UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 20-F

 

(Mark one)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the transition period from ____________to ____________

 

Commission file number 001-38766

 

MMTEC, INC.

(Exact name of the Registrant as specified in its charter)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

 

c/o Gujia (Beijing) Technology Co., Ltd., 

AF, 16/F, Block B, Jiacheng Plaza,

18 Xiaguangli, Chaoyang District, Beijing, 100027 

People’s Republic of China

Tel: +86 10 5617 2312

(Address of principal executive offices)

 

Zhen Fan, Chief Executive Officer

c/o Gujia (Beijing) Technology Co., Ltd., 

AF, 16/F, Block B, Jiacheng Plaza,

18 Xiaguangli, Chaoyang District, Beijing, 100027 

People’s Republic of China

Tel: +86 10 5617 2312

(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:

 

Title of each class   Name of each exchange on which registered
Common Shares, par value $0.001   The NASDAQ Stock Market LLC

  

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.

 

On May 22, 2020, the issuer had 20,070,000 shares issued and outstanding.

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☐             No ☒

 

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.

 

Yes ☐             No ☒

 

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.

 

Yes ☒             No ☐

 

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).

 

Yes ☒             No ☐

 

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.

 

☐ Large Accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer

 

Emerging growth company ☒

 

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:

 

☒ US GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ Other

 

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.

 

☐ Item 17            ☐ Item 18

 

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).

 

Yes ☐             No ☒

 

 

 

 

 

 

Table of Contents

 

    Page
PART I    
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
ITEM 3. KEY INFORMATION 1
ITEM 4. INFORMATION ON THE COMPANY 25
ITEM 4A. UNRESOLVED STAFF COMMENTS 37
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECT 37
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 47
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 53
ITEM 8. FINANCIAL INFORMATION 55
ITEM 9. THE OFFER AND LISTING 55
ITEM 10. ADDITIONAL INFORMATION 56
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 64
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 64
     
PART II    
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 65
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 65
ITEM 15. CONTROLS AND PROCEDURES 65
ITEM 16. RESERVED 66
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT. 66
ITEM 16B. CODE OF ETHICS. 66
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 66
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. 67
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. 67
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT. 67
ITEM 16G. CORPORATE GOVERNANCE 67
ITEM 16H. MINE SAFETY DISCLOSURE 67
     
PART III    
     
ITEM 17. FINANCIAL STATEMENTS 68
ITEM 18. FINANCIAL STATEMENTS 68
ITEM 19. EXHIBITS 68

 

i

 

 

CERTAIN INFORMATION

 

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:

 

  MM Future Technology Ltd. (“MM Future”), a Hong Kong incorporated limited company.
     
  MM Fund Services Limited (“MM Fund”), a Cayman Islands incorporated limited company.
     
  MM Capital Management Limited (“MM Capital”), a Cayman Islands incorporated limited company.
     
  MM Fund SPC (“MM SPC”), a Cayman Islands incorporated segregated portfolio company.
     
  Gujia (Beijing) Technology Co., Ltd (“Gujia”), a PRC incorporated limited company.
     
  Meimei Zhengtong (Beijing) Technology Co., Ltd., a PRC incorporated entity (dissolved effective as of June 8, 2018).
     
  MMBD Trading Limited (“MMBD Trading”), a British Virgin Islands incorporated limited company.
     
  MM Global Securities, INC. (“MM Global”), a State of Illinois incorporated limited company.
     
  “common shares” refer to our common shares, $0.001 par value per share,

 

  “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this report  only, Macau, Taiwan and Hong Kong, and

 

  all references to “RMB,” “yuan” and “Renminbi” are to the legal currency of China, and all references to “USD,” “$”, and “U.S. dollars” are to the legal currency of the United States.

 

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

 

ii

 

 

FORWARD-LOOKING STATEMENTS

 

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.

 

RELIANCE ON RELIEF ORDER

 

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.

 

iii

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not required.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not required.

