FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended August 31, 2020; filed October 20, 2020. Financial statements are unaudited and in U.S. dollars.
Business context
The company operates mobile recharge and payment, bulk SMS, and SIM-card businesses in China through subsidiaries and a contractually controlled variable interest entity (VIE). It had paused its video-game operations to focus on mobile data-related businesses. Management also described an Insurtech initiative using telecommunications data for insurance risk assessment, with commercialization targeted for mid-2021.
Financial performance and condition
| Metric | Three months ended Aug. 31, 2020 | Six months ended Aug. 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $3.62 million | $6.36 million | $2.04 million quarter; $2.97 million six months |
| Gross profit | $258,391 | $552,830 | $206,729 quarter; $288,355 six months |
| Gross margin | 7.1% | 8.7% | 10.1% quarter; 9.7% six months |
| Net loss attributable to company shareholders | $961,023 | $1.54 million | $766,549 quarter; $1.78 million six months |
| Loss per share, basic and diluted | $(0.03) | $(0.05) | $(0.03) quarter; $(0.07) six months |
| Operating cash flow | $(1.22) million for six months | $(1.72) million for six months |
- Quarterly revenue increased 77.5%; six-month revenue increased 114%. SMS revenue drove the growth, while mobile-recharge revenue declined 9.2% for the quarter and 28% for the six months. Six-month SMS revenue was $5.26 million; mobile recharge was $1.07 million; SIM-card revenue was $33,099.
- Gross profit rose, but gross margin narrowed year over year for both periods. Higher revenue and margin were cited by management as drivers of gross-profit growth; SMS represented most revenue and cost of revenue.
- Quarterly net loss attributable to shareholders increased from the 2019 quarter. The six-month net loss improved year over year, supported in part by lower share-based compensation, despite higher general and administrative expense and interest expense.
- Cash was $419,707 at August 31, 2020, versus $102,919 at February 29, 2020. Operating cash use was partly offset by $1.64 million of financing cash flow, principally loan proceeds. Equipment purchases used $115,239.
- Current liabilities of $9.42 million exceeded current assets of $9.06 million, implying a working-capital deficit of approximately $356,000. Total liabilities were $10.62 million and shareholders’ deficit was $1.55 million.
Changes, outlook, risks, and unusual items
- Revenue growth reflected expansion of SMS and the addition of SIM-card sales, as well as consolidation of the VIE businesses; mobile-recharge revenue declined. Management said new telecom subscription-marketing arrangements would generate upfront commissions and recurring revenue shares over 12–15 months, but described the unit as preliminary.
- Management stated that cash, operating revenue, and available resources were expected to fund projected requirements and repay outstanding indebtedness for at least 12 months. However, the filing’s going-concern note says continued operations depend on additional financing and achieving profitability; financing may not be available or may be dilutive or costly.
- Debt included a $1 million, 5% convertible note due October 9, 2020, convertible at $2.00 per share; $1.65 million of loans from a non-controlling stockholder at 20% annual interest; and a $66,000, non-interest-bearing note due May 21, 2021. The $1.65 million loans include a $544,900 portion due January 2021.
- After quarter-end, the company reported private-placement closings on October 19 totaling $1.426 million, including share-and-warrant units. These transactions added shares and potential dilution. The filing also reports 33,817,057 shares outstanding as of October 14, 2020.
- Management characterized COVID-19’s impact as minimal at the time of filing, while warning that a worsening outbreak could affect growth. Key risks include dependence on China Mobile and China Unicom, PRC regulatory and VIE-enforceability risks, cybersecurity and service continuity, and limited access to capital.
- Disclosure controls were not completely effective because of continuing material weaknesses: lack of written control documentation, limited segregation of duties and oversight, and insufficient documentation of some control procedures. Remediation efforts were underway but not yet demonstrated to be effective.
- The filing reports no material pending litigation or material off-balance-sheet arrangements. It identifies reliance on a cloud-hosting provider as a potential operational risk.
Important facts for investors to verify
- Whether the $1 million convertible note due October 9, 2020 was repaid, converted, or otherwise amended; the filing states its terms but does not clearly report the resolution.
- The company’s near-term liquidity and financing plan, including cash needs for telecom deposits and the high-interest related-party loans.
- The reconciliation of related-party balances: the balance sheet shows $973,982 due to related parties, while the note discloses $1,333,982 due to Ms. Li Li.
- The reconciliation of quarter-end stock subscriptions and subsequent issuance disclosures, including the differing reported amounts for certain October private placements and units.
- Whether revenue growth—particularly SMS and the new subscriber-marketing business—translates into improved margins, collections, and cash generation, given receivables of $3.48 million and prepayments/deposits of about $4.03 million.
- Progress in remediating internal-control weaknesses and any updates on VIE, PRC regulatory, customer-concentration, or COVID-19 risks.