Fingermotion, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended November 30, 2018. This conflicts with the request metadata describing “2017 Q3”; the filing’s stated period is 2018 Q3. Financial statements are unaudited.
Business context
FingerMotion shifted its focus from mobile games to mobile data distribution and related services in China. It paused publishing and operating existing games in June 2018. In October 2018, its indirect subsidiary entered into variable interest entity (VIE) agreements to contractually control Shanghai JiuGe Technology; the company consolidates the VIE. Management says the mobile data business distributes data for China Unicom and China Mobile, and offers China Unicom payment and recharge services.
Financial results and condition
| Metric | Three months ended Nov. 30, 2018 | Three months ended Nov. 30, 2017 | Nine months ended Nov. 30, 2018 | Nine months ended Nov. 30, 2017 |
|---|---|---|---|---|
| Revenue | $524,425 | $162,859 | $783,842 | $233,297 |
| Gross profit (loss) | $88,981 | $36,936 | $144,345 | $(19,584) |
| Net loss | $(422,670) | $(465,859) | $(936,322) | $(871,189) |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.05) | $(0.09) |
- Gross margin was approximately 17.0% for the quarter and 18.4% for the nine-month period, versus approximately 22.7% and a gross loss, respectively, in the comparable 2017 periods.
- Quarterly operating expenses were $130,819, down from $502,702; nine-month expenses were $678,531, down from $851,600. Quarterly operating loss was $41,838; nine-month operating loss was $534,186.
- Nine-month net loss includes a $386,614 goodwill write-off, $23,207 interest expense, and a $6,832 foreign-exchange gain.
- At November 30, 2018, cash was $685,193, accounts receivable $607,772, prepaid expenses $2,591,071, total assets $3,953,919, and total liabilities $3,478,265. Shareholders’ equity was $475,654, compared with a deficit of $102,641 at February 28, 2018. The filing says prepaid expenses mainly comprise a vendor deposit for stock credits for resale.
- Current liabilities included $370,000 of convertible notes, $66,000 of other notes payable, and $23,485 accrued interest. The convertible notes bear 10% interest and have stated maturities from February through May 2019; conversion prices range from $1.00 to $2.50 per share. The $66,000 note bears no interest and is due May 2021.
- For the nine months, operating activities used $1,214,677; investing activities used $11,298; financing activities provided $1,868,500. Financing included $1,482,500 from common stock issued for cash and $386,000 from notes payable. Cash increased from $10,551 to $685,193.
Changes, outlook, and risks
- Revenue rose substantially year over year, which management attributes to consolidation of the VIE and the new business model. Cost of revenue also rose with revenue. Management attributes lower operating expenses to ending outsourced game operations and shifting focus to China operations.
- Management says it has three game licenses with worldwide distribution rights except China and planned launches over the following six months. These plans are forward-looking, and the filing provides no quantified revenue or earnings guidance.
- The company reports a $2,845,836 accumulated deficit and states that continued operations depend on obtaining additional financing and achieving profitability. It cautions that financing may be unavailable or may cause dilution, restrictive covenants, or high interest costs.
- Key risks include the enforceability and effectiveness of the China VIE agreements, PRC regulatory and legal uncertainty, foreign-currency and fund-transfer restrictions, and potential conflicts involving a company executive who owns the VIE operating company. The filing also cites hosting-provider dependency and general operational risks in China.
- Management concluded disclosure controls were not effective because of a weakness previously described in the annual report. It reported no material change in internal control during the quarter. The filing reports no material outstanding legal claims and no operating lease at November 30.
- After quarter-end, the board approved 6,260,000 shares for investors and consultants, to be issued once authorized shares are increased. This is a potentially significant dilution item.
Important facts for investors to verify
- Confirm the reporting period: the filing says November 30, 2018, despite the request’s 2017 Q3 label.
- Assess whether the company can fund operations and meet the convertible-note maturities, given operating cash use and management’s going-concern warning.
- Verify the nature, recoverability, and use of the $2.59 million prepaid vendor balance and collection of accounts receivable.
- Review the VIE agreements, required PRC approvals, and the operating and financial exposure represented by the consolidated VIE.
- Confirm the status and terms of the proposed 6.26 million share issuance and reconcile the filing’s share-authorization disclosures, which state both 19 million and 200 million authorized common shares.
- Reconcile the intangible-asset amortization disclosure: the statements show $87 of quarterly amortization and depreciation, while Note 5 reports $85,417 of quarterly amortization.