☐ REGISTRATION STATEMENT PURSUANT
TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Name, Telephone, E-mail and/or Facsimile
Number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or an “emerging growth company.” See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Unless otherwise indicated,
numerical figures included in this Annual Report on Form 20-F (the “Annual Report”) have been subject to rounding adjustments.
Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede
them.
For the sake of clarity,
this Annual Report follows the English naming convention of first name followed by last name, regardless of whether an individual’s
name is Chinese or English. Numerical figures included in this Annual Report have been subject to rounding adjustments. Accordingly,
numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain
market data and other statistical information contained in this Annual Report are based on information from independent industry
organizations, publications, surveys and forecasts. Some market data and statistical information contained in this Annual Report
are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent
sources listed above, our internal research and our knowledge of the PRC information technology industry. While we believe such
information is reliable, we have not independently verified any third-party information and our internal data has not been verified
by any independent source.
Except where the context otherwise requires
and for purposes of this Annual Report only:
Depending on the context,
the terms “we,” “us,” “our company,” and “our” refer to MMTEC, INC., a BVI company,
and its consolidated subsidiaries:
Unless otherwise noted,
all currency figures in this filing are in U.S. dollars. Any discrepancies in any table between the amounts identified as total
amounts and the sum of the amounts listed therein are due to rounding
This Annual Report
contains “forward-looking statements” that represent our beliefs, projections and predictions about future events.
All statements other than statements of historical fact are “forward-looking statements” including any projections
of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future
operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions
or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements
of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”,
“would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”,
“future”, “intends”, “plans”, “believes”, “estimates” and similar expressions,
as well as statements in the future tense, identify forward-looking statements.
These statements are
necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements
described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking
statements, including with respect to correct measurement and identification of factors affecting our business or the extent of
their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which
our business strategy is based on the success of our business.
Forward-looking statements
should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether,
or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available
at the time those statements are made and management’s belief as of that time with respect to future events and are subject
to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested
by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information
on the Company” and elsewhere in this Annual Report.
This Annual Report
should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in Item
18 of this Annual Report.
On April 20, 2020,
the Company filed a Report on Form 6-K (the “6-K”) in compliance with and in reliance upon the SEC Order issued pursuant
to Section 36 of the Securities Exchange Act of 1934, as amended, granting Exemptions from Specified Provisions of the Exchange
Act and Certain Rules thereunder (SEC Release No. 34-88465 on March 25, 2020) (Relief Order) for the purpose of, among other things,
extending the time of filing of our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 in reliance on the Relief
Order.
This Annual Report
is being filed within the timeframe permitted by and in reliance upon the Relief Order.
The above-referenced 6-K provided, among things, operational
and audit timeline updates as well as updates on the impact of the coronavirus (COVID-19) outbreak in China on the Company, its
operations and filing of the Annual Report. Following the COVID-19 outbreak and the ensuing pandemic, a number of cities in China,
including Beijing (where the Company’s main offices are located), were and remain under severe travel and quarantine restrictions
and business closures. The Company’s suppliers and customers have been operating in the same, severely restricted manner,
often suspending their operations altogether. Beginning in February 2020, in light of the nearly universal travel restrictions,
the Company personnel has been working remotely, which, substantially impeded the Company’s ability to compile and prepare
its financial statements in connection with the Annual Report. As a standard audit procedure, the auditors are required to control
the confirmation procedures to ensure the effectiveness of this audit procedure, i.e. to issue confirmations to bank, customers
and suppliers directly, and required the counterparties to mail back the confirmations directly to the auditors’ office.
However, in light of the limited operation of the commercial banks and other business entities (especially small and medium sized
entities), and the extended processing period of the express delivery service during the outbreak and subsequent recovery periods,
the issuing time and related response period of audit confirmations had been delayed. The recovery rate of the audit confirmations
distributed (especially for those to customers and suppliers) was also expected to be lower than in previous years, as a result,
additional alternative procedures would be required, such measures would also in return delay the overall audit process. Consequently,
the Company’s 2019 audit schedule was revised to reflect the foregoing developments. The extension of time was necessary
due to unanticipated delays being experienced by the Company and its auditors in completing the field work associated with the
audit of the Company’s financial statements and the Company’s completing its Annual Report. Particularly, given that
the auditor personnel has been and continues to work remotely, and therefore has been unable to visit various field locations to
perform the work necessary to complete the audit. As a result, additional alternative procedures were required, and such measures
delayed the overall audit process and filing of the Annual Report.
PART I
ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not required.
ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not required.
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A.
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Selected financial data
|
The following selected
consolidated financial data as of and for the years ended December 31, 2019 and 2018 have been derived from the audited consolidated
financial statements of the Company included in this Annual Report. The following selected consolidated financial data as
of and for the year ended December 31, 2017 have been derived from the audited consolidated financial statements of the Company,
which are not included in this Annual Report. This information is only a summary and should be read together with the consolidated
financial statements, the related notes, the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other financial information included in this Annual Report. The Company’s
results of operations in any period may not necessarily be indicative of the results that may be expected for any future period.
See “Risk Factors” included elsewhere in this Annual Report.
The following table
presents our summary consolidated statements of operations and comprehensive loss for the fiscal years ended December 31, 2019,
2018 and 2017, respectively.
Selected Consolidated Statements of operations and Comprehensive Loss Data
|
|
|
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For the Year
|
|
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For the Year
|
|
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For the Year
|
|
|
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Ended
|
|
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Ended
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|
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Ended
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December 31,
2019
|
|
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December 31,
2018
|
|
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December 31,
2017
|
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Revenue
|
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$
|
200,797
|
|
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$
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26,882
|
|
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$
|
-
|
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Cost of revenue
|
|
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90,890
|
|
|
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16,308
|
|
|
|
-
|
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Gross profit
|
|
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109,907
|
|
|
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10,574
|
|
|
|
-
|
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Total operating expenses
|
|
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3,050,683
|
|
|
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2,338,114
|
|
|
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918,600
|
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Loss from operations
|
|
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(2,940,776
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)
|
|
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(2,327,540
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)
|
|
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(918,600
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)
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Other income (expense)
|
|
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697,542
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|
|
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(21,462
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)
|
|
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(598
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)
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Loss before income taxes
|
|
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(2,243,234
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)
|
|
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(2,349,002
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)
|
|
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(919,198
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)
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Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
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Net loss
|
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$
|
(2,243,234
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)
|
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$
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(2,349,002
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)
|
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$
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(919,198
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)
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Other comprehensive income (loss)
|
|
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(30,170
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)
|
|
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(50,586
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)
|
|
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39,610
|
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Comprehensive loss
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$
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(2,273,404
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)
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$
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(2,399,588
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)
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$
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(879,588
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)
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Net loss per common share
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|
|
|
|
|
|
|
|
|
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Basic and diluted
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$
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(0.11
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)
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$
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(0.06
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)
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$
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(0.02
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)
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Selected Consolidated Balance Sheets Data
|
|
|
|
As of December 31,
|
|
|
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2019
|
|
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2018
|
|
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2017
|
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Cash and cash equivalents
|
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$
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3,642,521
|
|
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$
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93,625
|
|
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$
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237,561
|
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Total current assets
|
|
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4,347,710
|
|
|
|
330,460
|
|
|
|
351,278
|
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Total non-current assets
|
|
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1,860,835
|
|
|
|
32,428
|
|
|
|
75,428
|
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Total assets
|
|
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6,208,545
|
|
|
|
362,888
|
|
|
|
426,706
|
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Total current liabilities
|
|
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805,499
|
|
|
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807,173
|
|
|
|
102,271
|
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Total non-current liabilities
|
|
|
648,334
|
|
|
|
-
|
|
|
|
-
|
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Total liabilities
|
|
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1,453,833
|
|
|
|
807,173
|
|
|
|
102,271
|
|
Total shareholders’ (deficit) equity
|
|
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4,754,712
|
|
|
|
(444,285
|
)
|
|
|
324,435
|
|
Total liabilities and shareholders’ (deficit) equity
|
|
|
6,208,545
|
|
|
|
362,888
|
|
|
|
426,706
|
|
Exchange Rate Information
Our
business is conducted in China, and the financial records of Gujia are maintained in RMB, its functional currency. However, we
use the U.S. dollar as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts
translated into U.S. dollars using the then-current exchange rates. Our financial statements have been translated into U.S. dollars
in accordance with Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” We have
translated our asset and liability accounts using the exchange rate in effect at the balance sheet date. We translated our statements
of operations using the average exchange rate for the period. We reported the resulting translation adjustments under other comprehensive
(loss) income. The consolidated balance sheet amounts, with the exception of equity at December 31, 2019, 2018 and 2017 were translated
at RMB 6.9762, RMB 6.8632 and RMB 6.5342 to $1.00, respectively. The equity accounts were stated at their historical rate. The
average translation rates applied to consolidated statements of operations and cash flows for the years ended December 31, 2019,
2018 and 2017 were RMB 6.8985, RMB 6.6174 and RMB 6.7518 to $1.00, respectively.
We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, or at all. The Chinese government imposes control over its foreign currency reserves in
part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
|
|
(RMB per U.S. Dollar)
|
|
|
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Period End
|
|
|
Average (1)
|
|
2017
|
|
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6.5342
|
|
|
|
6.7518
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|
2018
|
|
|
6.8632
|
|
|
|
6.6174
|
|
2019
|
|
|
6.9762
|
|
|
|
6.8985
|
|
|
|
(RMB per U.S. Dollar)
|
|
|
|
Period High
|
|
|
Period Low
|
|
January 2020
|
|
|
6.9718
|
|
|
|
6.8606
|
|
February 2020
|
|
|
7.0246
|
|
|
|
6.9249
|
|
March 2020
|
|
|
7.0999
|
|
|
|
6.9260
|
|
April 2020
|
|
|
7.1104
|
|
|
|
7.0300
|
|
May 2020 (through May 22, 2020)
|
|
|
7.1030
|
|
|
|
7.0690
|
|
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(1)
|
Annual averages were calculated by using the average of the midpoint exchange rate of each day during the relevant year.
|
Source: http://www.safe.gov.cn/safe/rmbhlzjj/index.html
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B.
|
Capitalization and Indebtedness
|
Not required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
You should carefully
consider the following risk factors, together with all of the other information included in this Annual Report. Investment in our
securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other
information included in this Annual Report before making an investment decision. The risks and uncertainties described below represent
our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results
of operations could suffer. In that case, you may lose all or part of your investment.
Risks Related to Our Business and Industry
We have incurred substantial losses
in recent periods and may incur losses in the future.
We have incurred substantial
losses in several recent periods as we have sought to expand our operations. We recorded net losses of $2,243,234 and $2,349,002
for the years ended December 31, 2019 and 2018, respectively. We may incur losses in future periods. If our future revenues do
not increase sufficiently, or even if our future revenues increase but we are unable to manage our expenses, we may not achieve
and maintain profitability in the future periods.
Our ability to protect the confidential
information of our users may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar
disruptions.
Our platform processes
certain personal and other sensitive data from our users, which makes it an attractive target and potentially vulnerable to cyber-attacks,
computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential
information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized
access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable
to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other
unauthorized access to our platform could cause confidential user information to be stolen and used for criminal purposes. Security
breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information,
time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action,
employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships
with borrowers and investors could be severely damaged, we could incur significant liability and our business and operations could
be adversely affected. In addition, we expect the secure transmission of confidential information over public networks to be a
critical element of our operations. Our networks, those of our third-party service vendors, and associated clearing corporations,
and our customers may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent
security measures could wrongfully use our information or cause interruptions or malfunctions in our operations, which could make
our customers hesitant to use our electronic marketplaces. We may be required to expend significant resources to protect against
the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches.
The Company may incur significant
delays and/or expenses relating to the COVID-19 (coronavirus) outbreak in China and beyond
Beginning in late 2019,
there were reports of the COVID-19 (coronavirus) outbreak originating in China, prompting government-imposed quarantines, cessation
of certain travel and business closures. Following this outbreak, in February 2020, the Company temporarily shut down its Beijing
offices. In March 2020, the Company gradually resumed its operations, with most of its personnel working remotely. The Company
may incur significant delays, reductions in revenue and increases in expenses relating to such events outside of its control. In
addition, the outbreak precludes the Company personnel from visiting customers and potential customers, which adversely affects
the Company’s ability to generate new revenue. Moreover, the Company expects that the impact of the COVID-19 outbreak on
the United States and world economies will have a material adverse effect on the demand for its services. Any and all of the foregoing
could have a material adverse impact on its business, operating results and financial condition. Further, as we do not have access
to a revolving credit or similar facility, there can be no assurance that we would be able to secure commercial financing in the
future in the event that we require additional capital. We currently believe that our financial resources will be adequate to see
us through the outbreak. However, in the event that we do need to raise capital in the future, the outbreak-related instability
in the securities markets could adversely affect our ability to raise additional capital.
We may pursue strategic alliances,
acquisitions or joint ventures, which could present unforeseen integration obstacles.
These acquisitions
may be necessary in order for us to enter into or develop new product areas. Strategic alliances, acquisitions, joint ventures
involve a number of risks and present financial, managerial and operational challenges, including:
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●
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potential disruption of our ongoing business and product development and distraction of management,
|
|
●
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difficulty retaining and integrating personnel and integrating financial and other systems,
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●
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the necessity of hiring additional management and other critical personnel and integrating them into our current operations,
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●
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increasing the scope, geographic diversity and complexity of our operations,
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●
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potential dependence upon, and exposure to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control,
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●
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potential unfavorable reaction to our strategic alliance, acquisition or joint venture strategy by our customers,
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●
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to the extent that we pursue business opportunities outside the U.S., exposure to political, economic, legal, operational and other risks that are inherent in operating in a foreign country, including risks of possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as the outbreak of hostilities,
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●
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conflicts or disagreements between any strategic alliance or joint venture partners and us, and
|
|
●
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exposure to additional liabilities of any acquired business, strategic alliance or joint venture.
|
As a result of these
risks and challenges, we may not realize any anticipated benefits from strategic alliances, acquisitions or joint ventures, and
such strategic alliances, acquisitions or joint ventures may in fact materially adversely affect our business, financial condition
and results of operations.
If we are unable to continue to identify
and exploit new market opportunities, our future revenues may decline and as a result our business, financial condition and results
of operations could be materially adversely affected.
As more participants
enter our markets, the resulting competition often leads to lower commissions. This may result in a decrease in future revenues
in a particular market even if the volume of trades we handle in that market increases. We may not be able to attract new customers
or successfully enter new markets. If we are unable to continue to identify and exploit new market opportunities on a timely and
cost-effective basis, our future revenues may decline and as a result our business, financial condition and results of operations
could be materially adversely affected.
Our ability to retain our key employees
and the ability of certain key employees to devote adequate time to us is critical to the success of our business, and failure
to do so may adversely affect our future revenues and as a result could materially adversely affect our business, financial condition
and results of operations.
Our people are our
most important resource and our success depends on the efforts and talent of our employees, including risk management, software
engineering, financial and marketing personnel. We must retain the services of our key employees and strategically recruit and
hire new talented employees to obtain customer transactions that generate substantially all our revenues. If any of our key employees,
including Xiangdong Wen, Zhen Fan, and Min Kong, were to join an existing competitor, form a competing company, or otherwise leave
us, some of our customers could choose to use the services of that competitor or another competitor instead of our services, which
could adversely affect our future revenues and as a result could materially adversely affect our business, financial condition
and results of operations. Our future success depends on our continued ability to attract, develop, motivate and retain qualified
and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense.
We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary
structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be
able to offer more attractive terms of employment. In addition, we invest significant time and expenses in training our employees,
which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant
expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors
could diminish, resulting in a material adverse effect to our business.
Difficult market conditions, economic
conditions and geopolitical uncertainties could adversely affect our business in many ways by negatively impacting our future revenues
in the financial markets in which we offer services, which could have a material adverse effect on our business, financial condition
and results of operations.
Difficult market conditions,
economic conditions and geopolitical uncertainties have in the past adversely affected and may in the future adversely affect our
business and profitability. Our business and financial services industry in general are directly affected by national and international
economic and political conditions, broad trends in business and finance, the level and volatility of interest rates, changes in
and uncertainty regarding tax laws and substantial fluctuations in the volume and price levels of securities transactions. The
financial markets and the global financial services business are, by their nature, risky and volatile and are directly affected
by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline
in the U.S. and global financial services markets, resulting in reduced trading volume. These events could have a material adverse
effect on our results and profitability. These factors include:
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●
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economic and political conditions in China, the U.S., Europe and elsewhere in the world,
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|
●
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concerns about terrorism, war and other armed hostilities,
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|
●
|
concerns over inflation and wavering institutional and consumer confidence levels,
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|
●
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the availability of cash for investment by our dealer customers and their customers,
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|
●
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the level and volatility of interest rates and foreign currency exchange rates,
|
|
●
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the level and volatility of trading in certain equity and commodity markets, and
|
In addition, any prolonged
slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition.
Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant
disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from
the lows of 2008 and 2009 has been uneven and there are new challenges, including the escalation of the European sovereign debt
crisis from 2011 and the slowdown of China’s economic growth since 2012 which may continue. There is considerable uncertainty
over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities
of some of the world’s leading economies, including the United States and China. There have also been concerns about the
economic effect of the tensions in the relationship between China and surrounding Asian countries. Adverse economic conditions
could have negative adverse effects on our business and financial conditions. Additionally, continued turbulence in the international
markets may adversely affect our ability to access the capital markets to meet liquidity needs.
Employee misconduct or error could
harm us by impairing our ability to attract and retain customers and subjecting us to significant legal liability and reputational
harm; moreover, this type of misconduct is difficult to detect and deter and error is difficult to prevent.
Employee misconduct
or error could subject us to financial losses and regulatory sanctions and could seriously harm our reputation and negatively affect
our business. It is not always possible to deter employee misconduct, and the precautions taken to prevent and detect employee
misconduct may not always be effective. Misconduct by employees could include engaging in improper or unauthorized transactions
or activities, failing to properly supervise other employees, or improperly using confidential information. Employee errors, including
mistakes in executing, recording or processing transactions for customers, could cause us to enter into transactions that customers
may disavow and refuse to settle, which could expose us to the risk of material losses even if the errors are detected and the
transactions are unwound or reversed. If our customers are not able to settle their transactions on a timely basis, the time in
which employee errors are detected may be increased and our risk of material loss could be increased. The risk of employee error
or miscommunication may be greater for products that are new or have non-standardized terms. It is not always possible to deter
employee misconduct or error, and the precautions we take to detect and prevent this activity may not be effective in all cases.
Financial services firms are highly
regulated, and the increased regulatory scrutiny over the last several years may increase the risk of financial liability and reputational
harm resulting from adverse regulatory actions
In April 2019, the
Company acquired from Xiangdong Wen and Zhen Fan the remaining 75.1% of outstanding securities of MMBD Trading Ltd., a British
Virgin Islands company (“MMBD”). Prior to the consummation of this acquisition, (i) the Company held 24.9% of outstanding
securities of MMBD, and (ii) each Xiangdong Wen (the Chairman of the Company’s Board) and Zhen Fan (the Company’s CEO)
beneficially owned 37.55% of outstanding securities of MMBD, respectively. The Company has agreed to pay the aggregate purchase
price of $185,000 for such securities to be equally divided between the two shareholders of MMBD. The acquisition closed on October
18, 2019, following the receipt by the Company of requisite corporate and regulatory approvals, including, without limitation,
FINRA CMA application approval, and the Company’s Audit Committee’s review and approval of the terms and provisions
of this transaction involving related parties. Following and as a result of this acquisition, MMBD has become a wholly-owned subsidiary
of the Company. Over the last several years, financial services firms have been operating in an evolving regulatory environment.
The industry has experienced an extended period of significant change in laws and regulations governing the financial services
industry, as well as increased scrutiny from various regulators. Penalties and fines imposed by regulatory authorities have increased
substantially in recent years. We may be adversely affected by changes in the interpretation or enforcement of existing laws, rules,
and regulations. There is also increased regulatory scrutiny (and related compliance costs) as we continue to grow and surpass
certain consolidated asset thresholds established under the Dodd-Frank Act, which have the effect of imposing enhanced standards
and requirements on larger institutions. Broker-dealers and investment advisers are subject to regulations covering all aspects
of the securities business, including, but not limited to: sales and trading methods; trade practices among broker-dealers; use
and safekeeping of clients’ funds and securities; capital structure of securities firms; anti-money laundering efforts; recordkeeping;
and the conduct of directors, officers and employees. Any violation of these laws or regulations could subject us to the following
events, any of which could have a material adverse effect on our business, financial condition and prospects: civil and criminal
liability; sanctions, which could include the revocation of our subsidiaries’ registrations as investment advisers or broker-dealers;
the revocation of the licenses of our financial advisors; censures; fines; or a temporary suspension or permanent bar from conducting
business. Failure to comply with regulatory capital requirements primarily applicable to our company, our bank subsidiaries, or
our broker-dealer subsidiaries would significantly harm our business.
Growth of our business could increase
costs and regulatory and integration risks
We continue to grow,
including through acquisitions and through our recruiting efforts. Integrating acquired businesses, providing a platform for new
businesses, and partnering with other firms involve risks and present financial, managerial, and operational challenges. We may
incur significant expense in connection with expanding our existing businesses, recruiting financial advisors, or making strategic
acquisitions or investments. Our overall profitability would be negatively affected if investments and expenses associated with
such growth are not matched or exceeded by the revenues derived from such investments or growth. Expansion may also create a need
for additional compliance, documentation, risk management, and internal control procedures, and often involves hiring additional
personnel to address these procedures. To the extent such procedures are not adequate or not adhered to with respect to our expanded
business or any new business, we could be exposed to a material loss or regulatory sanction. Financial services firms are subject
to numerous actual or perceived conflicts of interest, which are routinely examined by U.S. federal and state regulators and SROs
such as FINRA. Our risk management processes include addressing potential conflicts of interest that arise in our business. Management
of potential conflicts of interest has become increasingly complex as we expand our business activities. A perceived or actual
failure to address conflicts of interest adequately could affect our reputation, the willingness of clients to transact business
with us or give rise to litigation or regulatory actions. Therefore, there can be no assurance that conflicts of interest will
not arise in the future that could cause result in material harm to our business and financial condition.
We are generally subject to risks
inherent in doing business in the financial markets, and any failure to develop effective compliance and reporting systems could
result in regulatory penalties in the applicable jurisdiction and our business could be adversely affected.
There are certain additional
political, economic, legal, regulatory, operational and other risks inherent in doing business in international financial markets.
These risks include:
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less developed automation in exchanges, depositories and national clearing systems,
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additional or unexpected changes in regulatory and capital requirements,
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the impact of the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business,
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possible nationalization, expropriation and regulatory, political and price controls,
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difficulties in staffing and managing international operations,
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capital controls and other restrictive governmental actions,
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any failure to develop effective compliance and reporting systems, which could result in regulatory penalties in the applicable jurisdiction,
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fluctuations in currency exchange rates,
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reduced protections for intellectual property rights,
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outbreak of hostilities, and
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potentially adverse tax consequences arising from compliance with foreign laws and regulations to which our international subsidiaries are subject.
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In many countries,
the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may
be difficult for us to determine the exact requirements of local laws in every market. Our inability to remain in compliance with
local laws and regulations in a particular foreign market could have a significant and negative effect not only on our businesses
in that market but also on our reputation generally. If we are unable to manage any of these risks effectively, our business could
be adversely affected.
If the value of the U.S. dollar against
RMB in which we pay expenses continues to decline or if the value of the U.S. dollar against RMB in which we earn revenues improves
dramatically, our financial results could suffer.
Significant exchange
rate fluctuations can impact our results. Significant movements in the U.S. dollar against RMB, in which we pay expenses or earn
profits may have an adverse effect on our financial results. Potential movements in the U.S. dollar against RMB in which we earn
revenues could also adversely affect our financial results.
We may not be able to obtain additional
financing, if needed, on terms that are acceptable, which could prevent us from developing or enhancing our business, taking advantage
of future opportunities or responding to competitive pressure or unanticipated requirements.
Our business is dependent
upon the availability of adequate funding and sufficient capital. If for any reason we need to raise additional funds, we may not
be able to obtain additional financing when needed. If we cannot raise additional funds on acceptable terms, we may not be able
to develop or enhance our business, take advantage of future opportunities or respond to competitive pressure or unanticipated
requirements.
We may not be able to protect our
intellectual property rights or may be prevented from using intellectual property necessary for our business.
Our success is dependent,
in part, upon our intellectual property. We generally rely primarily on trade secret, contract, copyright and trademark laws to
establish and protect our rights to our proprietary technology, methods and products. It is possible that third parties may copy
or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We cannot assure
you that any of the rights granted under any patent, copyright or trademark that we may obtain will protect our competitive advantages.
