MMTEC, Inc. — Fiscal Year 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual Form 20-F, not a quarterly filing. The consolidated financial statements were prepared under U.S. GAAP and audited by MaloneBailey, LLP, which issued an unqualified opinion. The filing was signed May 22, 2020 and was delayed under the SEC COVID-19 relief order.
Business context
MMTEC is a British Virgin Islands holding company whose principal operations are conducted through Gujia in China and MM Global Securities in the United States. The company provides technology, market-data, investor-relations, brokerage and related services to Chinese-speaking financial institutions, funds, broker-dealers and investors seeking access to global securities markets.
MMTEC completed its IPO in January 2019, raising approximately $7.47 million in net proceeds from 2.07 million shares. In October 2019, it acquired the remaining 75.1% of MMBD Trading from Chairman Xiangdong Wen and CEO Zhen Fan for $185,000, making MMBD and its subsidiary, MM Global Securities, wholly owned. MM Global contributed revenue beginning October 18, 2019.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $200,797 | $26,882 | +647.0% |
| Gross profit | $109,907 | $10,574 | +939.5% |
| Gross margin | 54.7% | 39.3% | +15.4 percentage points |
| Operating expenses | $3,050,683 | $2,338,114 | +30.5% |
| Loss from operations | $(2,940,776) | $(2,327,540) | Loss increased 26.3% |
| Net loss | $(2,243,234) | $(2,349,002) | Loss decreased 4.5% |
| Comprehensive loss | $(2,273,404) | $(2,399,588) | Loss decreased 5.3% |
| Basic and diluted loss per share | $(0.11) | $(0.06) | Loss per share increased |
Revenue consisted of market-data services of $75,044, investor-relations management services of $86,788, commissions of $33,680 and other revenue of $5,285. The improvement in net loss was primarily attributable to a $724,795 government subsidy related to the IPO and higher interest income, partly offset by substantially higher operating expenses.
Operating expenses included payroll and benefits of $1.09 million, professional fees of $794,221, other general and administrative expenses of $775,647 and selling and marketing expenses of $389,750. Research and development expense was $737,329, compared with $828,367 in 2018.
Cash flow, liquidity and capital structure
| Metric | 2019 | 2018 |
|---|---|---|
| Cash and cash equivalents at year-end | $3,642,521 | $93,625 |
| Net cash used in operating activities | $(2,139,156) | $(1,870,353) |
| Net cash used in investing activities | $(725,476) | $(66,313) |
| Net cash provided by financing activities | $6,438,216 | $1,848,894 |
| Working capital | $3,542,211 | $(476,713) |
| Total liabilities | $1,453,833 | $807,173 |
| Total shareholders’ equity | $4,754,712 | $(444,285) |
Cash increased primarily because of the IPO. Operations remained cash-flow negative, and the company stated that it mainly relied on IPO proceeds to fund operations. The company had no short-term or long-term borrowings at December 31, 2019. Lease liabilities totaled $987,664, including $339,330 classified as current, and future office lease payments totaled approximately $1.06 million through 2022.
Cash included $1.5 million of cash equivalents and $875,987 held in uninsured PRC bank accounts. Management stated that available cash was expected to satisfy anticipated requirements for the next twelve months, but the company has no revolving credit facility and may need additional financing if resources become insufficient.
Material changes versus 2018
- Revenue expanded from $26,882 to $200,797, driven by new investor-relations, commission and other revenue streams, as well as the consolidation of MM Global after the MMBD acquisition.
- Gross margin improved to 54.7% from 39.3%, but operating expenses grew faster than gross profit and the operating loss widened.
- The IPO generated approximately $7.47 million of net proceeds and increased additional paid-in capital to $11.23 million.
- Cash and working capital shifted from $93,625 and a $476,713 deficit to $3.64 million and $3.54 million, respectively.
- Total shareholders’ equity improved from a $444,285 deficit to $4.75 million.
- The company adopted ASC 842 for operating leases, recognizing right-of-use assets of $979,885 and lease liabilities on the balance sheet.
- Goodwill of $127,717 arising from the MMBD acquisition was fully impaired in 2019.
- The company acquired a 4.9% interest in Caishang Education Technology for approximately $143,000 and acquired a 49% interest in Xchain Fintech, which was dormant at year-end.
Outlook, risks and unusual items
Management planned to expand financial advisory, investment banking and investor-relations services, develop technology and financial-product offerings, and pursue opportunities serving Chinese-speaking customers in overseas markets. The filing does not provide quantitative revenue or earnings guidance.
- COVID-19 caused temporary closure of the Beijing office, remote work, customer and supplier disruptions, reduced business-development activity and delays in the audit and filing process. The company stated that the ultimate financial impact could be material but could not be predicted.
- The business has incurred recurring losses and generated negative operating cash flow. Profitability depends on substantial revenue growth and control of operating expenses.
- Revenue concentration is significant: three customers represented 28.0%, 15.2% and 33.6% of 2019 revenue; one customer represented 100% of 2018 revenue.
- The company faces extensive U.S., PRC and other financial-services regulation, including broker-dealer, investment-adviser, capital, licensing, anti-money-laundering and reporting requirements.
- PRC currency controls may restrict transfers of cash from Chinese subsidiaries to the offshore parent. The company also faces RMB/U.S. dollar translation risk and broader PRC legal, political, tax and regulatory uncertainty.
- Cybersecurity, technology outages, intellectual-property claims, key-person dependence, competition and the ability to retain qualified personnel could materially affect results.
- Related-party risks include the $185,000 purchase of MMBD from the Chairman and CEO, related-party advances payable of $6,030 at year-end, and a $172,013 unsecured, non-interest-bearing employee loan.
- Subsequent events included a planned approximately $817,000 investment for 35% of Xtransfer, acquisition of MMBD Investment Advisory for $1,000, and continuing uncertainty from COVID-19.
- No material litigation or required off-balance-sheet arrangements were disclosed. Management reported effective disclosure controls and internal control over financial reporting, although the auditor was not engaged to provide an attestation opinion on internal controls.
Most important facts for investors to verify
- Whether revenue growth and the new brokerage, investor-relations and advisory businesses are recurring and scalable, rather than dependent on acquisitions or one-time items.
- The sustainability and cash impact of the $724,795 government subsidy and the company’s ability to reduce recurring operating losses.
- Current cash availability, including the portion held in PRC accounts, escrow restrictions and the ability to transfer funds outside China.
- Customer concentration, renewal terms and counterparty credit quality.
- Status and performance of MM Global, Xchain, Xtransfer and MMBD Investment Advisory, including required licenses and regulatory approvals.
- Completion and funding of the announced Xtransfer investment and any other post-year-end transactions.
- Potential effects of COVID-19, PRC regulatory developments, currency controls and access to future financing.
- Share count and dilution: the filing reports 20.70 million common shares outstanding at December 31, 2019, while it reports 20.07 million issued and outstanding as of May 22, 2020; this difference should be reconciled.