FingerMotion: A Flawed Business Model Funded Via Aggressive Stock Promotion and Shareholder Dilution

Initial Disclosure: After extensive research, we have taken a short position in shares of FingerMotion Inc (NASDAQ: FNGR). This report represents our opinion and is not financial advice. Do your own due diligence and don't take financial advice from strangers on the internet. Please read our full disclaimer at the bottom of this report.

• FingerMotion has been the subject of a recent promotional campaign targeting retail investors on social media platforms.
• FingerMotion funds promotional actively through large share issuances to unnamed “consultants”.
• FingerMotion’s stock promotion activities was flagged in the past by OTC Markets.
• The promotional campaign coincided with a 350% run-up in the stock price to bypass the “baby shelf” rule.
• FingerMotion is low on cash and has disclosed that it will need to raise money.
• FingerMotion has an effective Shelf Registration for $300m including a $25m ATM.
• The $300m Shelf Registration and $25m ATM agreement will likely cause significant shareholder dilution.
• Millions of shares are registered by PIPE investors from a low cost-basis and can be sold at any time.
• FingerMotion has given out millions of shares to repay debt investors. Most of these shares have not been sold yet.
• FingerMotion relies on accounting gimmicks to portray large revenue growth.
• FingerMotion’s balance sheet is deteriorating, the company’s gross margin is eroding, and cash burn is increasing.
• Insiders have begun selling shares.

We don’t think it’s a coincidence that the promotional campaign is happening just as the company files to sell shares ATM (effective and able for use). Nor do we think it’s a coincidence that insiders have been selling into the recent run-up in the stock price.

This is a very similar setup to our prior short report on Knightscope (NASDAQ: KSCP) whose shares fell 50% within a month of our report, as the company diluted shareholders into the promotional campaign.

Introduction

FingerMotion, Inc. (NASDAQ: FNGR) is a company that beckons caution and scrutiny from investors. The company’s financial performance has raised red flags, as it appears to rely on accounting gimmicks to project strong revenue growth, while the true profitability of the company is quite bleak. Moreover, the company operates in a climate of political risk, underscored by the introduction of new Chinese anti-espionage laws that may impact its operations. To compound these concerns, FNGR has done a large number of share issuances to “consultants”, a practice harkening back to its OTC history when the company was flagged by OTC Markets. The big kicker is that the company has recently entered into a $25M At-The-Market agreement with Univest. Given its poor financial position and cash on hand, we believe shareholders will be heavily diluted as the company sells shares to raise capital.

FingerMotion Overview

FingerMotion went public via an RTO with “Property Management Corporation of America”, a company that was listed on the OTCQB marketplace. Its primary business was offering management and consulting services to real estate property owners.

FingerMotion’s business model is overly complicated, deeply flawed, and generates little-to-no margin. The Company claims most of its revenue from providing mobile payment and recharge (top-up) services. FingerMotion sits between a telecom company and its existing customers. Those customers can purchase minutes & data directly from the telecom co, or they can purchase them through FingerMotion. FingerMotion buys the minutes & data from the telecom companies and pays the same price as retail customers. When FingerMotion then sells those minutes & data, they claim to receive a rebate from the telecom company.

Furthermore, as a telecom business incorporated in Delaware but primarily operating in China and Hong Kong, they face several potential risks and challenges stemming from China’s recent anti-espionage law. Moreover, its status as a U.S.-incorporated company operating in China could necessitate significant investments in legal and compliance resources to ensure a delicate balance between regulatory compliance and international data privacy expectations.

Business Segments

FingerMotion has three business segments

Telecom Products & Services

This segment is managed by JiuGe Technology, primarily serving the Chinese mobile consumer market. The company has established licensing agreements with major telecom providers such as China Unicom and China Mobile. JiuGe Technology earns rebates from these telecom giants by processing payments made by consumers for mobile data and talk time.

To incentivize consumers to use its platform over competitors or pay telecom providers directly, the company offers discounted rates. Their range of telecom products and services includes data plans, subscription plans, mobile phones, and loyalty points redemption.

Furthermore, they have integrated with e-commerce platforms to offer mobile payment services, catering to both consumers (B2C) and businesses (B2B). JiuGe Technology operates an electronic sales platform for China Unicom’s Yunnan subsidiary, through which it receives a percentage of the revenue generated from all sales it facilitates for China Unicom. These sales encompass a wide array of goods and services, including mobile telephones, broadband data, and various smart devices.