In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws in the U.S.
We may also face claims of infringement that could interfere with our ability to use technology that is material to our business
operations. This may limit the comprehensiveness and quality of the data we are able to distribute or sell. In the future, we may
have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope
of the proprietary rights of others or defend against claims of infringement or invalidity. Any such claims or litigation, whether
successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any
of which could negatively affect our business. Responding to these claims could also require us to enter into royalty or licensing
agreements with the third parties claiming infringement. Such royalty or licensing agreements, if available, may not be available
on terms acceptable to us.
We may experience technology failures
while developing and enhancing our software.
In order to maintain
our competitive advantage, our software is under continuous development. There is risk that software failures may occur and result
in service interruptions and have other unintended consequences, which could have a material adverse effect on our business, financial
condition and results of operations.
Our operations depend on the performance
of the Internet infrastructure and fixed telecommunications networks in China.
Almost all access to
the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory
supervision of the Ministry of Industry and Information Technology, or the MIIT. We primarily rely on a limited number of telecommunication
service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers
to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other
problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service
providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with
the increasing traffic on our platform. We cannot assure you that the Internet infrastructure and the fixed telecommunications
networks in China will be able to support the demands associated with the continued growth in Internet usage. In addition, we have
no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications
and Internet services rise significantly, our results of operations may be adversely affected. Furthermore, if Internet access
fees or other charges to Internet users increase, our user traffic may decline, and our business may be harmed.
Any significant disruption in service
on our platform or in our computer systems, including events beyond our control, could prevent us from processing or posting transactions
on our platform, reduce the attractiveness of our platform and result in a loss of borrowers or investors.
In the event of a platform
outage and physical data loss, our ability to perform our servicing obligations, process applications or make trades available
on our platform would be materially and adversely affected. The satisfactory performance, reliability and availability of our platform
and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to retain
existing and attract new borrowers and investors. Our operations depend on our ability to protect our systems against damage or
interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer
viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our facilities,
we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. Any interruptions
or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether
accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event
of damage or interruption, our insurance policies currently in place may not adequately compensate us for any losses that we may
incur.
Our platform and internal systems
rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal
systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability
of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and
may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released
for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience
for our users, delay introductions of new features or enhancements, result in errors or compromise our ability to protect user
data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm
to our reputation, loss of user or liability for damages, any of which could adversely affect our business, results of operations
and financial conditions.
The financial markets in which we
operate are generally affected by seasonality which could have a material adverse effect on our financial performance in a given
period.
Traditionally, the
financial markets around the world experience lower volume during the summer and at the end of the year due to a general slowdown
in the business environment and, therefore, our transaction volume levels may decrease during those periods. The timing of the
holidays also affects transaction volume. These factors could have a material adverse effect on our financial performance in a
given period.
We operate in a rapidly evolving
business environment. If we are unable to adapt our business effectively to keep pace with these changes, our ability to succeed
will be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.
The pace of change
in our industry is extremely rapid. Operating in such a rapidly changing business environment involves a high degree of risk. Our
ability to succeed will depend on our ability to adapt effectively to these changing market conditions. If we are unable to keep
up with rapid technological changes, we may not be able to compete effectively. To remain competitive, we must continue to enhance
and improve the responsiveness, functionality, accessibility and features of our proprietary software, network distribution systems
and technologies. Our business environment is characterized by rapid technological changes, changes in use and customer requirements
and preferences, frequent product and service introductions embodying new technologies and the emergence of new industry standards
and practices that could render our existing proprietary technology and systems obsolete. Our success will depend, in part, on
our ability to:
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develop, license and defend intellectual property useful in our business,
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enhance our existing services,
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develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers,
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respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis,
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respond to the demand for new services, products and technologies on a cost-effective and timely basis, and
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adapt to technological advancements and changing standards to address the increasingly sophisticated requirements and varied needs of our prospective customers.
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We cannot assure you
that we will be able to respond in a timely manner to changing market conditions or customer requirements. The development of proprietary
electronic trading technology entails significant technical, financial and business risks. Further, the adoption of new Internet,
networking or telecommunications technologies may require us to devote substantial resources to modify, adapt and defend our technology.
We cannot assure you that we will successfully implement new technologies or adapt our proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards, or that we will be able to successfully defend any challenges
to any technology we develop. Any failure on our part to anticipate or respond adequately to technological advancements, customer
requirements or changing industry standards, or any significant delays in the development, introduction or availability of new
services, products or enhancements, could have a material adverse effect on our business, financial condition and results of operations.
Lack of liquidity or access to capital
could impair our business and financial condition.
Liquidity, or ready
access to funds, is essential to our business. We expend significant resources investing in our business, particularly with respect
to our technology and service platforms. As a result, reduced levels of liquidity could have a significant negative effect on us.
Some potential conditions that could negatively affect our liquidity include:
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illiquid or volatile markets,
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diminished access to debt or capital markets,
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unforeseen cash or capital requirements, or
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regulatory penalties or fines, or adverse legal settlements or judgments.
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The capital and credit
markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure
on availability of liquidity and credit capacity for businesses similar to ours. Without sufficient liquidity, we could be required
to limit or curtail our operations or growth plans, and our business would suffer. Notwithstanding the self-funding nature of our
operations, we may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated
with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated
cash flow or, if needed, with funds drawn under our revolving credit facility. We may also need access to capital in connection
with the growth of our business, through acquisitions or otherwise. In the event current resources are insufficient to satisfy
our needs, we may need to rely on financing sources such as bank debt. The availability of additional financing will depend on
a variety of factors such as:
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the general availability of credit,
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the volume of trading activities,
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the overall availability of credit to the financial services industry,
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our credit ratings and credit capacity, and
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the possibility that our lenders could develop a negative perception of our long- or short-term financial prospects is a result of industry- or company-specific considerations. Similarly, our access to funds may be impaired if regulatory authorities or rating organizations take negative actions against us.
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Disruptions, uncertainty
or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market
conditions may limit our ability to satisfy statutory capital requirements, generate commission, fee and other market-related revenue
to meet liquidity needs and access the capital necessary to grow our business. As such, we may be forced to delay raising capital,
issue different types of capital than we would otherwise, less effectively deploy such capital, or bear an unattractive cost of
capital, which could decrease our profitability and significantly reduce our financial flexibility.
Our business could be materially
adversely affected as a result of the risks associated with acquisitions and investments.
We may pursue further
acquisitions and investments in the future. These transactions are accompanied by risks. For instance, an acquisition could have
a negative effect on our financial and strategic position and reputation or the acquired business could fail to further our strategic
goals. Moreover, we may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to
realize the intended benefits from an acquisition. We may have a lack of experience in new markets, products or technologies brought
on by the acquisition and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may create
an impairment of relationships with customers or suppliers of the acquired business or our advisors or suppliers. All of these
and other potential risks may serve as a diversion of our management’s attention from other business concerns, and any of
these factors could have a material adverse effect on our business.
We operate in an intensely competitive
industry, which could cause us to lose advisors and their assets.
Many of our competitors
have substantially greater resources than we do and may offer a broader range of products and services across more markets. Some
operate in a different regulatory environment than we do, which may give them certain competitive advantages in the services they
offer. For example, certain of our competitors only provide clearing services and consequently would not have any supervision or
oversight liability relating to actions of their financial advisors. We believe that competition within our industry will intensify
as a result of consolidation and acquisition activity and because new competitors face few barriers to entry, which could adversely
affect our ability to recruit new advisors and retain existing advisors. If current or potential clients decide to use our competitors,
we could face a significant decline in market share, future fee revenues and future net income.
We may be subject to intellectual
property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain
that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights,
know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal
proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks,
patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects
of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property
rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against
us, we may be forced to divert management’s time and other resources from our business and operations to defend against these
claims, regardless of their merits. Additionally, the application and interpretation of China’s intellectual property right
laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights
in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with
our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for
our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced
to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.
Increases in labor costs in the PRC
may adversely affect our business and results of operations.
The economy in China
has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue
to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments
to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees,
fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our
services, our financial condition and results of operations may be adversely affected.
The laws and regulations governing
the financial industry in China are developing and evolving rapidly. If any of our business practices is deemed to violate any
PRC laws or regulations, our business, financial condition and results of operations would be materially and adversely affected.
Due to the relatively
short history of the finance industry in China, the PRC government has yet to establish a comprehensive regulatory framework governing
our industry. To comply with existing laws, regulations, rules and governmental policies relating to the online finance industry,
we have implemented various policies and procedures to conduct our business and operations. However, due to the lack of detailed
rules and the fact that the relevant laws, regulations and rules are expected to continue to evolve, we cannot be certain that
our existing practices would not be deemed to violate any existing or future rules, laws and regulations. As of the date of this
report, we have never been subject to any material fines or other penalties under any PRC laws or regulations, including those
governing our industry in China. However, to the extent that we are not able to fully comply with any existing or new regulations
when they are promulgated, our business, financial condition and results of operations may be materially and adversely affected.
We are unable to predict with certainty the impact, if any, that future legislation, judicial precedents or regulations relating
to the online consumer finance industry will have on our business, financial condition and results of operations. Furthermore,
the growth in the popularity of online consumer finance increases the likelihood that the PRC government will seek to further regulate
this industry.
Our operations may be adversely affected
by international communication failures, which may affect trade executions and data updates.
Any significant disruption in service on our platforms, our
computer systems or third-party service providers’ systems, including events beyond our control, could reduce the attractiveness
of our platforms and result in a loss of customers or investors. In the event of a platform outage and physical data loss, our
ability to perform our servicing obligations, and process loan applications would be materially and adversely affected. The satisfactory
performance, reliability and availability of our platforms and our underlying network infrastructure are critical to our operations,
customer service, reputation, and ability to retain existing and attract new customers, investors and institutional funding partners.
Our operations depend on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications
failures, air quality issues, environmental conditions, computer viruses, or attempts to harm our systems, criminal acts and similar
events. Any interruptions or delays in our service, whether as a result of third-party or our error, natural disasters or security
breaches, whether accidental or wilful, could harm our relationships with our customers, investors and institutional funding partners
and our reputation. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient
capacity to recover all data and services in the event of an outage. These factors could prevent us from processing loans, damage
our brand and reputation, divert our employees’ attention, subject us to liability and cause customers, investors and institutional
funding partners to abandon our platforms, any of which could adversely affect our business, financial condition and results of
operations.
Our platforms and internal systems
rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platforms and internal
systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability
of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and
may now or in the future contain, undetected errors or bugs. Errors or other design defects within the software on which we rely
may result in a negative experience for customers and funding sources, delay introductions of new features or enhancements, result
in errors or compromise our ability to protect customer or investor data or our intellectual property. Any errors, bugs or defects
discovered in the software on which we rely could result in harm to our reputation, loss of customers or investors or liability
for damages, any of which could adversely affect our business, results of operations and financial condition.
Uncertainties relating to the growth
and profitability of the e-commerce industry in China could adversely affect our operating revenue and business prospects.
Our future results
of operations will depend on numerous factors affecting the development of the e-commerce industry in China, which may be beyond
our control. These factors include:
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the growth of Internet, broadband, personal computer and mobile penetration and usage in China, and the rate of any such growth,
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the level of trust and confidence of Chinese consumers in online trading, as well as changes in investor demographics and investor tastes and preferences,
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whether alternative lending channels or business models that better address the needs of investor emerge in China, and
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the development of fulfilment, payment and other ancillary services
associated with online purchases.
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Unfavorable developments
in domestic and international politics, including military conflicts, political turmoil and social instability, may also adversely
affect investor confidence and reduce investments, which could in turn materially and adversely affect our growth and profitability.
Any negative publicity or investor
complaints with respect to us, investor and our service providers may materially and adversely affect our business and results
of operations.
The reputation of our
brands is critical to our business and competitiveness. Any malicious or negative publicity or any publicized incidents in connection
with the use of our services, whether or not we are negligent or at fault, including but not limited to those relating to our management,
business, compliance with the law, financial conditions or prospects, whether with or without merit, could severely compromise
our reputation and harm our business and operating results.
As China’s online
investing industry is new and the regulatory framework for this industry is also evolving, negative publicity about this industry
and the market segment in which we operate may arise from time to time. Negative publicity about China’s online investing
industry in general may also have a negative impact on our reputation, regardless of whether or not we have engaged in any inappropriate
activities. The PRC government has recently instituted specific rules, including the Guidelines, Interim Measures and the CBRC
Circular 26, to develop a more transparent regulatory environment for the online consumer finance industry. Any players in China’s
online consumer finance industry who are not in compliance with these regulations may adversely impact the reputation of the industry
as a whole. Furthermore, any negative development or perception of the consumer finance industry as a whole, including campus lending,
even if factually incorrect or based on isolated incidents or as result of conduct by other market players, could compromise our
image, undermine our trust and credibility, and negatively impact our ability to attract new customers, investors and institutional
funding partners. Negative developments in the consumer finance industry, such as widespread customer defaults, fraudulent behavior,
the closure of other online consumer finance platforms, or incidents indirectly resulting from the accumulation of large amounts
of debt and inability to repay by any particular customer, may also lead to tightened regulatory scrutiny of the sector and limit
the scope of permissible business activities that may be conducted by market players in the consumer finance industry. For instance,
since 2015, there has been a number of reports of business failures of, or accusations of fraud and unfair dealing against, certain
companies in the consumer finance industry in China. If customers, investors or institutional funding partners associate our company
with these companies, they may be less willing to engage in borrowing or funding activities on our platform. If any of the foregoing
takes place, our business and results of operations could be materially and adversely affected.
Our business is dependent on our
ability to maintain relationships with our business partners and other third parties, and at the same time, we are subject to risks
associated with our business partners and other third parties.
We currently rely on
a number of business partners and other third parties in various aspects of our business. In addition, we cooperate with a number
of business partners and other third parties to deliver our services to our customers. Furthermore, if third-party service providers
fail to function properly, we cannot assure you that we would be able to find an alternative in a timely and cost-efficient manner,
or at all. Pursuing, establishing and maintaining relationships with business partners and other third parties, as well as integrating
their data and services with our system, require significant time and resources.
The smooth operation
of our business also depends on the compliance by our business partners and other third parties with applicable laws and regulations.
Any negative publicity about business partners and other third parties, such as negative publicity about their loan collection
practices and any failure by them to adequately protect the information of our customers and investors, to comply with applicable
laws and regulations or to otherwise meet required quality and service standards, could harm our reputation. If any of the foregoing
were to occur, our business and results of operations could be materially and adversely affected. Our reputation is associated
with these business partners and other third parties, and if any of the foregoing were to occur, our reputation may suffer.
Any lack of requisite approvals,
licenses or permits applicable to our business may have a material and adverse impact on our business, financial condition and
results of operations.
Our business is subject
to governmental supervision and regulation by the relevant PRC governmental authorities. Together, these government authorities
promulgate and enforce regulations that cover many aspects of the operation of the online retail and the online finance industries.
The PRC government extensively regulates the Internet industry. As a result, in certain circumstances it may be difficult to determine
what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We have made efforts
to obtain all the applicable licenses and permits. We cannot assure you that we have obtained all the permits or licenses required
for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government
determines that we are operating without the proper approvals, licenses or permits or promulgates new laws and regulations that
require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has
the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue
the relevant parts of our business or to impose restrictions on the affected portion of our business. Any of these actions by the
PRC government may have a material adverse effect on our business and results of operations.
Risks Relating to Our Corporate Structure
We will likely not pay dividends
in the foreseeable future.
Dividend policy is
subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition,
capital requirements and other factors. There is no assurance that our Board of Directors will declare dividends even if we are
profitable. The payment of dividends by entities organized in China is subject to limitations as described herein. Under BVI law,
we may only pay dividends from profits of our company, or credits standing in our Company’s share premium account, and we
must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become
due in the ordinary course of business; and the realizable value of assets of our Company will not be less than the sum of our
total liabilities, other than deferred taxes as shown on our books of account, and our capital. Pursuant to the Chinese enterprise
income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%.
Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the
foreign investment entity is subject to a withholding tax of 5%. The payment of dividends by entities organized in China is subject
to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated
profits as determined in accordance with accounting standards and regulations in China. The transfer to this reserve must be made
before distribution of any dividend to shareholders.
Our business may be materially and
adversely affected if any of our Chinese subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
The Enterprise Bankruptcy
Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall due
and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts. Our Chinese subsidiaries hold
certain assets that are important to our business operations. If any of our Chinese subsidiaries undergoes a voluntary or involuntary
liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our
ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Wholly Owned Foreign Entity (WOFE)
is required to allocate a portion of its after-tax profits, to the statutory reserve fund, and as determined by its Board of Directors,
to the staff welfare and bonus funds, which may not be distributed to equity owners.
Pursuant to Company
Law of P.R. China (2013 Revision), Wholly Foreign-Owned Enterprise Law of the P.R. China (2000 Revision) and Implementing Rules
for the Law of the People’s Republic of China on Wholly Foreign Owned Enterprises (2014 Revision), our WOFE entity is required
to allocate a portion of its after-tax profits, to the statutory reserve fund, and in its discretion, to the staff welfare and
bonus funds. No lower than 10% of an enterprise’s after tax-profits should be allocated to the statutory reserve fund. When
the statutory reserve fund account balance is equal to or greater than 50% of the WOFE’s registered capital, no further allocation
to the statutory reserve fund account is required. WOFE determines, in its own discretion, the amount contributed to the staff
welfare and bonus funds. These reserves represent appropriations of retained earnings determined according to Chinese law.
Our failure to obtain prior approval
of the China Securities Regulatory Commission for the listing and trading of our common shares on a foreign stock exchange could
have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.
On August 8, 2006,
six Chinese regulatory agencies, including the Ministry of Commerce of the People’s Republic of China (“MOFCOM”),
jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rule”),
which was amended on June 22, 2009. The M&A Rule contains provisions that require that an offshore special purpose vehicle
(“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall
obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV
seeking CSRC approval of overseas listings. However, the application of the M&A Rule remains unclear with no consensus currently
existing among leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement. The CSRC has not
issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the M&A Rule.
If we fail to maintain continuing
compliance with the PRC state regulatory rules, policies and procedures applicable to our industry, we may risk losing certain
preferential tax and other treatments which may adversely affect the viability of our current corporate structure, corporate governance
and business operations.
According to the Guidelines
on Foreign Investment issued by the State Council in 2002 and the Catalog on Foreign Invested Industries (2017 Revision) issued
by the National Development and Reform Commission and MOFCOM, IT services fall into the category of industries in which foreign
investment is encouraged. The State Council has promulgated several notices since 2000 to launch favorable policies for IT services,
such as preferential tax treatments and credit support. Under rules and regulations promulgated by various Chinese government agencies,
enterprises that have met specified criteria and are recognized as software enterprises by the relevant government authorities
in China are entitled to preferential treatment, including financing support, preferential tax rates, export incentives, discretion
and flexibility in determining employees’ welfare benefits and remuneration. Software enterprise qualifications are subject
to annual examination. Enterprises that fail to meet the annual examination standards will lose the favorable enterprise income
tax treatment. Enterprises exporting software or producing software products that are registered with the relevant government authorities
are also entitled to preferential treatment including governmental financial support, preferential import, export policies and
preferential tax rates. If and to the extent we fail to maintain compliance with such applicable rules and regulations, our operations
and financial results may be adversely affected.
Risks Related to Doing Business in China
Adverse changes in political, economic
and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which
could materially and adversely affect the growth of our business and our competitive position.
Our business, financial
condition, results of operations and prospects are affected significantly by economic, political and legal developments in China.
Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s,
the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources,
monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain
industries by foreign investors, control the exchange between the Renminbi and foreign currencies, and regulate the growth of the
general or specific market. While the Chinese economy has experienced significant growth in the past 30 years, growth has
been uneven, both geographically and among various sectors of the economy. Furthermore, the current global economic crisis is adversely
affecting economies throughout the world. As the PRC economy has become increasingly linked with the global economy, China is affected
in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted
by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business.
Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could
have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments
could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.
Uncertainties with respect to the
PRC legal system could have a material adverse effect on us.
The PRC legal system
is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late
1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic matters in general.
The overall effect has been to significantly enhance the protections afforded to various forms of foreign investments in China.
We conduct our business primarily through our subsidiaries established in China. These subsidiaries are generally subject to laws
and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the
PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. In
addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government
authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical,
or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the
legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion
in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative
and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may
impede our ability to enforce the contracts we plan to enter into with our business partners, clients and suppliers. In addition,
such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law
that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights
and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We
cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing
laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties
could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of our resources and management attention.
U.S. regulators’ ability to
conduct investigations or enforce rules in China is limited.
The majority of our
operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations
or inspections, or to effect service of process within the U.S. or elsewhere outside China on us, our subsidiaries, officers, directors
and shareholders, and others, including with respect to matters arising under BVI or U.S. federal or state securities laws. China
does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many other
countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S. securities
laws and the laws of the BVI, may be difficult or impossible.
We face uncertainty regarding the
PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.
Pursuant to the Notice
on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC
State Administration of Taxation on December 10, 2009, or Circular 698, where a foreign investor transfers the equity interests
of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer,
and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or
(ii) does not tax foreign income of its residents, the foreign investor should report such Indirect Transfer to the competent
tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of the Indirect Transfer, and
if the tax authority considers that the foreign investor has adopted an abusive arrangement in order to avoid PRC tax, they will
disregard the existence of the overseas holding company and re-characterize the Indirect Transfer and as a result, gains derived
from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise
is supposed to provide necessary assistance to support the enforcement of Circular 698. At present, the PRC tax authorities will
neither confirm nor deny that they would enforce Circular 698, in conjunction with other tax collection and tax withholding
rules, to make claims against our PRC subsidiaries as being indirectly liable for unpaid taxes, if any, arising
from Indirect Transfers by shareholders who did not obtain their common shares in the public offering of our common shares.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit
our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit their ability to distribute profits
to us, or otherwise materially and adversely affect us.
On July 4, 2014, the
PRC State Administration of Foreign Exchange (“SAFE”) promulgated the Circular on Relevant Issues Relating to Domestic
Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which
replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing
and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated by SAFE on October
21, 2005. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of
the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13
has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local
branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment
or financing.
These circulars require
PRC residents to register with qualified banks in connection with their direct establishment or indirect control of an offshore
entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular 37 as a “special purpose vehicle.”
These circulars further require amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division
or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the
required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with
the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls.
Failure by our shareholders or beneficial owners to comply with
Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our
PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely
affect our business and prospects.
PRC regulation of loans and direct
investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions
to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
As an offshore holding
company of our PRC subsidiary, we may make loans to our PRC subsidiary, or we may make additional capital contributions to our
PRC subsidiary. Any loans to our PRC subsidiary are subject to PRC regulations and approvals. For example, loans by us to our PRC
subsidiary in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits
and must be registered with SAFE or its local counterpart.
We may also decide
to finance our PRC subsidiary through capital contributions. These capital contributions must be approved by MOFCOM or its local
counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis,
if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or capital contributions by us
to our subsidiaries or any of their respective subsidiaries. If we fail to receive such registrations or approvals, our ability
to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our
ability to fund and expand our business.
On June 15, 2016, SAFE
promulgated the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts,
or SAFE Circular No.16. SAFE Circular No. 16 stipulates that the use of capital by foreign-invested enterprises, or FIEs shall
follow “the principle of authenticity and self-use” within the business scope of such FIEs. The capital of an FIE and
capital in Renminbi obtained by the FIE from foreign exchange settlement shall not be used for the following purposes: (i) directly
or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations;
(ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products
unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where
it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is
not for self-use (except for the foreign-invested real estate enterprises).
We cannot assure you
that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely
basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future
capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability
to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our
liquidity and our ability to fund and expand our business.
Governmental control of currency
conversion may limit our ability to use our future revenues effectively and the ability of our PRC subsidiary to obtain financing.
The PRC government
imposes control on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency
out of China. Restrictions on currency conversion imposed by the PRC government may limit our ability to use our future revenues
generated in Renminbi to fund our expenditures denominated in foreign currencies or our business activities outside China. Under
China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating
to current account transactions, which include among other things dividend payments and payments for the import of goods and services,
by complying with certain procedural requirements. Our PRC subsidiary is able to pay dividends in foreign currencies to us without
prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiary may also retain foreign currency
in their respective current account bank accounts for use in payment of international current account transactions. However, we
cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current
account transactions. Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating
to capital account transactions, which principally includes investments and loans, generally requires the approval of SAFE and
other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions
could affect the ability of our PRC subsidiary to make investments overseas or to obtain foreign currency through debt or equity
financing, including by means of loans or capital contributions from us. We cannot assure you that the registration process will
not delay or prevent our conversion of Renminbi for use outside of China.
