IFRESH INC. 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 otherSecurities and Exchange Commission ("SEC") filings. References to "we", "us", "our," "iFresh" or the "Company" are toiFresh 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 aDelaware company incorporated inJuly 2016 in order to reincorporateE-Compass Acquisition Corp. ("E-Compass") toDelaware pursuant to the Merger Agreement (as defined below). Immediately following the reincorporation, we acquiredNYM 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-easternU.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 theU.S. with its in-depth cultural understanding of its target customer's unique consumption habits. iFresh currently has ten retail supermarkets acrossNew York ,Massachusetts andFlorida , with in excess of 4,938,600 sales transactions in its stores in the fiscal year endedMarch 31, 2020 . It also 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 inNew Jersey andFlorida , 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. OnMarch 26, 2020 , the Company entered into an agreement (the "Acquisition Agreement") with Kairui Tong andHao Huang (collectively, the "Sellers") andHubei Rongentang Wine Co., Ltd. andHubei Rongentang Herbal Wine Co., Ltd (collectlively, the "RET Wine Co. ")., pursuant to which the Sellers will sell their 100% interest inHubei Rongentang Wine Co., Ltd. andHubei Rongentang Herbal Wine Co., Ltd. (collectively, the "Target Companies") to the Company in exchange for 3,852,372 shares of the Company's common stock and 1,000 shares of the Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock"). Upon approval of the Company's shareholders, the 1,000 shares of Series B Preferred Stock will be converted into 3,834,796 shares of the Company's common stock. The acquisition was closed onApril 22, 2020 . RETWine Co. is engaged in the business of manufacturing and sales of rice liquor products andHerbal Wine Co. is engaged in the business of manufacturing and sales of herbal rice liquor products.
RET
InApril 2020 , we acquired 70% ofXiamen DL Medical Technology Co, Ltd. , ("DL Medical") aPeople's Republic of China company, in exchange for$600,000 in cash and 900,000 shares of our common stock. The acquisition was closed on April
28, 2020. 26Xiamen DL Medical Technology Co, Ltd is our subsidiary that produces face masks inChina founded inMarch 2020 . Its core business includes engineering and technical research and experimental development in and production of medical protective masks, non-medical daily protective masks, cotton spinning processing. We have built our production lines from scratch, with an estimated aggregate annual output of 5 million masks. We have one medical mask production line, which we expect, once operational, can handle a daily capacity of up to 30,000 masks, and two non-medical mask production lines, with an output capacity of up to400,000 marks per day. We expect to launch production from these production lines in the fourth quarter of 2020. Around$420,000 was needed
to fund the production.
These acquisitions are aimed to diversify the Company's revenue stream and reduce the operational risk in the US. The operation of these two companies is expected to increase the Company's profitability, increase the cash flow and improve the Company's liquidity. Outlook
iFresh is an Asian Chinese supermarket chain in the
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; and
d. iFresh capitalizes on economies of scale, allowing strong negotiating
power with upstream vendors, downstream customers and sizable
competitors;
As mentioned above, starting from 2020, the Company started to expand its
operations in
iFresh's net sales were$21.5 million and$23.8 million for the three months endedJune 30, 2020 and 2019, respectively. Starting from April, 2020, we had revenue generated from our operations inChina . For the three months endedJune 30 , liquor business and mask business from operations inChina constituted approximately$217,000 sales. For the supermarket and trading business in the US, perishables constituted approximately 47.4% of the total sales for the three months endedJune 30, 2020 . iFresh's net income was$3.6 million for the three months endedJune 30, 2020 , an increase of$7.0 million , or 210%, from$3.4 million of net loss for the three months endedJune 30, 2019 . Adjusted EBITDA was$4.7 million for the three months endedJune 30, 2020 , an increase of$6.9 million , or 306%, from negative$2.3 million for the three months endedJune 30, 2019 .