Below we included a screenshot taking a look at one of FingerMotions stores it runs for China Unicom’s Yunnan subsidiary on Taobao. The agreement is initially set for a three-year term with automatic renewal provisions. We have tried contacting China Unicom to confirm the legitimacy of this but have received no response on multiple occasions. We question what the need is for China Unicom to use a middleman such as FingerMotion to sell their services, as setting up a store on Taobao is akin to making a seller account on Ebay.

The telecom segment accounted for 98% of Company revenue in Q1 FY 2024. However, margins are thin and declining at ~4% that revenue growth would need to increase dramatically for them to get on a path to profitability. We believe this to be a flawed business model and suspect its main benefit to FingerMotion is not the prospect of generating income but rather to report inflated revenues.

Mobile Messaging (SMS & MMS)

This segment operates through its Beijing XuaLian subsidiary. It operates in a similar fashion to the one described above, by acquiring bulk SMS and MMS bundles from telecom companies at discounted rates, then reselling these services to customers. They hold a license to operate this service in the PRC. The margins on this are also low ~12% for FY 2023 but not much better. However with only reporting $8,121 in revenue for Q1 2023, clearly there is no future for this side of the business either. What doesn’t make sense to us is how revenue can drop so much, and their only explanation is a “shift in our risk management focus.” At the same time, the Company asserts it can “still be a major revenue and profit contributor.”

This business as per their 2022 10-K has only 4 employees:

source: https://www.bamsec.com/filing/152013823000249/1?cik=1602409&table=87

Big Data (AKA Sapientus)

The company generates revenue through its platform, “Sapientus”, which is tailored to deliver data-driven solutions to businesses operating in the insurance, healthcare, and financial services sectors. Sapientus leverages publicly available information and integrates insurance and financial data into the FingerMotion telecom and insurance ecosystem. This platform offers a spectrum of services, including both standardized and personalized risk scoring and appraisal services.

This business segment reported revenue of $149k for 2024 Q1. We believe this business segment has little chance of producing profits and is instead an attempt to reframe the company as a high-growth tech co and get investors to apply a much higher PE premium.

No Clear Path to Profitability

Throughout their PRs and stock promotion, the main focus is revenue growth, which at a first glance looks impressive:

However, we believe the company is using accounting practices to report misleading numbers that don’t reflect the true economics of the business.

FingerMotion is an intermediary, using client funds to procure products from telecom providers, and earning rebates on the sale of the product. We believe they record the total transaction amount as its revenue even though most of it doesn’t remain in their possession, instead going towards buying the product from telecommunications companies like China Unicom.

The “true” revenue is likely a fraction of what is reported. This is a common accounting practice in China, and we’re not surprised considering they use a Chinese CPA. While there is nothing illegal about this accounting practice, it presents misleading financials that can easily fool unsophisticated investors.

On top of that, even though the Company reports YoY revenue growth, the gross margins for FY 2023 actually dropped from 12.27% to 6.8% compared with FY 2022.

Even with the issuance of an extra 9 million shares the balance sheet has deteriorated. Net cash used in operating activities has also been increasing and it’s clear to us that FingerMotion has a cash flow problem. To stay afloat, they’ll need to further dilute their stock, more on this later in the report.

Here is a look at the revenue per segment along with its margins.

FY 2023 vs FY 2022

2024 Q1 vs 2023 Q1

Promotional Activities

The recent surge in FingerMotion’s stock performance appears to be primarily attributed to extensive stock promotion efforts, rather than substantial underlying developments. Notably, there have been no significant news releases or events that could reasonably explain this surge in stock value and volume. FingerMotion has previously been flagged by the OTC Markets for its promotional activities and we believe they even “paid” for a $5 price target issued by The Benchmark Company.

Flagged by OTC Markets

FingerMotions promotional activity was flagged in the past by OTC Markets:

source: FNGR 8-K, Aug 2021

source: FNGR 8-K, Aug 2021

Shares Issued to “Consultants”

A consistent pattern of issuing shares to “consultants” may not be that unusual for OTC-listed companies, but it raises major red flags now that the company has moved to the NASDAQ. In Q1 2024 alone, FingerMotion allocated a substantial sum, over $296,461 (in share issuance), to compensate consultants with shares. This practice not only dilutes existing shareholders’ equity but also poses questions about the transparency and legitimacy of these consultant arrangements. There is never any mention of who these “consultants” are and we can only rely on the 8-K back in 2021 to get an idea of who they might be.

