MMTEC, INC. 2018 Form 20-F Summary
Business context and reporting period
MMTEC, Inc., a British Virgin Islands holding company, filed an annual Form 20-F for the fiscal year ended December 31, 2018. The filing is not a quarterly report; “2018 Q4” is covered only as part of the full-year reporting period. Operations are conducted primarily through Gujia (Beijing) Technology Co., Ltd., which provides Internet-based securities technology, trading, settlement, fund administration and related services to Chinese-speaking financial institutions accessing overseas markets.
The company was founded in January 2018 and generated revenue beginning in August 2018. Its financial statements were prepared under U.S. GAAP. The company completed its Nasdaq Capital Market IPO in January 2019 under the symbol MTC.
Financial performance and position
| Metric | Year ended December 31, 2018 | Year ended December 31, 2017 |
|---|---|---|
| Revenue | $26,882 | $0 |
| Cost of revenue | $16,308 | $0 |
| Gross profit | $10,574 | $0 |
| Gross margin | 39.3% | Not applicable |
| Operating expenses | $2,338,114 | $918,600 |
| Loss from operations | $(2,327,540) | $(918,600) |
| Net loss | $(2,349,002) | $(919,198) |
| Comprehensive loss | $(2,399,588) | $(879,588) |
| Basic and diluted loss per share | $(0.06) | $(0.02) |
| Cash flow from operating activities | $(1,870,353) | $(961,234) |
| Cash and cash equivalents at period end | $93,625 | $237,561 |
| Total assets | $362,888 | $426,706 |
| Total liabilities | $807,173 | $102,271 |
| Shareholders’ equity | $(444,285) | $324,435 |
Operating expenses consisted principally of payroll and benefits of $893,656, professional fees of $831,821, other general and administrative expenses of $441,621, and selling and marketing expenses of $171,016. Professional fees increased substantially because of audit, legal, consulting, IPO and public-company costs.
Net cash used in investing activities was $66,313, primarily for property and equipment and an equity-method investment. Financing activities provided $1,848,894, including $1,661,420 of shareholder cash contributions and $206,205 of related-party advances. The company had no short-term or long-term borrowings at December 31, 2018.
Working capital declined from $249,007 at December 31, 2017 to a deficit of approximately $476,713 at December 31, 2018. Current liabilities included $239,635 due to related parties, $283,496 of accrued liabilities and other payables, $185,434 of salary payable and $79,182 of deferred revenue.
Material changes versus the prior comparable period
- Revenue commenced in August 2018, reaching $26,882 for the year, compared with no revenue in 2017.
- Operating expenses increased 154% to $2.34 million, causing the operating loss to increase from $918,600 to $2.33 million.
- Net loss increased 155% to $2.35 million, while loss per share increased from $0.02 to $0.06.
- Operating cash burn increased from $961,234 to $1.87 million.
- Cash declined by $143,936, or approximately 61%, to $93,625.
- Total current liabilities increased by $704,902, or approximately 689%, and the company moved from positive working capital to a substantial working-capital deficit.
- Shareholders’ equity declined from $324,435 to a deficit of $444,285, primarily because of the net loss and foreign-currency translation loss.
- The company repurchased 36 million shares for $36,000 in August 2018; the related amount was payable on credit and was paid in January 2019.
- Meimei Zhengtong was dissolved in 2018, while several Cayman Islands subsidiaries were dormant at year-end.
Guidance, outlook, commentary, risks and unusual items
Management did not provide quantified revenue, earnings or margin guidance. It described plans to invest in research and development, hiring, sales and marketing, cloud-based financial technology platforms, fund administration and services for small and medium-sized Chinese-speaking brokers and private funds.
Management stated that the January 2019 IPO materially improved available liquidity and that, considering IPO proceeds and available cash, it believed anticipated cash requirements for the following twelve months could be met. The IPO generated total net proceeds of $7,472,401 from 2,070,000 shares. Approximately $3.13 million was allocated to research and development and hiring, $1.86 million to sales and marketing, and approximately $2.48 million to working capital. A $500,000 portion was placed in escrow for potential indemnification obligations.
- The company has a short operating and revenue history, has incurred recurring losses and may require additional financing if revenue growth or cost control is insufficient.
- Revenue was concentrated in one customer, which accounted for 100% of 2018 revenue. There were no accounts receivable at year-end.
- The company’s ability to fund operations and transfer cash depends partly on shareholder contributions, related-party advances, and the ability of PRC subsidiaries to remit funds under Chinese foreign-exchange and dividend rules.
- Cash held in PRC bank accounts was largely uninsured. Renminbi is not freely convertible for many capital-account transactions, creating foreign-exchange and repatriation risk.
- The company recorded a $61,876 loss on its 24.9% equity-method investment in MMBD Trading and recognized a $19,426 liability for investee losses exceeding its investment because of a commitment to provide future support.
- The company identified significant business risks involving cybersecurity, platform outages, software defects, intellectual-property protection, competition, employee retention, regulatory compliance, licensing, PRC legal and political conditions, and currency fluctuations.
- The company stated that it was not involved in material legal proceedings and had no material off-balance-sheet arrangements. Future office lease commitments totaled $267,542, all due during 2019.
- The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2018. However, the auditor was not engaged to express an opinion on internal control, and the filing notes the inherent limitations of such controls.
- No dividends had been declared, and management did not anticipate paying dividends in the foreseeable future.
Most important facts for investors to verify
- Whether post-IPO revenue growth is sufficient to offset the company’s very low 2018 revenue base and substantial operating expenses.
- Current cash, working capital, liabilities, related-party advances and the use of the $7.47 million IPO proceeds.
- The status and profitability of the company’s major customer relationships, given that one customer generated all 2018 revenue.
- The company’s continuing obligations and funding commitments relating to MMBD Trading and MM Global Securities.
- Compliance with PRC licensing, foreign-exchange, SAFE registration, tax and fund-transfer requirements.
- Whether the company has achieved profitability or reduced operating cash burn since December 31, 2018.
- Potential dilution, ownership concentration and governance implications following the IPO and the company’s related-party transactions.