FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 31, 2023; unaudited consolidated results compared with the three months ended May 31, 2022. FingerMotion is a Delaware holding company whose China-based telecom and data operations include a contractually controlled VIE.
Business context and financial results
The company operates mobile payment and recharge, telecom products and services, SMS/MMS, and Big Data businesses. Its video game division is inactive. Telecom revenue depends substantially on China Unicom and China Mobile.
| Metric | Three months ended May 31, 2023 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $12.17 million | $4.86 million | +151% |
| Gross profit | $662,549 | $377,071 | +76% |
| Gross margin | 5.4% | 7.8% | Lower |
| Operating expenses | $1.84 million | $1.81 million | +2% |
| Operating loss | $1.18 million | $1.44 million | Improved |
| Net loss attributable to company shareholders | $1.27 million | $1.44 million | Improved 12% |
| Loss per share, basic and diluted | $0.02 | $0.03 | Improved |
| Operating cash flow | $(2.58) million | $(0.42) million | Higher cash use |
Telecom products and services generated $12.01 million of revenue, up from $1.52 million; SMS/MMS revenue fell to $8,121 from $3.34 million; Big Data contributed $149,706 versus none reported in the prior period. Cost of revenue rose 157%, faster than revenue, contributing to the lower gross margin. Other expense was $84,760, including $121,451 of interest expense. Foreign-currency translation produced $413,808 of other comprehensive income; comprehensive loss attributable to the company was $851,615.
Liquidity, debt and capital
- Cash and cash equivalents were $5.42 million at May 31, down from $9.24 million at February 28, 2023. Working capital was $13.76 million, versus $15.23 million.
- Operating activities used $2.58 million; investing activities used $380. Financing activities used $1.08 million, primarily reflecting convertible-note repayments. The cash-flow statement reports a $3.82 million net decrease in cash.
- The balance sheet reported total liabilities of $607,695, including $95,289 of current lease liabilities; no convertible notes remained outstanding. The company says it repaid a $730,000 convertible note on April 28 and eliminated its remaining debt with its primary lender through conversions and payment around April 6. The lender note had previously experienced defaults; the company reports paying the outstanding balance, including a 10% default amount.
- Shares outstanding rose from 49.43 million at February 28 to 51.99 million at May 31. During the quarter, 2,465,816 shares were issued to the primary lender on conversion of $2.128 million of principal. The filing also reports cash proceeds of $60,000 from warrant exercises and shares issued for services.
Material changes, outlook and risks
- Management attributes the telecom revenue surge to deploying funding into mobile recharge activity and says additional deposits with telecom companies could support further growth. It also says SMS revenue fell due to a shift in risk management and that it is working to improve that business. Big Data revenue reflects Pacific Life Re and Munich Re work.
- Management states existing cash, cash equivalents and operating revenue are expected to fund projected requirements and repay outstanding indebtedness for at least 12 months. However, the going-concern note says continued operations depend on obtaining additional financing and achieving profitability. The company says substantial growth will require more capital and provides no assurance that funding will be available on acceptable terms.
- The company remains loss-making, with a $25.96 million accumulated deficit. It reported no specific earnings or revenue guidance.
- Disclosure controls were not completely effective as of May 31, 2023 because of material weaknesses: missing written control documentation and limited segregation of duties and oversight in finance and accounting. Remediation is ongoing; management says the weaknesses are not remediated until controls operate effectively for a sufficient period.
- Key risks include reliance on two telecom partners; dependence on contractual VIE arrangements that have not been tested in court; changing PRC rules, including possible CSRC filing requirements for future offerings; currency and cross-border fund-transfer restrictions; and data security and cybersecurity requirements. The filing also describes potential U.S. trading restrictions under the HFCAA if auditor-inspection requirements are not met. The company reports that the PCAOB obtained access to inspect Hong Kong and mainland China auditors in December 2022, but says future access remains uncertain.
- The company reports no material pending litigation, no material subsequent events, and no material off-balance-sheet arrangements. It identifies reliance on a cloud-hosting provider as an operational risk.
Important facts for investors to verify
- Whether the rapid telecom revenue growth is repeatable and whether it can generate adequate gross margin and cash flow; specifically, the reasons for the sharp SMS/MMS revenue decline.
- Cash runway and financing needs, including the reconciliation between management’s 12-month liquidity statement and the going-concern financing dependence.
- Completion and terms of the lender-note and $730,000 note repayments, including whether any default-related obligations remain.
- Collection and recoverability of receivables and supplier advances, and the nature and collectability of the $4.15 million in other receivables.
- Potential dilution from future financing, outstanding warrants and options, and any additional share issuance.
- Compliance with PRC requirements for the VIE, future securities offerings, data protection, and cross-border transfers; progress in remediating internal-control weaknesses.