost of sales-related parties   582,569    1,228,404    (645,835)   (52.6)%
Occupancy costs   1,930,619    1,831,074    99,545    5.4%
Gross Profit   4,798,495    6,425,746    (1,627,251)   (25.3)%
Selling, general, and administrative expenses   8,575,894    8,075,441    500,453    6.2%
Income from operations   (3,777,399)   (1,649,695)   (2,127,704)   129%
Interest expense   (609,745)   (245,703)   (364,042)   148.2%
Other income   921,080    332,569    588,511    177%
Income before income tax provision   (3,466,064)   (1,562,829)   (1,903,235)   121.8%
Income tax provision (benefit)   (97,937)   313,833    (411,770)   (131.2)%
Net income   (3,368,127)   (1,876,662)   (1,491,465)   79.5%
Net income attributable to common shareholders  $(3,368,127)  $(1,876,662)  $(1,491,465)   79.5%

   

Net Sales

 

   For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Net sales of retail-third parties  $19,295,677   $25,899,596   $(6,603,919)   -25.5%
Net sales of wholesale-third parties   3,788,998    3,772,227    16,771    0.4%
Net sales of wholesale-related parties   743,107    1,416,318    (673,211)   -47.5%
Total Net Sales  $23,827,782   $31,088,141   $(7,260,359)   -23.4%

 

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iFresh’s net sales were $23.8 million for the three months ended June 30, 2019, a decrease of $7.3 million, or 23.4 %, from $ 31.1 million for the three months ended June 30, 2018. 

 

Net retail sales to third parties decreased by $6.6 million, or 25.5 %, from $25.9 million for the three months ended June 30, 2018 to $19.3 million for the three months ended June 30, 2019.  The decrease resulted mainly from our Quincy (Zen Store) and Boston (Ming Store), Massachusetts stores. Ming and Zen contributed $5.3 million of retail sales for the three months ended June 30, 2018. Starting from the fiscal year 2019, these two stores experienced significantly decreased sales due to competition from newly opened grocery stores. On April 1, 2019, the Company contracted the two stores to other company to operate and is collecting management fees from these companies. Management fees are $40,000 per months for the six months and $50,000 after six months, for 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 inventories at net book value of $1.5 million, but keep the ownership of all property and equipment. The depreciation and amortization expense were approximately $140,000 for the three months ended June 30, 2019 which could be covered by the management fee billed. In addition, sales from our stores in NYC decreased by $1.9 million because we contracted part of vegetables and fruits business to third parties in our store to improve our margin.

 

Our total net wholesale sales decreased by $0.7 million from $5.2 million for the three months ended June 30, 2018 to $4.5 million for the three months ended June 30, 2019, attributable that our sales to related parties decreased by $0.7 million from the three months ended June 30, 2018 to the three months ended June 30, 2019, attributable to that New York Mart Group. Inc is going out of business.

 

Cost of sales, Occupancy costs and Gross Profit

 

Retail Segment  For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Cost of sales  $13,905,013   $18,999,424   $(5,094,411)   -26.8%
Occupancy costs   1,930,619    1,831,074    99,545    5.4%
Gross profit   3,460,045    5,069,098    (1,609,053)   (31.7)%
Gross margin   17.9%   19.6%   -1.7%   - 

 

For the retail segment, cost of sales decreased by $5.1 million, from $19.0 million for the three months ended June 30, 2018, to $14.0 million for the three months ended June 30, 2019. The decrease was consistent with the sales decreased and mainly due to changes we made to Ming and Zen store in MA mentioned above. The cost decreased by 26.8%, compared to sales decrease of 25.5%, lead to higher margin which was calculated before adding the occupancy cost in the total cost. This is expected when the strategic decision was made to contract the stores to others to operate.

 

Occupancy costs consist of store-level expenses such as rental expenses, property taxes, and other store specific costs. Occupancy costs increased by approximately $0.1million, which was mainly attributable to increased taxes and store specific costs and the rent of the iFresh E. Colonial store which was newly open in the end of fiscal year 2018.