We may be classified as a “resident
enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us
and our non-PRC shareholders.
The Enterprise Income
Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China
are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on
their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding
the standards used to classify certain Chinese-invested enterprises established outside of China as resident enterprises clarified
that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject to PRC withholding
tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such resident
enterprises to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income
Tax Law, a de facto management body is defined as a body that has material and overall management and control over the manufacturing
and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular
mentioned above details that certain Chinese-invested enterprises will be classified as resident enterprises if the following are
located or resident in China: senior management personnel and departments that are responsible for daily production, operation
and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of
board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Currently, there are
no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which
are applicable to our company or our overseas subsidiary. If our company or any of our overseas subsidiaries is considered a PRC
tax resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First,
our company or our overseas subsidiary will be subject to the uniform 25% enterprise income tax rate as to our global income as
well as PRC enterprise income tax reporting obligations. Second, although under the Enterprise Income Tax Law and its implementing
rules dividends paid to us from our PRC subsidiary would qualify as tax-exempted income, we cannot assure you that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax,
have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, dividends payable by us to our investors and gain on the sale of our common shares
may become subject to PRC withholding tax. It is possible that future guidance issued with respect to the new resident enterprise
classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise investors or a potential
withholding tax of 20% for individual investors is imposed on dividends we pay to them and with respect to gains derived by such
investors from transferring our common shares. In addition to the uncertainty in how the new resident enterprise classification
could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required
under the Enterprise Income Tax law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if you
are required to pay PRC income tax on the transfer of our common shares under the circumstances mentioned above, the value of your
investment in our common shares may be materially and adversely affected. It is unclear whether, if we are considered a PRC resident
enterprise, holders of our common shares would be able to claim the benefit of income tax treaties or agreements entered into between
China and other countries or areas.
We may rely on dividends paid by
our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a
material adverse effect on our ability to conduct our business.
As a holding company,
we conduct substantially all of our business through our consolidated subsidiaries incorporated in China. We may rely on dividends
paid by our PRC subsidiary for our cash needs, including the funds necessary to pay any dividends and other cash distributions
to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established
in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits
as determined in accordance with accounting standards and regulations in China. Our PRC subsidiary is required to set aside at
least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve
fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. As a result, our PRC subsidiary
is restricted in their ability to transfer a portion of their net assets to us in the form of dividends. In addition, if our PRC
subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends
or make other distributions to us. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially
and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends
and otherwise fund and conduct our business.
Our current employment practices
may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.
The PRC Labor Contract
Law and its implementing rules impose requirements concerning contracts entered into between an employer and its employees and
establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. Because
the Labor Contract Law and its implementing rules have not been in effect very long and because there is lack of clarity with respect
to their implementation and potential penalties and fines, it is uncertain how it will impact our current employment policies and
practices. We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law
or its implementing rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large
penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of
operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules,
if we intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to
compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor
contract, which may cause extra expenses to us. Furthermore, the Labor Contract Law and its implementation rules require certain
terminations to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers.
In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect
our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost-effective
manner, thus our results of operations could be adversely affected.
Risks Related to Ownership of our Common
Shares
If our financial condition deteriorates
as a NASDAQ listed company, we may not meet continued listing standards on the NASDAQ Capital Market.
Our securities are
currently listed for trading on the NASDAQ Capital Market. The NASDAQ Capital Market requires companies to fulfill specific requirements
in order for their securities to continue to be listed. If our common shares are delisted from the NASDAQ Capital Market at some
later date, our shareholders could find it difficult to sell our common shares. In addition, if our common shares are delisted
from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board or in the
“pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets”
are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are delisted
at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional
sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional
accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market.
As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common
shares are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely
that the price of our common shares would decline and that our shareholders would find it difficult to sell their common shares.
In addition, we have relied on an exemption to the blue-sky registration requirements afforded to “covered securities.”
Securities listed on the NASDAQ Capital Market are “covered securities.”
We are a “foreign private issuer,”
and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the
same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more
difficult for you to evaluate our performance and prospects.
We are a foreign private
issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will
be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting
companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose
detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required
to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure
and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure)
which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before
other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5
under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed
on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the
information provided by U.S. domestic reporting companies.
Common shares eligible for future
sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding common
shares in the public marketplace could reduce the price of our common shares.
The market price of
our common shares could decline as a result of sales of substantial amounts of our common shares in the public market, or the perception
that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings
of our common shares.
Our officers, directors and principal
shareholders own a significant percentage of our common shares and will be able to exert significant control over matters subject
to shareholder approval.
Our officers, directors and 5% or greater shareholders possess
substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval.
This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which
could deprive our shareholders of an opportunity to receive a premium for their common shares as part of a sale of our company
and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders.
We will incur increased costs and
become subject to additional regulations and requirements as a result of becoming a newly public company, and our management will
be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run
our business.
As a newly public company,
we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs
associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have
incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the Securities and Exchange
Commission, or the SEC, and NASDAQ. The expenses incurred by public companies generally for reporting and corporate governance
purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to
make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of
certainty. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements.
These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director
and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and
retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if
we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines,
sanctions and other regulatory action and potentially civil litigation.
The market price of common shares
may be volatile, which could cause the value of your investment to decline.
The market price of our common shares may be highly volatile
and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This
market volatility, as well as general economic, market or political conditions, could reduce the market price of our common shares
in spite of our operating performance. In addition, our results of operations could be below the expectations of public market
analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions
or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports
about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations
or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue
in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements
by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments,
adverse publicity about our industry in or individual scandals, and in response the market price of our common shares could
decrease significantly. In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past,
following periods of volatility in the overall market and the market price of a company’s securities, securities class action
litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial
costs and a diversion of our management’s attention and resources, or at all.
Future sales, or the perception of
future sales, by us or our existing shareholders in the public market could cause the market price for our common shares to decline.
The sale of substantial amounts of common shares in the public
market, or the perception that such sales could occur could harm the prevailing market price of our common shares. These sales,
or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future
at a time and at a price that we deem appropriate. If any existing shareholders sell a substantial amount of common shares, the
prevailing market price for our common shares could be adversely affected. In the future, the market price of our common shares
could drop significantly if the holders of our restricted shares sell them or are perceived by the market as intending to sell
them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common shares
or other securities.
As the rights of shareholders under
BVI law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs
will be governed by our Memorandum and Articles of Association, the BVI Business Companies Act, 2004, as amended (the “BVI
Act”), and the common law of the BVI. The rights of shareholders to take legal action against our directors, actions by minority
shareholders and the fiduciary responsibilities of our directors under BVI law are governed by the BVI Act and the common law of
the BVI. The common law of the BVI is derived in part from comparatively limited judicial precedent in the British Virgin Islands
as well as from the common law of England and the wider Commonwealth, which has persuasive, but not binding, authority on a court
in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under BVI law are largely codified
in the BVI Act but are potentially not as clearly established as they would be under statutes or judicial precedents in some jurisdictions
in the United States. In particular, the BVI has a less developed body of securities laws as compared to the United States, and
some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of all
of the above, holders of our common shares may have more difficulty in protecting their interests through actions against our management,
directors or major shareholders than they would as shareholders of a U.S. company.
BVI companies may not be able to
initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
Shareholders of BVI
companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. Shareholders
of a BVI company could, however, bring a derivative action in the BVI courts, and there is a clear statutory right to commence
such derivative claims under Section 184C of the BVI Act. The circumstances in which any such action may be brought, and the procedures
and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being
more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives
available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce
against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose
liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that
are penal in nature. There is no statutory recognition in the BVI of judgments obtained in the United States, although the courts
of the BVI will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial
on the merits. The BVI Act offers some limited protection of minority shareholders. The principal protection under statutory law
is that shareholders may apply to the BVI court for an order directing the company or its director(s) to comply with, or restraining
the company or a director from engaging in conduct that contravenes, the BVI Act or the company’s Memorandum and Articles
of Association. Under the BVI Act, the minority shareholders have a statutory right to bring a derivative action in the name of
and on behalf of the company in circumstances where a company has a cause of action against its directors. This remedy is available
at the discretion of the BVI court. A shareholder may also bring an action against the company for breach of duty owed to him as
a member. A shareholder who considers that the affairs of the company have been, are being or likely to be, conducted in a manner
that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial
to him in that capacity, may apply to the BVI court for an order to remedy the situation.
There are common law
rights for the protection of shareholders that may be invoked, largely dependent on English company law. Under the general rule
pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with
the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of
the company’s affairs by the majority or the Board of Directors. However, every shareholder is entitled to have the affairs
of the company conducted properly according to BVI law and the constituent documents of the company. As such, if those who control
the company have persistently disregarded the requirements of company law or the provisions of the company’s Memorandum and
Articles of Association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following:
(1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by
the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe or
are about to infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not
complied with provisions requiring approval of a special or extraordinary majority of shareholders. This means that even if shareholders
were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The laws of the BVI may provide less
protection for minority shareholders than those under U.S. law, so minority shareholders may have less recourse than they would
under U.S. law if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the
BVI, the rights of minority shareholders are protected by provisions of the BVI Act dealing with shareholder remedies and other
remedies available under common law (in tort or contractual remedies). The principal protection under statutory law is that shareholders
may bring an action to enforce the constitutional documents of the company (i.e. the Memorandum and Articles of Association) as
shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the Memorandum and Articles
of Association of the company. A shareholder may also bring an action under statute if he feels that the affairs of the company
have been or will be carried out in a manner that is unfairly prejudicial or discriminating or oppressive to him. The BVI Act also
provides for certain other protections for minority shareholders, including in respect of investigation of the company and inspection
of the company books and records. There are also common law rights for the protection of shareholders that may be invoked, largely
dependent on English common law, since the common law of the BVI for business companies is limited.
We may not be able to pay any dividends
on our common shares in the future due to BVI law.
Under BVI law, we may
only pay dividends to our shareholders if the value of our assets exceeds our liabilities and we are able to pay our debts as they
become due. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. Future
dividends, if any, will be at the discretion of our Board of Directors, and will depend upon our results of operations, cash flows,
financial condition, payment to us of cash dividends by our subsidiaries, capital needs, future prospects and other factors that
our directors may deem appropriate.
We are an “emerging growth
company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies”
will make our common shares less attractive to investors.
We are an “emerging
growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies.” In particular,
while we are an “emerging growth company” (1) we will not be required to comply with the auditor attestation requirements
of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the PCAOB requiring mandatory
audit firm rotations or a supplement to the auditor’s report on financial statements, (3) we will be subject to reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements and (4) we will not be required to hold
nonbinding advisory votes on executive compensation or shareholder approval of any golden parachute payments not previously approved.
We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. If we remain an
“emerging growth company” after fiscal 2018, we may take advantage of other exemptions, including the exemptions from
the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Wall Street Reform and Customer Protection
Act, or the Dodd-Frank Act, and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act. In addition, Section
107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, meaning that the company can delay the
adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the
same new or revised accounting standards as other public companies that are not emerging growth companies.
We may remain an “emerging
growth company” until the fiscal year-end following the fifth anniversary of the completion of this initial public offering,
though we may cease to be an “emerging growth company” earlier under certain circumstances, including (1) if we become
a large accelerated filer, (2) if our gross revenue exceeds $1.07 billion in any fiscal year or (3) if we issue more than $1.0
billion in non-convertible notes in any three-year period. The exact implications of the JOBS Act are still subject to interpretations
and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of
the benefits of the JOBS Act. In addition, investors may find our common shares less attractive if we rely on the exemptions and
relief granted by the JOBS Act. If some investors find our common shares less attractive as a result, there may be a less active
trading market for our common shares and our stock price may decline and/or become more volatile.
ITEM
4.
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INFORMATION ON THE
COMPANY
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A.
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History and Development
of the Company
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MMTEC,
INC. (“MMTEC”) was founded on January 4, 2018 under the laws of the British Virgin Islands (the “BVI”).
Our main operations are conducted through and by the People’s Republic of China (“PRC”) based operating entity,
Gujia (Beijing) Technology Co., Ltd. (“Gujia”), based in Beijing, China. On April 20, 2018, we incorporated MM Fund
Services Limited (“MM Fund”) for the purpose of providing administration services to the private equity funds industry.
On May 28, 2018 and August 8, 2018, we incorporated MM Capital Management Limited (“MM Capital”) and MM Fund SPC (“MM
SPC”), respectively, for the purpose of providing assets management and investment services to clients. On March 19, 2018,
MMTEC acquired a wholly owned subsidiary, MM Future Technology Limited (“MM Future”). MM Future was incorporated in
Hong Kong on October 31, 2017 for the purpose of being a holding company for the equity interest in Gujia. In addition, our company
acquired 24.9% of the outstanding securities of MMBD Trading Limited (“MMBD Trading”) on March 28, 2018 and acquired
the remaining 75.1% on April 25, 2019. The acquisition was closed on October 18, 2019. MMBD Trading acquired a wholly owned subsidiary,
MM Global Securities, INC. (“MM Global”) on August 16, 2017. MM Global located in New York, NY. MM Global changed
its corporate name from “MM IGlobal, INC” to “MM Global Securities, Inc.” effective as of February 25,
2019. On March 15, 2019, we incorporated MM Global Capital Limited, a new wholly subsidiary of the Company organized under the
laws of the British Virgin Islands. Currently, we intend to utilize this subsidiary to set up and engage in securities trading.
However, there is no assurance that we will proceed as intended, if at all. On July 9, 2019, we acquired 49% of a Newly-Formed
Entity called Xchain Fintech PTE.LTD., (“Xchain”), a Singapore company, for the purpose of providing technical support
for the construction and development of a new solutions for the existing problems of the traditional financial industry, the difficulty
experienced by investors in investing and allocating investment assets globally, and the protection of funds and investments by
using advanced technologies, such as artificial intelligence, big data analysis and blockchain. We have developed and deployed
a series of platforms which comprise a business chain that enables PRC-based hedge funds, mutual funds, registered investment
advisors, proprietary trading groups, and brokerage firms to engage in securities market transactions and settlements globally.
We
conduct our business through and based on distinct yet integrated business systems designed to provide support for our (i) Securities
Dealers Trading System (securities registration and clearing, account management, risk management, quick trading and execution,
and third party access middleware), (ii) Private Fund Investment Management System (multi-account management, fund valuation,
risk management, quantitative trading access, liquidation and requisition management) and (iii) Mobile Transaction Individual
Client System and PC Client System (Apple IOS, Android, PC, Web). We assist PRC-based financial institutions taking part in the
overseas securities trading markets by providing them comprehensive Internet-based securities solutions. These PRC financial institutions,
along with Hong Kong broker-dealer customers, may “white label” our trading interface (i.e., put their logos
on it, make our trading interface available to their customers without referencing our name, as if it was developed by them in-house),
or they can select from among our modular functionalities, such as order routing, trade reporting or clearing on specific products
or exchanges where they may not have up-to-date technology to offer their customers a comprehensive range of services and products.
We also help PRC-based hedge funds, mutual funds, proprietary trading groups to speed up their integration into the overseas market
and offer them additional services, such as fund establishment, issuance, custody, transaction and settlement. We also provide
a series of IR solutions service for China Concepts Stock companies, help maintain the relationship between listed companies and
the company’s equity, debt investors or potential investors. We provide our clients across all industries, sectors, and regions
with strategic actionable intelligence and visibility into the capital markets for the long term.
The
Initial Public Offering
On
January 7, 2019, we completed our initial public offering on the NASDAQ Capital Market under the symbol of “MTC”.
We offered 1,800,000 common shares at $4 per share. Net proceeds raised by us from the initial public offering amounted to approximately
$6,478,801 after deducting underwriting discounts and commissions and other offering expenses. Out of the $6.5 million net proceeds,
$500,000 was deposited into an escrow account to satisfy the initial $500,000 in potential indemnification obligations arising
during an escrow period of two years following the IPO closing date of January 7, 2019. On January 7, 2019, we sold additional
270,000 common shares at $4 per share. Net proceeds raised by us amounted to $993,600 after deducting underwriting discounts.
As a result, we raised a total of $7,472,401 from the issuance of 2,070,000 shares of common stock in the January 2019 IPO.
Recent
Developments
On July 9, 2019, the Company
acquired 49% of interest in a newly-formed entity called Xchain Fintech PTE.LTD (“Xchain”), a Singapore corporation.
Xchain has been formed for the purpose of providing technical support for the construction and development of a new solutions for
the existing problems of the traditional financial industry, the difficulty experienced by investors in investing and allocating
investment assets globally, and the protection of funds and investments by using advanced technologies, such as artificial intelligence,
big data analysis and blockchain.
Pursuant
to the Securities Purchase Agreement dated as of April 25, 2019, the Company agreed to purchase from Xiangdong Wen and Zhen Fan
the remaining 75.1% of outstanding securities of MMBD Trading Ltd., a British Virgin Islands company (“MMBD”). Prior
to the consummation of this acquisition, (i) the Company held 24.9% of outstanding securities of MMBD, and (ii) each of Xiangdong
Wen (the Chairman of the Board) and Zhen Fan (the Chief Executive Officer) beneficially owned 37.55% of outstanding securities
of MMBD, respectively. The Company has agreed to pay the aggregate purchase price of $185,000 for such securities to be equally
divided between the two shareholders of MMBD. The acquisition closed on October 18, 2019, following the receipt by the Company
of requisite corporate and regulatory approvals, including, without limitation, FINRA CMA application approval, and the Company’s
Audit Committee’s review and approval of the terms and provisions of this transaction involving related parties. Following
and as a result of this acquisition, MMBD has become a wholly-owned subsidiary of the Company.
We
provide comprehensive, Internet-based technology services and solutions to the Chinese language speaking hedge funds, mutual funds,
registered investment advisors, proprietary trading groups, and brokerage firms engaging in securities market transactions and
settlements globally. We help these financial institutions to accelerate their integration into the overseas market by offering
complete suite trading solutions, including services such as fund establishment, issuance, custody, transaction and settlement.
These financial institutions may “white label” our trading interface (i.e., put their logos on it, make our trading
interface available to their customers without referencing our name), or they can select from among our modular functionalities,
such as order routing, trade reporting or clearing on specific products or exchanges to offer their customers a comprehensive
range of services and products.
Our
Company was founded on January 4, 2018. We have developed and deployed a series of platforms, including the ETN Counter Business
System, the PTN Private Fund Investment Management System, the Personal Mobile Transaction Client System, the PC Transaction Client
System, the Individual and Institutional Integrated Account Management System, and the Quantitative Investment Transaction Platform,
which comprise a business chain that enables Chinese language speaking hedge funds, mutual funds, registered investment advisors,
proprietary trading groups, and brokerage firms to engage in securities market transactions and settlements globally.
We
conduct our business through and based on distinct yet integrated business systems designed to provide support for (i) Securities
Dealers Trading System (securities registration and clearing, account management, risk management, quick trading and execution,
and third party access middleware), (ii) Private Fund Investment Management System (multi-account management, fund valuation,
risk management, quantitative trading access, liquidation and requisition management) and (iii) Mobile Transaction Individual
Client System and PC Client System (Apple IOS, Android, PC, Web). We assist PRC-based financial institutions in taking part in
the overseas securities trading markets by providing them with comprehensive Internet-based securities solutions. These PRC financial
institutions, along with Hong Kong broker-dealer customers may “white label” our trading interface (i.e., put their
logos on it, make our trading interface available to their customers without referencing our name, as if it were their in house
product), or they can select services from among our modular functionalities, such as order routing, trade reporting or clearing
on specific products or exchanges where they may not have up-to-date technology to offer their customers a comprehensive range
of services and products. We also help Chinese language speaking hedge funds, mutual funds, proprietary trading groups to speed
up their integration with the overseas market and offer them additional services, such as fund establishment, issuance, custody,
transaction and settlement.
In
2019, our company added financial advisory and investment banking business line to the roster of services it offers to its customers.
Under this new business line, the Company anticipates providing financial advising and investment banking services, including,
among others, investments, restructuring, IPO and secondary offering guidance, and venture funding advice, for PRC-based small
and medium-sized enterprises from various industries that seek access to the US capital markets. Specifically, the Company intends
to assist its customers in financings and capital formation at different stages of their growth and development.
Our
company has expanded investor relations management services business to help maintain the relationship between listed companies
and the company’s equity, debt investors or potential investors. It also includes the relationship between listed companies and
various intermediaries in the capital market in the process of communicating with investors. Our global team of consultative experts
and industry-leading software provides our clients across all industries, sectors, and regions with strategic actionable intelligence
and unparalleled visibility into the capital markets for the long term.
Our
System and Solutions
Securities
Dealers Trading Support System
The
Electric Trading Network Counter Management System (“ETN”) supports our institutional customers. The system consists
of the following business modules:
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Our account management
system that provides customers with a highly adaptable multi-account management system that systematically manages multiple
accounts, executes simultaneous transactions among the accounts and guarantees efficiency and fairness in transactions.
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Our risk control
system conducts comprehensive monitoring in the transaction execution process from initial position, decision-making to
execution by setting the warning line and open line. It evaluates dynamic control of risks presented by scanning all asset
units every 30 minutes. The system provides one-click opening and one-click query functions to facilitate operations by the
risk control personnel, so that risks are controlled in a more timely and efficient manner. It supports multi-dimensional
risk control and eliminates the transaction of highly risky stocks by setting up a stock pool in which such highly risky stocks
are stored.
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Our fast transaction
system features in one-click booking, fast transaction and combined booking to rapidly and efficiently integrate the centralized
transaction system to ensure efficiency and accuracy of transactions.
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Private
Fund Investment Management System
The
Private Fund Trading Network Management System (“PTN”) is an in-house developed system that supports institutional
customers. The system consists of the following modules:
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Our account management
system - the PTN investment management system sets up account management functions such as risk control, clearing, accounting,
reporting, and trading, etc. for fund operating and investment.
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Our fund valuation
system - this system provides a package of valuation services, including valuation validation, investment monitoring,
and information disclosure, with general and grouped valuation options provided to users upon demands.
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Our fund risk
management platform - this system provides all-round risk control management for users in the entire process from transaction,
compliance to risk control on three dimensions: transaction risk control, process risk control and risk control setting.
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Our quantitative
transaction access – this system provides the user with efficient and fast quantitative transaction access modes
including the standardized API and customized H5, SDK, APP, PC, to ensure rapid development and operation.
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Mobile
Transaction Individual Client System and PC Client System - As a result of our internal research and development efforts and
upgrades, we have developed a mobile application for business transaction and social networking for our broker-dealer customers,
and an efficient and fast transaction-only PC client system for their individual investor customers. This system provides the
end users with real time comprehensive market information (bid/ask price, volume, breaking news, etc.) access through dedicated
cross-border lines. We utilize dedicated Sino-US cross-border lines to provide end users with high-speed and stable market data,
help them to apply for market licenses, and provide integrated market information-related solutions to the users, who may choose
to pay monthly or yearly. We also provide end users with testing and debugging services.
Our
Financial Technology Solutions
One-stop
broker technology system solution - we provide the following solutions to our broker customers:
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modular website
building, online account opening system.
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modular PC-based
trading clients and mobile APP trading clients for retail customers.
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market data center
to help them apply for exchange quotations.
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ETN investment management
system, backstage ERP system and commission clearing and settlement system.
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assistance to deployment
system and undertaking operation and maintenance services.
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One-stop
private fund investment management fund solution – for small and medium-sized private funds with a management scale
of more than $1 million and less than $100 million, we provide the following one-stop establishment and investment trading solutions
to assist with:
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establishing private
equity funds, registration, administration and management of such funds.
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building PTN investment
management system, deployment of investment transaction, fund management, risk control, ERP and other modules.
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opening trading
accounts, handling valuation, liquidation and investment redemptions.
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Corporate
History and Background
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MMTEC, INC.
–We formed MMTEC, INC., our BVI holding company on January 4, 2018.
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MM Future Technology
Limited – Our wholly-owned Hong Kong subsidiary, was incorporated on October 31, 2017.
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Gujia (Beijing)
Technology Co., Ltd – Our operating company in China and a wholly-owned subsidiary of MM Future Technology
Limited.
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MM Fund Services
Limited – Our wholly-owned Cayman Islands subsidiary, which was incorporated on April 20, 2018 and dormant as of
December 31, 2019.
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MM Capital Management
Limited – Our wholly-owned Cayman Islands subsidiary, was incorporated on May 28, 2018 and dormant as of December
31, 2019.
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MM Fund SPC
– MM Fund SPC was incorporated on August 8, 2018, as a wholly-owned subsidiary of MM Capital Management Limited, and
dormant as of December 31, 2019.
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MMBD Trading
Limited – our wholly-owned subsidiary of MMTEC, acquired in October 2019.
