FingerMotion, Inc. — Form 10-Q Summary
Period: Quarter and six months ended August 31, 2019. The request metadata says “2018 Q2,” but the filing itself is for 2019; the filing period is used below. The company is a smaller reporting company and an emerging growth company.
Business context and reporting period
FingerMotion shifted focus from mobile gaming to China mobile-data services. Its main activities are mobile recharge/payment services, mass SMS messaging (acquired March 7, 2019), and portal management. Its China operations include a variable-interest entity (VIE) consolidated through contractual arrangements. Gaming operations were paused in June 2018.
Financial performance and position
| Metric | Three months ended Aug. 31, 2019 | Six months ended Aug. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $2.039 million | $2.973 million | $76,287 quarterly; $259,417 six-month |
| Gross profit | $206,729 | $288,355 | $24,741 quarterly; $55,364 six-month |
| Gross margin | About 10.1% | About 9.7% | About 32.4% quarterly; 21.3% six-month |
| Operating expenses | $978,834 | $2.079 million | $221,681 quarterly; $547,712 six-month |
| Net loss | $766,549 | $1.779 million | $206,468 quarterly; $498,752 six-month |
| Basic and diluted loss per share | $0.03 | $0.07 | $0.01 quarterly; $0.03 six-month |
- Six-month revenue growth came from mobile recharge ($1.493 million) and SMS ($1.480 million); gaming revenue fell to zero. The filing attributes the increase primarily to consolidation of the VIE businesses and the new business model.
- Six-month cost of revenue was $2.684 million. Higher revenue was accompanied by lower gross margin than the 2018 comparison.
- At August 31, cash was $553,187, down from $1.337 million at February 28. Total assets were $6.051 million, total liabilities $5.233 million, and shareholders’ equity $817,917. Current assets and current liabilities imply working capital of about $818,000.
- Accounts receivable was $1.210 million; prepayments and deposits were $3.692 million. The company said deposits with telecommunications providers are needed to support recharge services.
- Six-month operating cash use was $1.724 million; investing cash use was $11,253; financing cash provided was $966,473. Cash decreased by $784,058 over the six months.
- Convertible notes were reported as fully converted by August 31. A separate $66,000 note payable bears no interest and is due May 21, 2021. The balance sheet reports $1.674 million due to related parties.
Material changes, outlook, and risks
- Management said quarterly revenue growth reflected the mobile recharge and SMS businesses, while increased general and administrative expenses reflected business build-out, including $255,744 of non-cash share-based consulting expense.
- Management expects recharge revenue to grow and hopes the SMS business will continue contributing. It gave no quantified revenue or earnings guidance.
- The filing says current cash, operating revenue, and other resources are expected to fund projected requirements and repay outstanding indebtedness for at least 12 months. However, it also states that substantial growth will require additional deposits and that the company expects to seek equity or debt financing. No financing arrangements were in place at the filing date.
- The going-concern note highlights accumulated deficit of $6.602 million, six-month net loss of $1.779 million, and dependence on additional financing and future profitability. Financing may cause dilution or involve restrictive covenants or high costs.
- Key risks include dependence on China Unicom and other telecom relationships, the enforceability and operation of China VIE contracts, competition and regulatory or market changes in China, cybersecurity or technology disruption, and reliance on a cloud-hosting provider.
- Management concluded disclosure controls were ineffective due to material weaknesses, including lack of documented controls, limited segregation of duties, and insufficient documentation of control performance. Remediation efforts were underway but were not yet considered complete.
- The company reported no material litigation and no significant disclosed subsequent event other than the July 7, 2019 Yunnan Unicom platform agreement. That agreement is for three years, may be terminated unilaterally by China Unicom, and compensates FingerMotion with a percentage of processed sales revenue.
Important facts for investors to verify
- Confirm the correct reporting period: the filing is for the quarter ended August 31, 2019, despite the “2018 Q2” request metadata.
- Reconcile the filing’s one-dollar quarterly revenue difference: the financial statements report $2,039,476, while MD&A reports $2,039,477.
- Assess the quality and collectability of receivables and the recoverability and liquidity impact of the large telecom-related prepayments and deposits.
- Review the company’s financing needs, cash runway, related-party balances, and ability to fund expansion without material dilution.
- Evaluate VIE contractual risks and the China Unicom agreements, including termination rights and the economics of the revenue-share arrangement.
- Track remediation and testing of the identified internal-control material weaknesses.