   

Gross profit was $3.5 and $5.1 million for the three months ended June 30, 2019 and 2018, respectively. Gross margin was 17.9% and 19.6% for the three months ended June 30, 2019 and 2018, respectively. The gross profit decreased due to the increase of rent expense and decreased sales from stores operated by the Company.

 

Wholesale Segment  For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Cost of sales  $3,193,655   $3,831,897   $(638,242)   (16.7)%
Gross profit   1,338,450    1,356,648    (18,198)   (1.3)%
Gross margin   29.5%   26.1%   3.4%   - 

 

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For our wholesale segment, the cost of sales for the three months ended June 30, 2019 decreased by $0.6 million, or 16.7%, from $3.8 million for the three months ended June 30, 2018 to $3.2 million for the three months ended June 30, 2019. The decrease is consistent with the significant decrease of sales from the wholesale segment in 2019.

 

Gross profit for the three months ended June 30, 2019 decreased by around $18,000, or 1.3%, from $1.36 million for the three months ended June 30, 2018 to $1.34 million for the three months ended June 30, 2019. Gross margin increased by 3.4% from 26.1% to 29.5%. The increase was due to the significant sales decrease to its related parties, of which the margin is lower than sales made to third parties.

 

Selling, General and Administrative Expenses

 

Selling, general, and administrative expenses were $8.6 million for the three months ended June 30, 2019, an increase of $0.5 million, or 6.2%, compared to $8.1 million for the three months ended June 30, 2018, which was mainly attributable to the $0.5 million of stock compensation to employees and $1.5 million of expense associated with warrant exercise in this quarter, offsetting of $0.8 million expense decrease was due to that we contracted two stores in MA and we do not operate these two stores ourselves thus we are decreasing selling, general and administrative expense from these two stores .  Due to the change of majority shareholder from Mr. Long Deng to HK Xu Ding Co., Limited, which is qualified as “fundamental transaction” defined in the warrant agreements dated in October 23, 2018. The shareholders exercised its warrants at no cost

 

Interest Expense

 

Interest expense was $0.6 million for the three months ended June 30, 2019, an increase of $0.4 million, or 148%, from $245,000 for the three months ended June 30, 2018, attributable to the increased average outstanding loan balance from $19.7 from three months ended June 30, 2018 to $21.2 for the three months ended June 30, 2019, as well as increased interest rate from 5.7% for the three months ended June 30, 2018 to 6.45% for the three months ended June 30, 2019. In addition, the Company paid approximately $150,000 of forbearance fee to Key Bank in May due to the violation of covenant.

 

Other income

 

Other income was $0.9 million for the three months ended June 30, 2019, which included management and advertising fee income, rental income, lottery sales, and other miscellaneous income. Other income increased $0.6 million, 177%, from $0.3 million for the three months ended June 30, 2018. For the three months ended June 30, 2019, the Company collected $0.1 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 $0.3 million.

 

Income Taxes Provision

 

We are subject to U.S. federal and state income taxes. Income tax benefit was around $98,000 for the three months ended June 30, 2019, compared to $313,000 of income tax expense for the three months ended June 30, 2018. The effective income tax rate was 2.8% and -20% for the three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2018, the Company made reserve for deferred tax asset due to the significant loss incurred. For the three months ended June 30, 2019, the Company recognized deferred tax result from deferred expense, inventory cap and lease liabilities.

 

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Net Income (loss)

 

   For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Net income  $(3,368,127)  $(1,876,662)  $(1,491,465)   79.5%
Net Loss Margin   -14.14%   -6.04%   -8.1%     

 

Net loss was $3.4 million for the three months ended June 30, 2019, an increase of $1.5 million, or 79.5%, from $1.9 million of net loss for the three months ended June 30, 2018, mainly attributable to the decreased gross margin and increase in selling, general, and administrative expenses described above. Net loss as a percentage of sales was -14.14% and -6.04% for the three months ended June 30, 2019 and 2018, respectively.

