FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2023; filed January 16, 2024. Unaudited consolidated financial statements. The company operates mobile telecommunications products and services, SMS/MMS and big-data businesses, primarily in China, including through a contractually controlled variable interest entity (VIE).
Financial results and position
| Metric | Three months ended Nov. 30, 2023 | Three months ended Nov. 30, 2022 | Nine months ended Nov. 30, 2023 | Nine months ended Nov. 30, 2022 |
|---|---|---|---|---|
| Revenue | $6.14 million | $11.40 million | $27.59 million | $21.24 million |
| Gross profit | $638,000 | $859,000 | $3.14 million | $1.65 million |
| Operating expenses | $2.60 million | $2.72 million | $6.48 million | $6.44 million |
| Net loss attributable to company shareholders | $1.94 million | $2.52 million | $3.34 million | $5.50 million |
| Loss per share, basic and diluted | $0.04 | $0.06 | $0.06 | $0.13 |
- Margins: Gross margin was approximately 10.4% for the quarter versus 7.5% a year earlier, and 11.4% for the nine-month period versus 7.8%. The filing attributes the nine-month gross-profit increase to revenue growth and a new telecommunications product mix.
- Cash flow: Nine-month operating cash use was $6.95 million, compared with $5.60 million in the prior-year period. Investing cash use was $379; financing cash use was $295,000, versus $17.55 million of financing inflows a year earlier. Cash declined by $7.31 million to $1.93 million.
- Liquidity and balance sheet: Working capital was $12.51 million, down from $15.23 million at February 28, 2023. Current assets were $17.43 million and current liabilities $4.92 million. Total liabilities were $4.92 million; no convertible notes remained outstanding at November 30, 2023. Accounts payable rose to $3.89 million from $27,000. Accumulated deficit was $28.04 million.
- Share count: 52.55 million common shares outstanding at November 30, 2023, versus 49.43 million at February 28, 2023. The company also reported 4.08 million outstanding options and 513,312 warrants at period-end.
Material changes versus comparable periods
- Quarterly revenue fell 46% year over year. Telecommunications products and services revenue declined 41%; SMS/MMS revenue fell 99%; big-data revenue fell 97%.
- Nine-month revenue increased 30%, led by telecommunications products and services, up 86% to $27.33 million. SMS/MMS revenue dropped to $24,213 from $6.32 million, which the company linked to changes in government protocols for distribution. Big-data revenue was $232,036 versus $250,000.
- Nine-month gross profit rose 90%, while net loss attributable to shareholders narrowed 39%. Quarterly net loss narrowed 23%, despite the sharp quarterly revenue decline.
- Quarterly general and administrative expense increased 38% to $2.26 million; nine-month G&A rose 27% to $5.25 million. The company cited professional services, regulatory filings, funding activities and other operating requirements. Nine-month operating expenses overall were nearly unchanged.
- Operating cash use worsened as receivables, prepayments and other receivables increased; the increase was partly offset by higher accounts payable. Cash also reflects repayment of convertible debt and lower financing proceeds than in the prior-year period.
Outlook, risks and unusual items
- Outlook: No quantified financial guidance is provided. Management expects further growth in telecommunications products and services and says it intends to allocate more resources to the segment. It describes the quarterly decline in that business as temporary, but provides no recovery timetable. It is adapting its SMS/MMS approach in response to regulatory changes. Big-data commercialization is described as developing, with large-scale commercialization expected in approximately two to three years; management also says more significant revenue improvement is anticipated in upcoming periods.
- Funding and going concern: The filing states that continued operations depend on obtaining financing, executing the business model and achieving profitability. Management says available cash and operating revenue should cover projected needs and liabilities for the next 12 months, but also says additional capital may be needed to increase telecom deposits and that future financing is not assured. The company reported a $3.34 million nine-month net loss and $28.04 million accumulated deficit.
- China/VIE exposure: The company is a Delaware holding company and does not directly own its principal PRC operating VIE. VIE agreements have not been tested in court; changes in PRC rules or adverse interpretations could impair the company’s contractual control or access to VIE earnings. The filing also identifies uncertainty around PRC regulatory approvals, overseas-listing filings, data and cybersecurity rules, currency transfers and distributions.
- Internal controls: Management concluded disclosure controls were not completely effective as of November 30, 2023 because of material weaknesses, including incomplete control documentation and limited segregation of duties and oversight due to limited personnel. Remediation is ongoing; management says the weaknesses are not considered remediated until controls operate effectively for a sufficient period and are tested.
- Other risks and items: Revenue depends substantially on China Unicom and China Mobile; the company also cites cybersecurity, service interruption, financing, dilution, foreign-exchange and China regulatory risks. It repaid convertible notes during the period and issued shares through conversions, option exercises and other transactions. The filing reports no material pending legal proceedings and no material subsequent events.
Most important facts for investors to verify
- Whether the sharp quarterly revenue decline continues, and whether telecom revenue rebounds as management expects.
- Whether cash conversion improves: operating cash use was $6.95 million, while cash fell to $1.93 million and receivables and other working-capital balances increased.
- Whether the company can fund operations and planned telecom deposits without further dilutive or costly financing, notwithstanding management’s 12-month liquidity expectation and the going-concern disclosure.
- Whether SMS/MMS revenue can recover or be replaced following the reported regulatory changes, and whether big-data partnerships produce material commercial revenue.
- Progress in remediating material weaknesses in internal controls and any changes to PRC regulatory requirements affecting the VIE structure, operations or securities financing.