Factors Affecting iFresh's Operating Results
Seasonality iFresh's business shows seasonal fluctuations. Sales in its first and second fiscal quarters (endingJune 30 andDecember 31 , respectively) are usually 5% to 10% lower than in third and fourth quarters (endingDecember 31 andMarch 31 , respectively). In its third fiscal quarter, customers make holiday purchases forThanksgiving 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 inBoston andNew York experienced significantly decreased sales due to competition from newly opened grocery stores. In first quarter of fiscal year 2020, the Company outsourced these two stores to third party to operate and are collecting contracting fees. The Company's retail sales decreased significantly due to the change of operations of these two stores. 27 Payroll
Minimum wage rates in some states increased. For example, the minimum wage rose from$13 to$15 per hour inNew York City . Payroll and related expenses decreased by$2.3 million , or 70.6% for the three months endedJune 30, 2020 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 facility, which supplied about 16.8% of its procurement for the three months endedJune 30, 2020 . 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 rely 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 ofJune 30, 2020 , one iFresh store is under renovation and has
not opened yet.
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. Due to operational difficulties and loss, iFresh closed two stores inNew York and opened one store inFlorida for the year endedMarch 31, 2020 . COVID-19 The Company was impacted by the COVID-19 outbreak as it operates in area under stay-at-home orders sincemid-March 2020 . The Company is classified as an essential business and has remained open to serve our customers and the communities. The safety of our associates and our customers is always our first priority. In response to COVID-19, iFresh incurred incremental operating expenses of over$305,000 in the 16 weeks endedJune 30, 2020 for new initiatives implemented to support and protect our associates, customers and the communities:
1. Enhanced and more frequent sanitation practices, including hourly cleaning of
high touch point areas throughout our stores, like cashier station, and
customer bathroom, nightly deep cleaning and disinfectant fogging in every
store
2. Reduced store operating hours, including the closure of the stores located in
and at high risk of infection during the end of March and April peak period.
3. Posting and educating official recommended guidance and adhere to guidelines
within safety plan.
4. Created a centralized call center to provide our associates with single
guidance and direct reporting.
5. Expanded remote work capabilities for office associates and provided private
numerous private car pools in order to limit access to public transportation.
6. Implemented a temporary wage or allowance premium of 15%-50% above standard
base rate of pay for front line associates
7. Donated over 200,000 masks to local police precinct, school, community and
our customers.
28
8. Expanded online order sales and mobile order delivery
9. Limited bulk sales per customer on diary produce such as milk, eggs,
seafood & produce.
10. Limited the number of customers to approximately 25% of each store's
maximum occupancy, test the temperature of each customer, sterilize, and
distribute masks and gloves before entering to facility.
11. Implemented a Personal Protective Equipment program, provided associates
with masks and gloves, provide frontline associates, such as cashiers,
security guard, delivery team with protective clothing, goggles, and
complimentary herbal heath care supplies to enhance immune system.
12. Step Marking for Social Distancing program - installed floor markers andadditional signage in high traffic areas to signify six-foot distances to
encourage proper social distancing, hiring safe guard to monitor the social
distance and customer safety in store.
13. Reserved the first two hours of business each day for elderly and at-risk
customers
14. Implemented temperature checks for all associates
15. Acquiring mask supplies business oversea, to stock up on in demand related
products.
16. Installed plexiglass shields at all registers, guest services and pharmacy
counters
Due to the stay-at-home order, sales transactions were decreased by 62% from 1.3
million transactions for the three months ended June 30, 2019 to 0.5 million
transactions for the three months ended June 30, 2020 . However, sales per
transaction increased from $14 to $33 . Sales decreased by $1.0 million due to
the lockdown for the quarter ended June 30, 2020 .
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.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of retail operational expenses, administrative salaries and benefits costs, marketing, advertising and corporate overhead.
Adjusted EBITDA iFresh believes that Adjusted EBITDA is a useful performance measure and can be used to facilitate a comparison of NYM's operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone can provide. iFresh also uses Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including senior executives. Other companies in the industry may calculate Adjusted EBITDA differently than iFresh does, limiting its usefulness as a comparative measure. iFresh's management defines Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, store opening costs, and non-recurring expenses. All of the omitted items are either (i) non-cash items or (ii) items that we do not consider in assessing its ongoing operating performance. Because it omits non-cash items, iFresh's management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect its operating performance. iFresh's management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the company's financial measures with other specialty retailers, many of which present similar non-GAAP financial measures to investors.