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MM Global Securities,
INC. – Our operating company in New York and a wholly-owned subsidiary of MMBD Trading Limited.
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Gujia
(Beijing) Technology Co., Ltd was established on June 9, 2015 under the laws of China with registered capital of RMB 10 million
(approximately $1.51 million). Its original shareholders were Xiangdong Wen, who owned 75% and Peng Dong, which owned 25%. On
January 29, 2016, Gujia increased its registered capital to RMB20.83 million (approximately $3.15 million). As result of the capital
contribution, Xiangdong Wen decreased his equity ownership to 48%, Peng Dong decreased his equity ownership to 12%, added an individual
shareholder Zhen Fan, who owned 40%. On June 6, 2016, Gujia increased its registered capital to RMB 26.04 million (approximately
$3.94 million). As result of the capital contribution, Xiangdong Wen decreased his equity ownership to 38.4%, Peng Dong decreased
his equity ownership to 9.6%, and Zhen Fan decreased his equity ownership to 32%. New shareholders Beijing Yiyi Angel Investment
Management Co. Ltd. owned 6.7%, Zhoushan Xianhe Investment Partnership (Limited Partnership) owned 10% and Shanghai Lanhong Investment
Management Center (Limited Partnership) owned 3.3%. On November 30, 2017, Peng Dong transferred its 9.6% equity ownership
to Xiangdong Wen; Beijing Yiyi Angel Investment Management Co. Ltd. transferred its 6.7% equity ownership to Zhen Fan; Shanghai
Lanhong Investment Management Center (Limited Partnership) transferred its 3.3% equity ownership to Zhen Fan, and Zhoushan Xianhe
Investment Partnership (Limited Partnership) kept the same equity ownership as before. On January 29, 2018, Xiangdong Wen transferred
his 48% equity ownership to MM Future Technology Limited, Zhen Fan transferred his 42% equity ownership to MM Future Technology
Limited, Zhoushan Xianhe Investment Partnership (Limited Partnership) transferred its 10% equity ownership to MM Future Technology
Limited. MM Future Technology Limited became the sole shareholder of Gujia (Beijing) Technology Co. Ltd.
Pursuant
to the Securities Purchase Agreement dated as of April 25, 2019, the Company agreed to purchase from Xiangdong Wen and Zhen Fan
the remaining 75.1% of outstanding securities of MMBD Trading Ltd., a British Virgin Islands company (“MMBD”). Prior
to the consummation of this acquisition, (i) the Company held 24.9% of outstanding securities of MMBD, and (ii) each of Xiangdong
Wen (the Chairman of the Board) and Zhen Fan (the Chief Executive Officer) beneficially owned 37.55% of outstanding securities
of MMBD, respectively. The Company has agreed to pay the aggregate purchase price of $185,000 for such securities to be equally
divided between the two shareholders of MMBD. The acquisition closed on October 18, 2019, following the receipt by the Company
of requisite corporate and regulatory approvals, including, without limitation, FINRA CMA application approval, and the Company’s
Audit Committee’s review and approval of the terms and provisions of this transaction involving related parties. Following
and as a result of this acquisition, MMBD has become a wholly-owned subsidiary of the Company.
Industry
and Market Background
Over
the past several years, China has seen a steady increase in the rate of individual net worth and investment appetite for domestic
and overseas equity investments, including an increase in investment demand of private equity funds.
There
are two main channels which can currently be utilized by Chinese investors to invest in the U.S. securities markets:
Ways
to invest from within the PRC:
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Qualified Domestic
Institutional Investor (“QDII”): this status allows domestic investors to invest in publicly trading securities
on foreign securities markets (excluding venture capital and private equity funds securities) via certain fund management
institutions, insurance companies, securities companies and other assets management institutions which have been approved
by China Securities Regulatory Commission (“CSRC”). These entities, in turn, offer investment opportunities to
individual investors to invest in overseas stocks and fixed return securities.
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Qualified Domestic
Limited Partner: this status allows qualified domestic limited partners to invest in overseas private funds and private
equities. Only a few companies have obtained this status to date.
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Qualified Domestic
Investment Enterprise: this platform allows mainland PRC investors to tap into a wider variety of foreign asset classes
compared to the QDII by accessing offshore private equity, hedge funds and real assets, in addition to listed equities and
debt securities that are already covered by the existing QDII. This platform is generally viewed as broad in scope, administration
and lacking regulatory clarity.
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Outbound Direct
Investment – Chinese companies headquartered in the Shanghai Free Trade Zone may conduct almost all equity investments
via this platform as it is not subject to any investment quotas. However, this platform is ill-suited for small scale operations
as it only contemplates investments by institutional/corporate investors, not individuals.
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Qualified Domestic
Individual Investor is a new investment channel promoted by the Chinese government. It is expected to give PRC based individual
investors who have at least RMB1 million of net assets more freedom to invest their money in overseas assets. It is expected
that the PRC investors will be able to put money directly into overseas shares, bonds, mutual funds, insurance products, financial
derivatives and property through this initiative. It is also expected to allow them to make direct investments in companies
through mergers and acquisitions. No official date has been given for the launch of the scheme as of yet.
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Ways
to invest from outside of the PRC:
Many
Chinese already have their assets in bank accounts outside China such as in Hong Kong, Singapore, Taiwan, U.S., or other countries.
These investors may invest these funds in any available investment. We believe that these investors will benefit from a trading
platform and service based in Mandarin Chinese.
Growth
of Chinese private fund markets
There
are several notable aspects of development of Chinese private fund industry in recent years:
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Rapid rate of
growth. According to Asset Management Association of China, by the end of March 2018, the number of registered
private fund managers has reached 23,400, with a total dollar amount of RMB 12.04 trillion. The number of registered private
funds has reached 71,040.
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Substantial number
of QDII funds under management and amount of QDII quota. As of the first quarter of 2018, 31 fund management companies
managed 135 QDII funds, with a total cumulative amount of $84.443 billion, with E Fund Management Co., Ltd., and China Asset
Management Co., Ltd. reaching over $10 billion and $15.8 billion, respectively. As of April 2018, the quota of QDII approved
by various securities institutions totaled $43.52 billion, the latest quota of insurance institutions was $3.28 billion, and
the latest quota of trust institutions was $8.13 billion.
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Increasing number
of small and medium private funds with focus on overseas investment. As of March 2018, there were 210 registered private
fund managers with a management fund of at least RMB 10 billion and above. Approximately 256 registered private funds manage
between RMB 5 billion and RMB 10 billion, and 64 registered private funds - between RMB 2 billion and RMB 5 billion.
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Competition
The
development of financial information technology and the emergence of Internet securities brokers, such as Tigerbroker and Futu
Securities, through an innovative Internet product development model, have changed the experience of the Internet trading platforms,
by optimizing the account opening process, improving the market response rate, and impacting the traditional retail brokers. Traditional
brokers mainly rely on conventional financial system providers for solutions. Financial technology companies provide various financial
transaction solutions for their customers, including financial transactions such as online trading, front desk transactions and
backstage clearing systems, which charge different costs according to different technical solutions.
There
are several types of entities that provide investment system support in the U.S. securities markets for domestic (PRC) brokers
and private funds.
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The traditional
retail brokerage system development company in USA. At present, there are no U.S. securities technology suppliers specialized
in providing services for the Chinese market, most of U.S. securities technology suppliers have focus on domestic market,
and there is no entire indigenous overseas investment system suit for Chinese market.
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The traditional
retail brokerage system development company in Hong Kong. At present, there are four mainstream technology suppliers in
Hong Kong, which are Hundsun technology (HongKong) Inc., Ayers Solutions Limited, Ebroker Systems LTD and iAsia Online Systems
Limited. Among these, Hundsun technology has a shareholding in Ayers Solutions Limited. Hundsun and iAsia are public companies.
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The traditional
private funds management system development company. Most of the large private funds use Bloomberg system, but we focus
on the private equity funds with assets management amount between $1 million to $200 million, our main competitor in this
field is Hundsun Technologies.
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For
the private funds’ administrator service, there are two types of companies that provide the service:
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Traditional Hong
Kong securities dealers, including Galaxy Securities (Hong Kong), Haitong International Securities, CITIC International
Securities, BOC International, Guosen Securities (Hong Kong), engage in trades of Hong Kong as well as U.S. securities. These
dealers mainly conduct their business through offline business departments of domestic (PRC) dealers. These dealers generally
buy a system or use the U.S. broker system, offer a total solution for the private funds.
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The traditional
private funds fund administrator service, including Apex Fund Services, Citco Fund Services, etc.
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The
Hong Kong market mainly relies on the following four securities system development service companies providing services for traditional
securities firms and financial institutions: Hundsun.com Co., Limited, Ayers Solutions Limited, eBroker Systems Limited, and iAsia
Online Systems Limited:
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●
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Hundsun.com Co.,
Limited is a Hong Kong holding subsidiary of Hundsun Technologies Inc., located in Hong Kong, mainly providing integrated
accounts, securities and futures solutions for the Hong Kong financial industry.
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Ayers Solutions
Limited is a member of the Shanghai DZH Group. Ayers was incorporated in 2001 and specialized in developing securities
and futures trading systems and settlement system for local and global financial institutions. Our company has developed a
comprehensive system that supports trading in multi-market, multi-currency, feature-rich sets of tools in an integrated platform
with flexible application settings. Ayers has built an extensive network of global exchange connectivity, risk management
solutions and API and FIX technology support. Ayers also specializes in providing trading systems and settlement system solutions
for securities companies and futures companies in Hong Kong and its surrounding countries and regions.
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iAsia Online
Systems Limited is a financial software developer that supplies flexible and cost-effective applications, ranging from
online trading, front-end trading and back-office settlement systems for various financial products to retail solutions. This
company offers a wide range of financial products including securities, futures, commodities, options, unit trust, saving
plan, leveraged FX and bullion systems. iAsia systems handle transaction settlement, monitor risk exposure, offer front end
trading and inquiry to its users. All products are being used by market participants or financial houses.
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eBroker Systems
Limited is a financial technology solution provider focusing on the provision of financial software solutions services
to financial institutions. Its solutions are engineered to perform a variety of functions for both front office and back office.
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In
addition to the above-referenced companies, we compete with the following entities for providing services to the private equity/fund
industry:
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OP Investment
Management Ltd. is a leading asset management company based in Hong Kong, and a member of the Oriental Patron Financial
Group. Our company manages both global and Asian-based fund vehicles with expertise across every major regional market from
China, Korea, India to the Middle East. OPIM is a fully licensed holder of Hong Kong SFC Type 4 & Type 9 licenses.
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AssetMark Financial
Holdings, Inc. is a U.S. turnkey asset management platform, purchased by a Chinese listed brokerage. It has provided professional
and serial investment solutions to U.S. investment advisers over the past 20 years. As of March 31, 2016, the total assets
under management on the AssetMark platform were about $28.5 billion, serving more than 6,700 investment advisers and over
87,000 investors.
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Our
Strategies
Our
key market strategies include:
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Providing
free, flexible and open securities technology services - we provide one-stop integrated solutions to small and medium-sized
broker customers, by replacing a technical fee model with a free technical system featuring open system underlay access, standardized
access interface and module products. The purpose is to build a more open technical platform that provides a wide variety
of financial products and more open technical services for Internet securities.
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Specifically,
as we face increased competition, we also innovate when it comes to attracting new users. The general approach is to, by use of
free platform, attract traffic and customers early on in the process, and then establish and maintain an environment connecting
various users for which we can then charge our users. In this effort, we:
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Aim, when we compete
with traditional technology developers, to provide free technical base platforms for securities business, which meet the traditional
securities business in terms of functionality, security, etc., so as to attract more traditional securities companies to switch
to our technical products,
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Develop better,
more innovative products and offer functionalities and user experience beyond of what traditional technology developers may
offer; we accomplish that by providing incentive to switch to our services for free,
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Provide, in addition
to our basic set of technical products, value-added technical products, such as intelligent investment customers service,
intelligent trading service, AI user analysis tools, etc., to help securities companies expand their business lines. We intend
to charge for these product offerings in the future, but only if our users fully or partially use these free products first,
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Provide fund products,
intelligent investment products or other types of financial products through MM Fund Services Limited. We intend to become
a channel distributor to help small and medium-sized securities firms to provide competitive financial products on free platforms.
As more securities brokers use our free products, we will put these products directly in the securities business platform
for free as a part of our standard module. As wholesalers of these products, we anticipate deriving revenue from this approach
in the future, and
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Establish an internal
system where are able to connect different securities firms from one technical platform, so that their structured financial
products and fixed income products can be circulated on one (our) platform.
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Many
small and medium-sized brokers do not have the capacity for research and development and are unwilling to bear high development
costs. A licensed broker wishing to develop its own products and to builds a comprehensive research and development team will
need teams of engineers, developers of IOS and Android applications, of PC applications, and websites and online account set-up
system. Most small- and medium-sized brokers are reluctant to invest in incur such costs.
We
(i) make most technical systems free, open part of the core code, in an effort to build a more open technical platform to help
admit more small and medium sized brokers; (ii) modularize products to help small and medium-sized broker customers to carry out
development, lower the technical threshold, and facilitate customization; (iii) help small and medium-sized broker customers to
deploy the system within one to four weeks to commence business immediately and provide system security solutions and post-maintenance;
(iv) provide technical support in Chinese by offering solutions for technical interface with major U.S. exchanges and clearing
banks; (v) deliver rapidly iterative products by providing multiple modules of personalized portfolio solutions and a better Internet
experience for small and medium-sized broker customers; and (vi) use cloud technology to provide services with more varieties
of financial products, to help small and medium-sized brokers to gain competitive advantages in attracting their customers.
Focus
on serving small and medium sized private equity funds by lowering the setting up threshold, we believe that we can help our fund
customers overcome the entry barrier, and make it possible to bring such funds to overseas stock markets. According to our analysis,
we believe that small and medium sized private equity funds with assets under management (“AUM”) between $1 million
and $100 million, especially those with AUM between $2 million and $20 million, will become the bulk of our customers.
Large
equity funds tend to set up their accounts through well-known brokers, and choose the services of fund administrators that are
highly ranked across the globe. In contrast, small and medium sized private equity funds, especially those at the early stage
with assets under management below $20 million, are faced with the following challenges: (i) limited capacity for fundraising
at the early stage, typically small AUM of initial fund; (ii) small AUM equity funds makes it hard to cover the initial cost for
attorneys and administrators; (iii) unfamiliar with the process for setting up overseas equity funds, lack of related laws and
regulations, difficult to open bank accounts and brokerage trading accounts; (iv) loss of oversea growth opportunity. Many fund
managers’ domestic customers have already had their own personal investments overseas. It will be easier for these fund
managers to attract their investors’ overseas assets and invest in their oversea funds; (v) need tools for marketing and
promotion, including brand promotion, as well as further information about overseas market; and vi) failure of overseas investment
platform and system support to meet their needs, especially the needs of financial accounting and risk management.
For
such funds, we will provide (i) a package solution will optimize the set-up process and reduces the set-up cost to help them to
invest in overseas markets; (ii) personal service to help them to solve issues related to the regulations and supervision of overseas
funds and account set-up; (iii) completely Chinese language based PTN investment management system, free of charge to provide
fund valuation, redemption management, and risk-control financial management system, free estimate of fund value, and a system
for risk control and financial management that is customized for China’s private equity funds; (iv) assistance in brand
promotion and marketing, by providing additional market information, and organizing industry gatherings to promote their development;
and (v) providing quantitative interface and open data to meet needs for access to small scale funds by localizing the U.S. financial
industry standards so that more local quantitative funds can be interfaced with the U.S. stock market according to native technical
standards.
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Minimize technical
barriers to securities trading – We aim to assist small- to medium-sized securities dealers, online financial
management enterprises, Internet traffic platforms and individuals in their efforts to expand their respective businesses
and lower the threshold for participation of the traditional securities industry.
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Utilize cloud
computing technologies, open financial platforms, and more diversified financial product - We help small and medium-
sized securities brokerage firms build system on the cloud, we focus on providing backstage support for institutional clients,
and develop a wide variety of technical and financial products for them.
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Support PRC
private equity funds to participate in overseas markets –We strive to minimize and possibly eliminate the cost
of setting up the private equity funds, allowing our customers to use and rely on our technologies. We focus on small private
funds with assets under management ranging from $1 million to $200 million.
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Focus on the
Chinese market, and all the markets that use Chinese as the native language- The U.S. securities market is the largest
securities market in the world. We want to rely on financial technology to lower transaction threshold for all Chinese speaking
investors to invest in U.S. securities market, and make it more convenient for them to invest.
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Our
Competitive Strengths
We
believe that the following competitive strengths distinguish us from our competitors:
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Product advantages
and technology accumulation – by means of our technological advantages, better Internet experience and one-stop
securities dealer solutions, we simplify the process of overseas investment transactions and lower the threshold of securities
trading, making it easier for Chinese investors to get involved in global investment. We also provide (i) a complete product
line from ENT, PTN to mobile end trading platform and PC-side trading platform, thus covering most of the operating systems
required by broker-dealers and private equity funds; (ii) a stable market, trading system tested and relied for a period of
time; (iii) rapid product development and iteration - we can develop products which meet the customer’s latest demands;
and (iv) understanding of financial markets and information technology development.
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Sound marketing
strategies - We follow the same rules for both brokerage firms and private equity customers: we provide free technical
systems yet charge a fee for post financial or additional premium services to encourage more brokers-dealers and private equity
funds to use our technical products and services. (i) through free technical system services that change the delivery mode
of the securities industry developers, we reduce the operating costs of small and medium-sized brokerage firms, (ii) with
more choices for small and medium-sized brokerage firms, to help their customers respond to changes in the Internet, we provide
better tools and platforms that enable customers choose and customize their services, and (iii) by helping private equity
funds overcome the set-up threshold issue, we enable more private equity funds step into the overseas stock market and grow
with them.
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Innovative
and open Internet idea - By using cloud technology, we help traditional financial institutions cope with the changes
in traditional online securities trading. Based on cloud technology that helps more brokerage firms minimize the access threshold
of technology, we stick to the user-centered product development model, and use faster deployment systems to meet customers’
demand and reduce their technical service costs. We maintain an open technical environment and provide an open platform for
all users who want to access overseas investment transactions. We are also able to provide customized product service for
users. We believe that the new generation of Chinese investors has a more sophisticated understanding of financial transactions,
which requires a better user experience and more innovative products and service.
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We
will (i) be more open minded, make accessible most of the bottom core code, make accessible the bottom system interface, and complete
the most challenging task so as to help customers use simple tools for development on our platform; (ii) quickly develop and update
products so as to be in better preparation for changes in the online securities trading industry; (iii) provide more tools for
our customers to help them become business partners and help them grow.
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A professional
team with diversified backgrounds - Our team members are from Internet companies, financial enterprises and traditional
securities information system development companies. They are familiar with the financial markets, and have expertise in the
development of securities information technology. Members of this diverse background teamwork in their respective areas with
efficiency and professionalism.
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Better ecology
and environment - With the acquisition of MMBD Trading and MM Global in the United States, we are able to provide
better services to non-U.S. small and medium-sized brokerage firms to access the U.S. market, and also to the small and medium-sized
private equity funds with deeper understanding of their needs.
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Market opportunities
- Traditional financial markets rely more and more on information technology. In dealing with the overseas market,
under the barrier of language, market mechanism and cultural background, we rely on technology to change the relationship
between brokerage firms and traditional information technology developers. As the earliest participants in this model, we
enjoy favorable market opportunities. At the same time, there has been an increasing demand for China’s small and medium-sized
private equity funds to go overseas, as well as more Chinese investors investing outside of China. At the early stage development
of this industry, we will actively participate in the development of industry service standards and service system, and make
good use of this market opportunity.
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Localized
service - 24/7 customer service in complete Chinese language. From trading API document to technology support, we
strive to create a more user-friendly environment for our customers. We also provide more pleasant user trading experience
for Chinese customers. They will get more localized trading experience, without trial and error, and easier and more pleasant
investment in overseas markets. Back on the Chinese market, we understand the rules of the United States. We also understand
better the needs of Chinese investors. And we provide more localized private fund services and more financial products and
services support. With the system support of MM Fund Services Limited and PTN, we will provide a more localized private fund
administration service to our clients. We will respond to their request in a timely manner, being more attentive to their
needs and requests.
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Individual
investors and private equity funds coming from China and Hong Kong markets are increasingly relying on financial systems developed
by traditional system developing companies. Our competitive strengths are primarily in the following areas:
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●
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Reliance on
our technological advantages, rich Internet experience and one-stop securities dealer solutions: We make overseas
investment transactions more convenient by lowering the trading threshold, making it easier for Chinese investors to get involved
in global investment. We also provide smoother user trading experience for Chinese customers. They will get more localized
trading experience, without trial and error, becoming easier and smoother investing in overseas markets. Back on the Chinese
market, we understand the rules of the United States, we also have a better understanding of needs of Chinese investors.
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●
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More localized
private equity fund services. Based on the system support from MM Fund Service Limited and PTN, we will provide more
localized private fund administrator service for our clients.
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Reducing the
technical access threshold of the securities industry. Rely on cloud technology to help more brokerage firms to minimize
the access threshold of technology. We insist in user-centered product development model, faster deployment systems to meet
customers’ demand and reduce their technical service costs. We adhere to an open technical environment and provide an
open platform for all users who want to access overseas investment transactions. We also provide customized product service
for users. The new generation of Chinese investors has an updated understanding of the transactions, which requires a better
user experience and more innovative products and service.
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●
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Localized
user experience. 24/7 customer support in complete Chinese language service. From trading API document to technology
support, we make our customers more competitive in trading space by providing service in their native language.
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Marketing
We
aim to offer these and other similarly situated financial services providers with a full spectrum of technical system solutions.
Specifically, we intend to open an office in Hong Kong for such future customers and retain local sales force to promote our services
in the market and increase our brand exposure. In addition, we intend to increase our sales and marketing teams in Shanghai and
Beijing to offer our technical solutions to the PRC private fund industry participants. We also intend to hold conference, educational
and other events to promote our brand recognition.
Research
and Development
Our
technology is critical to our operations. The following are some of our technology development milestones:
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In October 2015,
our Shanghai Branch was founded; the Shanghai Technical Research and Development Center started operation.
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In December 2015,
the ETN Counter Business System was launched for trial operation.
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In August 2016,
the PTN Private Fund Investment Management System was launched for operation.
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In December 2016,
the 4th version of the ETN Investment Management System was successfully employed. The Sino-US Special Line was completed
and the Market and Quantitative Transaction Platform started operation.
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We
intend to maintain the research and development input in product design at no less than 35% of our company’s total input,
and an incentive mechanism for research and development personnel should be formulated to achieve breakthrough in product design
stability and security and personalization.
Employees
Gujia
(Beijing) Technology Co., Ltd. was established on June 9, 2015 by our Chairman of Board, Xiangdong Wen. Our principal offices
are located in Beijing, China; we also have a research and development center in Shanghai, China. As of May 22, 2020, we employed
24 people on a full-time basis, comprised of 5 employees in management, 3 employees in sales and marketing, 8 employees in
research and development, and 8 employees in administration.
MM
Global Securities, INC incorporated in the State of Illinois on September 25, 1997 and operates in New York City. As of May 22,
2020, we employed 2 people on a full-time basis, including one in management and one in administration.
Intellectual
Property Rights
We
rely on our technology copyright to protect our domestic business interests and ensure our competitive position in our industry.
We have placed a high priority on the management of our intellectual property. Some products that are material to our operating
results incorporate technology copyright. Although technology copyright is important to the continued success of our products,
we do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected by the
revocation, termination, expiration or infringement upon any particular patent or copyright. We have applied for software copyright
protection in China covering our software technology. We applied to National Copyright Administration of the P.R.C. for 5 software
copyrights, which was approved on June 28, 2018.
Properties
Our
headquarters is located at Room 608A, Air China Century Building, 40 Xiaoyun Road, Chaoyang District, 100020 People’s Republic
of China. Our research and development center is located in Shanghai. All of the facilities are leased. We believe our facilities
are adequate for our current needs and we do not believe we will encounter any difficulty in extending the terms of the leases
by which we occupy our respective premises. A summary description of our facilities locations follows:
Office
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Address
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Rental
Term
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Space
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Headquarters
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AF, 16/F, Block B, Jiacheng Plaza, 18 Xiaguangli,
Chaoyang District,Beijing 100027
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October 10,
2019 – November 30, 2022
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6920.66. sq. ft.
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Shanghai Research and Development Center
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Room 2605, Bank of Shanghai Building, Pudong
New Area, Shanghai 200120
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September 25, 2019
– September 24, 2022
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1500.81 sq. ft.
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Beijing Marketing Center
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Room 1903, Block A, Yuanyangxinganxian Building,
Xiaguangli, Chaoyang District, Beijing 100027
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September 9, 2018
– September 8, 2020
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1674.33 sq. ft.
