MSS

Business Context and Reporting Period

Company: Maison Solutions Inc. (MSS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended October 31, 2024
Business Overview: A specialty grocery retailer operating Asian supermarkets in California and Arizona. The company operates under a center-satellite store model. A significant event during the period was the April 2024 acquisition of Lee Lee Oriental Supermart, Inc. (Lee Lee), a three-store chain in Arizona, for approximately $22.2 million.

Key Financial Metrics

Note: Total Debt includes $9.83 million in notes payable (Lee Lee acquisition) and $2.53 million in SBA loans.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 125.3% for the quarter and 120.5% for the six months compared to the prior year periods. This growth is primarily driven by the inclusion of Lee Lee revenues ($19.2M for the quarter; $37.4M for six months).
• California Store Decline: Despite overall growth, revenues from the four California-based stores decreased by approximately $2.0 million (quarter) and $4.3 million (six months) due to increased competition, the end of pandemic-era relief programs (SNAP work requirements), and temporary renovations.
• Operating Expenses: Total operating expenses rose 160.7% (quarter) and 127.9% (six months), largely due to payroll increases from the Lee Lee acquisition and higher professional fees related to legal contingencies.
• Profitability: The company reported a net loss of $0.26 million for the quarter, reversing a net income of $0.09 million in the prior year quarter. However, for the six-month period, the company reported a net income of $0.44 million, compared to a net loss of $0.01 million in the prior year.
• Investment Losses: Significant investment losses were recorded, including $0.23 million from HKGF Arcadia (49% equity interest) and $0.04 million from the write-off of the HKGF Alhambra investment (10% interest) following its temporary shutdown.

Guidance, Outlook, Risks, and Contingencies

Going Concern

Management has raised substantial doubt about the company's ability to continue as a going concern. This is due to a history of recurring losses, an accumulated deficit of $2.37 million, a negative working capital of $15.64 million, and a bank overdraft of $1.32 million. Continued operations depend on generating sufficient revenue and raising additional funds.

Debt and Liquidity

The company faces significant near-term debt obligations. The Senior Secured Note related to the Lee Lee acquisition ($9.83 million outstanding) requires full repayment by May 5, 2025. On October 21, 2024, the note agreement was amended to increase the interest rate to 10% and change the payment schedule to weekly installments. The company also holds SBA loans totaling $2.53 million.

Legal Proceedings and Contingencies

• SEC Investigation: The company received an SEC subpoena in May 2024 following a Hindenburg Research report and is cooperating fully.
• Securities Litigation: Two class action lawsuits (Ilsan Kim and Rick Green) allege violations of the Securities Act of 1933 and Exchange Act of 1934. A shareholder derivative action (Azad) alleges breaches of fiduciary duty. The company intends to defend these vigorously but cannot estimate potential losses.
• Other Litigation: Various other claims exist, including wrongful termination, disability access violations, and unpaid invoices, with potential damages ranging from thousands to millions of dollars.

Internal Controls

The company disclosed material weaknesses in internal controls over financial reporting, including insufficient accounting expertise, lack of related party transaction monitoring, and failure to maintain a perpetual inventory system. Disclosure controls and procedures were deemed ineffective as of October 31, 2024.

Investor Verification Checklist

• Debt Maturity: Verify the company's ability to repay the $9.83 million Lee Lee note due in May 2025 given the current cash balance of $0.36 million and negative working capital.
• Going Concern Status: Assess the feasibility of management's plan to raise additional capital or generate sufficient cash flow to avoid insolvency.
• Legal Exposure: Monitor the status of the SEC investigation and securities class actions, as outcomes could result in significant financial penalties or operational restrictions.
• Related Party Transactions: Review the volume and terms of transactions with related parties (e.g., HKGF Arcadia, Dai Cheong Trading) given the material weakness in monitoring such transactions.
• California Store Performance: Evaluate the sustainability of the revenue decline in the core California market versus the growth from the new Arizona acquisition.