FingerMotion, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2022; filed January 17, 2023. Amounts are in U.S. dollars. FingerMotion is a Delaware holding company whose operations are primarily conducted in China, including through a contractually controlled variable interest entity (VIE). Its businesses include telecommunications products and services, SMS/MMS, and Big Data insights.
Financial performance
| Metric | Three months ended Nov. 30, 2022 | Three months ended Nov. 30, 2021 | Nine months ended Nov. 30, 2022 | Nine months ended Nov. 30, 2021 |
|---|---|---|---|---|
| Revenue | $11.40 million | $5.90 million | $21.24 million | $17.29 million |
| Gross profit | $858,614 | $967,075 | $1.65 million | $2.28 million |
| Gross margin | 7.5% | 16.4% | 7.8% | 13.2% |
| Operating loss | $1.86 million | $1.06 million | $4.79 million | $3.31 million |
| Net loss attributable to FingerMotion shareholders | $2.52 million | $1.04 million | $5.50 million | $3.40 million |
| Basic and diluted loss per share | $0.06 | $0.02 | $0.13 | $0.08 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $(5.60) million | $(5.12) million |
- Revenue mix, nine months: Telecommunications products and services revenue was $14.67 million, up 118%; SMS/MMS revenue was $6.32 million, down 39%; Big Data revenue was $250,000, up 90% from $131,418.
- Liquidity at November 30, 2022: Cash and cash equivalents were $11.87 million, versus $461,933 at February 28, 2022. Working capital was $16.71 million; current assets were $21.59 million and current liabilities were $4.87 million.
- Debt: Convertible notes totaled $5.53 million in stated principal: a $730,000 note due April 30, 2023, accruing 20% interest, and a $4.8 million note issued for $4.0 million of funding. The latter note is convertible and provides for monthly repayments beginning 180 days after issuance.
- Financing and equity: Nine-month financing cash inflow was $17.55 million, including $5.53 million of convertible-note proceeds and $12.02 million from common-stock issuance. Share count rose from 42.63 million at February 28 to 46.32 million at November 30.
Material changes and management commentary
- Quarterly revenue grew 93%, driven mainly by telecommunications products and services, which management attributed partly to deploying newly raised funds into mobile recharge operations. Gross profit nevertheless declined 11% as margins contracted.
- Nine-month revenue increased 23%, but gross profit fell 28%. Cost of revenue rose 31%, exceeding revenue growth; management cited lower profit margins.
- Operating expenses increased 34% in the quarter and 15% for the nine-month period. Nine-month stock compensation expense was $1.37 million, up 136%, largely related to consulting and advisory services associated with financing activities.
- Management said SMS/MMS faced challenges amid the continuing COVID outbreak in China. It expects further mobile-recharge revenue growth if it deploys additional funds. The Pacific Life Re Big Data collaboration advanced to a further phase; management expected that phase to be completed by the third quarter of the next fiscal year. No quantified earnings or revenue guidance is provided.
- Cash used in operations was $5.60 million for nine months, compared with $5.12 million in the prior-year period. The company reported no material planned capital expenditures and stated that available cash, operating revenues, and cash equivalents were expected to fund projected operations and repay outstanding debt for at least 12 months. It also said growth would require additional funding, particularly to increase telecom deposits.
Risks, contingencies, and unusual items
- Convertible-note default: The filing reports events of default on November 4 and November 21, 2022, following private placements totaling $11.55 million. The noteholder could declare a default amount of $5.28 million due or seek conversion at a potentially lower price. The filing says the holder had not declared that amount due and did not require the contractual 25% proceeds repayment. Management also attributes part of the period’s loss to a provision for the mandatory default amount; the precise accounting treatment and amount are not clearly reconciled in the supplied text.
- Going concern and losses: The company disclosed an accumulated deficit of $22.66 million and nine-month net loss of $5.50 million. It says continued operations and long-term liquidity depend on financing, revenue growth, and achieving profitability; additional financing may be unavailable or dilutive or carry restrictive terms.
- China/VIE exposure: The company does not directly own the VIE. It warns that VIE agreements have not been tested in court and may not provide control equivalent to direct ownership; changes in PRC law or enforcement could disrupt operations or undermine the structure. Most revenue is tied to China Unicom and China Mobile.
- Financial controls: Management concluded disclosure controls were not completely effective at November 30, 2022 because previously reported material weaknesses remained, including inadequate written control documentation and limited segregation of duties and oversight.
- Audit and listing risk: The filing discusses the PCAOB’s then-existing inability to inspect the company’s Hong Kong-based auditor and the related Holding Foreign Companies Accountable Act delisting risk. It states FingerMotion was identified as a Commission-Identified Issuer in June 2022; the filing describes uncertainty about whether subsequent inspection access would resolve the risk.
- Foreign-currency translation produced a $711,433 loss for the nine-month period, compared with a $58,611 gain in the prior-year period. The company reported no pending material legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the note default was cured, waived, or otherwise resolved after November 30, 2022, and whether any acceleration, repayment, or discounted conversion occurred.
- The accounting basis and amount of the stated mandatory-default provision, and its relationship to the noteholder’s reported decision not to demand payment.
- Whether operating cash burn, margins, and telecom deposit requirements support management’s stated 12-month funding expectation.
- Current status of the VIE agreements, PRC regulatory permissions and data-compliance obligations, and dependence on China Unicom and China Mobile.
- Progress in remediating internal-control material weaknesses and developments in PCAOB inspection access and HFCAA listing compliance.
- Potential dilution from outstanding warrants and convertible securities; the filing reports 5.64 million warrants outstanding at November 30, 2022.