Results of Operations for the three months ended
For the three months
ended June 30, Changes
2020 2019 $ %
Net sales-third parties $ 21,268,301 $ 23,084,675 $ (1,816,374 ) (7.9 )%
Net sales-related parties 265,614 743,107 (477,493 ) (64.3 )%
Total Sales 21,533,915 23,827,782 (2,293,867 ) (9.6 )%
Cost of sales-third parties 13,822,463 16,516,099 (2,693,635 ) (16.3 )%
Cost of sales-related parties 194,620 582,569
(387,950 ) (66.6 )%
Occupancy costs 1,473,174 1,930,619 (457,445 ) (23.7 )%
Gross Profit 6,043,658 4,798,495 1,245,163 25.9 %
Selling, general, and administrative
expenses 4,414,162 8,575,894 (4,161,732 ) (48.5 )%
Income (loss) from operations 1,629,496 (3,777,399 )
5,406,895 (143.1 )%
Interest expense (361,226 ) (609,745 ) 248,519 (40.8 )%
Other income 2,329,200 921,080 1,408,119 152.9 %
Income (loss) before income tax
provision 3,597,470 (3,466,064 ) 7,063,533 (203.8 )%
Income tax provision (benefit) - (97,937 ) 97,937 (100 )%
Net income (loss) 3,597,470 (3,368,127 ) 6,965,596 (206.,8 )%
Less: net loss attributable to non-controlling interest (5,918 ) - (5,918 ) (100 )% Net income (loss) attributable to common shareholders$ 3,603,388 $ (3,368,127 ) $ 6,971,514 (207 )% 30 Net Sales
The following table summarizes disaggregated revenue from contracts with customers by segments:
For the three months
ended June 30, Changes
2020 2019 $ %
US Wholesale $ 4,227,311 $ 4,532,105 $ (304,794 ) (7 )%
US Retail $ 17,089,552 $ 19,295,677 $ (2,206,125 ) (11 )%
Liquor products 192,749 - 192,749 100 %
Mask products 24,303 - 244,303 100 %
Total Net Sales $ 21,533,915 $ 23,827,782 $ (2,293,867 ) (10 )%
US Retail and wholesale business
The following table summarized the sales from US supermarket and trading
business for the three months ended
For the three months
ended June 30, Changes
2020 2019 $ %Net sales of retail-third parties$ 17,089,552 $ 19,295,677 $ (2,206,125 ) (11 )% Net sales of wholesale-third parties 3,961,697 3,788,998 172,699 5 % Net sales of wholesale-related parties 265,614 743,107
(477,493 ) (64 )%
Total Net Sales $ 21,316,863 $ 23,827,782 $ (2,510,919 ) (11 )%
For the US supermarket and trading business, net sales were $21.3 million for
the three months ended June 30, 2020 , a decrease of $2.5 million , or 11 %, from
$ 23.8million for the three months ended June 30, 2019 .
Net retail sales to third parties decreased by $2.2 million , or 11%, from $19.3
million for the three months ended June 30, 2019 to $17.1 million for the three
months ended June 30, 2020 . The decrease resulted mainly from the closure of
two stores in New York City due to lower performance. These two stores
contributed $2.2 million for the three months ended June 30, 2019 . Due to the
impact of Covid-19, our sales was decreased by $1.0 million in the wholesale and
retail business sector. However, we opened a new store in North Miami in January
2020 , which contributed sales of $1.0 million for the three months ended June
30, 2020 , compared to $nil for the three months ended June 30, 2019 .
Our total net wholesale sales decreased by $0.2 million from $4.4 million for
the three months ended June 30, 2019 to $4.2 million for the three months ended
June 30, 2020 . Sales was considered to be consistent for these two periods.Liquor and mask products InApril 2020 , we acquiredRET Wine Co. and DL Medical inChina . For the three months endedJune 30, 2020 ,RET Wine Co. and DL Medical contributed sales of$192,749 and$24,303 , respectively. DL Medical is a newly incorporated Company established inMarch 2020 .