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New York Center
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2 Wall Street, Suite 805, New York, NY 10005
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July 25, 2019 –
July 24, 2020
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Approximately 200
sq. ft.
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Legal
Proceedings
We
are currently not involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect
on our business, financial condition, results of operations or cash flows.
Government
Regulation
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange
Administration Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment
of Foreign Exchange (1996) and the Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi
are freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related
foreign exchange transactions, but not for most capital account items, such as direct investment, loans, repatriation of investment
and investment in securities outside China, unless the prior approval of SAFE or its local counterparts is obtained. In addition,
any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference
between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any
foreign loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of
the total investment and registered capital must be approved by the MOFCOM or its local counterpart. We may not be able to obtain
these government approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making
these loans.
The
dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit
foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE.
Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration
with, SAFE and other relevant Chinese governmental authorities.
Dividend
Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include
the Company Law of China (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000, and the
Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended respectively in 2001 and 2014.
Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits,
if any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned investment
enterprises in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain
reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
Circular
37. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular
37, Chinese residents shall apply to SAFE and its branches for going through the procedures for foreign exchange registration
of overseas investments before contributing the domestic assets or interests to a SPV. An amendment to registration or filing
with the local SAFE branch by such Chinese resident is also required if the registered overseas SPV’s basic information
such as domestic individual resident shareholder, name, operating period, or major events such as domestic individual resident
capital increase, capital reduction, share transfer or exchange, merger or division has changed. Although the change of overseas
funds raised by overseas SPV, overseas investment exercised by overseas SPV and non-cross-border capital flow are not included
in Circular 37, we may be required to make foreign exchange registration if required by SAFE and its branches.
Moreover,
Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV,
but failed to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37,
are required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration
procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine
of up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital
outflow occurred, a fine up to 30% of the illegal amount may be assessed.
Chinese
residents who control our Company are required to register with SAFE in connection with their investments in us. If we use our
equity interest to purchase the assets or equity interest of a Chinese company owned by Chinese residents in the future, such
Chinese residents will be subject to the registration procedures described in Circular 37.
ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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Not
applicable.
ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2019 and
2018 should be read in conjunction with our consolidated financial statements and related notes to those consolidated financial
statements that are included elsewhere in this report. Certain information contained in
the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Our
actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements
as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this report.
Unless
otherwise indicated, references to the “Company”, “us” or “we” refer to MMTEC, Inc. and its
consolidated subsidiaries.
Special
Note Regarding Forward-looking Statements
All
statements other than statements of historical fact included in this report including, without limitation, statements under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy
and the plans and objectives of management for future operations, are forward-looking statements. When used in this report, words
such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and
similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management.
Actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of factors,
including those set forth under the risk factors and business sections in this report.
Overview
Our
Company develops and deploys a series of platforms, including the ETN Counter Business System, the PTN Private Fund Investment
Management System, the Personal Mobile Transaction Client System, the PC Transaction Client System, the Individual and Institutional
Integrated Account Management System, and the Quantitative Investment Transaction Platform, which comprise a business chain that
enables Chinese language speaking hedge funds, mutual funds, registered investment advisors, proprietary trading groups, and brokerage
firms to engage in securities market transactions and settlements globally.
In
2019, our company added financial advisory and investment banking business line to the roster of services it offers to its customers.
Under this new business line, the Company anticipates providing financial advising and investment banking services, including,
among others, investments, restructuring, IPO and secondary offering guidance, and venture funding advice, for PRC-based small
and medium-sized enterprises from various industries that seek access to the US capital markets. Specifically, the Company intends
to assist its customers in financings and capital formation at different stages of their growth and development.
Our
company has expanded investor relations management services business to help maintain the relationship between listed companies
and the company’s equity, debt investors or potential investors. It also includes the relationship between listed companies and
various intermediaries in the capital market in the process of communicating with investors. Our global team of consultative experts
and industry-leading software provides our clients across all industries, sectors, and regions with strategic actionable intelligence
and unparalleled visibility into the capital markets for the long term.
The
value of the Renminbi (“RMB”), the main currency used in China, fluctuates and is affected by, among other things,
changes in China’s political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar
have generally been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s
interbank foreign exchange market rates and current exchange rates on the world financial markets.
Basis
of Presentation
The
accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and
Exchange Commission for financial information.
The
Company’s consolidated financial statements include the accounts of MMTEC and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Results of Operations
for the Years Ended December 31, 2019 and 2018
Revenue
The
following table sets forth the components of our net revenues by amounts and percentages of our total net revenues for the periods
presented:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Market data services
|
|
|
26,882
|
|
|
|
100.0
|
%
|
|
|
75,044
|
|
|
|
37.4
|
%
|
Investor relations management services
|
|
|
-
|
|
|
|
-
|
|
|
|
86,788
|
|
|
|
43.2
|
%
|
Commissions
|
|
|
-
|
|
|
|
-
|
|
|
|
33,680
|
|
|
|
16.8
|
%
|
Other revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
5,285
|
|
|
|
2.6
|
%
|
Total net revenues
|
|
|
26,882
|
|
|
|
100.0
|
%
|
|
|
200,797
|
|
|
|
100.0
|
%
|
For the years ended December 31, 2019 and 2018, we had revenue
from performing market data services for our customers of $75,044 and $26,882, respectively. We expanded our investor relations
management services business to help maintain the relationship between listed companies and the company’s equity, debt investors
or potential investors, from which business we generated $86,788 in revenue during the year ended December 31, 2019. As a result
of our acquisition of MMBD Trading and its wholly-owned subsidiary and a securities broker-dealer, MM Global, we generated commission
revenue of $33,680 and other related revenue of $5,285 during the year ended December 31, 2019.
Cost of
Revenue
Cost of
revenue consists primarily of internal labor cost and related benefits, and other overhead costs that are directly attributable
to services provided.
For the year ended
December 31, 2019 and 2018, cost of revenue was $90,890 and $16,308, respectively.
Gross Profit
and Gross Margin
Our gross profit was
$109,907 for the year ended December 31, 2019, representing gross margin of 54.7%. Gross profit was $10,574 for the year ended
December 31, 2018, representing gross margin of 39.3%.
Operating
Expenses
During the years ended
December 31, 2019 and 2018, operating expenses included selling and marketing, payroll and related benefits, professional fees,
and other general and administrative expenses.
Selling
and Marketing
Selling and marketing
totaled $389,750 for the year ended December 31, 2019, as compared to $171,016 for the year ended December 31, 2018, an increase
of $218,734 or 127.9%. During the year ended December 31, 2019, we increased selling and marketing costs to enhance our visibility.
Payroll
and Related Benefits
Payroll and related
benefits totaled $1,091,065 for the year ended December 31, 2019, as compared to $893,656 for the year ended December 31, 2018,
an increase of $197,409 or 22.1%. The increase was primarily attributable to the increase in staff resulting from our business
expansion.
Professional
Fees
For
the years ended December 31, 2019 and 2018, Professional Fees consisted of the following:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Audit fees
|
|
$
|
270,000
|
|
|
$
|
246,006
|
|
Legal fees
|
|
|
62,661
|
|
|
|
344,259
|
|
Financial consulting fees
|
|
|
20,057
|
|
|
|
50,000
|
|
Industry and consulting fees
|
|
|
209,767
|
|
|
|
-
|
|
Advisory fees
|
|
|
22,667
|
|
|
|
-
|
|
Others
|
|
|
209,069
|
|
|
|
191,556
|
|
|
|
$
|
794,221
|
|
|
$
|
831,821
|
|
|
●
|
For
the year ended December 31, 2019, Audit fee increased by $23,994, or 9.8%, as compared to the year ended December 31, 2018. The
increase was primarily attributable to the increased audit fee charged by MaloneBailey, LLP.
|
|
●
|
For the year ended December 31, 2019, Legal fee decreased by $281,598, or 81.8%. The decrease was primarily attributable to the legal fees associated with our IPO which were mainly incurred in 2018.
|
|
●
|
For the year ended December 31, 2019, Financial consulting fee
decreased by $29,943, or 59.9%. The decrease was primarily attributable to the financial consulting fee of our initial public offering
which were mainly incurred in 2018.
|
|
●
|
For the year ended December 31, 2019, we incurred Industry and consulting fees of $209,767; we did not have corresponding expense in the year ended December 31, 2018.
|
|
●
|
For the year ended December 31, 2019, we incurred NASDAQ advisory fees of $22,667; we did not have corresponding expense in the year ended December 31, 2018.
|
|
●
|
For the year ended December 31, 2019, other miscellaneous items increased by $17,513, or 9.1%. The increase was primarily attributable to miscellaneous fees related to the acquisition of MMBD Trading.
|
Other General
and Administrative Expenses
For
the years ended December 31, 2019 and 2018, other general and administrative expenses consisted of the following:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Rent and related utilities
|
|
$
|
358,965
|
|
|
$
|
257,630
|
|
Public Relations Expenses
|
|
|
29,609
|
|
|
|
-
|
|
ETC clearing cost
|
|
|
22,646
|
|
|
|
-
|
|
NASDAQ application and listing fees
|
|
|
55,000
|
|
|
|
75,000
|
|
Travel and entertainment
|
|
|
88,348
|
|
|
|
28,414
|
|
NASDAQ GIDS Information fee
|
|
|
93,500
|
|
|
|
-
|
|
Others
|
|
|
127,579
|
|
|
|
80,577
|
|
|
|
$
|
775,647
|
|
|
$
|
441,621
|
|
|
●
|
For the year ended December 31, 2019, office rent and related utilities increased by $101,355, or 39.3%, as compared to the year ended December 31, 2018. The increase was primarily attributable to the increase in our office space resulting from our business expansion.
|
|
●
|
For the year ended December 31, 2019, we incurred Public Relations Expenses of $29,609 and we did not have corresponding expense in the year ended December 31, 2018.
|
|
●
|
For the year ended December 31, 2019, we incurred ETC Clearing cost for broke dealer of $22,646 by MM Global, we did not have corresponding expense in the year ended December 31, 2018.
|
|
●
|
For the year ended December 31, 2019, NASDAQ application and
listing fees decreased by $20,000, or 26.7%, as compared to the year ended December 31, 2018. The NASDAQ application and initial
listing fees decrease was primarily attributable to that our initial public offering has completed in January 2019.
|
|
●
|
For the year ended December 31, 2019, travel and entertainment expenses increased by $59,934, or 210.9%, as compared to the year ended December 31, 2018, which was mainly attributable to the increased travel and entertainment activities incurred in the year ended December 31, 2019.
|
|
●
|
For the year ended December 31, 2019, we incurred NASDAQ GIDS Information fee of $93,500, NASDAQ provide real-time global index date service for us, so we did not have corresponding expense in the year ended December 31, 2018.
|
|
●
|
Other general and administrative expenses were primarily comprised of office supplies, internet service fee, and depreciation. For the year ended December 31, 2019, other general and administrative expenses increased by $47,002, or 58.3%, as compared to the year ended December 31, 2018, mainly due to our business expansion.
|
Loss from Operations
As
a result of the foregoing, for the year ended December 31, 2019, loss from operations amounted to $2,940,776, as compared to $2,327,540
for the year ended December 31, 2018, an increase of $613,236, or 26.3%.
Other Income
(Expense)
Other income (expense) mainly includes interest income from
bank deposits, other miscellaneous expense, government subsidies, foreign currency transaction gain (loss) and loss on equity method
investment controlled by major shareholders. Other income, net, totaled $697,542 for the year ended December 31, 2019, as compared
to other expense of $21,462 for the year ended December 31, 2018, a change of $719,004, which was mainly attributable to an increase
in interest income from bank deposits of $36,887, an increase in government subsidy of $724,795, an decrease in loss on equity
method investment controlled by major shareholders of $12,463, offset by an increase in other expenses of $13,972, and a change
in foreign currency transaction gain (loss) of $41,181.
Income Taxes
We
did not have any income taxes expense for the years ended December 31, 2019 and 2018 since we did not generate any taxable income
in these two fiscal years.
Net Loss
As a result of the
factors described above, our net loss was $2,243,234, or $0.11 per share (basic and diluted), for the year ended December 31, 2019.
Our net loss was $2,349,002, or $0.06 per share (basic and diluted), for the year ended December 31, 2018.
Foreign
Currency Translation Adjustment
Our
reporting currency is the U.S. dollar. The functional currency of our parent company - MMTEC, MM Future, MM Fund, MM Capital and
MM SPC, is the U.S. dollar and the functional currency of Gujia, is the Chinese Renminbi (“RMB”). The financial statements
of our subsidiaries whose functional currency is the RMB are translated to U.S. dollars using period end rates of exchange for
assets and liabilities, average rate of exchange for revenue and expenses and cash flows, and at historical exchange rates for
equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result
of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $30,170 and
$50,586 for the years ended December 31, 2019 and 2018, respectively. This non-cash loss had the effect of increasing our reported
comprehensive loss.
Comprehensive
Loss
As
a result of our foreign currency translation adjustment, we had comprehensive loss of $2,273,404 and $2,399,588 for the years ended
December 31, 2019 and 2018, respectively.
Liquidity and
Capital Resources
Liquidity is the ability
of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. At December 31, 2019 and 2018, we had cash balance of approximately $3,643,000 and $94,000, respectively. Most of
these funds are kept in financial institutions located in China.
Under applicable PRC
regulations, foreign invested enterprises, or FIEs, in China may pay dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, a foreign invested enterprise in China is required to
set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative
amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
In addition, a majority
of our businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange
transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies
at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank
of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices,
shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may
restrict the ability of our PRC subsidiary to transfer its net assets to the Parent Company through loans, advances or cash dividends.
The current PRC Enterprise
Income Tax (“EIT”) Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced
income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement.
The
following table sets forth a summary of changes in our working capital from December 31, 2018 to December 31, 2019:
|
|
|
|
|
|
|
|
December 31, 2018 to
December 31, 2019
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
Change
|
|
|
Percentage Change
|
|
Working capital (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
4,347,710
|
|
|
$
|
330,460
|
|
|
$
|
4,017,250
|
|
|
|
1,215.7
|
%
|
Total current liabilities
|
|
|
805,499
|
|
|
|
807,173
|
|
|
|
(1,674
|
)
|
|
|
(0.2
|
)%
|
Working capital (deficit)
|
|
$
|
3,542,211
|
|
|
$
|
(476,713
|
)
|
|
$
|
4,018,924
|
|
|
|
(843.0
|
)%
|
Our
working capital increased by $4,018,924 to working capital of $3,542,211 at December
31, 2019 from working capital deficit of $476,713 at December 31, 2018. The increase in working capital deficit was primarily
attributable to an increase in cash and cash equivalents of approximately $3,549,000, an increase in accounts receivable of approximately
$16,000, an increase in loan to employee of approximately $172,000, an increase in loan receivable of approximately $79,000, an
increase in prepaid expenses and other current assets of approximately $308,000, a decrease in deferred revenue of approximately
$16,000, a decrease in salary payable of approximately $11,000, a decrease in accrued liabilities and other payables of approximately
$61,000, a decrease in due to related parties of approximately $234,000, a decrease in investee losses in excess of investment
controlled by major shareholders of approximately $19,000, offset by an decrease in prepaid rent of approximately $101,000, and
an increase in lease liabilities current portion of approximately $339,000, a decrease in Security deposits current portion of
approximately $5,000.
Because
the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the
changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the
comparable changes reflected on the consolidated balance sheets.
Cash
Flows for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
The
following summarizes the key components of our cash flows for the years ended December 31, 2019 and 2018:
|
|
Year Ended
December 31,
2019
|
|
|
Year Ended
December 31,
2018
|
|
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
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(24,688
|
)
|
|
|
(56,164
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
3,548,896
|
|
|
$
|
(143,936
|
)
|
Net cash flow used
in operating activities for the year ended December 31, 2019 was $2,139,156, which primarily reflected our net loss of approximately
$2,243,000, and the changes in operating assets and liabilities primarily consisting of an increase in prepaid expenses and other
current assets of approximately $82,000, an increase in security deposits of approximately $103,000, and a decrease of operating
lease liability of approximately $231,000, a decrease in accrued liabilities and other payables of approximately $40,000, a decrease
in deferred revenue of approximately $15,000, offset by an increase in salary payable of approximately $13,000, an decrease in
accounts receivable of approximately $60,000, and the add-back of non-cash items consisting of noncash lease expense of approximately
$340,000, depreciation of approximately $26,000, loss on equity method investment controlled by major shareholders of approximately
$49,000 and noncash other expense of approximately $85,000.
Net cash flow
used in operating activities for the year ended December 31, 2018 was $1,870,353, which primarily reflected our net loss of approximately
$2,349,000, and the changes in operating assets and liabilities primarily consisting of an increase in prepaid expenses and other
current assets of approximately $63,000, an increase in security deposits of approximately $14,000, and an increase of prepaid
rent of approximately $17,000, offset by an increase in deferred revenue of approximately $82,000, an increase in salary payable
of approximately $92,000 and an increase in accrued liabilities and other payables of approximately $310,000, and the add-back
of non-cash items consisting of depreciation of approximately $27,000 and loss on equity method investment controlled by major
shareholders of approximately $62,000.
Net cash flow used
in investing activities was $725,476 for the year ended December 31, 2019 as compared to net cash flow used in investing activities
of $66,313 for the year ended December 31, 2018. During the year ended December 31, 2019, the Company made payment in cost method
investment of approximately $145,000, payment for acquisition of subsidiaries, net of cash acquired of approximately $109,000,
payments made for purchase of property and equipment of approximately $130,000, payments made for loan to employee of approximately
$174,000, payments made for loan to third party of approximately $80,000 and payment in equity method investment of approximately
$88,000. During the year ended December 31, 2018, we made payments for purchase of property and equipment of approximately $24,000,
and made payments in equity method investment of approximately $42,000.
Net cash flow provided
by financing activities was $6,438,216 for the year ended December 31, 2019 as compared to $1,848,894 for the year ended December
31, 2018. During the year ended December 31, 2019, we received advances from related parties of approximately $14,000, proceeds
from issuance of stocks of approximately $6,851,000 in funding our operations, offset by repayments made to related parties of
approximately $428,000. During the year ended December 31, 2018, we received cash contribution from shareholders of approximately
$1,661,000, capital contribution from shareholders of approximately $5,000, and advances from related parties of approximately
$206,000 in funding our operations, offset by repayments made to related parties of approximately $24,000.
We mainly relied upon the IPO proceeds to meet our operating
needs during the year ended December 31, 2019.
Our capital requirements
for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third parties’
professional services, reduction of accrued liabilities, and the development of business opportunities. These uses of cash will
depend on numerous factors including our future sales revenue and our ability to control costs. All funds received have been expended
in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our
liquidity over the near to long term:
|
●
|
An increase in working capital requirements to finance our current business;
|
|
●
|
The use of capital for the development of business opportunities;
|
|
●
|
Addition of administrative and sales personnel as the business grows; and
|
|
●
|
The cost of being a public company.
|
Initial Public
Offering
On
January 7, 2019, we completed its initial public offering on the NASDAQ Capital Market under the symbol of “MTC”. We
offered 1,800,000 common shares at $4 per share. Net proceeds raised by us from the initial public offering amounted to approximately
$6,478,801 after deducting underwriting discounts and commissions and other offering expenses. Out of the $6.5 million net proceeds,
$500,000 was deposited into an escrow account to satisfy the initial $500,000 in potential indemnification obligations arising
during an escrow period of two years following the closing date of January 7, 2019. On January 7, 2019, we sold additional 270,000
common shares at $4 per share. Net proceeds raised by us amounted to $993,600 after deducting underwriting discounts. As a result,
we raised a total of $7,472,401 from the issuance of 2,070,000 shares of common stock in January 2019.
Currently, we use our
cash to support our operations and to provide working capital for our ongoing operations and obligations. Considering our available
cash together with our cash inflow from IPO, we believe that it is not likely that we will not meet our anticipated cash requirements
for the next twelve months.
Contractual Obligations and Off-Balance
Sheet Arrangements
Contractual Obligations
We have certain fixed
contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions,
and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts
presented in the tables, in order to assist in the review of this information within the context of our consolidated financial
position, results of operations, and cash flows. The following tables summarize our contractual obligations as of December 31,
2019, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
|
|
Payments Due by Period
|
|
Contractual obligations:
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5+ years
|
|
Office leases commitment
|
|
$
|
1,055,372
|
|
|
$
|
379,638
|
|
|
$
|
675,734
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
1,055,372
|
|
|
$
|
379,638
|
|
|
$
|
675,734
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-balance Sheet Arrangements
Under SEC regulations,
we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement
or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
|
●
|
Any obligation under certain guarantee contracts,
|
|
●
|
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
|
|
●
|
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
|
|
●
|
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
|
We do not have any
off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business,
we enter into operating lease commitments, and other contractual obligations. These transactions are recognized in our financial
statements in accordance with generally accepted accounting principles in the United States.
Foreign Currency Exchange Rate Risk
Our operations are
in China. Thus, our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For
the years ended December 31, 2019 and 2018, we had unrealized foreign currency translation loss of approximately $30,000 and $51,000,
respectively, because of changes in the exchange rate.
Inflation
The
effect of inflation on our revenue and operating results was not significant.
Critical Accounting Policies
Please refer to NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of our consolidated financial statements for details.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and senior management
|
The following table
sets forth our executive officers and directors, their ages and the positions held by them:
Name
|
|
Age
|
|
Position
|
Xiangdong Wen (1) (2)
|
|
35
|
|
Chairman of the Board
|
Zhen Fan (1) (2)
|
|
42
|
|
Chief Executive Officer and Director
|
Zhengfei Li (1)
|
|
36
|
|
Chief Technology Officer
|
Min Kong (1)
|
|
31
|
|
Chief Financial Officer
|
Hinman Au (1) (4)
|
|
54
|
|
Director
|
Qingshun Meng (1) (3) (5) (6) (7)
|
|
60
|
|
Independent Director
|
Yiqin Zhang (1) (3) (5) (6) (7)
|
|
45
|
|
Independent Director
|
Shuguo Li (1) (4) (5) (6) (7)
|
|
68
|
|
Independent Director
|
Dongqiang Wang (1) (3)
|
|
34
|
|
Independent Director
|
(1)
|
The individual’s business address is c/o Gujia (Beijing) Technology Co., Ltd., AF, 16/F, Block B, Jiacheng Plaza, 18 Xiaguangli, Chaoyang District, Beijing, 100027 China.
|
|
|
(2)
|
Class C director whose term expires at the 2020 succeeding annual meeting of shareholders.
|
|
|
(3)
|
Class B director whose term expires at the 2021 succeeding annual meeting of shareholders.
|
|
|
(4)
|
Class A director whose term expires at the 2022 annual meeting of shareholders.
|
|
|
(5)
|
Member of audit committee.
|
|
|
(6)
|
Member of compensation committee.
|
|
|
(7)
|
Member of nominating committee.
|
Xiangdong Wen
has served as the Chairman of the Board of MMTEC since January 2018. Mr. Wen founded Gujia in 2015 and was Gujia’s
Chief Executive Officer between June 2015 and January 2016. Mr. Wen has also served as Gujia’s executive director since June
2015. Between May 2012 and May 2015, Mr. Wen served as Chief Executive Officer of Jiazi Investment Co., Ltd, an investment
management company. Between February 2015 and June 2015, Mr. Wen served as Chief Operating Officer of Beijing Dongfangjuhe Technology
Co., Ltd, providing technology solutions to the broker/dealer industry. Mr. Wen holds a Bachelor’s degree in business management
from Communication University of China. Mr. Wen was nominated as a director because of his experience serving in executive positions
at companies operating in the financial industry and his extensive knowledge, experience and relationships in China’s financial
industry.
Zhen Fan
has served as the Chief Executive Officer and Director of MMTEC since January 2018. Mr.Fan has served as Gujia’s Chief Executive
Officer since January 2016. Between November 2011 and January 2016, Mr. Fan served as the Chief Operative Officer of Anhui Channel
Network Co., Ltd., an internet marketing company. Between June 2009 and October 2011, Mr. Fan served as Content Director of Beijing
Tianying Jiuzhou Network Technology Co. Ltd, a mobile network media company. Mr. Fan received his Bachelor’s degree in Automation
from Yangzhou University and a Master’s degree in Finance from Graduate School of Chinese Academy of Social Sciences (GSCASS).
Mr. Fan was nominated as a director because of his operating experience and his extensive knowledge and relationship in media and
Internet industry.