 

Adjusted EBITDA

 

   For the three months
ended June 30,
   Changes 
   2019   2018   $   % 
Net income  $(3,368,127)  $(1,876,662)  $(1,491,465)   79.5%
Interest expense   609,745    245,703    364,042    148.2%
Income tax provision   (97,937)   313,833    (411,770)   -132.2%
Depreciation   561,644    459,945    101,699    22.1%
Amortization   33,333    33,333    -    0%
Adjusted EBITDA  $(2,261,342)  $(823,848)  $(1,437,494)   174.5%
Percentage of sales   -9.5%   -2.7%   -6.8%     

  

Loss before income tax, depreciation, and amortization was $2.3 million for the three months ended June 30, 2019, an increase of $1.4 million, as compared to income before income tax, depreciation, and amortization of $0.8million for the three months ended June 30, 2018, mainly attributable to the decrease in net income resulting from decreased sales and increase in selling, general, and administrative expenses described above.

 

Liquidity and Capital Resources

 

As of June 30, 2019, iFresh had cash and cash equivalents of approximately $1.3 million. iFresh had operating losses three months ended June 30, 2019 and had negative working capital of $26.9 million and $21.6million as of June 30, 2019 and March 31, 2019, respectively. iFresh had negative equity of $1.4 million as of June 30, 2019. The long-term KeyBank loan of $21 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 June 30, 2019, the Company has outstanding loan facilities of approximately $21.4 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 June 30, 2019. iFresh’s ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control.

 

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We have $4.6 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 June 30, 2019, the Company remains in noncompliance with the financial covenants of the KeyBank Loan. These conditions continue to raise doubt as to the Company’s ability to remain a going concern.

 

The following table summarizes iFresh’s cash flow data for the three months ended June 30, 2019 and 2018.

  

   For the three months
ended June 30,
 
   2019   2018 
Net cash used in operating activities  $(620,468)  $(3,466,885)
Net cash provided by (used in) investing activities   329,249    (1,808,660)
Net cash provided by financing activities   552,745    5,192,868 
Net increase (decrease) in cash and cash equivalents  $261,526   $(82,677)

 

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 $0.6 million for the three months ended June 30, 2019, a decrease of $2.8 million, or 82%, compared to $3.5million used in operating activities for the three months ended June 30, 2018. The increase was a result of an increase of $3 million from change of working capital mainly resulting from decrease from inventory, offset by decrease in net income of $1.5 million.

 

Investing Activities

 

Net cash provided by investing activities was approximately $330,000 for the three months ended June 30, 2019, an increase of $2.1million, compared to $1.8 million used in investing activities for the three months ended June 30, 2018. The increase was primarily attributable to the decrease of $2.5 million in acquisition of property and equipment in 2019.

 

Financing Activities

 

Net cash provided by financing activities was approximately $0.55 million for the three months ended June 30, 2019, which mainly consisted of net cash paid for bank loans of $0.5 million, cash received from capital contribution of $1.1 million, offset by $60,000 cash paid notes payable, and capital leases. Net cash provided from financing activities was $5.2 million for the three months ended June 30, 2018, which mainly consisted of net cash flow from bank loans of $5.7 million, offset by $74,000 cash paid for notes payable and capital leases.

 

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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, 2018.

 

$15,000,000 of the term loan was fully funded by the lender in January 2017. The Company is required to make fifty-nine consecutive monthly payments of principal and interest in the amount of $142,842 starting from February 1, 2017 and a final payment of the then entire unpaid principal balance of the term loan, plus accrued interest on the maturity date.

 

A Delayed Draw Term Loan was available and would be advanced on the Delayed Draw Funding date (as defined in the Credit Agreement, which is no later than December 23, 2021. A withdrawal of $5 million under the Delayed Draw Term Loan was made as of June 30, 2019.