 

ITEM 3. KEY INFORMATION

 

  A. 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
 
    For the Year     For the Year     For the Year  
    Ended     Ended     Ended  
    December 31,
2019
    December 31,
2018
    December 31,
2017
 
Revenue   $ 200,797     $ 26,882     $ -  
Cost of revenue     90,890       16,308       -  
Gross profit     109,907       10,574       -  
Total operating expenses     3,050,683       2,338,114       918,600  
Loss from operations     (2,940,776 )     (2,327,540 )     (918,600 )
Other income (expense)     697,542       (21,462 )     (598 )
Loss before income taxes     (2,243,234 )     (2,349,002 )     (919,198 )
Income taxes     -       -       -  
Net loss   $ (2,243,234 )   $ (2,349,002 )   $ (919,198 )
Other comprehensive income (loss)     (30,170 )     (50,586 )     39,610  
Comprehensive loss   $ (2,273,404 )   $ (2,399,588 )   $ (879,588 )
Net loss per common share                        
Basic and diluted   $ (0.11 )   $ (0.06 )   $ (0.02 )

 

1

 

 

Selected Consolidated Balance Sheets Data
 
    As of December 31,  
    2019     2018     2017  
Cash and cash equivalents   $ 3,642,521     $ 93,625     $ 237,561  
Total current assets     4,347,710       330,460       351,278  
Total non-current assets     1,860,835       32,428       75,428  
Total assets     6,208,545       362,888       426,706  
Total current liabilities     805,499       807,173       102,271  
Total non-current liabilities     648,334       -       -  
Total liabilities     1,453,833       807,173       102,271  
Total shareholders’ (deficit) equity     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.

 

2

 

 

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)  
    Period End     Average (1)  
2017     6.5342       6.7518  
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  

 

(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

 

  B. Capitalization and Indebtedness

 

Not required.

  

  C. Reasons for the Offer and Use of Proceeds

 

Not required.

  

  D. Risk factors

 

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.

 

3

 

 

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:

 

  potential disruption of our ongoing business and product development and distraction of management,

 

  difficulty retaining and integrating personnel and integrating financial and other systems,

 

  the necessity of hiring additional management and other critical personnel and integrating them into our current operations,

 

  increasing the scope, geographic diversity and complexity of our operations,

 

  potential dependence upon, and exposure to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control,

 

  potential unfavorable reaction to our strategic alliance, acquisition or joint venture strategy by our customers,

 

  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,

 

  conflicts or disagreements between any strategic alliance or joint venture partners and us, and

 

  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.

4

 

 

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:

 

  economic and political conditions in China, the U.S., Europe and elsewhere in the world,

 

  concerns about terrorism, war and other armed hostilities,

 

  concerns over inflation and wavering institutional and consumer confidence levels,

 

  the availability of cash for investment by our dealer customers and their customers,

 

  the level and volatility of interest rates and foreign currency exchange rates,

 

  the level and volatility of trading in certain equity and commodity markets, and

 

  currency values.

  

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.

 

5

 

 

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.

 

6

 

 

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:

 

  less developed automation in exchanges, depositories and national clearing systems,

 

  additional or unexpected changes in regulatory and capital requirements,

 

  the impact of the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business,

 

  possible nationalization, expropriation and regulatory, political and price controls,

 

  difficulties in staffing and managing international operations,

 

  capital controls and other restrictive governmental actions,

 

  any failure to develop effective compliance and reporting systems, which could result in regulatory penalties in the applicable jurisdiction,

 

  fluctuations in currency exchange rates,

 

  reduced protections for intellectual property rights,

 

  adverse labor laws,

 

  outbreak of hostilities, and

 

  potentially adverse tax consequences arising from compliance with foreign laws and regulations to which our international subsidiaries are subject.

 

7

 

 

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.

 

8

 

 

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.

 

9

 

 

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:

 

  develop, license and defend intellectual property useful in our business,

 

  enhance our existing services,

 

  develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers,

 

  respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis,

 

  respond to the demand for new services, products and technologies on a cost-effective and timely basis, and

 

  adapt to technological advancements and changing standards to address the increasingly sophisticated requirements and varied needs of our prospective customers.

 

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:

 

  illiquid or volatile markets,

 

  diminished access to debt or capital markets,

 

  unforeseen cash or capital requirements, or

 

  regulatory penalties or fines, or adverse legal settlements or judgments.

 

10

 

 

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:

 

  market conditions,

 

  the general availability of credit,

 

  the volume of trading activities,

 

  the overall availability of credit to the financial services industry,

 

  our credit ratings and credit capacity, and

 

  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.

 

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.

 

11

 

 

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.

 

12

 

 

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:

 

  the growth of Internet, broadband, personal computer and mobile penetration and usage in China, and the rate of any such growth,

 

  the level of trust and confidence of Chinese consumers in online trading, as well as changes in investor demographics and investor tastes and preferences,

 

  whether alternative lending channels or business models that better address the needs of investor emerge in China, and

 

  the development of fulfilment, payment and other ancillary services associated with online purchases.