Hinman Au
has served as a Director of MMTEC since October 2019. Since July 2016 Hinman Au served as Chief Executive Officer of MM iGlobal,
Inc., a registered broker-dealer. From September 2012 to July 2016, he held the offices of Chief Executive Officer of Tradefield
Securities, Inc., a registered broker-dealer. From August 2014 to August 2016, he held the position of Chief Executive Officer
of American Education Center, a publicly traded company (OTCQB). Hinman Au holds a Bachelor of Science degree in Computer Science
from Lehman College (CUNY, 1987), a Master of Science degree in Electrical Engineering from State University of New York at Stony
Brook (1989), and a Master of Business Administration degree from Baruch College (CUNY, 1992).
Min Kong
has served as the Chief Financial Officer of MMTEC since January 2018. Between June 2015 and January 2018, Mr. Kong served as the
Institutional Business Director of Gujia (Beijing) Technology Co., Ltd. Between February 2014 and February 2015, Mr. Kong served
as Data Analyst Manager of American Dental Solutions, LLC. Between April 2012 and January 2013, Mr. Kong served as Marketing Manager
of Yiwu Yi Jue Trading Company. Mr. Kong received his MBA degree from Missouri State University.
Dongqiang Wang
has served as an Independent Director of MMTEC since April 2018. Mr. Wang served as manager of advisory and management
consulting of KPMG since October 2016. Between March 2014 and September 2016, Mr. Wang served as assistant CIO and investment director
of UCF Group, an integrated financial services provider in China. Mr. Wang holds an MBA degree from Renmin University and a Bachelor’s
degree in software engineering of Beijing University of Posts and Telecommunications. Mr. Wang was nominated as a director because
of his experience in accounting, financial advisory, and auditing.
Zhengfei Li has
served as the Chief Technology Officer of MMTEC since January 2018. Mr. Li has served as the Chief Technology Officer of Gujia
(Beijing) Technology Co., Ltd since June 2015. Between February 2009 and May 2015, Mr. Li served as the Chief Technology Officer
of Shanghai Zirandao Information Technology Co., Ltd, a financial technology service company. Mr. Li holds a Bachelor’s degree
in Information and Computing Science from Kunming University of Science and Technology.
Qingshun Meng
has served as an Independent Director of MMTEC since April 2018. Mr. Meng has served as management professor at the Communication
University of China since 2004. Mr. Meng holds a Bachelor of Science degree in Corporate Management from Shandong Institute of
Mining and Technology, and a Bachelor of Science degree in Mining Engineering from Liaoning Technical University. Mr. Meng was
member of the comprehensive brand management expert committee of China Association for Quality. Mr. Meng was nominated as a director
because of his management knowledge and expertise.
Shuguo Li
has served as an Independent Director of MMTEC since April 2018. Mr. Li brings approximately 37 years of financial experience as
senior auditor and public accountant. Mr. Li served as a certified public accountant in good standing for 22 years. Between January
1981 and November 2012, Mr. Li served as the Director in charge of Public Affairs audit of Heilongjiang provincial audit office.
Mr. Li holds an Associate’s degree in Finance from Heilongjiang Business School. Mr. Li was nominated as a director because
his accounting and auditing experience.
Yiqin Zhang
has served as an Independent Director of MMTEC since April 2018. Mr. Zhang has served as the Founding Partner of Zhongguancun River
Capital, a venture capital company since August 2013. Between January 2012 and August 2013, Mr. Zhang served as the Founding Partner
of Beiruan Angel Foundation, a venture capital company located in Beijing, China. Mr. Zhang holds a Bachelor’s degree in
Public Administration Management from Capital University of Economics and Business. Mr. Zhang offers his experience serving in
founder positions at companies operating in the financial industry and has extensive knowledge, experience and relationships in
China’s financial industry. Mr. Zhang was nominated as a director because of his experience in enterprise management, venture
capital investment, and fund management.
None of the events
listed in Item 401(f) of Regulation S-K has occurred during the past ten years that is material to the evaluation of the ability
or integrity of any of our directors, director nominees or executive officers.
Limitation on Liability and Other Indemnification Matters
The Companies Law does
not limit the extent to which Memorandum and Articles of Association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Our Memorandum and Articles of Association permit
indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such
losses or damages arise from dishonesty of such directors or officers willful default of fraud. This standard of conduct is generally
the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the
foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Executive Compensation
The following table shows the annual compensation
paid by us for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
Equity
|
|
|
All Other
|
|
|
|
|
Name/principal position
|
|
Year
|
|
Salary
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total Paid
|
|
Zhen Fan, CEO
|
|
2018
|
|
$
|
18,134
|
|
|
$
|
-
|
|
|
$
|
1,466
|
|
|
$
|
19,600
|
|
|
|
2019
|
|
$
|
35,174
|
|
|
$
|
-
|
|
|
$
|
4,001
|
|
|
$
|
39,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Min Kong, CFO
|
|
2018
|
|
$
|
30,347
|
|
|
$
|
-
|
|
|
$
|
7,376
|
|
|
$
|
37,723
|
|
|
|
2019
|
|
$
|
48,936
|
|
|
$
|
-
|
|
|
$
|
5,148
|
|
|
$
|
54,083
|
|
Under Chinese law,
we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior
to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate
an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year
we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where
the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us.
Director Compensation
All directors hold office until the next annual meeting of shareholders
at which their respective class of directors is re-elected and until their successors have been duly elected and qualified. There
are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the
Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled
to receive $10,000 per year for serving as directors and may receive option grants from our company. In addition, non-employee
directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended. We
have entered into independent director agreements with our directors which agreements set forth the terms and provisions of their
engagement.
None of our officers
currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any
other entity that has one or more officers serving as a member of our board of directors.
Composition of Board; Risk Oversight
Our Board of Directors
presently consists of seven directors. Pursuant to our Memorandum and Articles of Association, our officers will be elected by
and serve at the discretion of the board. A director will be removed from office automatically if, among other things, the director
becomes bankrupt or makes any arrangement or composition with his creditors, or becomes physically or mentally incapable of acting
as director. Except as noted above, there are no family relationships between any of our executive officers and directors. Officers
are elected by, and serve at the discretion of, the Board of Directors. Our Board of Directors shall hold meetings on at least
a quarterly basis.
As a smaller reporting
company under the NASDAQ rules we are only required to maintain a Board of Directors comprised of at least 50% independent directors,
and an audit committee of at least two members, comprised solely of independent directors who also meet the requirements of Rule
10A-3 under the Securities Exchange Act of 1934. There are no membership qualifications for directors. Further, there are no share
ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings
pursuant to which our directors are selected or nominated.
Our Board of Directors
plays a significant role in our risk oversight. The board makes all relevant Company decisions. As such, it is important for us
to have our Chief Executive Officer serve on the board as he plays key roles in the risk oversight of our company. As a smaller
reporting company with a small Board of Directors, we believe it is appropriate to have the involvement and input of all of our
directors in risk oversight matters.
Duties of Directors
Under BVI law, our
directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise
the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their
duty of care to us, our directors must ensure compliance with our Memorandum and Articles of Association. We have the right to
seek damages if a duty owed by our directors is breached. A director is not required to hold shares as a qualification to
office. The functions and powers of our Board of Directors include, among others:
|
●
|
appointing officers and determining the term of office of the officers,
|
|
●
|
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable,
|
|
●
|
exercising the borrowing powers of the company and mortgaging the property of the company,
|
|
●
|
executing checks, promissory notes and other negotiable instruments on behalf of the company, and
|
|
●
|
maintaining or registering a register of mortgages, charges or other encumbrances of the company.
|
Director Independence
Our board has reviewed
the independence of our directors, applying the NASDAQ independence standards. Based on this review, the board determined that
each of Qingshun Meng, Yiqin Zhang, Dongqiang Wang and Shuguo Li are “independent” within the meaning of the NASDAQ
rules. In making this determination, our board considered the relationships that each of these non-employee directors has with
us and all other facts and circumstances our board deemed relevant in determining their independence. As required under applicable
NASDAQ rules, we anticipate that our independent directors will meet on a regular basis as often as necessary to fulfill their
responsibilities, including at least annually in executive session without the presence of non-independent directors and management.
Board Committees
Currently, three committees
have been established under the board: the Audit Committee, the Compensation Committee and the Nominating Committee.
The Audit Committee
is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements
of our company, including the appointment, compensation and oversight of the work of our independent auditors. The Compensation
Committee of the Board of Directors reviews and makes recommendations to the board regarding our compensation policies for our
officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board
retains the authority to interpret those plans). The Nominating Committee of the board is responsible for the assessment of the
performance of the Board, considering and making recommendations to the board with respect to the nominations or elections of directors
and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors.
Audit Committee
The Audit Committee will be responsible
for, among other matters:
|
●
|
appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm,
|
|
●
|
discussing with our independent registered public accounting firm the independence of its members from its management,
|
|
●
|
reviewing with our independent registered public accounting firm the scope and results of their audit,
|
|
●
|
approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm,
|
|
●
|
overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC,
|
|
●
|
reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements,
|
|
●
|
coordinating the oversight by our Board of Directors of our code of business conduct and our disclosure controls and procedures,
|
|
●
|
establishing procedures for the confidential and or anonymous submission of concerns regarding accounting, internal controls or auditing matters, and
|
|
●
|
reviewing and approving related-party transactions.
|
Our Audit Committee
consists of Shuguo Li (Chair), Qingshun Meng and Yiqin Zhang. Our board has affirmatively determined that each of the members of
the Audit Committee meets the definition of “independent director” for purposes of serving on an Audit Committee under
Rule 10A-3 of the Exchange Act and NASDAQ rules. In addition, our Board of Directors has determined that Mr. Shuguo Li qualifies
as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K and
meets the financial sophistication requirements of the NASDAQ rules.
Compensation Committee
The Compensation Committee will be responsible
for, among other matters:
|
●
|
reviewing and approving, or recommending to the Board of Directors to approve the compensation of our CEO and other executive officers and directors,
|
|
●
|
reviewing key employee compensation goals, policies, plans and programs,
|
|
●
|
administering incentive and equity-based compensation,
|
|
●
|
reviewing and approving employment agreements and other similar arrangements between us and our executive officers, and
|
|
●
|
appointing and overseeing any compensation consultants or advisors.
|
Our Compensation Committee
consists of Yiqin Zhang (Chair), Shuguo Li and Qingshun Meng. Our board has affirmatively determined that each of the members of
the Compensation Committee meets the definition of “independent director” for purposes of serving on Compensation Committee
under NASDAQ rules.
Nominating Committee
The Nominating Committee will be responsible
for, among other matters:
|
●
|
selecting or recommending for selection candidates for directorships,
|
|
●
|
evaluating the independence of directors and director nominees,
|
|
●
|
reviewing and making recommendations regarding the structure and composition of our Board of Directors and the Board of Directors committees,
|
|
●
|
developing and recommending to the Board of Directors corporate governance principles and practices;
|
|
●
|
reviewing and monitoring our company’s Code of Business Conduct and Ethics, and
|
|
●
|
overseeing the evaluation of our company’s management.
|
Our Nominating Committee
consists of consists of Qingshun Meng (Chair), Shuguo Li and Yiqin Zhang. Our board has affirmatively determined that each of the
members of the Nominating Committee meets the definition of “independent director” for purposes of serving on a Nominating
Committee under NASDAQ rules.
Code of Business Conduct and Ethics
Our Board of Directors
has adopted a code of business conduct and ethics that applies to our directors, officers and employees. A copy of this code is
available on our website. We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any
waivers of the Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer,
principal accounting officer, controller, or persons performing similar functions.
Interested Transactions
A director may vote,
attend a Board of Directors meeting or sign a document on our behalf with respect to any contract or transaction in which he or
she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that
he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the Board
of Directors or otherwise contained in the minutes of a meeting or a written resolution of the Board of Directors or any committee
of the Board of Directors that a director is a shareholder, director, officer or trustee of any specified firm or company and is
to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general
notice, it will not be necessary to give special notice relating to any particular transaction.
Remuneration and Borrowing
The directors may receive
such remuneration as our Board of Directors may determine from time to time. Each director is entitled to be repaid or prepaid
for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our Board
of Directors or committees of our Board of Directors or shareholder meetings or otherwise in connection with the discharge of his
or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure
for the directors. Our Board of Directors may exercise all the powers of the company to borrow money and to mortgage or charge
our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is
borrowed or as security for any debt, liability or obligation of the company or of any third party.
Qualification
A director is not required to hold shares
as a qualification to office.
Limitation on Liability and Other Indemnification
Matters
BVI law does not limit
the extent to which a company’s Memorandum and Articles of Association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the BVI courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Under our Memorandum and Articles of Association, we may indemnify
our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts
paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which
they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled
to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and,
in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions,
we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable as a matter of United States law.
The table below provides
information as to the total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining
agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our
employees to be good.
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Number of Employees
|
|
|
24
|
|
|
|
33
|
|
|
|
38
|
|
See Item 7 below.
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The following table
sets forth certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially own
more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive
officers, and all directors and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole
voting and investment powers with respect to the shares indicated. Our major shareholders do not have different voting rights than
any other holder of our shares.
We have determined
beneficial ownership in accordance with the rules of the SEC. Under such rules, beneficial ownership includes any shares over which
the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to subscribe
for within 60 days of May 22, 2020. Except as indicated by the footnotes below, we believe, based on the information furnished
to us, that the persons and entities named in the table below have sole voting and investment power or the power to receive the
economic benefit with respect to all common shares that they beneficially own, subject to applicable community property laws. None
of the stockholders listed in the table are a broker-dealer or an affiliate of a broker dealer. None of the stockholders listed
in the table are located in the United States and none of the common shares held by them are located in the United States. Applicable
percentage ownership is based on 20,070,000 common shares outstanding as of May 22, 2020. Unless otherwise indicated, the address
of each beneficial owner listed in the table below is c/o Gujia (Beijing) Technology Co., Ltd., AF, 16/F, Block B, Jiacheng Plaza,
18 Xiaguangli, Chaoyang District, Beijing, 100027 China.
|
|
Beneficial Ownership
|
|
Name of Beneficial Owner
|
|
Common Shares
|
|
|
Percentage
|
|
Zhen Fan * (1)
|
|
|
3,276,000
|
|
|
|
16.3
|
%
|
Min Kong *
|
|
|
-
|
|
|
|
|
**
|
Xiangdong Wen * (2)
|
|
|
3,276,000
|
|
|
|
16.3
|
%
|
Zhengfei Li *
|
|
|
216,000
|
|
|
|
1.1
|
%
|
Hinman Au *
|
|
|
360,000
|
|
|
|
1.8
|
%
|
Qingshun Meng *
|
|
|
-
|
|
|
|
|
**
|
Yiqin Zhang *
|
|
|
-
|
|
|
|
|
**
|
Shuguo Li *
|
|
|
-
|
|
|
|
|
**
|
Dongqiang Wang *
|
|
|
-
|
|
|
|
|
**
|
All officers and directors as a group (9 persons)
|
|
|
7,128,000
|
|
|
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
5% or greater beneficial owners
|
|
|
|
|
|
|
|
|
Length Technology Limited(3)
|
|
|
2,340,000
|
|
|
|
11.6
|
%
|
Rate Technology Limited(4)
|
|
|
1,800,000
|
|
|
|
9.0
|
%
|
Jishan Sun
|
|
|
1,818,000
|
|
|
|
9.1
|
%
|
5% or greater beneficial owners as a group
|
|
|
5,958,000
|
|
|
|
29.7
|
%
|
|
*
|
Officer and/or director of the Company
|
|
(1)
|
Represents (i) 2,916,000 shares owned by Mr. Fan and (ii) 947,880
shares owned by MMBD Information Technology Limited, of which Mr. Fan holds 37.98%. Mr. Fan is the Chief Executive Officer of MMBD
Information Technology Limited, with mailing address of Rm 18D 27/F Ho King Comm. Ctr., 2-16 Fayuen St. Mongkok, Hong Kong 999077
China.
|
|
(2)
|
Represents
(i) 3,096,000 shares owned by Mr. Wen and (ii) 947,880 shares owned by MMBD Information Technology Limited, of which Mr. Wen holds
18.99%.
|
|
(3)
|
A
Hong Kong corporation with the mailing address of RMC, 13/F, Harvard Commercial Building, 105-111 Thomson Road, Wan Chai, Hong
Kong, 999077 China, with Qingyi Luan as its sole owner and manager.
|
|
(4)
|
A
Hong Kong corporation with the mailing address of 13/F, Ho Fu Commercial Building, 105-111 Thomson Road, Wanchai, Hong Kong, 999077
China, with Qian Ruan as its sole owner and manager.
|
As of May 22,
2020, there were eight registered holders of record of our common shares, based upon information received from our stock
transfer agent. However, this number does not include beneficial owners whose shares were held of record by nominees or
broker dealers. The number of individual holders of record is based exclusively upon our share register and does not address
whether a share or shares may be held by the holder of record on behalf of more than one person or institution who may be
deemed to be the beneficial owner of a share or shares in our company. To our knowledge, no other shareholder beneficially
owns more than 5% of our shares. Our company is not owned or controlled directly or indirectly by any government or by any
corporation or by any other natural or legal person severally or jointly. Our major shareholders do not have any special
voting rights.
|
B.
|
Related Party Transactions
|
Due to Related Parties
At December 31, 2019
and 2018, the due to related parties amount consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Advances from Xiangdong Wen (1)
|
|
$
|
4,320
|
|
|
$
|
150,338
|
|
Advances from Zhen Fan (2)
|
|
|
1,710
|
|
|
|
53,297
|
|
Repurchase of common stock on credit from shareholders (3)
|
|
|
-
|
|
|
|
36,000
|
|
|
|
$
|
6,030
|
|
|
$
|
239,635
|
|
|
(1)
|
Xiangdong
Wen is the chairman and 16.3% shareholder of the Company.
|
|
(2)
|
Zhen
Fan is the chief executive officer and 16.3% shareholder of the Company.
|
|
(3)
|
On
August 7, 2018, the Company repurchased 36,000,000 shares of its common stock from 14 shareholders through a privately negotiated
transaction at an aggregate price of $36,000. The treasury stock purchase amount was paid in full in January 2019.
|
From time to time, Xiangdong Wen, Zhen Fan
and Hinman Au provided advances to the Company or made payment on behalf of the Company to supplement its working capital needs.
Hinman Au is a director, member of board and 1.8% shareholder of the Company. Those advances are short-term in nature, non-interest
bearing, unsecured and payable on demand.
Acquisition of MMBD Trading
During the year ended December 31, 2019,
the Company acquire 75.1% of equity interests in MMBD Trading from Xiangdong Wen and Zhen Fan by cash payment of $185,000. See
NOTE 9 of the consolidated financial statements for details.
Shareholders’
Contribution
During
the year ended December 31, 2019 and 2018, the Company’s shareholders contributed $nil and $5,448, respectively, to the Company
for working capital needs. See NOTE 13 of the consolidated financial statements for details.
|
C.
|
Interests of Experts and Counsel
|
Not required.
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information.
|
See Item 18 for our audited consolidated
financial statements.
Legal Proceedings
We are currently not
involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Dividend Policy
The holders of shares
of our common shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should
we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition, the operating
companies may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency
and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common shares are
entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
Except as disclosed
elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this Annual Report.
ITEM 9.
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THE OFFER AND LISTING
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A.
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Offer and Listing Details
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The following table
sets forth, for the months indicated and through May 21, 2020, the monthly high and low sale prices for our shares, as reported
on NASDAQ Stock Market. The closing price for the Company’s securities on May 20, 2020 was $1.16 per share.
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Price Per Share of
Common Shares:
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High
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Low
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Monthly highs and lows
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January 2020
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$
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2.95
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$
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1.86
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February 2020
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$
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2.08
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$
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1.34
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March 2020
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$
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1.60
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$
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0.64
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April 2020
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$
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1.48
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$
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0.82
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May 2020 (through May 20, 2020)
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$
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1.41
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$
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0.95
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Not Applicable.
Our shares have been
listed on the NASDAQ Stock Market under the symbol MTC since January 8, 2019 following the completion of our initial public offering.
Not Applicable.
Not Applicable.
Not Applicable.
ITEM 10.
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ADDITIONAL INFORMATION
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Not Applicable.
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B.
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Memorandum and Articles of Association
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The information required
by Item 10.B of Form 20-F is included in the section titled “Description of Share Capital” in our Registration Statement
on Form F-1 initially filed with the SEC on October 22, 2018, and subsequently updated (File No.: 333-227934), which section is
incorporated herein by reference.
The information required
by Item 10.B of Form 20-F is included in the sections titled “Our Business,” “Directors and Executive Officers,”
“Related Party Transactions,” and “Underwriting” in in our Registration Statement on Form F-1 initially
filed with the SEC on October 22, 2018, and subsequently updated (File No.: 333-227934), which section is incorporated herein by
reference.
BVI Exchange Control
Under BVI law, there
are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect
the remittance of dividends, interest or other payments to nonresident holders of our shares.
China Exchange Control
Foreign
Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996),
as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and
the Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current
account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions,
but not for most capital account items, such as direct investment, loans, repatriation of investment and investment in securities
outside China, unless the prior approval of SAFE or its local counterparts is obtained. In addition, any loans to an operating
subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its respective
approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be registered
with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered
capital must be approved by the China Ministry of Commerce or its local counterpart. We may not be able to obtain these government
approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making these loans.
The
dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit
foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE.
Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration
with, SAFE and other relevant Chinese governmental authorities.
Circular
37
On
July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, Chinese residents
shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments
before contributing the domestic assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch
by such Chinese resident is also required if the registered overseas SPV’s basic information such as domestic individual
resident shareholder, name, operating period, or major events such as domestic individual resident capital increase, capital reduction,
share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas
investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to make
foreign exchange registration if required by SAFE and its branches.
Moreover,
Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV, but
failed to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are
required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration
procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine
of up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital
outflow occurred, a fine up to 30% of the illegal amount may be assessed.
Chinese
residents who control our Company are required to register with SAFE in connection with their investments in us. If we use our
equity interest to purchase the assets or equity interest of a Chinese company owned by Chinese residents in the future, such Chinese
residents will be subject to the registration procedures described in Circular 37.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An
offshore company may invest equity in a Chinese company, which will become the Chinese subsidiary of the offshore holding company
after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested
enterprise in China, which include the Wholly Foreign-Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing
rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of
the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct
Investment.
Under
the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior
approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment
amount shall both be registered with SAIC, Ministry of Commerce and SAFE.
Shareholder
loans made by offshore parent holding companies to their Chinese subsidiaries are regarded as foreign debts in China for regulatory
purpose, which is subject to a number of Chinese laws and regulations, including the Chinese Foreign Exchange Administration Regulations,
the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under
these regulations, the shareholder loans made by offshore parent holding companies to their Chinese subsidiaries shall be registered
with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such Chinese subsidiaries, including any shareholder
loans, shall not exceed the difference between the total investment amount and the registered capital amount of the Chinese subsidiaries,
both of which are subject to the governmental approval.
Regulation
of Dividend Distribution
The
principal regulations governing the distribution of dividends by foreign holding companies include the Company Law of China (1993),
as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000, and the Administrative Rules under the Foreign
Investment Enterprise Law (1990), as amended respectively in 2001 and 2014.
Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits, if
any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned investment enterprises
in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
The following sets
forth the material BVI, Chinese and U.S. federal income tax matters related to an investment in our common shares. It is directed
to U.S. Holders (as defined below) of our common shares and is based on laws and relevant interpretations thereof in effect as
of the date of this report, all of which are subject to change. This description does not deal with all possible tax consequences
relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws. DeHeng Law
Offices, our counsel as to the PRC laws and regulations, advised us with respect to the PRC taxation matters and the below referenced
discussion constitutes their opinion as to such matters. Ogier, our counsel as to the BVI law, advised us on the BVI taxation matters
and their opinion is set forth in the discussion below. Schiff Hardin LLP, our counsel as to the U.S. laws, rules and regulations,
advised us on, among other things, on the U.S. taxation matters and their opinion is also set forth below. The following brief
description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S. dollar
as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of
this report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this report, as well as judicial
and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change,
which change could apply retroactively and could affect the tax consequences described below. The brief description below of the
U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of common shares
and you are, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States,
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia,
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an estate whose income is subject to U.S. federal income taxation regardless of its source, or
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a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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PRC Enterprise Income
Tax
According to the Enterprise
Income Tax Law of PRC (the “EIT Law”), which was promulgated on March 16, 2007, last amended in February 2017
and became effective as of January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform
rate of 25%. The Regulation on the Implementation of Enterprise Income Tax Law of the PRC (the “EIT Rules”) was promulgated
on December 6, 2007 and became effective on January 1, 2008. On April 14, 2008, the Chinese Ministry of Science and Technology,
Ministry of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology
Enterprises (the “Certifying Measures”), which retroactively became effective on January 1, 2008 and was amended on
January 29, 2016. In the years ended December 31, 2018 and 2017, Gujia and Meimei Zhengtong were recognized as small low-profit
enterprises and received a preferential income tax rate of 10%. Under the EIT Law, an enterprise established outside of China with
a “de facto management body” within China is considered a “resident enterprise”, which means that it is
treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the
EIT Law define “de facto management body” as a managing body that exercises substantive and overall management
and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance
for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, at April 22,
2009 which provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident
enterprise” with its “de facto management bodies” located within China if the following criteria
are satisfied:
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the place where the senior management and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC,
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its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC,
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its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC, and
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more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC.