Cost of sales, Occupancy costs and Gross Profit
The following table summarizes disaggregated Cost from contracts with customers
by segments:
For the three months
ended June 30, Changes
2020 2019 $ %
US Whole sale $ 2,761,865 $ 3,193,655 $ (431,790 ) (14 )%
US Retail $ 12,645,555 $ 15,835,632 $ (3,190,077 ) (20 )%
Liquor products 70,554 - 70,554 100 %
Mask products 12,283 - 12,283 100 %
Total Cost of sales (including occupancy
cost) $ 15,490,257 $ 19,029,287 $ (3,539,030 ) (19 )%
31
US retail and wholesale business
For the three months
Retail Segment ended June 30, Changes
2020 2019 $ %
Cost of sales $ 11,172381 $ 13,905,013 $ (2,732,632 ) (20 )%
Occupancy costs 1,473,174 1,930,619 (457,445 ) (24 )%
Gross profit 4,443,997 3,460,045 983,952 28 %
Gross margin 26 % 18 % 8 % -
For the retail segment, cost of sales decreased by$2.7 million , from$13.9 million for the three months endedJune 30, 2019 , to$11.2 million for the three months endedJune 30, 2020 . The decrease was consistent with the sales decreased and mainly due to the closure of two stores inNew York City in 2020, which contributed cost of$1.7 million for the three months endedJune 30, 2019 . The cost decreased by 20%, compared to sales decrease of 11%, 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 close the two stores with margin lower compared to others. For the three months endedJune 30, 2019 , these two stores had gross margin of 2% only. Occupancy costs consist of store-level expenses such as rental expenses, property taxes, and other store specific costs. Occupancy costs decreased by approximately$0.5million , which was mainly attributable to the closure of the two stores inNew York City which contributed occupancy cost of$0.5 million for the three months endedJune 30, 2019 . Gross profit was$4.4 million and$3.5 million for the three months endedJune 30, 2020 and 2019, respectively. Gross margin was 26% and 18% for the three months endedJune 30, 2020 and 2019, respectively. The gross profit increased due to the closure of the two stores with lower gross margin in 2020 as mentioned above. For the three months Wholesale Segment ended June 30, Changes 2020 2019 $ % Cost of sales$ 2,761,865 $ 3,193,655 $ (431,790 ) (14 )% Gross profit 1,465,446 1,338,450 126,996 9 % Gross margin 35 % 30 % 5 % - For our wholesale segment, the cost of sales for the three months endedJune 30, 2020 decreased by$0.4 million , or 14%, from$3.2 million for the three months endedJune 30, 2019 to$2.8 million for the three months endedJune 30, 2020 . The decrease is consistent with the decrease of sales from the wholesale segment in 2020. Gross profit for the three months endedJune 30, 2020 increased by around$0.1 million , or 9%, from$1.4 million for the three months endedJune 30, 2019 to$1.5 million for the three months endedJune 30, 2020 . Gross margin increased by 5% from 30% to 35%. 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. Liquor and mask products For our liquor products, the cost of sales and gross profit for the three months endedJune 30, 2020 were$70,554 and$122,195 , respectively, with a gross margin of 63%. For our mask products, the cost of sales and gross profit for the three months endedJune 30, 2020 were$12,283 and$12,020 , respectively, with a gross margin of 49%. These two business have relatively high margin due to the industry barriers where business licenses are required for the manufacturing of these products. 32
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were$4.4 million for the three months endedJune 30, 2020 , a decrease of$4.2 million , or 48.5%, compared to$8.6 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2019 , we had$0.5 million of stock compensation to employees and$1.5 million of expense associated with warrant exercise in that quarter. Due to the change of majority shareholder fromMr. Long Deng toHK Xu Ding Co., Limited , which is qualified as "fundamental transaction" defined in the warrant agreements dated inOctober 23, 2018 . The shareholders exercised its warrants at no cost. For the three months endedJune 30, 2020 , due to the permanent closure of two stores inNew York City , selling, general, and administrative expenses decreased by$0.7 million . In addition, overall selling, general, and administrative expenses decreased by$1.3 million across the all segments due to the lower sales and management's effort to cut expense, as well as the impact of Covid-19 when we have to temporarily close certain stores for 20 days in April. Interest Expense