 

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.

 

13

 

 

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.

 

14

 

 

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.

 

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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.

 

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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.

 

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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. 

 

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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.

 

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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.”

 

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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. 

 

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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.

 

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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.

 

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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. 

 

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ITEM 4. INFORMATION ON THE COMPANY

 

  A. History and Development of the Company

 

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.

 

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  B. Business Overview

 

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:

 

  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.

 

  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.

 

  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:

 

  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.

 

  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.

 

  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.

 

  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.

 

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:

 

  modular website building, online account opening system.

 

  modular PC-based trading clients and mobile APP trading clients for retail customers.

 

  market data center to help them apply for exchange quotations.

 

  ETN investment management system, backstage ERP system and commission clearing and settlement system.

 

  assistance to deployment system and undertaking operation and maintenance services.

 

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:

 

  establishing private equity funds, registration, administration and management of such funds.

 

  building PTN investment management system, deployment of investment transaction, fund management, risk control, ERP and other modules.

 

  opening trading accounts, handling valuation, liquidation and investment redemptions.

 

  marketing.

 

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Corporate History and Background

 

  MMTEC, INC. –We formed MMTEC, INC., our BVI holding company on January 4, 2018.

 

  MM Future Technology Limited – Our wholly-owned Hong Kong subsidiary, was incorporated on October 31, 2017.

 

  Gujia (Beijing) Technology Co., Ltd – Our operating company in China and a wholly-owned subsidiary of MM Future Technology Limited.

 

  MM Fund Services Limited – Our wholly-owned Cayman Islands subsidiary, which was incorporated on April 20, 2018 and dormant as of December 31, 2019.
     
  MM Capital Management Limited – Our wholly-owned Cayman Islands subsidiary, was incorporated on May 28, 2018 and dormant as of December 31, 2019.
     
  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.
     
  MMBD Trading Limited – our wholly-owned subsidiary of MMTEC, acquired in October 2019.
     
  MM Global Securities, INC. – Our operating company in New York and a wholly-owned subsidiary of MMBD Trading Limited.

 

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.

 

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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:

 

  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.
     
  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.
     
  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.
     
  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.
     
  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.

 

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:

 

  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.

 

  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.

 

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.

 

  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.

 

  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.

 

  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.

 

For the private funds’ administrator service, there are two types of companies that provide the service:

 

  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.

 

  The traditional private funds fund administrator service, including Apex Fund Services, Citco Fund Services, etc.

 

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:

 

  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.

 

  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.

 

  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.

 

In addition to the above-referenced companies, we compete with the following entities for providing services to the private equity/fund industry:

 

  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.

 

  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.

 

Our Strategies

 

Our key market strategies include:

 

  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.

 

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:

 

  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,

 

  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,

 

  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

 

  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.

 

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.

 

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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.

 

  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.

 

  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.

 

  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.

 

  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.

 

Our Competitive Strengths

 

We believe that the following competitive strengths distinguish us from our competitors:

 

  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.
     
  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.

 

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.

 

  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.
     
  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.
     
  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.
     
  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.

 

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:

 

  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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  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.

 

  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.

 

  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.

 

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:

 

  In October 2015, our Shanghai Branch was founded; the Shanghai Technical Research and Development Center started operation.
     
  In December 2015, the ETN Counter Business System was launched for trial operation.
     
  In August 2016, the PTN Private Fund Investment Management System was launched for operation.
     
  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.

 

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.

 

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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   Address   Rental Term   Space
Headquarters   AF, 16/F, Block B, Jiacheng Plaza, 18 Xiaguangli, Chaoyang District,Beijing 100027   October 10, 2019 – November 30, 2022   6920.66. sq. ft.
             
Shanghai Research and Development Center   Room 2605, Bank of Shanghai Building, Pudong New Area, Shanghai 200120   September 25, 2019 – September 24, 2022   1500.81 sq. ft.
             
Beijing Marketing Center   Room 1903, Block A, Yuanyangxinganxian Building, Xiaguangli, Chaoyang District, Beijing 100027   September 9, 2018 – September 8, 2020   1674.33 sq. ft.
             
New York Center   2 Wall Street, Suite 805, New York, NY 10005   July 25, 2019 – July 24, 2020   Approximately 200 sq. ft.