 

The senior secured credit facility is secured by all assets of the Company and is jointly guaranteed by the Company and its subsidiaries and contains financial and restrictive covenants. The financial covenants require NYM to deliver audited consolidated financial statements within one hundred twenty days after the fiscal year end and to maintain a fixed charge coverage ratio not less than 1.1 to 1.0 and senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio less than 3.0 to 1.0 at the last day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2017. Except as stated below, the senior secured credit facility is subject to customary events of default. It will be an event of default if Mr. Long Deng resigns, is terminated, or is no longer actively involved in the management of NYM and a replacement reasonably satisfactory to the Lender is not made within sixty (60) days after such event takes place. The Company violated the loan covenant when Mr. Long Deng, CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares to HK Xu Ding Co., Limited on January 23, 2019, representing 51% of the total issued and outstanding shares of the Company as of December 31, 2018. The Company failed to obtain a written consent for the occurrence of the change of ownership. As a result, effective as of March 1, 2019, interest was accrued on all loans at the default rate and the monthly principal and interest payment due under the effective date term loan will be $155,872 instead of $142,842.

 

On May 20, 2019 (the “Effective Date”), the Company entered into a forbearance agreement (the “Forbearance Agreement”) with KeyBank, pursuant to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of the events of defaults for certain period of time.  The Forbearance Agreement contains customary forbearance covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment decreased to $142,842 as originally required per the credit facility agreements.

 

The Company 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 June 30, 2019 and March 31, 2019, the Company has negative EBITDA, thus the ratio was negative and the Company was not in compliance with the financial covenants of the KeyBank loan.

 

While KeyBank has not yet acted to accelerate payment of the facility, KeyBank considers the Company to be in default and will not make any further advances under the Credit Facility until the Company comes into compliance with the Credit Agreement.

 

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Commitments and Contractual Obligations

 

The following table presents the Company’s material contractual obligations as of June 30, 2019:

 

Contractual Obligations (unaudited)  Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
Bank Loans  $20,960,215   $1,521,862   $19,438,353   $     
Estimated interest payments on bank loans   1,204,458    509,744    694,714         
Notes payable   203,729    95,130    107,334    1,265     
Capital lease obligations including interest   620,129    188,028    309,892    122,209     
Operating Lease Obligations(1)   95,257,872    8,599,004    17,386,121    16,838,557    52,434,190 
   $118,246,403   $10,913,768   $37,936,414   $16,962,031   $52,434,190 

    

(1)Operating lease obligations do not include common area maintenance, utility and tax payments to which iFresh is obligated, which is estimated to be approximately 50% of operating lease obligation.

 

Off-balance Sheet Arrangements

 

iFresh is not a party to any off-balance sheet arrangements.

 

Critical Accounting Estimates

 

The discussion and analysis of iFresh’s financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with GAAP. These principles require iFresh’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. The estimates include, but are not limited to, revenue recognition, inventory valuation, impairment of long-lived assets, lease, and income taxes. iFresh bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and the actual results, future financial statements will be affected.

 

iFresh’s management believes that among their significant accounting policies, which are described in Note 3 to the unaudited condensed consolidated financial statements of iFresh included in this Form 10-Q, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, iFresh’s management believes these are the most critical to fully understand and evaluate its financial condition and results of operations.

 

Revenue Recognition

 

In accordance with Topic 606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise or delivery is made to our wholesale customers. Payment terms are established for our wholesale customers based on the Company’s pre-established credit requirements. Payment terms vary depending on the customer. Based on the nature of receivables no significant financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical return experience.

 

Topic 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account. The majority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct.

 

We had no material contract assets, contract liabilities or costs to obtain and fulfill contracts recorded on the Condensed Consolidated Balance Sheet as of June 30, 2019. Revenue recognized from performance obligations related to prior periods was insignificant.

 

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Inventories

 

Inventories consist of merchandise purchased for resale, which are stated at the lower of cost or market. The cost method is used for wholesale and retail perishable inventories by assigning costs to each of these items based on a first-in, first-out (FIFO) basis (net of vendor discounts).

 

The Company’s wholesale and retail non-perishable inventory is valued at the lower of cost or market using weighted average method.

 

Impairment of Long-Lived Assets

 

iFresh assesses its long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which independent identifiable cash flows are available. Factors which may indicate potential impairment include a significant underperformance relative to the historical or projected future operating results of the store or a significant negative industry or economic trend. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value is estimated based on the discounted future cash flows or comparable market values, if available.

