FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 31, 2022; unaudited results compared with the three months ended May 31, 2021. FingerMotion is a Delaware holding company whose China operations include a contractually controlled VIE. Its principal businesses include telecommunications products and services, SMS/MMS, and Big Data; its video game division is inactive.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $4.86 million | $6.00 million; down 19% |
| Gross profit / margin | $377,071 / 7.8% | $619,697 / 10.3%; gross profit down 39% |
| Operating expenses | $1.81 million | $1.48 million; up 23% |
| Operating loss | $1.44 million | $855,882 |
| Net loss attributable to company shareholders | $1.44 million; $0.03 per share | $911,890; $0.02 per share |
| Comprehensive loss attributable to company | $1.75 million | $851,870 |
| Operating cash flow | $(421,968) | $(1.94) million |
| Cash at period end | $805,548 | $789,752 at May 31, 2021; $461,933 at February 28, 2022 |
Revenue by line: Telecommunications Products & Services was $1.52 million, down 13%; SMS/MMS was $3.34 million, down 20%; Big Data was nil versus $98,715. Cost of revenue fell 17%, less than the revenue decline, contributing to lower gross margin. Foreign-currency translation was a $305,370 loss, versus a $60,184 gain a year earlier.
At May 31, 2022, working capital was $3.52 million, down from $4.93 million at February 28, 2022. Current assets were $8.83 million and current liabilities $5.31 million. Total liabilities were $5.43 million; these included a $730,000 convertible note bearing 20% interest, due April 30, 2023 and convertible at $4.00 per share, plus $245,589 of lease liabilities. The note was issued in May 2022. Total assets were $9.21 million and shareholders’ equity $3.77 million.
Net cash from financing was $730,000, entirely reported as proceeds from the convertible note. Cash increased by $343,615 during the quarter, including a $35,583 favorable exchange-rate effect. The company issued 150,000 shares for consulting/professional services during the quarter; weighted-average shares were 42.69 million, compared with 38.93 million a year earlier.
Material changes and management commentary
- Management attributed the 19% revenue decline partly to COVID-19 outbreaks and lockdowns in parts of China, and said operations were gradually returning toward pre-lockdown levels.
- Management said the revenue decline reflected lower telecommunications, SMS/MMS, and Big Data sales. It expects the mobile recharge business to grow and anticipates further contribution from new product offerings and Big Data, but provided no quantified financial guidance.
- Operating expenses increased, including research and development costs (up 56%) and share compensation expenses (reported in the income statement as $289,931 versus $60,975). Management said consultant shares were used to conserve cash for revenue-generating activities.
- The company reported a $1.44 million quarterly net loss and an accumulated deficit of $18.60 million. The filing states continued operations depend on obtaining additional financing and achieving profitable operations. Management nevertheless said available cash, operating revenue, and short-term investments were expected to fund operations and repay indebtedness for at least 12 months; it also said substantial growth would require additional capital.
- Management disclosed material weaknesses in internal control over financial reporting: undocumented control policies and procedures, and limited segregation of duties and oversight due to limited personnel. Disclosure controls were not completely effective as of May 31, 2022; remediation was ongoing and not yet considered complete.
Risks, contingencies, and unusual items
- China/VIE exposure: A significant portion of operations is conducted through a PRC VIE under contractual arrangements, not direct ownership. The filing warns that PRC authorities or courts could challenge the arrangements, restrict operations, or require restructuring. Regulatory, data-security, currency-transfer, and U.S.–China risks are also described.
- Customer and funding concentration: The company depends substantially on China Unicom and China Mobile, and says growth in recharge activity requires larger deposits with telecom providers. Additional equity or debt funding may be needed and could dilute shareholders or impose restrictive terms.
- Audit and listing risk: The filing says its Hong Kong-based auditor was among firms the PCAOB could not inspect, and warns of potential U.S. trading restrictions or delisting under the HFCAA if inspection requirements are not met.
- Other operating risks: The filing highlights losses, uncertain profitability, cybersecurity and service continuity, reliance on cloud hosting and telecom infrastructure, and effects from COVID-19. It reports no material outstanding litigation and no material off-balance-sheet arrangements.
- Share-based items: The company had 4,545,500 stock options outstanding at an $8.00 exercise price; 909,000 were exercisable. It also issued 30,000 shares in July 2022 for consulting services after quarter-end.
Important facts for investors to verify
- Reconcile share-based compensation: the income statement reports $289,931 of stock compensation, while the cash-flow statement adds back $379,013 of share-based compensation; the filing text does not clearly reconcile the difference.
- Assess the 20% convertible note’s repayment and conversion terms, potential dilution, and the company’s ability to fund required telecom deposits.
- Track receivable collection, prepaid/deposit balances, operating cash burn, and whether management’s stated 12-month liquidity expectation remains supportable.
- Monitor recovery in telecom and SMS/MMS revenue, gross margins, and whether Big Data and planned mobile-device protection offerings generate material revenue.
- Review progress in remediating internal-control weaknesses and developments affecting the VIE structure, China regulation, and PCAOB audit inspection access.