  

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.

 

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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. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. 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.

 

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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.

 

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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%.

 

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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.

  

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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.

 

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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.

 

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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.

 

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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.

 

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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,

 

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  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.

 

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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.

 

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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.

 

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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.

  

  B. Compensation

 

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.

 

  C. Board Practices

 

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.

 

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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,

 

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  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.

 

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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. 

  

  D. Employees

 

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  

 

  E. Share Ownership

 

See Item 7 below.

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

  A. Major shareholders

 

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

 

** Less than 1%

 

(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.

 

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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.

 

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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.

 

  B. Significant Changes

 

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. THE OFFER AND LISTING

 

  A. Offer and Listing Details

 

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.

 

    Price Per Share of
Common Shares:
 
    High     Low  
Monthly highs and lows            
January 2020   $ 2.95     $ 1.86  
February 2020   $ 2.08     $ 1.34  
March 2020   $ 1.60     $ 0.64  
April 2020   $ 1.48     $ 0.82  
May 2020 (through May 20, 2020)   $ 1.41     $ 0.95  

 

  B. Plan of Distribution

 

Not Applicable.

 

  C. Markets

 

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.

 

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  D. Selling Shareholders

 

Not Applicable.

 

  E. Dilution

 

Not Applicable.

 

  F. Expenses of the Issue

 

Not Applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

  A. Share Capital

 

Not Applicable.

 

  B. Memorandum and Articles of Association

 

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.

 

  C. Material Contracts

 

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.

 

  D. Exchange controls

 

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.

 

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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.

   

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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.

 

  E. Taxation

 

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:

 

  an individual who is a citizen or resident of the United States,

 

  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,

 

  an estate whose income is subject to U.S. federal income taxation regardless of its source, or

 

  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:

 

  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,

 

  its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC,

 

  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

 

  more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC.

 

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%.

 

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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:

 

  banks,

 

  financial institutions,

 

  insurance companies,

 

  regulated investment companies,

 

  real estate investment trusts,

 

  broker-dealers,

 

  traders that elect to mark to market,

 

  U.S. expatriates,

 

  tax-exempt entities,

 

  persons liable for alternative minimum tax,

 

  persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction,

 

  persons that actually or constructively own 10% or more of our common shares,

 

  persons who acquired our common shares pursuant to the exercise of any employee common share option or otherwise as consideration, or

 

  persons holding our common shares through partnerships or other pass-through entities.

 

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.

 

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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:

 

  at least 75% of its gross income is passive income, or

 

  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:

 

  the excess distribution or gain will be allocated ratably over your holding period for the common shares,

 

  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

 

  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.

 

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.

 

62

 

 

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.

 

  F. Dividends and paying agents

 

Not required.

 

  G. Statement by experts

 

Not required.

 

  H. Documents on display

 

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.

 

  I. Subsidiary Information

 

Not required.

 

63

 

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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. 

 

64

 

 

PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

There has been no default of any indebtedness nor is there any arrearage in the payment of dividends.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019. Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures as of December 31, 2019 were effective.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s annual report on internal control over financial reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies and procedures may deteriorate.

  

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has concluded that our internal control over financial reporting was effective as of December 31, 2019.

 

65

 

  

All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We cannot be certain that these measures will successfully remediate the material weakness or that other material weaknesses will not be discovered in the future. If our efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline. In addition, it could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods. Because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

 

Changes in Internal Controls over Financial Reporting

 

Except as discussed above, during the year ended December 31, 2019, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our company’s internal control over financial reporting. It should be noted that while our management believes that our disclosure controls and procedures provide a reasonable level of assurance; our management does not expect that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

ITEM 16. RESERVED

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.

 

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.

 

ITEM 16B. CODE OF 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.

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

During 2019 and 2018, MaloneBailey, LLP’s fees for the annual audit of our financial statements and the periodic reviews of the financial statements were $270,000 and $246,000, respectively.

 

Audit-Related Fees

 

During 2019 and 2018, the Company did not incur audit-related services for services rendered in connection with financial due diligence of the company in connection with the company’s initial public offering.

 

66

 

 

Tax Fees

 

The company has not paid Malone Bailey, LLP for tax services in 2019 and 2018.

 

All Other Fees

 

The company has not paid Malone Bailey, LLP for any other services in 2019 and 2018.

