FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter ended May 31, 2020, compared with the quarter ended May 31, 2019. FingerMotion operates mobile recharge, bulk SMS, and video-game businesses; the filing reports no gaming revenue in either period. Its China mobile-data operations are conducted through a contractually controlled VIE structure.
Key financial metrics
| Metric | Quarter ended May 31, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $2.743 million | $933,269 |
| Cost of revenue | $2.448 million | $851,643 |
| Gross profit; gross margin | $294,439; approximately 10.7% | $81,626; approximately 8.7% |
| Operating expenses | $869,771 | $1.100 million |
| Net loss | $578,051 | $1.013 million |
| Operating cash flow | $(182,275) | $(2.140) million |
| Cash at period end | $154,911 | $151,622 |
SMS revenue was $2.349 million, up from $182,327; mobile recharge revenue was $393,792, down from $750,942. The company reported a $578,077 net loss attributable to its shareholders and a $0.02 basic and diluted loss per share.
At May 31, 2020, total assets were $5.943 million and total liabilities were $6.548 million, resulting in a $604,785 shareholders’ deficit. Current liabilities included $1.000 million of convertible notes, $66,000 of other notes, and $1.131 million due to a related party. The convertible notes bear 5% interest, are convertible at $2.00 per share, and mature October 9, 2020; the other note bears no interest and matures May 21, 2021.
Changes and liquidity
- Revenue increased 194%, mainly from the SMS business; mobile recharge revenue declined 48%. Gross profit rose 261%.
- Operating expenses fell 21%, largely because share-based compensation declined from $405,744 to $21,677. General and administrative expense increased 19%, and research and development expense increased 77%.
- Operating cash use improved to $182,275 from $2.140 million. Investing used $11,578, while financing provided $261,898, which the company attributes to share issuance. Cash increased by $51,992 during the quarter.
- Prepayments and deposits rose to $3.504 million from $2.483 million, mainly deposits for mobile recharge and SMS services. Management says growth in recharge activity requires additional deposits with telecommunications providers.
- During the quarter, the company issued 8,045,000 shares for services, increasing shares outstanding from 25,847,953 to 33,892,953. It also reported $261,898 in proceeds from share issuance in its cash flow discussion.
Outlook, risks, and unusual items
The filing provides no formal financial guidance. Management said it expected the SMS business to continue contributing revenue and stated that business could improve as China reopened, while warning that a worsening COVID-19 outbreak could affect growth. The company said the first phase of its insurtech prototype was complete and targeted commercialization by mid-2021.
The financial statements include a going-concern disclosure: continued operations depend on obtaining additional financing, generating revenue, and achieving profitability; no assurance is given that financing will be available on acceptable terms. Management stated that existing cash and operating revenue were expected to fund projected requirements and repay outstanding debt for at least 12 months, but also said substantial growth would require more capital.
Key risks include dependence on China Unicom and China Mobile, the enforceability and control limitations of the PRC VIE agreements, PRC regulatory and currency risks, potential dilution or financing constraints, and continuing losses. COVID-19’s impact was described as minimal through the filing date but uncertain. No material litigation or other material subsequent event was reported.
Management concluded disclosure controls were not completely effective because of material weaknesses in internal control over financial reporting, including inadequate written control documentation, limited segregation of duties, and insufficient documentation of some procedures. Remediation efforts were in progress; management said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
Important facts for investors to verify
- Confirm the maturity, repayment or conversion status of the $1.000 million convertible note due October 9, 2020, and the company’s subsequent financing and liquidity.
- Review the quality and recoverability of receivables and the $3.504 million in prepayments and deposits, including vendor terms and concentration.
- Assess the economics and sustainability of SMS growth and the decline in mobile recharge revenue, including dependence on two telecommunications providers.
- Reconcile the share issuance disclosures: the filing reports 8.045 million shares issued for services and also describes $261,898 of share-issuance proceeds.
- Check reported weighted-average share counts: the statements show diluted shares of 28,440,888, lower than basic shares of 33,892,953, an apparent inconsistency requiring clarification.
- Track remediation of the disclosed material weaknesses and assess the legal, regulatory, and operating risks of the VIE structure in China.