Compensation given to “consultants”, as disclosed in FNGR’s SEC filings:

source: FNGR 10-Q [page 18]

Naked Shorting Conspiracy

If anyone has been following the market for the last couple of years, the new big thing in promoting small caps is blaming poor stock performance on “Naked Shorting”. Unsurprisingly, FingerMotion has been activily promoting this narrative as well.

FingerMotion PR about Naked Shorting

Social Media Promoters

We believe a large ring of social media promoters have been hired for coverage and constant promotion of FingerMotions stock. Promotion is primarily done through Twitter and Youtube, but is also present in many Discord chat rooms, emails and more. We also believe one of the crews promoting it were involved in GTII and MMTLP, two stocks that ended terribly for uninformed investors. As we mentioned earlier, it is very likely this whole run is as a result of its extensive promotion. This section will cover who we believe to be some of the different promoters and clear targeting of uninformed investors.

Promoters

It’s important to note that we can’t be certain which of the above mentioned people are actually paid by FingerMotion or its affiliates.

For more clarity on why we believe some of these users were involved in promotion, here is a chart showcasing when above listed members began coverage, or started aggressively mentioning FNGR multiple times a day.

Looking at the amount of tweets per day involving FNGR, the number of tweets is correlated with the rise in stock price. Most of these tweets are from the promoters mentioned above. At the same time, there was no material news released by FingerMotion.

Individual Promoters

In this section, we’ll briefly touch upon a few individuals whom we believe to be among FingerMotion’s promoters. However, we’ll keep it concise, as the content presented here reflects what can only be described as a striking lack of competence.

Avid Trader

Avid’s motives are clear. As he discloses on his YouTube channel, he is paid cash and stock to promote companies to retail investors:

source: https://www.youtube.com/@AvidTrader

It is also clear that his target audience is uninformed investors. The biggest red flag to us is that he tries to spin getting “Effectiveness” on their shelf registration as being bullish. He fails to explain how dilution works, perhaps not understanding it himself.

He also spreads misinformation claiming they were the underwriters for TOP’s shelf registration. Avid fails to mention that TOP had a low float and the shelf registration was filed after the big move.

HAMShortKiller & WilliamPFarran1

In our eyes, these are the main promoters for FNGR. They post multiple tweets a day, host Twitter spaces, live youtube videos, they do it all.

HAMShortKiller and William P. Farrand, both claim that there are 160 million FNGR shares sold short (over 6x the float) and their source is Buyins.net. Coincidentally, the creator of Buyins.net, Thomas Ronk, has been charged by the SEC for fraudulent promotional efforts and is barred from trading stocks under $5.

Thomas Ronk is likely a friend/partner with this crew as his name is consistently brought up in YouTube videos and twitter spaces. We recommend against spending time watching these videos unless you want to lose brain cells.

A common theme throughout most of these promoters, specifically these two, is their constant mention of MMTLP and GTII. It is likely that they were also partially behind the promotion for those two tickers, as their style of tweeting/content covering these names were very similar.

Stock charts for MMTLP and GTII:

Also, they keep putting out billboards mentioning either FNGR, MMTLP or GTII in front of the SEC, potentially to make the cult-like group inspired that they are trying to do the right thing against the Naked Shorties!

Arcabulls

Arcabulls promotes on youtube and twitter as well as in his discord room.

The majority of his videos are focused on FNGR, and he started consistently promoting the name in the beginning of the run.

According to a user on Stocktwits, Arcabulls is paid by FingerMotion to post ~4 videos a week. Which is what he seems to be doing, as shown in the above picture.

Ace Indy Biz

Ace also appears to be on the same page as HAMShortKiller and William Farrand, consistently putting out the same type of tweets and content claiming the same high short float narrative etc.

Ace promoting FNGR on YouTube: A Happy July 4th to Remember! GTII and FNGR Look Ready to BLOW

StockAlertzzzz

This user mentioned FNGR and Univest together on Twitter 46 times in the past 20 days.

1. Univest never represented HKD as an underwriter
2. Using incomparable examples again, similar to Avid trader, and Daniel Borders

RRR1

Another big GTII and MMTLP promoter, tweets nearly daily about short float/interest on FNGR.