   

Leases

 

On April 1, 2019 the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, we elected to apply the package of practical expedients. Based on this guidance we will not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. The adoption of Topic 842 resulted in the presentation of $64,881,376 of operating lease assets and $71,620,095 operating lease liabilities on the consolidated balance sheet as of June 30, 2019. See Note 12 for additional information.

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 

 

Income Taxes

 

iFresh must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in income tax rates is recognized in income in the period that includes the enactment date.

 

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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.   

  

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As of June 30, 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 June 30, 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 June 30, 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.

  

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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 a decision is expected to be made within 90 days. No guaranties or predictions can be made at this time as to ultimate final outcome of this case.

 

HDH, LLC v. New York Mart Group Inc.

 

A subsidiary of the Company, New York Mart Group, Inc., entered into a lease agreement with HDH, LLC for a warehouse located at 55-01 2nd Street, Long Island City, New York 11101 for the period March 15, 2011 through February 28, 2021. The landlord sued the tenant for breaching the lease by altering the premises without the landlord’s permission and without obtaining necessary governmental permits. The landlord also sued the tenant for failing to pay rent and additional fee. The trial court entered a judgement on September 28, 2018. The landlord claims it is entitled to $372,667 in damages and other related fees. On July 8, final stipulation was signed and the petitioner agreed to waive $222,667 of the arrears, leaving a balance due of $150,000. The Company has previously accrued $200,000 for the potential loss and expense associated with this case.

 

Voice Road Plaza, LLC v. New York Mart Group Inc

 

A subsidiary of the Company, New York Mart Group, Inc., entered into a lease with Voice Road Plaza, LLC for the Company’s new store Glen Cove located at Carle Place, NY 11514. The landlord sued the Company for failing to pay rent and additional fee. In April 2019, landlord was awarded money judgment of $207,975 and judgment of passion and warrant of eviction. The landlord has also requested legal order to withhold the Company’s bank account for $415,950 on May 3, 2019. On June 19, 2019, the Company signed Stipulation of Settlement with landlord to pay for the unpaid rent and execute warrant of eviction by July 24, 2019. The Company has accrued around $210,000 expense associated with this case. The Company is planning to file a notice of appeal to sue the landlord not timely provide documents requested in order for the Company to obtain required license to operate.

 

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. The deadline for iFresh to respond to that motion has not yet occurred. In view of the uncertainties inherent in litigation, we are unable to form a judgment as to the likelihood of an unfavorable outcome. If the plaintiff was to prevail on the merit, it could obtain a judgment against iFresh in the amount of its alleged loss under the bonds for the amount of $424,772, in addition to attorney’s fee, costs and interest. The Company has accrued $500,000 for the potential loss and expense associated with this case.

  

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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 around $355,000. The Company is currently negotiating an agreement with the landlord to settle the case. A hearing will be held on August 20, 2019. All unpaid rent has been fully accrued as of June 30, 2019.

 

Regulatory Compliance

 

On July 2, 2019, the Company received a notification letter (the “Notification”) from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“Nasdaq”) stating that the Company is no longer in compliance with Nasdaq Listing Rule. Nasdaq 5550(b)(3) requires listed companies to maintain net income of $500,000 from continuing operations in the most recently completed fiscal year, or in two of the three most recently completed fiscal years. The Company’s Form 10-K for the period ended March 31, 2019 reported net loss from continuing operations of $12,003,443, below the net income requirement set forth in Nasdaq Listing Rule 5635(d)(3). Further, as of July 1, 2019, the Company did not meet the alternative compliance standards under Nasdaq Listing Rule 5550(b) of (i) market value of listed securities of at least $35 million, or (ii) stockholders’ equity of at least $2.5 million.

 

The notification received has no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing Rules, the Company has until August 16, 2019 to submit a plan to regain compliance (the “Compliance Plan”). If the Compliance Plan is accepted, Nasdaq can grant an extension of up to 180 calendar days from the date of the Notification. If Nasdaq does not accept the Company’s plan, the Company will have the right to appeal such decision to a Nasdaq hearings panel.

 

The Company intends to submit to Nasdaq, within the requisite period, a plan to regain compliance. There can be no assurance that Nasdaq will accept the Company’s plan or that the Company will be able to regain compliance with the applicable listing requirements.

