FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2023. Financial statements are unaudited and reported in U.S. dollars. FingerMotion conducts substantial operations in China, including through a contractually controlled VIE.
Financial performance
| Metric | Three months ended Aug. 31, 2023 | Six months ended Aug. 31, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue | $9.28 million | $21.45 million | $4.98 million / $9.84 million |
| Gross profit | $1.84 million | $2.50 million | $0.42 million / $0.79 million |
| Gross margin | 19.8% | 11.7% | 8.4% / 8.1% |
| Operating loss | $0.20 million | $1.38 million | $1.49 million / $2.93 million |
| Net loss attributable to FingerMotion shareholders | $0.13 million | $1.40 million | $1.54 million / $2.98 million |
| Reported loss per share | $0.00 | $(0.03) | $(0.04) / $(0.07) |
Quarterly revenue increased 86% year over year; six-month revenue increased 118%. Growth was led by Telecommunications Products & Services, whose six-month revenue rose to $21.21 million from $4.33 million. SMS & MMS revenue fell to $16,313 from $5.45 million; Big Data revenue increased to $226,452 from $62,500. Management attributed the SMS decline to changes in government distribution protocols. Cost of revenue rose 109% for the six-month period, while gross profit increased 215%.
Six-month operating expenses were $3.88 million, up 4%. General and administrative expense rose 19% to $3.00 million. No income tax expense was recorded. Foreign-currency translation reduced six-month comprehensive results by $523,734.
Balance sheet, cash flow, and financing
- At August 31, cash and cash equivalents were $4.04 million, down from $9.24 million at February 28, 2023. Working capital was $14.03 million, compared with $15.23 million.
- Current assets were $20.12 million and current liabilities $6.08 million. Accounts receivable rose to $8.58 million from $1.33 million; accounts payable rose to $5.35 million from $27,371.
- Six-month operating cash flow was negative $4.87 million, versus negative $3.79 million in 2022. The filing cites increased receivables as a major use of cash, partly offset by increased accounts payable.
- Investing cash flow was negative $372. Financing cash flow was negative $295,333, including $1.14 million of convertible-note repayments and $840,000 from stock and warrant exercises. Cash declined by $5.20 million during the period.
- The balance sheet reported no convertible notes payable at August 31. The company repaid a $730,000 note in April and settled the remaining balance of another note, including a 10% mandatory-default amount. That note had previously experienced disclosed events of default; the holder had not declared the full mandatory default amount due.
- Common shares outstanding were 52,381,952 at August 31 and 52,545,350 as of October 12. The company issued 2,648,500 stock options in July.
Outlook, risks, and other notable matters
- Management expects telecommunications revenue growth to continue and plans to direct additional resources to that business. It is working to improve SMS & MMS performance and expects Big Data improvements, but gives no quantitative guidance.
- Management stated that cash on hand and operating revenues should cover projected operating needs and liabilities for the coming year, while also saying additional capital may be needed to expand telecommunications deposits. The financial statements disclose dependence on future financing and achieving profitability to continue as a going concern; the company cautions that financing may be unavailable or dilutive.
- The company has an accumulated deficit of $26.09 million and a history of losses. It reported six-month net loss of $1.40 million.
- Substantially all operating activity is conducted in China, and investors own shares in the Delaware holding company, not the VIE. The VIE agreements have not been tested in court; PRC regulatory changes, enforceability, currency controls, and limits on fund transfers are significant risks. The company noted that future securities offerings may require CSRC filing.
- China Unicom and China Mobile are important revenue and operating relationships. Other stated risks include cybersecurity and data rules, foreign-exchange movements, access to capital, and possible disruption of third-party hosting or telecommunications services.
- Management concluded disclosure controls were not completely effective as of August 31 because of material weaknesses, including limited segregation of duties and incomplete control documentation. Remediation is underway; weaknesses are not yet considered remediated.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements. Subsequent events included consulting-share issuances and officers’ net-stock option exercises in September.
Key facts for investors to verify
- Whether the sharp increase in receivables converts to cash, and the collectability and timing of the $8.58 million balance.
- Whether revenue growth in telecommunications products and services produces sustainable margins and cash flow, and whether the SMS & MMS decline continues.
- How management’s stated one-year liquidity expectation reconciles with continued operating cash outflows, the going-concern financing dependence, and plans to raise additional capital.
- The status of the VIE agreements, applicable PRC approvals or filing requirements, and the company’s ability to transfer funds from China.
- The control remediation timeline and the accuracy of expense disclosures: the filing’s three-month marketing expense table reports $58,437, while the accompanying discussion says $53,437.