MSS

Business Context and Reporting Period

Company: Maison Solutions Inc. (MSS)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and nine months ended January 31, 2025

Business Overview: Maison Solutions is a specialty grocery retailer operating Asian supermarkets in California and Arizona. The company operates a center-satellite store network. A significant event during the period was the acquisition of Lee Lee Oriental Supermart, Inc. (Lee Lee), a three-store chain in Arizona, completed on April 8, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 151.1% for the three months and 130.6% for the nine months compared to the prior year periods. This growth is primarily driven by the inclusion of Lee Lee (acquired April 2024), which contributed $21.6 million in Q3 and $59.0 million in the nine-month period.
• Profitability: The company transitioned from a net loss to net income. For the three months ended Jan 31, 2025, net income was $1.01 million compared to a loss of $0.55 million in the prior year. For the nine months, net income was $1.46 million compared to a loss of $0.56 million.
• Operating Expenses: Total operating expenses increased 83.9% (Q3) and 112.0% (9 months) due to the consolidation of Lee Lee, resulting in higher payroll, utilities, and merchant service charges.
• Inventory: Inventory levels increased significantly to $10.66 million (from $6.80 million at April 30, 2024), reflecting the acquisition of Lee Lee and increased stock levels.
• Investment Losses: The company recorded investment losses of $0.71 million (Q3) and $0.50 million (9 months), primarily related to its 49% equity interest in HKGF Market of Arcadia, LLC.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management believes cash on hand and operating cash flows are sufficient to fund operations for the next 12 months. However, the company has a working capital deficit of approximately $11.5 million and requires approximately $8.0 million to repay the remaining Lee Lee acquisition note. The company plans to expand its footprint on the West and East Coasts, estimating capital needs of $35–$40 million over the next few years.

Recent Financing (Subsequent Event)

On March 12, 2025, the company issued a $3.0 million senior unsecured convertible promissory note to an institutional investor at an 8.5% original issue discount. The note bears 5.25% interest (up to 18% on default) and matures in March 2027. It includes a warrant for up to $6.5 million in additional notes.

Risks and Contingencies

• Legal Proceedings: The company is involved in multiple lawsuits, including class action securities litigation regarding its IPO (stayed pending other motions), shareholder derivative actions alleging breach of fiduciary duty, and employment/labor claims. Management believes losses are not estimable but intends to defend vigorously.
• Debt Covenants: The Senior Secured Note related to the Lee Lee acquisition was modified in March 2025, extending maturity to May 2026 but increasing the interest rate to 12% and adding strict covenants restricting new debt, liens, and distributions to related parties.
• Internal Controls: The company disclosed material weaknesses in internal controls over financial reporting, including insufficient accounting expertise, lack of related party transaction monitoring, and inadequate inventory controls. These weaknesses were deemed to render disclosure controls ineffective as of January 31, 2025.
• Related Party Transactions: Significant transactions exist with entities controlled by the CEO, John Xu, including sales, purchases, and investments. The company relies on these related parties for supply chain integration.

Investor Verification Checklist

• Liquidity Position: Verify the company's ability to service the $8.29 million Lee Lee note and $2.51 million SBA loans given the $11.5 million working capital deficit and low cash balance ($0.45 million).
• Debt Restructuring Terms: Review the March 2025 Note Modification Agreement details, specifically the 12% interest rate, 18% default rate, and restrictive covenants on operations and distributions.
• Legal Exposure: Monitor the status of the IPO-related class action lawsuits and shareholder derivative suits, as outcomes could result in significant compensatory damages.
• Internal Control Remediation: Assess the progress of hiring qualified accounting staff and implementing inventory controls to address the disclosed material weaknesses.
• Related Party Dependence: Evaluate the financial health and terms of transactions with related parties (e.g., Dai Cheong Trading, HKGF Arcadia) to ensure arm's-length pricing and solvency.
• Subsequent Financing: Confirm the terms and dilution impact of the March 2025 convertible note issuance and the potential exercise of the incremental warrant.