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We do not believe that
we meet the conditions outlined in the preceding paragraph since we do not have a PRC enterprise or enterprise group as our primary
controlling shareholder. In addition, we are not aware of any offshore holding companies with a corporate structure similar to
our company that has been deemed a PRC “resident enterprise” by the PRC tax authorities.
If we are deemed a
China resident enterprise, we may be subject to the EIT at the rate of 25% on our global income, except that the dividends we receive
from our Chinese subsidiaries may be exempt from the EIT to the extent such dividends are deemed dividends among qualified resident
enterprises. If we are considered a resident enterprise and earn income other than dividends from our Chinese subsidiaries, a 25%
EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
PRC Value Added
Tax (“VAT”)
Pursuant to the Provisional
Regulations on Value-added Tax (VAT) of the PRC last amended on February 6, 2016 and became effective from January 1, 2009 and
the Detailed Rules for the Implementation of the Provisional Regulation of China on VAT last amended on October 28, 2011 and effective
as of November 1, 2011, all entities or individuals in the PRC engaging in the sale of goods, the provision of processing services,
repairs and replacement services, and the importation of goods are required to pay VAT.
According to the requirements
of the Notice of the Ministry of Finance and the State Administration of Taxation on Implementing the Pilot Program of Replacing
Business Tax with Value-Added Tax in an All-round Manner (Cai Shui [2016] Document No. 36) and the annexes thereto, namely The
Measures for Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax, the Provisions on Relevant Matters
concerning the Pilot Program of Replacing Business Tax with Value-Added Tax, the Provisions on the Transitional Policies for the
Pilot Program of Replacing Business Tax with Value-Added Tax, and the Provisions on the Application of VAT Zero Rate and VAT Exemption
Policy to Cross-border Taxable Activities, effective from 1 May 2016, the pilot program of replacing business tax with value-added
tax was implemented across the country, and the payment of business tax for taxpayers in the construction industry, the real estate
industry, the financial industry, and the living service industry shall be replaced with the payment of value-added tax at 6%.
BVI Taxation
The company and all
distributions, interest and other amounts paid by the company in respect of the common shares of the company to persons who are
not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance,
succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to
any common shares, debt obligations or other securities of the company.
All instruments relating
to transactions in respect of the common shares, debt obligations or other securities of the company and all instruments relating
to other transactions relating to the business of the company are exempt from payment of stamp duty in the BVI provided that they
do not relate to real estate in the BVI.
There are currently
no withholding taxes or exchange control regulations in the BVI applicable to the company or its shareholders.
United States Federal
Income Taxation
The following does
not address the tax consequences to any particular investor or to persons in special tax situations such as:
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financial institutions,
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regulated investment companies,
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real estate investment trusts,
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traders that elect to mark to market,
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persons liable for alternative minimum tax,
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persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction,
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persons that actually or constructively own 10% or more of our common shares,
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persons who acquired our common shares pursuant to the exercise of any employee common share option or otherwise as consideration, or
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persons holding our common shares through partnerships or other pass-through entities.
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Prospective purchasers
are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as
well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.
Taxation of Dividends
and Other Distributions on our Common Shares
Subject to the passive
foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the common
shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend
income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, to the extent that
the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income
tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to the extent the amount
of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings
and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated
as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under
the rules described above. The dividends will not be eligible for the dividends-received deduction allowed in respect of dividends
received from other U.S. corporations.
With respect to non-corporate
U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified
dividend income, provided that (1) the common shares are readily tradable on an established securities market in the
United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes
an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our
taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are
met. Under U.S. Internal Revenue Service authority, our common shares will be considered for purpose of clause (1) above to
be readily tradable on an established securities market in the United States if they are listed on the NASDAQ Capital Market. You
are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common
shares, including the effects of any change in law after the date of this report.
Dividends on our common
shares will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified
dividend income (as discussed above), the amount of the dividend considered for purposes of calculating the foreign tax credit
limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will constitute “passive
category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
Taxation of Dispositions
of Common Shares
Subject to the passive
foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of common shares equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis
(in U.S. dollars) in the common shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder,
including an individual U.S. Holder, who has held the common shares for more than one year, you will be eligible for the capital
gains tax rate of 20% (or lower for individuals in lower tax brackets). The deductibility of capital losses is subject to limitations.
Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit
limitation purposes.
Passive Foreign
Investment Company
Based on our current
and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2017. Our actual PFIC status
for the current taxable years ending December 31, 2017 will not be determinable until after the close of such year and, accordingly,
there is no guarantee that we will not be a PFIC for the current year. PFIC status is a factual determination for each taxable
year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year
if either:
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at least 75% of its gross income is passive income, or
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).
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We will be treated
as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which
we own, directly or indirectly, at least 25% (by value) of the stock. We must make a separate determination each year as to whether
we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset
test will generally be determined based on the market price of our common shares, our PFIC status will depend in large part
on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to become
a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our
income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we are a PFIC for any
year during which you hold common shares, we will continue to be treated as a PFIC for all succeeding years during which you hold
common shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed
sale” election with respect to the common shares.
If we are a PFIC for
any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common
shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year
that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the common shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the common shares,
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
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the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. The tax liability for amounts allocated to such years cannot be offset by any net operating losses for such years, and gains realized on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital assets.
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A U.S. Holder of “marketable
stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed
above. If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the
excess, if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in
such common shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair
market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market
gains on the common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market
election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary
loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized
on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or
loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations that are not
PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed
above under “Taxation of Dividends and Other Distributions on our Common Shares” generally would not apply.
The mark-to-market
election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities
on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined
in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares are regularly traded on the
NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would be available to you were we to
be or become a PFIC.
Alternatively, a U.S.
Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the
tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally
include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for
the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain
information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend
to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold common shares
in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions
received on the common shares and any gain realized on the disposition of the common shares.
You are urged to consult
your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections discussed
above.
Information Reporting
and Backup Withholding
Dividend payments with
respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject to information
reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification
on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to
establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders
are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding
is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the U.S. Internal Revenue Service and furnishing any required information.
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F.
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Dividends and paying agents
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Not required.
Not required.
Documents concerning
us that are referred to in this document may be inspected at c/o Room 608A, Air China Century Building, 40 Xiaoyun Road, Chaoyang
District, Beijing, 100020 China. In addition, we file annual reports and other information with the Securities and Exchange Commission.
We file annual reports on Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt
from the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt
from the insider short-swing disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information
we file with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100
F. Street, N.E., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of
the prescribed fees. You may call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference
rooms and you can request copies of the documents upon payment of a duplicating fee, by writing to the Commission. In addition,
the Commission maintains a web site that contains reports and other information regarding registrants (including us) that file
electronically with the Commission which can be assessed at http://www.sec.gov.
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I.
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Subsidiary Information
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Not required.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Interest
Rate Risk
As
of December 31, 2019 and 2018, we had no short-term or long-term borrowings. If we borrow money in future periods, we may be exposed
to interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to the interest income generated
by our cash deposits with our banks. We have not been exposed, nor do we anticipate being exposed to material risks due to changes
in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates.
Credit
Risk
As
of December 31, 2019 and 2018, we had cash and cash equivalents of $3,642,521 and $93,625, respectively. Our cash and cash equivalents
are invested primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts
generate a small amount of interest income.
Inflation
Risk
Inflationary
factors such as increases in the cost of our product may adversely affect our operating results. Although we do not believe that
inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of gross profit and selling and marketing, general
and administrative expenses as a percentage of revenue if the selling prices of our products do not increase with these increased
costs.
Foreign
Exchange Risk
A majority of the Company’s
expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities
are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions
are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank
of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC
or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
Our
functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB appreciated by 2.4% in fiscal
2018 and depreciated by 1.6% in fiscal year 2019. It is difficult to predict how market forces or PRC or U.S. government policy
may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative to
the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying changes
in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.
To
the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business
purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from
the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends,
strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative
effect on the U.S. dollar amount available to the Company.
Commodity
Risk
We
are not exposed to commodity price risk.
ITEM 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not required.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial
statements are an integral part of these statements.
The accompanying notes to consolidated financial
statements are an integral part of these statements.
The accompanying notes to consolidated financial
statements are an integral part of these statements.
NOTE 1 – ORGANIZATION
AND NATURE OF OPERATIONS
MMTEC, INC. (“MMTEC”, the “Company”)
was incorporated on January 4, 2018 under the laws of the British Virgin Islands (“BVI”). On March 19, 2018, MMTEC
acquired a wholly owned subsidiary, MM Future Technology Limited (“MM Future”). MM Future was incorporated in Hong
Kong on October 31, 2017 for the purpose of being a holding company for the equity interest in Gujia (Beijing) Technology Co.,
Ltd. (“Gujia”).
Gujia
was incorporated in People’s Republic of China (“PRC”) on June 9, 2015. Gujia is a technology provider,
operates as an internet business platform to support operations. Gujia provides investment services to the U.S. securities markets
for PRC investors and provides technical services to Chinese financial institutions to help them be able to provide investment
services in the U.S. securities markets for their clients.
On November 6, 2017, Gujia acquired a wholly-owned
subsidiary Meimei Zhengtong (Beijing) Technology Ltd. (“Meimei Zhengtong”) which was dissolved in July 2018.
On March 28, 2018, the Company acquired 24.9% of MMBD Trading
Limited. (“MMBD Trading”). MMBD Trading was incorporated on March 4, 2016 under the laws of the British Virgin Islands.
The remaining 75.1% of MMBD Trading was owned by 32.7% shareholders of the Company, Xiangdong Wen and Zhen Fan. The Company agreed
to purchase from Xiangdong Wen and Zhen Fan the remaining 75.1% of outstanding securities of MMBD Trading on April 25, 2019. The
acquisition was closed on October 18, 2019. Following and as a result of this acquisition, MMBD has become a wholly-owned subsidiary
of the Company. MMBD Trading acquired a wholly owned subsidiary, MM Global Securities, INC. (“MM Global”) on August
16, 2017. MMBD Trading does not conduct any operations or own any material assets or liabilities except for the 100% of the equity
interest of MM Global. MM Global was incorporated in the State of Illinois on September 25, 1997 as Feil Daily Investment Co. which
was changed to Whitewood Group Inc. in 2011. MM Global’s continuing membership application approved by FINRA as a broker-dealer
in August 2017 and changed its name to MM IGlobal, INC. in November 2017 pursuant to the ownership change. MM IGlobal, INC. changed
its name to MM Global Securities, INC. in March 2019. MM Global operates as a securities broker/dealer in New York City.
On April 20, 2018, the Company incorporated
MM Fund Services Limited (“MM Fund”), a Cayman Islands company, for the purpose of providing administration services
to the private equity funds industry. MM Fund is dormant as of December 31, 2019.
On May 28, 2018, the Company incorporated
MM Capital Management Limited (“MM Capital”), a Cayman Islands company, for the purpose of providing assets management
and investment services to clients. MM Capital is dormant as of December 31, 2019.
On August 8, 2018, the Company incorporated
MM Fund SPC (“MM SPC”), a Cayman Islands company, for the purpose of providing asset management services to clients.
MM SPC is a wholly-owned subsidiary of MM Capital and is dormant as of December 31, 2019.
On March 15, 2019, the Company incorporated
MM Global Capital Limited (“MM Global Capital”), a Hong Kong company, for the purpose of providing assets management
and investment services to clients. MM Global Capital is a wholly-owned subsidiary of MMTEC.
On July 9, 2019, the Company acquired 49%
of a Newly-Formed Entity called Xchain Fintech PTE.LTD., (“Xchain”), a Singapore company, for the purpose of providing
technical support for the construction and development of a new solutions for the existing problems of the traditional financial
industry, the difficulty experienced by investors in investing and allocating investment assets globally, and the protection of
funds and investments by using advanced technologies, such as artificial intelligence, big data analysis and blockchain. Xchain
is dormant as of December 31, 2019.
Since October 18, 2019, MMBD Trading and
MM Global were consolidated into the Company. MMTEC and its consolidated subsidiaries and collectively referred to herein as the
“Company”, “we” or “us”, unless specific reference is made to an entity.
NOTE
2 – BASIS OF PRESENTATION
The accompanying
consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange
Commission for financial information.
The Company’s
consolidated financial statements include the accounts of MMTEC and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Use of Estimates
The preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates during the years ended December 31, 2019 and 2018 include the allowance for doubtful accounts,
the useful life of property and equipment, assumptions used in assessing impairment of long-term assets and goodwill, and valuation
of deferred tax assets.
Fair Value of Financial Instruments
and Fair Value Measurements
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value as follows:
|
●
|
Level 1-Inputs
are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
|
|
●
|
Level 2-Inputs
are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions
on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
|
The
carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid
rent, loan to employee, loan receivable, security deposits – current, prepaid expenses and other current assets, deferred
revenue, salary payable, accrued liabilities and other payables approximate their fair market value based on the short-term maturity
of these instruments.
Transactions involving
related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless
such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due to related
parties due to their related party nature.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash and short-term highly liquid investments purchased with original maturities of three
months or less. The Company maintains cash with various financial institutions in China. At December 31, 2019 and 2018, cash balances
in China of $875,987 and $84,306, respectively, are uninsured. The Company has not experienced any losses in bank accounts and
believes it is not exposed to any risks on its cash in bank accounts. Cash equivalents are $1,500,000 and $nil at December 31,
2019 and 2018, respectively.
Concentrations of Credit Risk
Currently,
the Company’s operations are mainly carried out in China. Accordingly, the Company’s business, financial condition
and results of operations may be influenced by the political, economic and legal environment in China, and by the general state
of China’s economy. The Company’s operations in China are subject to specific considerations and significant risks
not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation, and depreciated on a straight-line basis over the estimated
useful lives of the assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its
existing use. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income/loss in the year of disposition. Estimated
useful lives are as follows:
|
|
Estimated
useful life
|
Office equipment and furniture
|
|
3 - 5 Years
|
Leasehold improvement
|
|
The lesser of remaining lease term or 2 - 3 Years
|
Software
|
|
1 - 3 Years
|
Goodwill
Goodwill represents the excess of the purchase
consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from the
acquired entity as a result of the Company’s acquisitions of interests in its subsidiaries. Goodwill is not depreciated or
amortized but is tested for impairment at the reporting unit level on an annual basis, and between annual tests when an event or
circumstances change occurs that indicate the asset might be impaired. Under ASC 350-20-35, the Company has the option to choose
whether it will apply the qualitative assessment first and then the quantitative assessment, if necessary, or to apply the quantitative
assessment directly. The Company chooses to directly apply the quantitative impairment test, which consists of a two-step quantitative
impairment test. The first step is comparing the carrying amount of the reporting unit to the fair value of the reporting unit.
If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired, and the Company
is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting
unit, then the Company must perform the second step of the two-step quantitative goodwill impairment test to measure the amount
of impairment loss by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each
reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining
appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the
determination of fair value for each reporting unit. The acquired entity as a whole is determined to be one reporting unit for
goodwill impairment testing. The Company directly applied the quantitative assessment and performed the goodwill impairment test
by quantitatively comparing the fair values of the reporting unit to its carrying amounts. The
Company recognized $127,717 impairment loss on goodwill, which is recorded as a part of the “other expenses”
in the consolidated statement of operations and comprehensive loss.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Impairment of Long-lived Assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment
is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any
impairment charge for the years ended December 31, 2019 and 2018.
Long-term
Investments
The Company’s
long-term investments primarily consist of equity investment accounted for using the measurement alternative as of December 31,
2019. It also had an equity investment accounted for using the equity method prior to the business combination described in NOTE
9.
Equity
Investment Using Measurement Alternative. The Company uses the measurement alternative for those investments over
which the company does not have significant influence, and without readily determinable fair value and do not qualify for the net
asset value practical expedient. The Company records these investments at cost, less impairment, and plus or minus subsequent adjustments
for observable price changes. Under this measurement alternative, changes in the carrying value of the equity investments are required
to be made whenever there are observable price changes in orderly transactions for the identical or similar investment of the same
issuer.
The Company periodically
reviews its equity investment for impairment. At each reporting date, an entity that uses the measurement alternative to measure
an equity investment without a readily determinable fair value is required to make a qualitative assessment of whether the investment
is impaired. The Company regularly evaluates the impairment of these investments based on performance and financial position of
the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s
cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment
loss recognized equal to the excess of the investment cost over its fair value at the end of each reporting period for which the
assessment is made. The fair value would then become the new cost basis of investment.
Equity Method
Investment. The Company uses the equity method of accounting for its investment in, and earning or loss of, company that
it does not control but over which it does exert significant influence.
In the event the
Company incurs losses in excess of the carrying amount of an equity investment and reduces the Company’s investment balance
to zero, the Company would not record additional losses unless (i) the Company guaranteed obligations of the investee, (ii) the
Company is otherwise committed to provide further financial support for the investee, or (iii) it is anticipated that the investee’s
return to profitability is imminent. If the Company provided a commitment to fund losses, it would continue to record losses resulting
in a negative equity method investment, which is presented as a liability.
The Company periodically
reviews its equity investment for impairment. Under the equity method of accounting, an impairment loss would be recorded whenever
the fair value of an equity investment is determined to be below its carrying amount and the reduction is considered to be other
than temporary. In judging “other than temporary,” the Company considers the length of time and extent to which the
fair value of the investment has been less than the carrying amount of the equity investment, the near-term and long-term operating
and financial prospects of the entity and the Company’s longer-term intent of retaining its investment in the entity. The
Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse
events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to
be other than temporary (based on various factors, including historical financial results and the overall health of the investee),
then a write-down would be recorded to estimated fair value.
See NOTE 8
for discussion of long-term investments.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Value Added Tax
Gujia is subject to a value added tax (“VAT”)
of 3% for performing professional services. The amount of VAT liability is determined by applying the applicable tax rate to the
invoiced amount of professional services provided. The Company reports revenue net of PRC’s value added tax for all the periods
presented in the consolidated statements of operations.
Revenue Recognition
The Company has adopted Accounting
Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective
January 1, 2018. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an
amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue
recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the
contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the
entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that
the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. The
Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Market data services and investor relation
management services revenue
The Company generate these revenues by
providing services under written service contracts with its customers. Revenue related to its service offered is recognized over
time as the services are performed when the performance obligation is satisfied.
Commissions
The Company generated revenue from commissions
through customers’ transactions in stocks by providing brokerage service for its customers. Commission revenue is recognized
at a point in time on the trade date when the performance obligation is satisfied.
The following tables disaggregate the Company’s
revenue by revenue type:
|
|
For the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Market data services
|
|
$
|
26,882
|
|
|
$
|
75,044
|
|
Investor relations management services
|
|
|
-
|
|
|
|
86,788
|
|
Commissions
|
|
|
-
|
|
|
|
33,680
|
|
Other revenue
|
|
|
-
|
|
|
|
5,285
|
|
Total revenues
|
|
$
|
26,882
|
|
|
$
|
200,797
|
|
Deferred revenue represents income collected but not earned
as of the reporting date. As of December 31, 2019, deferred revenue totaled $63,246. As of December 31, 2018 deferred revenue was
$79,182, of which $69,899 was recognized as revenue in the year ended December 31, 2019.
Cost of Revenue
Cost of
revenue consists primarily of internal labor cost and related benefits, and other overhead costs that are directly attributable
to service provided.
Research and Development
Expenditures
for research and product development costs are expensed as incurred.
For the years
ended December 31, 2019 and 2018, research and development expenses were $737,329 and $828,367, respectively.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Selling and
Marketing Costs
All
costs related to selling and marketing are expensed as incurred. For the year ended December 31, 2019 and 2018, selling and marketing
costs were $389,750 and $171,016, respectively.
Government
Subsidy
The Company’s PRC based subsidiary received government
subsidies according to related policy from local government. Government subsidies are recognized when received and all the conditions
specified in the grant have been met. For the year ended December 31, 2019, the Company recognized government subsidy of RMB5,000,000
(approximately $725,000) for completing its initial public offering on the NASDAQ Capital
Market upon receipt.
Operating Leases
On January 1,
2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), as amended, which supersedes the lease accounting guidance under
Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use
assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising
from leasing arrangements.
The Company elected
to apply practical expedients permitted under the transition method that allow the Company to use the beginning of the period of
adoption as the date of initial application, to not recognize lease assets and lease liabilities for leases with a term of twelve
months or less, to not separate non-lease components from lease components, and to not reassess lease classification, treatment
of initial direct costs, or whether an existing or expired contract contains a lease. The Company used modified retrospective method
and did not adjust the prior comparative periods. Under the new lease standard, the Company determines if an arrangement is or
contains a lease at inception. Right-of-use assets and liabilities are recognized at lease commencement date based on the present
value of remaining lease payments over the lease terms. The Company considers only payments that are fixed and determinable at
the time of lease commencement. See NOTE 15 for discussion of Operating Leases.
Segment Information
ASC 280 “Segment reporting” establishes standards
for reporting information on operating segments in interim and annual financial statements. Operating segments are defined as the
components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision makers direct the
allocation of resources to operating segments based on the profitability, cash flows, and growth opportunities of each respective
segment.
The Company currently has two operating segments, Gujia and
MM Global. See NOTE 17 for details.
Income Taxes
The
Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under
this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected
to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes
of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not
the position will be sustained upon examination by the tax authorities. As of December 31, 2019 and 2018, the Company had no significant
uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject
to examination are the years ended December 31, 2019, 2018 and 2017. The Company recognizes interest and penalties related to significant
uncertain income tax positions in other expense. No such interest and penalties incurred for the years ended December 31, 2019
and 2018.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of the parent company, MMTEC, and MM Future,
MM Fund, MM Capital, MM SPC, MM BD Trading, MM Global Capital and MM Global is the U.S. dollar and the functional currency of Gujia
is the Chinese Renminbi (“RMB”). For the subsidiary whose functional currency is the RMB, result of operations and
cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and
liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on
the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into
U.S. dollars are included in determining comprehensive income/loss.
Transactions denominated
in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets
and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing
at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred. All
of the Company’s revenue and expense transactions are transacted in the functional currency of the operating subsidiaries.
The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are
not expected to have, a material effect on the results of operations of the Company.
The
consolidated balance sheet amounts, with the exception of equity, at December 31, 2019 and 2018 were translated at RMB 6.9762
to $1.00 and at RMB 6.8632 to $1.00, respectively. Equity accounts were stated at their historical rates. The average translation
rates applied to consolidated statements of operations and cash flows for the years ended December 31, 2019 and 2018 were RMB 6.8985
and RMB 6.6174 to $1.00, respectively.
Comprehensive
Loss
Comprehensive
loss is comprised of net loss and all changes to the statements of shareholders’ equity, except those due to investments
by shareholders, changes in paid-in capital and distributions to shareholders. For the Company, comprehensive loss for the years
ended December 31, 2019 and 2018 consisted of net loss and unrealized loss from foreign currency translation adjustment.
Business Combinations
The Company accounts
for its business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations.
The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities
incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition
are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values
as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total costs
of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest
in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost
of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly
in the consolidated statements of operations and comprehensive loss. During the measurement period, which can be up to one year
from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded on the consolidated statements of operations
and comprehensive loss.
In a business
combination achieved in stages, the Company remeasures the previously held equity interests in the acquiree when obtaining control
at its acquisition date fair value and the remeasurement gain or loss, if any, is recognized on the consolidated statements of
operations and comprehensive loss.
See NOTE 9
for details on business combination.
Per Share Data
ASC
Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”)
with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Basic
net loss per common share are computed by dividing net loss available to common shareholders by the weighted average number
of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss by
the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding
during each period. Common stock equivalents are not included in the calculation of diluted loss per common share if their effect
would be anti-dilutive. The following table presents a reconciliation of basic and diluted net loss per common share:
|
|
Year Ended
December
31,
2019
|
|
|
Year Ended
December
31,
2018
|
|
Net loss for basic and diluted net loss per share of common stock
|
|
$
|
(2,243,234
|
)
|
|
$
|
(2,349,002
|
)
|
Weighted average common stock outstanding – basic and diluted
|
|
|
20,013,288
|
|
|
|
39,600,000
|
|
Net loss per common share - basic and diluted
|
|
|
(0.11
|
)
|
|
|
(0.06
|
)
|
The
Company did not have any common stock equivalents and potentially dilutive common stock outstanding during the years ended
December 31, 2019 and 2018.