Interest expense was$0.4 million for the three months endedJune 30, 2020 , a decrease of$0.2 million , or 41%, from$0.6 million for the three months endedJune 30, 2019 , attributable to decreased interest rate from 4.45% for the three months endedJune 30, 2019 to 2.25% for the three months endedJune 30, 2019 . Other income Other income was$2.3 million for the three months endedJune 30, 2020 , which included management and advertising fee income, rental income, lottery sales, and other miscellaneous income. Other income increased$1.4 million , 153%, from$0.9 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 , the Company collected$2.3 million from the litigation claims. For the three months endedJune 30, 2020 , management fee and rental income decreased by$0.6 million due to the closure of two stores, as well
as the impact of Covid-19. Income Taxes Provision
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. iFresh is aDelaware holding company that is subject to theU.S. income tax. RET and DL Medical are incorporated in the PRC and subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Income tax expense was $nil for the three months endedJune 30, 2020 , compared to$98,000 of income tax benefit for the three months endedJune 30, 2019 . The effective income tax rate was 0% and 2.8% for the three months endedJune 30, 2020 and 2019, respectively. For the three months endedJune 30, 2020 , the Company utilized the deferred tax assets due to NOLs from prior periods which has been fully reserved. For the three months endedJune 30, 2019 , the Company recognized deferred tax result from deferred expense, inventory cap and lease liabilities. Net Income (loss) and Net Income (loss) attributable to noncontrolling interset For the three months ended June 30, Changes 2020 2019 $ % Net income (loss)$ 3,597,470 $ (3,368,126 ) $ 6,965,596 (207 )% Net loss attributable to noncontrolling interest$ (5,918 ) $ -$ (5,918 ) (100 )% Net income (loss) attributable to iFresh$ 3,603,388 $ (3,368,126 ) $ 6,971,514 (207 )% Net income (loss) Margin 17 % (14 )% 31 % Net income was$3.6 million for the three months endedJune 30, 2020 , an increase of$7.0 million , or 207%, from$3.4 million of net loss for the three months endedJune 30, 2019 , mainly attributable to the increased gross margin, decrease in selling, general, and administrative expenses and increased other income described above. Net loss attributable to noncontrolling interest resulted from the loss from DL Medical, which was 70% owned by iFresh. Net income(loss) as a percentage of sales was 17% and -14% for the three months endedJune 30, 2020 and 2019, respectively. 33 Adjusted EBITDA For the three months ended June 30, Changes 2020 2019 $ % Net income (loss)$ 3,597,470 $ (3,368,127 ) $ 6,965,597 (207 )% Interest expense 361,226 609,745 (248,519 ) (41 )% Income tax provision - (97,937 ) 97,937 (100 )% Depreciation 573,872 561,644 12,228 2 % Amortization 136,633 33,333 103,300 (310 )% Adjusted EBITDA$ 4,669,201 $ (2,261,342 ) $ 6,930,543 (306 )% Percentage of sales 21.7 % -9.5 % 31.2 % Income before income tax, depreciation, and amortization was$4.7 million for the three months endedJune 30, 2020 , an increase of$7.0 million , as compared to loss before income tax, depreciation, and amortization of$2.3 million for the three months endedJune 30, 2019 , mainly attributable to the increase in net income resulting from increased gross margin, decrease in selling, general, and administrative expenses and increased other income described above.
Liquidity and Capital Resources
As ofJune 30, 2020 , iFresh had cash and cash equivalents of approximately$4.4 million . iFresh had operating income of$3.6 million and operating loss of$3.5 million for the three months endedJune 30, 2020 and 2019, respectively, and had negative working capital of$19.1 million and$28.6 million as ofJune 30, 2020 andMarch 31, 2020 , respectively. The long-termKeyBank loan of$20.1 million has been reclassified as short-term because the Company is not in compliance with theKeyBank loan covenants andKeyBank has the option to accelerate payment at any time. The Company did not meet certain financial covenants required in the credit agreement withKeyBank National Association ("KeyBank"). As ofJune 30, 2020 , the Company has outstanding loan facilities of approximately$20.1 million due toKeyBank . Failure to maintain these loan facilities will have a significant impact on the Company's operations. Refer to the discussion below in "KeyBank National Association - Senior Secured Credit Facilities" section for more detail. iFresh had funded working capital and other capital requirements in the past primarily by equity contribution from shareholders, cash flow from operations, and bank loans. Cash is required to pay purchase costs for inventory, rental, salaries, office rental expenses, income taxes, other operating expenses and repay debts. iFresh's ability to repay its current obligation will depend on the future realization of its current assets. iFresh's management has considered the historical experience, the economy, trends in the retail industry, the expected collectability of the accounts receivables and the realization of the inventories as ofJune 30, 2020 . iFresh's ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control.