• RRR1 praising Univest, and referring to a pathetic InsiderFinancial article regarding FNGR and its S-3 that recently was filed (declared effective), with Univest acting as sales agent.

  • A website which clearly aims at promoting stocks on misleading information and what seems to be very untrustworthy allegations. AvidTrader was even referenced.
  • In the disclaimer section, it is mentioned that they receive compensation for spreading this information.
  • Disclaimer: “Our reports/releases are commercial advertisements and are for general information purposes ONLY. We are engaged in the business of marketing and advertising companies for monetary compensation.”

Daniel Borders

Borders is consistently hopping over to the next trend. Whilst likely not a promoter, and instead looking for views and likes, he just about sums up the retail investor targeted by FingerMotion. Just on Friday the 29th, Borders was consistently tweeting about NVOS, a name which clearly put out a fake PR. This was commented on by both Nate Anderson from Hindbenburg Research and White Diamond Research.

He clearly is tweeting in a way to make readers of his tweets believe that Univest will start buying up FNGR:

Putting out outrageous targets:

And best one yet, hinting to his followers that by them uniting together (i.e. manipulating), that they would be able to take the stock higher on their own. This clearly ties in with this criminal record posted below, and is a good way to summarize the type of people behind FingerMotions promotion.

Multiple criminal offenses:

TikTok Promotion

Back in 2021, Finger Motion even paid content creators on TikTok to promote the stock.

source: https://www.tiktok.com/t/ZT8M5LwT9/

Current Cash Position

source: FNGR 10-K, 2022

As of FNGR’s 10-Q filed on 7/13/23 for the quarterly period ending May 31st, 2023, “Cash and cash equivalents” were $5,424,912.

FingerMotion’s quarterly cash burn comes in at around $2.58 million (as seen in table below).

This comes out to around $860k per month. And as of 9/31/23 it has been 4 months since this quarterly report, totaling around $3,400,000, leaving FNGR with around $1 million in cash (based on the same continuous cash burn levels), which would last them just over another months.

However, historically, Q2 and Q3 for FNGR have recorded higher cash burn, so we expect the company is likely on the brink of running out of cash and will need to dilute the stock in order to continue operating.

source: FNGR 10-Q, May 31, 2023

Dilution

A Troubling History of Dilution

As mentioned previously, FingerMotion continually dilutes shareholders via insider compensation, share issuances to “consultants” (promoters), and financing deals.

Shelf Registration and ATM Offering

We believe this trend will not stop and is bound to get more aggressive following its S-3 shelf registration filed on September 11th, which is now effective.

This allows FNGR to raise up to $300 million through offerings. But most importantly, included in the prospectus is also a $25 million At-The-Market agreement with Univest Securities.

An At-The-Market agreement will allow the company to issue shares directly to the open market. In our prior short report on Knightscope (NASDAQ: KSCP), we mentioned how they would have to use their At-The-Market facility to raise cash to continue operations. We believe this is the most likely scenario and the best way for them to benefit from all the promotion they have been doing for the stock.

FNGR S-3; Sept 11, 2023

Lind Global Partners Agreement

On 8/9/22, FingerMotion entered into an investment agreement with Lind Global Partners II LLC for a principal amount of $4.8 million in addition to a warrant purchase agreement to acquire 3.48mln shares. Starting 3/10/23, the company would be responsible for 18 consecutive monthly payments of ~$267k. The conversion of these notes is $2 with a 90% of VWAP clause and floor price of $0.86! The warrants have an exercise price of $1.75, a similar toxic conversion and a cashless option (basically free). These securities can be sold on an effective registration statement or 6 months from the date of issuance.

What do you know, almost immediately after the 6-month term, these guys begin to sell. That shows how much faith they have in FingerMotion’s future. On 2/7/23, they issued 1.7m shares at a deemed price of $1.75 through a cashless exercise of the warrants.

On 2/26/23 and 2/22/23, they issued 500k shares at a price of $2 to the conversion of $1mln respectively off the principal amount. Not to mention, they had a shareholder vote on 2/21/23 in which they attempted to reduce the floor price of this note to $0.5 from $0.86 as well as trying to issue in excess of 20% shares to help pay the loan. Both were voted against.

Shortly after on 3/17/23, FingerMotion issued ~2.46mln shares at $0.86 per share to raise $2.1mln. They soon after put out a PR saying they eliminated this debt.