Related Parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries,
control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the
Company, its management, members of the immediate families of principal owners of the Company and its management and other parties
with which the Company may deal with if one party controls or can significantly influence the management or operating policies
of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
The Company discloses all significant related party transactions in NOTE 11.
Fiscal Year End
The Company has
adopted a fiscal year end of December 31st.
Recent Accounting
Pronouncements
January 2017,
the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update
simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step
2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. A public entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt
the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. The Company does not expect the adoption to have a material impact on its consolidated financial statements.
In August 2018,
the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under
the guidance, public companies will be required to disclose the range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December
15, 2019 and for interim periods within those fiscal years. The Company does not expect the adoption to have a material impact
on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016–02, Leases (Topic 842). The guidance supersedes existing guidance on accounting
for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right–of–
use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities.
For public companies, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Early application of the guidance is permitted. In July 2018, ASU 2016-02 was updated with ASU No. 2018-11,
Targeted Improvements to ASC 842, which provides entities with relief from the costs of implementing certain aspects of the new
leasing standard. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods
presented when transitioning to ASC 842 and (2) lessors may elect not to separate lease and non-lease components when certain conditions
are met. Before ASU 2018-11 was issued, transition to the new lease standard required application of the new guidance at the beginning
of the earliest comparative period presented in the financial statements.
The
Company adopted Topic 842 on January 1, 2019 using the modified retrospective transition
approach allowed under ASU 2018-11, without adjusting the comparative periods presented. The Company elected
the practical expedients under ASU 2016-02 which includes the use of hindsight in determining the lease term and the practical
expedient package to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification
of any expired or existing leases, and to not reassess initial direct costs for any existing leases. Upon adoption of Topic 842,
the Company recognized both a right-of-use assets and corresponding lease liabilities
on the consolidated balance sheet as described in NOTE 15. The adoption
did not have a material impact on the Company’s consolidated statements of operations
or consolidated statements of cash flows upon adoption. The adoption of Topic 842 also did not result in a cumulative-effect adjustment
to retained earnings.
NOTE 4 – LOAN TO EMPLOYEE
Pursuant to the loan agreement dated
June 15, 2019, the Company has agreed to loan RMB1,200,000 (approximately $172,000) to Yong Zhang, an employee of the company.
The loan is unsecured, non-interest bearing, and due within one year.
NOTE 5 – LOAN RECEIVABLE
Pursuant to the loan agreement dated
August 10, 2019, the Company has agreed to loan RMB548,500 (approximately $79,000) to Zhengtong Huazhi (Beijing) Technology Co.,
Ltd (“Zhengtong Huazhi”). Term of the loan is from August 10, 2019 to August 11, 2020, and interest rate is 4.35% per
annum. Zhengtong Huazhi is a wholly-owned subsidiary of Xtransfer Tech Limited (“Xtransfer”), a Hong Kong corporation.
Pursuant to the investment agreement dated as of January 1, 2020, the Company has agreed to invest RMB5.7 million (approximately
$817,000) to acquired 35% of Xtransfer. See NOTE 18 for details.
NOTE 6 – PREPAID EXPENSES
AND OTHER CURRENT ASSETS
At December 31, 2019 and 2018, prepaid
expenses and other current assets consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Prepaid professional service fees
|
|
$
|
329,694
|
|
|
$
|
66,421
|
|
Other receivables
|
|
|
29,147
|
|
|
|
-
|
|
Other
|
|
|
33,170
|
|
|
|
18,009
|
|
|
|
$
|
392,011
|
|
|
$
|
84,430
|
|
NOTE 7 – PROPERTY
AND EQUIPMENT
At December 31,
2019 and 2018, property and equipment consisted of the following:
|
|
Useful life
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Office equipment and furniture
|
|
3 - 5 Years
|
|
$
|
115,093
|
|
|
$
|
73,325
|
|
Leasehold improvement
|
|
The lesser of remaining lease term or 2 - 3 Years
|
|
|
87,275
|
|
|
|
4,855
|
|
Software
|
|
1 - 3 Years
|
|
|
11,898
|
|
|
|
12,093
|
|
|
|
|
|
|
214,266
|
|
|
|
90,273
|
|
Less: accumulated depreciation
|
|
|
|
|
(82,250
|
)
|
|
|
(57,845
|
)
|
|
|
|
|
$
|
132,016
|
|
|
$
|
32,428
|
|
For
the years ended December 31, 2019 and 2018, depreciation expense amounted to $25,839 and $27,311, respectively, of which,
$0 and $604 was included in cost of revenue, and $25,839 and $26,707 was included in operating expenses,
respectively.
NOTE 8 –
LONG-TERM INVESTMENTS
The
Company’s long-term investments primarily consist of equity investment accounted for using the measurement alternative as
of December 31, 2019. It also had an equity investment accounted for using the equity method prior to the business combination
described in NOTE 9.
Equity Investment Using Measurement
Alternative
On July 1, 2019,
the Company invested RMB1,000,000 (approximately $143,000) to acquire a 4.9% interest in Caishang Education Technology (Beijing)
Co., Ltd (“Caishang”). Since the Company does not exercise significant influence over Caishang and Caishang does not
have readily determinable fair value as a privately held Company, the investment was accounted for using measurement alternative,
in which the Company record the investment at cost, less impairment, and plus or minus subsequent adjustments for observable price
changes.
The Company reviews its investment
for impairment based on performance and financial position of the investee as well as other evidence of market value. Such evaluation
includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial
performance, cash flow forecasts and financing needs. The Company did not record any impairment loss associated with its investment
in Caishang for the year ended December 31, 2019, and the investment was not adjusted for any observable price changes during the
year ended December 31, 2019.
Equity Method Investment
On March 28, 2018,
the Company acquired a 24.9% interest in MMBD Trading by cash payment of $12,450. The remaining 75.1% of MMBD Trading was owned
by 32.7% shareholders of the Company. The Company agreed to purchase from the shareholders the remaining 75.1% of outstanding securities
of MMBD Trading on April 25, 2019, and the acquisition was closed on October 18, 2019 (See NOTE 9). The investment
was accounted for under the equity method prior to the acquisition. Equity method investment is recorded at original cost and adjusted
periodically to recognize: (i) the Company’s proportionate share of investee’ net income or losses after the date of
the investment; (ii) additional contributions made or distributions received; and (iii) impairment losses relating to the investment.
As of December 31, 2018, the Company’s proportionate share of the losses of MMBD Trading exceeds its investment in MMBD Trading
by $19,426. This amount is recorded as “Investee loss in excess of investment controlled by major shareholders” on
the accompanying consolidated balance sheets at December 31, 2018. During the period from January 1, 2019 through October 18,2019,
the Company has paid in cash of $87,762 in equity method investment, and recognized a loss on equity method investment in an amount
of $49,413. On October 18, 2019, the Company remeasured the investment at its share of MMBD Trading’s fair value and recognized
a remeasurement gain of $42,415, which is recorded as part of the “other expenses” in the Company’s consolidated
statement of operations and comprehensive loss. As of December 31, 2019, the equity method investment in MMBD Trading was $nil.
NOTE 9 – BUSINESS COMBINATION
Pursuant to the Securities Purchase
Agreement dated April 25, 2019, the Company agreed to purchase from Xiangdong Wen and Zhen Fan the remaining 75.1% of outstanding
securities of MMBD Trading Ltd. Prior to the consummation of this acquisition, (i) the Company held 24.9% of outstanding securities
of MMBD Trading, and (ii) each Xiangdong Wen (the Chairman of the Company’s Board, a 16.3% shareholder of the Company) and
Zhen Fan (the Company’s chief executive officer, a 16.3% shareholder of the company) beneficially owned 37.55% of outstanding
securities of MMBD. The Company has agreed to pay the aggregate purchase price of $185,000 for such securities to be equally divided
between the two shareholders of MMBD Trading, also see NOTE 11. The acquisition closed on October 18, 2019. Following and
as a result of this acquisition, MMBD has become a wholly-owned subsidiary of the Company.
The Company remeasured the previously
held equity interests in MMBD Trading at its acquisition date fair value of $61,338, and recognized a remeasurement gain of $42,415,
which is recorded as part of the “other expenses” in the Company’s consolidated statement of operations and comprehensive
loss. The Company’s previously recorded “Investee losses in excess of investment controlled by major shareholders”
was derecognized from the Company’s consolidated balance sheet. The financial results of MMBD Trading have been included
in the Company’s consolidated financial statements from October 18, 2019.
NOTE 9 – BUSINESS
COMBINATION (continued)
The following table summarizes the
fair value of the assets acquired and liabilities assumed as of the date of acquisition and total purchase price:
|
|
Amount
|
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
75,506
|
|
Accounts receivable
|
|
|
75,629
|
|
Prepaid expenses and other current assets
|
|
|
770
|
|
Security deposit, current
|
|
|
72,214
|
|
Accounts payable
|
|
|
(104,821
|
)
|
Other payables
|
|
|
(677
|
)
|
Net assets acquired
|
|
$
|
118,621
|
|
|
|
|
|
|
Cash paid for acquisition
|
|
|
185,000
|
|
Fair value of existing equity interest in MMBD Trading
|
|
|
61,338
|
|
Total purchase price
|
|
$
|
246,338
|
|
|
|
|
|
|
Goodwill
|
|
$
|
127,717
|
|
Goodwill
represents the excess of the purchase consideration over the fair value of the identifiable assets acquired and liabilities assumed
from the acquired entity as a result of the Company’s acquisitions of interests in its subsidiaries. The Company recognized
$127,717 impairment loss on goodwill, which is recorded as part of the “other expenses” in the Company’s
consolidated statement of operations and comprehensive loss.
NOTE 10 – ACCRUED LIABILITIES
AND OTHER PAYABLES
At December 31, 2019 and 2018, accrued
liabilities and other payables consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accrued professional service fees
|
|
$
|
219,574
|
|
|
$
|
282,928
|
|
Other
|
|
|
2,578
|
|
|
|
568
|
|
|
|
$
|
222,152
|
|
|
$
|
283,496
|
|
NOTE 11 – RELATED
PARTY TRANSACTIONS
Due to Related Parties
At December 31, 2019 and 2018, the
due to related parties amount consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Advances from Xiangdong Wen (1)
|
|
$
|
4,320
|
|
|
$
|
150,338
|
|
Advances from Zhen Fan (2)
|
|
|
1,710
|
|
|
|
53,297
|
|
Repurchase of common stock on credit from shareholders (3)
|
|
|
-
|
|
|
|
36,000
|
|
|
|
$
|
6,030
|
|
|
$
|
239,635
|
|
|
(1)
|
Xiangdong Wen is the chairman and 16.3% shareholder
of the Company.
|
|
(2)
|
Zhen Fan is the chief executive officer and 16.3%
shareholder of the Company.
|
|
(3)
|
On August 7, 2018, the Company repurchased 36,000,000
shares of its common stock from 14 shareholders through a privately negotiated transaction at an aggregate price of $36,000. The
treasury stock purchase amount was paid in full in January 2019.
|
NOTE 11 – RELATED
PARTY TRANSACTIONS (continued)
From time to time, Xiangdong Wen, Zhen Fan and Hinman Au provided
advances to the Company or made payment on behalf of the Company to supplement its working capital needs. Hinman Au is a director,
member of board and 1.8% shareholder of the Company. Those advances are short-term in nature, non-interest bearing, unsecured and
payable on demand.
Acquisition of MMBD Trading
During the year ended December 31, 2019, the Company acquire
75.1% of equity interests in MMBD Trading from Xiangdong Wen and Zhen Fan by cash payment of $185,000. See NOTE 9 for details.
Shareholders’
Contribution
During the year
ended December 31, 2019 and 2018, the Company’s shareholders contributed $nil and $5,448, respectively, to the Company for
working capital needs. See NOTE 13 for details.
NOTE 12 – INCOME
TAXES
British Virgin
Islands (“BVI”)
Under the current
laws of BVI, MMTEC and MMBD Trading is not subject to tax on income or capital gain. In addition, payments of dividends by the
Company to their shareholders are not subject to withholding tax in the BVI.
Hong Kong
The Company’s
subsidiary, MM Future, is incorporated in Hong Kong and has no operating profit or tax liabilities during the years ended December
31, 2019 and 2018. MM Future is subject to tax at 16.5% on the assessable profits arising in or derived from Hong Kong.
Cayman Islands
There is no income
tax for companies domiciled in the Cayman Islands. Accordingly, MM Fund, MM Capital and MM SPC do not present any income tax provisions
related to Cayman Islands tax jurisdiction, where these three companies are domiciled.
United States
MM Global was
incorporated in the State of Illinois and operates as a securities broker/dealer in New York City. MM Global subject to Federal,
State, and Local income taxes on its net income. MM Global, however, had a loss for the year ending December 31, 2019 and, as a
result, no provision for income tax has been made. MM Global has determined that there are no material uncertain tax positions
that require recognition or disclosure in its financial statements.
MM Global’s
income tax returns are subject to examination by the appropriate tax jurisdictions. As of December 31, 2019, MM Global’s
federal and state tax returns generally remain open for the last three years.
PRC
Gujia was incorporated
in the PRC and are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant
PRC income tax laws. On March 16, 2007, the National People’s Congress enacted a new enterprise income tax law, which took
effect on January 1, 2008. The law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic
enterprises. In the years ended December 31, 2019 and 2018, Gujia were recognized as small low-profit enterprises and received
a preferential income tax rate of 10%. In the years ended December 31, 2019 and 2018, Gujia and did not generate any taxable income.
Therefore, there was no provision for income taxes in the years ended December 31, 2019 and 2018.
NOTE 12 – INCOME
TAXES (continued)
The
reconciliations of the statutory income tax rate and the Company’s effective income tax rate are as follows:
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
31-Dec-19
|
|
|
31-Dec-18
|
|
Hong Kong statutory income tax rate
|
|
|
16.5
|
%
|
|
|
16.5
|
%
|
Valuation allowance recognized with respect to the loss in the Hong Kong company
|
|
|
(16.5
|
)%
|
|
|
(16.5
|
)%
|
PRC statutory income tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of income tax exemptions and reliefs
|
|
|
(15.0
|
)%
|
|
|
(15.0
|
)%
|
Valuation allowance recognized with respect to the loss in the PRC companies
|
|
|
(10.0
|
)%
|
|
|
(10.0
|
)%
|
US corporate tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Valuation allowance recognized with respect to the loss in the US companies
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Total
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
As of December 31, 2019 and 2018, the components
of the Company’s deferred income tax assets were set forth below:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Net operating losses carry forwards
|
|
$
|
6,034,026
|
|
|
$
|
3,686,219
|
|
Gross deferred tax assets
|
|
|
526,519
|
|
|
|
389,316
|
|
Less: valuation allowance
|
|
|
(526,519
|
)
|
|
|
(389,316
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December
31, 2019, the Company has a net operating loss carry forward for tax purposes of $6,034,026 available to offset future taxable
income through 2024.
The Company provided
a valuation allowance equal to the deferred income tax asset for the years ended December 31, 2019 and 2018. The management believes
that the Company’s cumulative losses arising from recurring business of subsidiaries constituted significant strong evidence
that most of the deferred tax assets would not be realizable and this evidence outweighed the expectations that the Company would
generate future taxable income. As such, deferred tax assets arise from net operating losses are fully allowed for the years ended
December 31, 2019 and 2018. The increase in the allowance was $137,203 and $210,998 for the years ended December 31, 2019 and 2018,
respectively.
As
of December 31, 2019 and 2018, the Company had no significant uncertain tax positions that qualify for either recognition
or disclosure in the financial statements. Tax years that remain subject to examination are the years ended December 31, 2019,
2018 and 2017.
Accounting for Uncertainty in Income
Taxes
The tax authority
of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those
enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject
to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s PRC
entities’ tax filings, which may lead to additional tax liabilities.
ASC 740 requires
recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management
evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was necessary as of
December 31, 2019 and 2018.
NOTE 13 – SHAREHOLDERS’
EQUITY
On
January 7, 2019, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “MTC”.
The Company offered 1,800,000 common shares at $4 per share. Net proceeds raised by the Company from the initial public offering
amounted to $6,478,801 after deducting underwriting discounts and commissions and other offering expenses. Out of the $6.5 million
net proceeds, $500,000 was deposited into an escrow account to satisfy the initial $500,000 in potential indemnification obligations
arising during an escrow period of two years following the closing date of January 7, 2019. On January 7, 2019, the Company sold
additional 270,000 common shares at $4 per share. Net proceeds raised by the Company amounted to $993,600 after deducting underwriting
discounts. As a result, the Company raised a total of $7,472,401 from the issuance of 2,070,000 shares of common stock in January
2019.
On January 4,
2018, MMTEC, Inc. was incorporated in the British Virgin Islands. On the same day, the Company issued 20,000 common shares at $0.001
per share to its two directors/incorporators with cash proceeds of $20. On March 23, 2018, the Company issued 8,980,000 common
shares at $0.18 per share to eight individuals and four companies for total cash proceeds of $1,616,400. On May 23, 2018, the Company
issued 45,000,000 common shares at $0.001 per share to the same 12 shareholders for total cash proceeds of $45,000. On August 7,
2018, the Company repurchased 36,000,000 common shares from the foregoing 14 shareholders through a privately negotiated transaction
at an aggregate price of $36,000. The treasury stock purchase amount was paid to the shareholders in full in January 2019.
Shares Authorized
The Company is
authorized to issue 500,000,000 shares of stock with a par value of $0.001 per share.
There are 54,000,000
shares of common stock issued and 20,700,000 shares of common stock outstanding as of December 31, 2019.
There are 54,000,000
shares of common stock issued and 18,000,000 shares of common stock outstanding as of December 31, 2018.
Treasury Stock
The Company records
treasury stock using the cost method. On August 7, 2018, the Company repurchased 36,000,000 shares of its common stock from 14
shareholders through a privately negotiated transaction at an aggregate price of $36,000.
Shareholders’
Contribution
During the year
ended December 31, 2019, there was no Company’s shareholders contribution to the Company for working capital needs.
During the year
ended December 31, 2018, Zhen Fan, who is the chief executive officer and 16.3% shareholder of the Company, and Hinman Au, who
is a director, member of board and 1.8% shareholder of the Company, made contributions with the amount of $3,834 and $1,614, respectively,
to the Company for working capital needs and the Company recorded an increase in additional paid-in capital.
NOTE 14 - STATUTORY
RESERVE
Gujia operate
in the PRC, are required to reserve 10% of their net profit after income tax, as determined in accordance with the PRC accounting
rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting
standards for business enterprises for each year. The profit arrived at must be set off against any accumulated losses sustained
by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must
be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50%
of the registered capital. This statutory reserve is not distributable in the form of cash dividends.
Gujia had sustained
losses since establishment. As of December 31, 2019 and 2018, no appropriation to statutory reserves was required as it incurred
recurring net losses.
NOTE 15 – COMMITMENTS
AND CONTINCENGIES
Operating Leases
The Company entered
into various operating lease agreements for office space. As a result of the adoption Topic 842, the Company recognized RMB2,057,797
(approximately $295,000) of right-of-use assets and corresponding short-term leasing liabilities recorded in “Lease
liabilities, current” and long-term leasing liabilities recorded in “Lease Liabilities, noncurrent” in total
of RMB 1,356,772 (approximately $194,000) on the consolidated balance sheet as of January 1, 2019. The adoption had no material
impact on the company’s consolidated statements of operations and comprehensive loss for the year ended December 31,
2019 or the opening balances of retained earnings as of January 1, 2019.
NOTE 15 – COMMITMENTS
AND CONTINCENGIES (continued)
The company leases
office space under non-cancelable operating lease agreements, which expire at various dates through 2022. As of December 31,
2019, the Company’s operating leases had a weighted average remaining lease term of 2.76 years and a
weighted average discount rate of 4.85%. Future lease payments under operating leases as of December 31, 2019 were
as follows:
|
|
December 31,
2019
|
|
2020
|
|
$
|
379,638
|
|
2021
|
|
|
374,550
|
|
2022
|
|
|
301,183
|
|
Total future lease payments
|
|
|
1,055,371
|
|
Less imputed interest
|
|
|
(67,707
|
)
|
Total lease liabilities
|
|
|
987,664
|
|
Less: current portion
|
|
|
(339,330
|
)
|
Operating lease liability, non-current
|
|
$
|
648,334
|
|
Lease expense is recognized on a straight-line basis over the
lease term. For the year ended December 31, 2019, the Company had operating lease costs of $358,965. Cash paid for amounts included
in the measurement of operating lease liabilities was $246,178, and operating lease right-of-use assets obtained in exchange for
new operating lease liabilities was $1,001,193 during the year ended December 31, 2019. Total rent expense for the year ended December
31, 2018 was $272,926.
NOTE 16 - CONCENTRATIONS
Concentrations
of Credit Risk
At December 31,
2019 and 2018, cash and cash equivalent balances in the PRC are $875,987 and $84,306, respectively, are uninsured. The Company
has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.
Customer
The following table sets forth information
as to each customer that accounted for 10% or more of the Company’s revenue for the years ended December 31, 2019 and 2018.
Customer
|
|
Year Ended
December
31,
2019
|
|
|
Year Ended
December
31,
2018
|
|
A
|
|
|
28.0
|
%
|
|
|
-
|
|
B
|
|
|
15.2
|
%
|
|
|
-
|
|
C
|
|
|
33.6
|
%
|
|
|
100.0
|
%
|
NOTE 17 –
SEGMENT INFORMATION
The Company currently has two operating
segments, (i) Gujia provides market data services and investor relations management services to customers in China, and (ii) MM
Global operates as an introducing broker that clears all transactions through a clearing broker dealer and earns commission income
and other related income from customers in the U.S. Corporate and unallocated amounts that do not relate to an operating segment
have been allocated to “Unallocated.”
The
following tables present summary information by segment:
|
|
Gujia
|
|
|
MM Global
|
|
|
Unallocated
|
|
|
Total
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
161,832
|
|
|
$
|
38,965
|
|
|
$
|
-
|
|
|
$
|
200,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
$
|
70,942
|
|
|
$
|
38,965
|
|
|
$
|
-
|
|
|
$
|
109,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,135,238
|
)
|
|
$
|
(36,418
|
)
|
|
$
|
(1,071,578
|
)
|
|
$
|
(2,243,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
$
|
25,839
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,839
|
|
CAPITAL EXPENDITURE
|
|
$
|
129,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
129,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
26,882
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
$
|
10,574
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,584,950
|
)
|
|
$
|
-
|
|
|
$
|
(764,052
|
)
|
|
$
|
(2,349,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
$
|
27,311
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,311
|
|
CAPITAL EXPENDITURE
|
|
$
|
23,863
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,652,162
|
|
|
$
|
153,581
|
|
|
$
|
3,402,802
|
|
|
$
|
6,208,545
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
303,569
|
|
|
$
|
-
|
|
|
$
|
59,319
|
|
|
$
|
362,888
|
|
NOTE 18 –
SUBSEQUENT EVENTS
The following
subsequent events were evaluated on May 22, 2022, the date the financial statements were issued.
Except as set
forth below, there were no events that occurred subsequent to December 31, 2019 that require adjustment to or disclosure in the
consolidated financial statements.
Pursuant to the
investment agreement dated as of January 1, 2020, the Company has agreed to invest RMB 5.7 million (approximately $817,000) to
acquired 35% of Xtransfer Tech Limited (“Xtransfer”), a Hong Kong corporation. Xtransfer acquired a wholly owned subsidiary,
Zhengtong Huazhi (Beijing) Technology Co., Ltd (“Zhengtong Huazhi”) on September 27, 2019. Zhengtong Huazhi was incorporated
in People’s Republic of China (“PRC”) on September 27, 2019. Zhengtong Huazhi assists PRC-based financial institutions,
financial planner and high net worth families taking part in the overseas financial investment by providing them with
information platform.
Pursuant to the investment agreement dated
as of March 23, 2020, the Company acquired all outstanding securities of MMBD Investment Advisory Company Limited (“MMBD
Advisory”) by cash payment of $1,000. Prior to this transaction, all outstanding securities of MMBD Advisory were owned by
Hinman Au, a director, member of board and 1.8% shareholder of the Company. MMBD Advisory was formed in January 2018 in the U.S.
and is registered as an investment advisor firm under the laws of the State of New York on May 7, 2018. The firm intends to offer
non-discretionary investment advisory services to individuals and advisory services to private fund managers.
Starting from January 2020, it was reported
that a novel strain of coronavirus, later named COVID-19, spread worldwide. The Company is still in the process of assessing the
impact. The extent to which COVID-19 impacts the business and financial results of the company will depend on future developments,
which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus
and the actions to contain the coronavirus or treat its impact, among others.
F-22