 

Our Audit Committee evaluated and approved in advance the scope and cost of the engagement of an auditor before the auditor rendered its audit and non-audit services. 

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

 

None.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

 

On August 7, 2018, the Company repurchased 36,000,000 common shares from 14 shareholders through a privately negotiated transaction at an aggregate price of $36,000.

 

ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.

 

None.

 

ITEM 16G. CORPORATE GOVERNANCE

 

None.

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

 

67

 

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

ITEM 18. FINANCIAL STATEMENTS

 

The financial statements are filed as part of this Annual Report beginning on page F-1.

 

ITEM 19. EXHIBITS

 

Exhibit No.   Description
     
1.1   Underwriting Agreement (1)
3.1   Memorandum and Articles of Association (1).
4.1   Specimen Share Certificate (1).
10.1   Employment Agreement between the Company and CEO (1).
10.2   Employment Agreement between the Company and CFO (1).
10.3   Individual Loan Contract with Zhen Fan (1).
10.4   Individual Loan Contract with Xiangdong Wen (1).
10.5   Lease Agreement (1).
10.6   Share Repurchase Agreement (1).
12.1   Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
12.2   Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
13.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
14.1   Code of Conduct and Ethics (1).
21.1   List of Subsidiaries of the Registrant (1).
99.1   Charter of the Audit Committee (1).
99.2   Charter of the Compensation Committee (1).
99.3   Charter of the Nominating Committee (1).
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

   

(1) Previously filed as part of the registration statement filed with the SEC on October 22, 2018 and incorporated by reference herein.

 

68

 

    

SIGNATURES

 

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  MMTec, Inc.
     
May 22, 2020 By: /s/ Zhen Fan
    Name: Zhen Fan
    Title: Chief Executive Officer
(Principal Executive Officer)
       
May 22, 2020 By: /s/ Min Kong
    Name: Min Kong
    Title: Chief Financial Officer
(Principal Financial and Accounting Officer)

 

69

 

 

 

 

 

 

 

 

MMTEC, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

MMTEC, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and 2018

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Financial Statements:    
     
Consolidated Balance Sheets - As of December 31, 2019 and 2018   F-3
     
Consolidated Statements of Operations and Comprehensive Loss - For the Years Ended December 31, 2019 and 2018    F-4
     
Consolidated Statements of Changes in Shareholders’ Equity (Deficit) - For the Years Ended December 31, 2019 and 2018    F-5
     
Consolidated Statements of Cash Flows – For the Years Ended December 31, 2019 and 2018    F-6
     
Notes to Consolidated Financial Statements   F-7

 

F-1

 

  

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

 

MMTEC, INC. and subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of MMTEC, INC. and its subsidiaries (collectively, the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company’s auditor since year 2018.

Houston, Texas

May 22, 2020

 

F-2

 

 

MMTEC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 

    As of  
    December 31,
2019
    December 31,
2018
 
ASSETS            
             
CURRENT ASSETS:            
Cash and cash equivalents   $ 3,642,521     $ 93,625  
Accounts receivable, net     16,029       -  
Prepaid rent     -       101,298  
Loan to employee     172,013       -  
Loan receivable     78,624       -  
Security deposit - current     46,512       51,107  
Prepaid expenses and other current assets     392,011       84,430  
                 
Total Current Assets     4,347,710       330,460  
                 
NON-CURRENT ASSETS:                
Security deposit - noncurrent     605,588       -  
Property and equipment, net     132,016       32,428  
Operating lease right-of-use assets     979,885       -  
Long-term investment     143,346       -  
                 
Total Non-current Assets     1,860,835       32,428  
                 
Total Assets   $ 6,208,545     $ 362,888  
                 
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY                
CURRENT LIABILITIES:                
Deferred revenue   $ 63,246     $ 79,182  
Salary payable     174,741       185,434  
Accrued liabilities and other payables     222,152       283,496  
Investee losses in excess of investment controlled by major shareholders     -       19,426  
Due to Related Parties     6,030       239,635  
Operating lease liabilities - current     339,330       -  
                 
Total Current Liabilities     805,499       807,173  
                 
NON-CURRENT LIABILITIES:                
Operating lease Liabilities - noncurrent     648,334       -  
                 