We have
The Company's principal liquidity needs are to meet its working capital requirements, operating expenses, and capital expenditure obligations. As ofJune 30, 2020 , the Company remains in noncompliance with the financial covenants of the KeyBank Loan. These conditions continue to raise doubt as to the Company's ability to remain a going concern. The management believe the Company does not have enough liquidity for the next twelve months.
The following table summarizes iFresh's cash flow data for the three months
ended
For the three months
ended June 30,
2020 2019Net cash provided by (used in) operating activities$ 1,141,128 $ (620,468 ) Net cash provided by (used in) investing activities (1,680,106 ) 329,249 Net cash provided by financing activities 4,213,676
552,745
Effect of exchange rate change on Cash and cash equivalent 196
552,745
Net increase in cash and cash equivalents$ 3,674,694
$ 261,526 34 Operating Activities
Net cash provided by 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 provided from operating activities was approximately$1.1million for the three months endedJune 30, 2020 , an increase of$1.8 million , or 284%, compared to$0.6 million used in operating activities for the three months endedJune 30, 2019 . The increase was a result of an increase of$7.0 million net income, offset by$5.2 million decrease from change of working capital mainly resulting from decrease from inventory of$4.2 million and share based compensation of$1.9 million . Investing Activities Net cash used in investing activities was approximately$1.7 million for the three months endedJune 30, 2020 , an increase of$2.0million , compared to$0.3 million provided by investing activities for the three months endedJune 30, 2019 . The increase was primarily attributable to the increase of$0.4 million in acquisition of property and equipment in 2020,$1.4 million of cash advanced to related parties, as well as net cash paid to acquire two business inChina
for$0.2 million . Financing Activities Net cash provided by financing activities was approximately$4.2 million for the three months endedJune 30, 2020 , which mainly consisted of cash received from issuance of stock for$2.5 million and cash received from governmental PPP loans of$1.8 million , offset by$55,000 cash paid notes payable, and capital leases. Net cash provided by financing activities was approximately$0.6 million for the three months endedJune 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.
Paycheck Protection Program loans from government
In April andMay 2020 , the Company received Paycheck Protection Program loan ("PPP loan") of$1,768,212 provided byUS Small Business Administration ("SBA"). These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses. These loans have an interest rate of 1% with a maturity of 2 years.
OnDecember 23, 2016 , NYM, as borrower, entered into a$25 million senior secured Credit Agreement (the "Credit Agreement") withKey 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 areDecember 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 ofDecember 31, 2018 .$15,000,000 of the term loan was fully funded by the lender inJanuary 2017 . The Company is required to make fifty-nine consecutive monthly payments of principal and interest in the amount of$142,842 starting fromFebruary 1, 2017 and a final payment of the then entire unpaid principal balance of the term loan, plus accrued interest on the maturity date. 35
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 thanDecember 23, 2021 . A withdrawal of$5 million under the Delayed Draw Term Loan was made as ofMarch 31, 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 endingMarch 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 ifMr. 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 whenMr. Long Deng , CEO and major shareholder of the Company sold an aggregate of 8,294,989 restricted shares toHK Xu Ding Co., Limited onJanuary 23, 2019 , representing 51% of the total issued and outstanding shares of the Company as ofDecember 31, 2018 . The Company failed to obtain a written consent for the occurrence of the change of ownership. As a result, effective as ofMarch 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 . OnMay 20, 2019 (the "Effective Date"), the Company entered into a forbearance agreement (the "Forbearance Agreement") withKeyBank , pursuant to whichKeyBank has agreed to delay the exercise of its rights and remedies under the Loan agreement based on the existence of the events of defaults for certain period of time. The Forbearance Agreement contains customary forbearance covenants and other forbearance covenants and defined certain events of defaults. Starting from May, 2019, the monthly payment decreased to$142,842 as originally required per the credit facility agreements. The Company failed to meet its obligations under the Loan Agreements by the end of the First Forbearance Period. OnOctober 17, 2019 (the "Effective Date"), the