FingerMotion, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended May 31, 2021. The filing is unaudited and compares results with the three months ended May 31, 2020. FingerMotion operates mainly in China through telecommunications, SMS/MMS and early-stage big-data businesses; its video-game division is inactive.
Financial results and position
| Metric | Quarter ended May 31, 2021 | Comparable 2020 period |
|---|---|---|
| Revenue | $5.996 million | $2.743 million |
| Gross profit | $619,697 | $294,439 |
| Gross margin | 10.3% | 10.7% |
| Operating expenses | $1.476 million | $870,000 |
| Net loss | $909,506 | $578,051 |
| Net loss attributable to company shareholders | $911,890 | $578,077 |
| Loss per share, basic and diluted | $0.02 | $0.02 |
| Net cash from (used in) operating activities | $(1.941) million | $38,109 |
Revenue increased 119% year over year. Telecommunications products and services generated $1.737 million, SMS/MMS $4.161 million, and Big Data $98,715. Cost of revenue increased 120%, slightly faster than revenue, while gross margin declined from 10.7% to 10.3%. Operating expenses rose 70%, principally reflecting higher general and administrative costs, marketing, research and development, and share compensation.
At May 31, 2021, cash was $789,752, down from $850,717 at February 28, 2021. Current assets were $8.401 million and current liabilities $6.048 million, leaving reported working capital of $2.353 million. Total liabilities were $7.157 million; loans payable totaled $1.954 million, including $844,595 current and $1.109 million non-current. The loans are from a non-controlling stockholder and carry a stated 20% annual rate. Stock subscription payable was $1.347 million. Total shareholders’ equity was $1.456 million, and accumulated deficit was $13.121 million.
Operating cash outflow was driven chiefly by a $2.812 million increase in prepayments and deposits, partly offset by collections of accounts receivable and increased accruals/payables. Financing provided $1.827 million, including stock-subscription advances, a new loan and common-stock proceeds. Investing cash outflow was $4,401. Foreign-currency effects added $57,922 to cash.
Material changes and management commentary
- Telecommunications products and services revenue increased 341%; SMS/MMS revenue increased 77%. Big Data recorded revenue for the first time in the presented comparison period, at $98,715.
- Management attributed higher expenses to building its business lines, increased staff and consulting costs, marketing, and higher data-access and usage fees. It said the first-stage insurtech prototype was complete and targeted commercialization by the end of calendar 2021.
- Management expects revenue growth from existing and newer offerings, including mobile recharge, SMS, phone sales, subscription plans and Big Data. The filing provides no quantified revenue, earnings or cash-flow guidance.
- Management stated that cash, operating revenues and available resources were expected to fund projected requirements and repay indebtedness for at least 12 months, but also said growth would require additional capital, particularly to increase telecom deposits. It gave no assurance that financing would be available on acceptable terms.
- The company depends substantially on China Unicom and China Mobile and operates its principal business through PRC contractual VIE arrangements. The filing warns that loss of telecom relationships, VIE enforceability or regulatory changes could materially affect operations.
Risks, contingencies and unusual items
- The financial statements disclose substantial doubt-related going-concern conditions: the company has recurring losses and an accumulated deficit, and continuation depends on financing, revenue growth and eventual profitability.
- Disclosure controls and procedures were not completely effective as of May 31, 2021 because of previously identified material weaknesses, including missing written control documentation and limited segregation of duties. Remediation was in progress, not yet established as effective.
- Telecom deposits and prepayments are significant and increased sharply during the quarter; operating cash flow was negative despite revenue growth. The filing says these deposits support access to telecom products for resale.
- COVID-19, cybersecurity and system interruptions, China regulatory and currency risks, and difficulty enforcing judgments are among the disclosed risks. The company reported no pending legal proceeding and no known material outstanding claim or litigation.
- Subsequent events included share issuances and warrant exercises in June and July 2021. As of July 12, 2021, 39,020,160 common shares were outstanding.
Important facts for investors to verify
- Whether telecom deposits and other prepayments convert into sales and cash collections, and whether working capital remains adequate as the business scales.
- The terms, repayment requirements and related-party nature of the 20% loans, as well as the status and share issuance associated with the $1.347 million stock-subscription payable.
- Revenue concentration and contract terms with China Unicom and China Mobile, including the ability to sustain margins as transaction volumes grow.
- The legal and operational enforceability of the PRC VIE arrangements and any relevant regulatory developments.
- Progress toward profitability, Big Data commercialization and remediation of the disclosed internal-control material weaknesses.