MMTEC, Inc. 2020 Form 20-F Summary
Business context and reporting period
MMTEC, Inc. is a British Virgin Islands holding company whose principal operations are conducted through subsidiaries in China, Hong Kong and the United States. The company provides internet-based securities technology, market data, investor-relations, brokerage, fund-management and related financial services to Chinese-speaking financial institutions and investors accessing global markets. The filing covers the fiscal year ended December 31, 2020, and is prepared under U.S. GAAP. It is an annual report, not a quarterly filing.
During 2020, the company consolidated MMBD Investment Advisory Company Limited, acquired in March 2020, and expanded its MOM fund activities. MM Global, the company’s U.S. broker-dealer subsidiary, generated most of the year’s revenue growth.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $742,125 | $200,797 | +269.6% |
| Gross profit | $734,720 | $109,907 | +568.4% |
| Gross margin | 99.0% | 54.7% | +44.3 percentage points |
| Operating expenses | $3,918,871 | $3,050,683 | +28.8% |
| Loss from operations | $(3,184,151) | $(2,940,776) | Loss increased 8.3% |
| Net loss | $(3,181,596) | $(2,243,234) | Loss increased 41.8% |
| Basic and diluted loss per share | $(0.16) | $(0.11) | Worsened |
| Comprehensive loss | $(3,063,909) | $(2,273,404) | Loss increased 34.8% |
- Revenue consisted primarily of commissions of $643,145, or 86.7% of total revenue; market data services contributed $73,524, investor-relations services $21,113 and other revenue $4,343.
- Commission revenue increased substantially following the inclusion and expansion of MM Global’s broker-dealer operations. The filing states that commission revenue is presented net and carries relatively little associated cost of revenue, contributing to the unusually high gross margin.
- Operating expenses included payroll and benefits of $1,024,565, professional fees of $1,744,395, other general and administrative expenses of $905,748, and selling and marketing expenses of $244,163.
- Professional fees increased by $950,174, principally because the company issued 750,000 shares valued at $1,005,000 as compensation for a consulting program.
- Other income was only $2,555 in 2020 versus $697,542 in 2019, primarily because the company received no comparable government subsidy in 2020. The 2019 subsidy was approximately $725,000.
- There was no income tax expense in either 2020 or 2019. The company reported net operating loss carryforwards of approximately $7.8 million at December 31, 2020, fully offset by a valuation allowance.
Cash flow, liquidity, debt and balance sheet
| Metric | December 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $1,425,926 | $3,642,521 |
| Total current assets | $2,253,141 | $4,347,710 |
| Working capital | $1,595,112 | $3,542,211 |
| Total liabilities | $1,014,469 | $1,453,833 |
| Shareholders’ equity | $2,695,803 | $4,754,712 |
| Net cash used in operating activities | $(1,982,847) | $(2,139,156) |
| Net cash used in investing activities | $(331,944) | $(725,476) |
| Net cash provided by financing activities | $37,250 | $6,438,216 |
- Cash declined by approximately $2.2 million during 2020, and working capital decreased 55.0% from 2019.
- Operating cash burn remained substantial despite higher revenue. Cash flow benefited from $1.005 million of noncash stock-based compensation and $337,221 of noncash lease expense.
- Investing cash outflows included approximately $873,577 for long-term investments, partially offset by investment refunds and collections of employee and related-party loans.
- At year-end, debt consisted primarily of a $41,250 Paycheck Protection Program loan bearing 1.0% interest and maturing in two years. The loan could be partially or fully forgiven subject to maintaining employee counts and wages.
- Operating lease liabilities totaled $745,542, including $430,352 current and $315,190 non-current. Future office lease payments totaled $767,541 before imputed interest.
- The company reported no material off-balance-sheet arrangements and no defaults or dividend arrearages.
- Most cash was held in financial institutions in China; $654,104 of PRC cash balances was uninsured at year-end.
Material changes versus the prior comparable period
- Revenue increased sharply because commissions rose from $33,680 to $643,145, while investor-relations revenue declined from $86,788 to $21,113.
- Gross margin increased from 54.7% to 99.0%, largely because commissions were reported net and had limited associated cost of revenue.
- Operating expenses increased despite lower selling and marketing costs and lower payroll costs. The principal increase was professional fees, including the $1.005 million share-based consulting charge.
- Net loss increased by approximately $938,000, reflecting higher operating expenses and the absence of the prior-year government subsidy.
- Cash and working capital declined materially because of continuing operating losses, investing outflows and limited financing activity during 2020.
- The company cancelled 36 million treasury shares in August 2020 and issued 750,000 shares for consulting services, ending the year with 20.82 million shares outstanding according to the audited balance sheet.
- MMBD Advisory was acquired for nominal consideration from a director and shareholder, creating an additional investment-advisory business line.
Guidance, outlook, management commentary and risks
Management did not provide formal revenue, earnings or margin guidance. It stated that future capital needs primarily relate to working capital, salaries, professional fees, accrued liabilities and development of business opportunities. Management believed available cash and expected inflows would be sufficient for anticipated requirements over the following twelve months, but also identified business expansion, additional personnel, business-development investments and public-company costs as factors that could reduce liquidity.
On February 22, 2021, after the reporting date, the company completed a registered direct offering of 4.3 million common shares at $3.70 per share, generating gross proceeds of $15.91 million and net proceeds of $14.6372 million for working capital and general corporate purposes. This subsequent financing materially changed the company’s liquidity profile but was not included in year-end cash.
- The company has incurred recurring losses and expects that it may continue to incur losses. Accumulated deficit was $9.56 million at December 31, 2020.
- COVID-19 reduced travel and certain staffing costs, while remote work and reduced personnel affected operations.
- Key risks include dependence on the financial markets, intense competition, regulatory and licensing requirements, cybersecurity and technology failures, employee misconduct, retention of key personnel, acquisition and integration risks, and reliance on third-party infrastructure.
- Operations are exposed to PRC political, legal, regulatory and currency controls. RMB is not freely convertible for many capital-account transactions, potentially limiting transfers of funds from PRC subsidiaries to the parent.
- The company may face restrictions on dividends from PRC subsidiaries and does not expect to pay dividends in the foreseeable future.
- U.S. regulators may have limited ability to conduct investigations or enforce judgments in China, and shareholder protections under BVI law may differ from those under U.S. law.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020. The independent auditor was not engaged to audit internal control effectiveness, consistent with the company’s emerging-growth-company status.
- The company reported no material litigation as of the filing date.
Important facts for investors to verify
- Whether the sharp increase in commissions and the 99.0% gross margin are sustainable, given their concentration in MM Global’s broker-dealer operations and the net presentation of commissions.
- Whether the $15.91 million February 2021 offering proceeds materially extend the company’s runway and how those funds are being deployed.
- The company’s ability to reduce recurring operating losses and approximately $1.98 million of annual operating cash burn.
- The nature, duration and economic benefit of the $1.005 million consulting arrangement settled with 750,000 shares.
- The collectability and terms of the $92,831 related-party loan receivable and the company’s other related-party transactions.
- The status and potential forgiveness of the $41,250 PPP loan.
- Regulatory standing and capital requirements of MM Global and MMBD Advisory, including any FINRA, SEC, state or PRC regulatory developments.
- Restrictions on moving cash from PRC subsidiaries to the BVI parent and the amount of cash actually available outside China.
- Share count and dilution following the 2021 offering, consulting share issuance and cancellation of treasury shares.
- Whether the company’s disclosures regarding business lines, dormant subsidiaries and operating segments remain consistent with current operations.