Liew Yow Ming - Shareholder and High-cost Financier

Liew Yow Ming is a non-controlling stockholder. He essentially provides loans for the company at a 20% rate.

As of 2/28/21 - The company has $1.6mln outstanding and has paid hundreds of thousands to Liew over the past few years.

As of 5/31/21 - The outstanding debt to Liew was $1.95mln

Between 7/28/21 and 8/27/21 - Liew sent multiple conversion notices to FingerMotion in which they had to convert 2.4mln shares with 1.7mln at $.50 and the rest at $2.50 and $5 (micro amounts). The balance thereafter was 0.

Shortly after, the company accepted another note on 5/1/22 for $730k. This note was paid in full to Liew on 4/28/23.

Clearly once again, the company can only afford to pay off debt via issuances of their stock at a massive discount to the current market price.

In summary, it’s very clear the company has given out millions upon millions of shares to either promote or pay down debt either on the OTC or NSDQ exchange. The timeline shows that there isn’t sufficient demand for the company’s stock at its inflated valuation so FNGR is forced to repeatedly dilute shareholders.

Share Price and Dilution

The following charts hopefully make it crystal clear the true incentives of FingerMotion.

FNGR stock price while listed on OTC:

FNGR stock price while listed on NASDAQ:

Stock Incentive Plan

In November 2021, the 2021 Stock Incentive plan was approved. The plan provides for a maximum of 7mln shares to be issued.

In December, the following board members/management received stock options:

Following this, the company put out a PR saying they granted 4.5mln shares at $8 to 40 individuals. These “individuals” are directors/officers/employees or consultants.

Dec 2022: The Board approved 9mln shares comprised of 3.57mln to awards granted in the 2021 plan, 3.43mln shares available for issuance under the same plan, and 2mln shares which may be issued to awards under the 2023 plan.

Feb 2023: FNGR had an annual meeting in which the 2023 incentive plan was approved as well as the reduction of the cost basis of the 2021 incentive plan shares from $8 to $3.84.

Shortly after, an S-8 was filed to register those 3.57mln shares from the 2021 plan at $3.84 and to register the remaining off the 2021 plan along with the additional 2mln for a total of 5.4mln at $2.04.

March 2023: Choe Yang Yeat was given 96k.

July 2023: Granted 2.6mln shares at $4.62 to 22 people

Sep. 2023: Lee Yew Hon and Martin Shen sold 88.4k and 92k respectively.

In summary, FNGR has once again issued millions of shares at a massive discount to the market that are already registered, and we are recently seeing signs that management is selling these so-called “Incentive” shares.

Offices Are Not Real

FNGR claims to have offices in Singapore, Hong Kong, and New York. However, there are significant doubts about the legitimacy of these locations.

The Singapore office address, “111 Somerset Road, Level 3, Singapore 238164” is a co-working space that doesn’t list FNGR as a client.

The Hong Kong address, “Unit 912, 9/F., Two Harbourfront, 22 Tak Fung Street, HungHom, Kowloon”, is an incorporation service address and not an office space for the company.

FNGR’s New York office, located at “1460 Broadway, New York, NY 10036” is a WeWork co-working space.

These discrepancies raise concerns about FNGR’s transparency and its actual presence in these locations, which should be taken into account by potential investors.

Troubled Auditor

FingerMotions’s accounting firm, Centurion ZD which is based in Hong Kong, was reprimanded by the AFRC for serious breaches of professional standards. The firm was fined penalties totaling HK$700,000 and the practicing certificate for the managing partner was canceled.

Summary

We believe:

• FingerMotion has a fundamentally flawed business model with a questionable path to profitability.
• The driving force behind FingerMotion’s recent stock surge is an aggressive and pervasive promotional campaign financed at least in part through the company’s issuance of shares to stock promoters.
• FingerMotion is in a precarious financial position, marked by severe cash problems.
• FingerMotion will inevitably resort to diluting its stock through the execution of its shelf registration, whether through its ATM agreement, secondary offerings, or large amounts of shares held by insiders

Ultimately, the losers in this situation will be the unsuspecting investors who become ensnared in this investment trap.

Disclosure

Information provided in this report represents our subjective opinions and analysis. Readers are advised to consider this bias when evaluating the content, and it should not be taken as financial advice. Prior to making any investment decisions concerning FingerMotion, individuals should conduct their own research and seek guidance from a qualified financial advisor.

• FNGR