 

On July 30, 2019, the Company held its annual meeting of shareholders. Reference is made to the current report on Form 8-K filed with the SEC on August 2, 2019.

 

On August 5, 2019, the Company received a letter from Nasdaq Listing Qualification informing the Company that the staff has determined that the Company complies with the annual meeting requirement for continued listing on The Nasdaq Capital Market set forth in Listing Rules 5620.

 

Item 1A. Risk Factors.

 

Other than the risk factor related to the Company that is further discussed in this section, 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. Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and in our Annual Report on Form 10-K for the year ended March 31, 2018, under the caption “Risk Factors,” 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 Annual Report on Form 10-K for the year ended March 31, 2018. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the SEC.

 

If we fail to effectively operate our self-insured health plan, we may not be able to retain employees and may be subject to tax penalties and legal proceedings.

 

Under The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, employers with 50 or more full-time equivalent employees must offer health insurance to certain of their employees and their dependent children, and if coverage meeting certain minimum requirements is not offered the employer may face non-deductible tax penalties.

  

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We and our subsidiaries operate self-insurance health plan for our employees. We could be subject to payment of health care claims from employees, which vary from time to time. If we do not settle such health care claims in time, we may be subject to various tax penalties, legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in a substantial cost and diversion to our resources, including our management’s time and attention. Any tax penalties may adversely affect our financial performance.

 

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

 

On June 1 and June 5, 2019, respectively, the Company, and two holders (the “Holders”) of the Company’s warrants (the “Existing Warrants”) issued pursuant to that certain Securities Purchase Agreement dated October 19, 2018, entered into certain Exchange Agreements, whereby the Company agreed to issue to the Holders an aggregate of 1,170,000 shares  (“Exchange Shares”) of the Company’s common stock, par value $0.0001 per share and warrant to purchase an aggregate of 1,170,000 shares of common stock (the “Exchange Warrants”) as the negotiated purchase price for the Existing Warrants based on the Black Scholes Value as a result of a certain transaction which was deemed as a Fundamental Transaction (as defined in the Existing Warrants) pursuant to Section 3(e) of the Existing Warrants.

 

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 June 30, 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, the Company, NYM, certain subsidiaries of NYM, Mr. Long Deng and KeyBank National Association entered into a forbearance agreement (the “Forbearance Agreement”) with respect to that certain Credit Agreement, dated as of December 23, 2016, as amended, pursuant to which KeyBank National Association, “Keybank” the or “Lender”, made available to NYM, the “Borrower”, a revolving credit facility, a term loan facility, and other credit accommodations. Pursuant to that certain Guaranty Agreement, dated as of December 26, 2016, as amended by several joinder agreements, the Company, certain subsidiaries of NYM and Mr. Long Deng (collectively, the “Guarantors”, and together with the Borrower, the “Loan Parties”) have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement (“Obligations”). The Lender has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default (the “Specified Events of Default”) until the earlier to occur of: (a) 5:00 p.m. Eastern Time on the 90th day from Effective Date; and (b) a Forbearance Event of Default.

 

Item 4. Mine Safety Disclosure.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit 
No.
  Description
     
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: August 14, 2019 By: /s/ Long Deng
    Long Deng
    Chairman of the Board and 
Chief Executive Officer
(Principal executive officer)
     
  By: /s/ Long Yi
    Long Yi
    Chief Financial Officer
(Principal financial and accounting officer)

 

 

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Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Long Deng, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of iFresh, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2019

 

  /s/ Long Deng
  Long Deng
  Chief Executive Officer
  (Principal executive officer)

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Long Yi, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of iFresh, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2019

 

  /s/ Long Yi
  Long Yi
  Chief Financial Officer
  (Principal financial and accounting officer)

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of iFresh, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2019 as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

Date: August 14, 2019

 

  /s/ Long Deng
  Long Deng
  Chief Executive Officer
  (Principal executive officer)

 

Date: August 14, 2019

 

  /s/ Long Yi
  Long Yi
  Chief Financial Officer
  (Principal financial and accounting officer)