FingerMotion, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2018 Q3, the filing is for the quarter ended November 30, 2019, with comparisons to November 30, 2018. The financial statements are unaudited.
Business context
FingerMotion operates mobile recharge/payment and SMS messaging businesses in China through subsidiaries and a contractually controlled variable interest entity (VIE). SMS operations entered the group through the March 2019 acquisition of Beijing XunLian. The company had paused its mobile gaming operations in 2018 and redirected resources to mobile data businesses. It also reported a China Unicom Yunnan electronic sales platform agreement, which runs for three years but may be terminated unilaterally by China Unicom.
Financial performance and position
| Metric | Three months ended Nov. 30, 2019 | Three months ended Nov. 30, 2018 | Nine months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2018 |
|---|---|---|---|---|
| Revenue | $2.693 million | $524,425 | $5.665 million | $783,842 |
| Gross profit | $437,460 | $88,981 | $725,815 | $144,345 |
| Gross margin | 16.3% | 17.0% | 12.8% | 18.4% |
| Operating expenses | $1.002 million | $130,819 | $3.081 million | $678,531 |
| Net loss | $496,693 | $422,670 | $2.276 million | $936,322 |
| Loss per share, diluted | $0.02 | $0.02 | $0.09 | $0.05 |
For the nine-month period, revenue comprised $3.911 million from SMS, $1.755 million from mobile recharge, and no gaming revenue. The company reported an $817,232 non-cash share-based compensation expense for the period.
At November 30, 2019, cash was $643,346, compared with $1.337 million at February 28, 2019. Total assets were $6.414 million, total liabilities $5.975 million, and shareholders’ equity $439,227. Accounts receivable was $1.955 million and prepayments and deposits were $3.392 million. Liabilities included $1.206 million due to related parties, $66,000 of 0% notes payable due May 2021, and a $16,627 lease liability. Convertible notes had been converted into common shares.
Nine-month cash used in operating activities was $1.581 million, versus $1.215 million in the prior-year period; investing cash use was $16,291; financing provided $910,729. Cash declined by $693,899 over the period. Operating cash use reflected, in part, deposits with telecommunications providers.
Changes, outlook, and risks
- Revenue increased substantially as mobile recharge expanded and the acquired SMS business contributed; gaming revenue ended after the company paused that business. Nine-month net loss widened, with higher operating expenses as the company built its mobile recharge and SMS operations.
- Management said existing cash, operating revenues, and cash equivalents were expected to fund projected requirements for at least 12 months, but also said growth would require additional capital and that it expected to seek equity or debt financing. The going-concern note says continued operations depend on obtaining financing and achieving profitable operations; access to financing on acceptable terms is not assured. Additional financing could dilute shareholders or impose restrictive terms or high interest costs. No formal quantified guidance was provided.
- The company relies on VIE agreements to consolidate its China affiliate and identifies risks involving management of those agreements, Chinese relationships and licenses, competition, technology disruption, and cybersecurity. It also relies on a cloud-hosting provider; disruption could adversely affect near-term operations.
- Management reported material weaknesses in internal controls, including insufficient written procedures, limited segregation of duties, and inadequate documentation of control performance. Remediation efforts were ongoing; disclosure controls were not considered completely effective.
- The filing reports no material litigation, defaults on indebtedness, or significant subsequent events requiring disclosure.
Important facts for investors to verify
- Reconcile the period and growth figures: the primary statements show nine-month revenue of $5.665 million versus $783,842, while parts of MD&A label nine-month amounts as quarterly and state an 86% increase. The primary statements imply growth of approximately 623% for nine months and 414% for the quarter.
- Assess the collectability and working-capital requirements of receivables and provider deposits, and the resulting cash burn and financing needs.
- Review VIE contractual-control and China regulatory risks, including the termination provisions in the Yunnan Unicom agreement.
- Track whether internal-control material weaknesses are remediated and whether the business can improve margins and reach profitability.