Company, Go Fresh 365, Inc. ("Go Fresh"),Mr. Long Deng andKeybank entered into the second forbearance agreement (the "Second Forbearance Agreement"). Pursuant to certain Guaranty Agreement dated as ofDecember 26, 2016 , as amended by several joinder agreements and the Second Forbearance Agreement, the Company, certain subsidiaries of NYM, Go Fresh andMr. Long Deng (collectively, the "Guarantors", and together with the Borrower, the "Loan Parties") have agreed to guarantee the payment and performance of the obligations of the Borrower under the Credit Agreement ("Obligations").Key Bank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default (the "Specified Events of Default") until the earlier to occur of: (a)5:00 p.m. Eastern Time on theNovember 29, 2019 ; and (b) a Forbearance Event of Default. From Jan toJune 2020 , non-payment of amount due by the Company was$1,194,878 . Also, the Company has filed certain loan covenants. OnAugust 6, 2020 the Company received 3rd forbearance agreement fromKey Bank , which includes the following terms: ? All delinquent regular interest paid at or before settlement. ? July and August required payments will be regular interest amounts. ? Default interest will be deferred until9/25/2020 ? Store valuations will be ordered immediately. ? Continue to provide weekly cash flow reports. ? Provide quarterly financial statements of NYM, iFresh and newly acquired businesses. ? Monthly financial projections. ? Cost/work detail on the completion of the CT store. ? Pledge of the equity and guarantee of newly acquired businesses. ? File a UCC-1 financing statement foriFresh Inc.
If agreement cannot be reached,
36
Commitments and Contractual Obligations
The following table presents the Company's material contractual obligations as ofJune 30, 2020 : Contractual Obligations Less than More than (unaudited) Total 1 year 1-3 years 3-5 years 5 years Bank Loans$ 20,141,297 $ 20,141,297 $ - $ - - PPP Loans$ 1,768,212 $ -$ 1,768,212 $ - - Estimated interest payments on bank loans 1,398,563 1,009,882 388,681 - - Notes payable 105,618 76,070 29,548 - - Capital lease obligations including interest 429,930 162,551 265,120 2,259 - Operating Lease Obligations(1) 86,211,379 7,903,304 16,685,843 15,482,039 46,140,193$ 110,054,999 $ 29,293,104 $ 19,137,404 $ 15,484,298 $ 46,140,193
(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 ofJune 30, 2019 . Revenue recognized from performance obligations related to prior periods was insignificant. 37 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 OnApril 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. See Note 13 for additional information. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company's consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on
our consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company's terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 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. 38
iFresh apply the provisions of the authoritative guidance on accounting for uncertainty in income taxes that was issued by theFinancial 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. Business Combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 ("ASC 805"), "Business Combinations". The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of income.
Recently Issued Accounting Pronouncements
InJune 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 afterDecember 15, 2019 , and interim periods within fiscal years beginning afterDecember 15, 2020 . Early adoption is permitted, but no earlier than an entity's adoption date of Topic 606. OnApril 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. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU is effective for annual and interim periods beginning afterDecember 15, 2019 for issuers andDecember 15, 2020 for non-issuers. Early adoption is permitted for all entities for annual periods beginning afterDecember 15, 2018 , and interim periods therein. InMay 2019 , the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. The updates should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). InNovember 19, 2019 , the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years beginning afterDecember 15, 2022 and interim periods therein. The Company does not believe this guidance will have a material impact on its consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12 ("ASU 2019-12"), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to managerial accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 , with early adoption permitted. The Company is currently assessing the impact of adopting this standard, and does not believe this guidance will have a material impact on its consolidated financial statements. No other new accounting pronouncements issued or effective had, or are expected to have, a material impact on the Company's condensed consolidated financial statements. 39
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