Total Non-current Liabilities     648,334       -  
                 
Total Liabilities     1,453,833       807,173  
                 
Commitments and Contingencies                
                 
SHAREHOLDERS’ (DEFICIT) EQUITY:                
Common shares ($0.001 par value; 500,000,000 shares authorized; 56,070,000 shares issued and 20,700,000 shares outstanding at December 31, 2019, and 54,000,000 shares issued and 18,000,000 outstanding at December 31, 2018)     56,070       54,000  
Additional paid-in capital     11,229,339       3,759,008  
Less: treasury stock, at cost; (36,000,000 shares at December 31, 2019 and 2018)     (36,000 )     (36,000 )
Accumulated deficit     (6,375,303 )     (4,132,069 )
Accumulated other comprehensive loss     (119,394 )     (89,224 )
                 
Total Shareholders’ Equity (Deficit)     4,754,712       (444,285 )
                 
Total Liabilities and Shareholders’ Equity (Deficit)   $ 6,208,545     $ 362,888  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-3

 

  

MMTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(IN U.S. DOLLARS)

 

    For the Year Ended     For the Year Ended  
    December 31,
2019
    December 31,
2018
 
             
             
REVENUE   $ 200,797     $ 26,882  
                 
COST OF REVENUE     90,890       16,308  
                 
GROSS PROFIT     109,907       10,574  
                 
OPERATING EXPENSES:                
Selling and marketing     389,750       171,016  
General and administrative                
Payroll and related benefits     1,091,065       893,656  
Professional fees     794,221       831,821  
Other general and administrative     775,647       441,621  
                 
Total Operating Expenses     3,050,683       2,338,114  
                 
LOSS FROM OPERATIONS     (2,940,776 )     (2,327,540 )
                 
OTHER INCOME (EXPENSE):                
Interest income     37,370       483  
Interest expense     -       (12 )
Other expenses     (14,994 )     (1,022 )
Government subsidy     724,795       -  
Foreign currency transaction gain (loss)     (216 )     40,965  
Loss on equity method investment controlled by major shareholders     (49,413 )     (61,876 )
                 
Total Other income (expense)     697,542       (21,462 )
                 
LOSS BEFORE INCOME TAXES     (2,243,234 )     (2,349,002 )
                 
INCOME TAXES     -       -  
                 
NET LOSS   $ (2,243,234 )   $ (2,349,002 )
                 
COMPREHENSIVE LOSS:     (2,243,234 )     (2,349,002 )
NET LOSS                
OTHER COMPREHENSIVE LOSS                
Foreign currency translation adjustments     (30,170 )     (50,586 )
COMPREHENSIVE LOSS   $ (2,273,404 )   $ (2,399,588 )
                 
NET LOSS PER COMMON SHARE                
Basic and diluted   $ (0.11 )   $ (0.06 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:                
Basic and diluted     20,013,288       39,600,000  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

F-4

 

  

MMTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(IN U.S. DOLLARS)

  

                                        Accumulated     Total  
    Common Shares     Additional     Treasury Stock           Other     Shareholders’  
    Number of           Paid-in     Number of           Accumulated     Comprehensive     Equity  
    Shares     Amount     Capital     Shares     Amount     Deficit     Loss     (Deficit)  
                                                 
Balance, December 31, 2017     54,000,000     $ 54,000     $ 2,092,140                     $ (1,783,067 )   $ (38,638 )   $ 324,435  
                                                                 
Capital contribution from shareholders     -       -     $ 5,448       -       -       -       -     $ 5,448  
                                                                 
Cash contribution from shareholders     -       -     $ 1,661,420       -       -       -       -     $ 1,661,420  
                                                                 
Treasury stock purchase     -       -       -       (36,000,000 )   $ (36,000 )     -       -     $ (36,000 )
                                                                 
Net loss for the year     -       -       -       -       -     $ (2,349,002 )     -     $ (2,349,002 )
                                                                 
Foreign currency translation adjustment     -       -       -       -       -       -     $ (50,586 )   $ (50,586 )
                                                                 
Balance, December 31, 2018     54,000,000     $ 54,000     $ 3,759,008       (36,000,000 )   $ (36,000 )   $ (4,132,069 )   $ (89,224 )   $ (444,285 )
                                                                 
Issuance of common stock for cash     2,070,000     $ 2,070     $ 7,470,331       -       -       -       -     $ 7,472,401  
                                                                 
Net loss for the year ended December 31, 2019     -       -       -       -       -     $ (2,243,234 )     -     $ (2,243,234 )
                                                                 
Foreign currency translation adjustment     -       -       -       -       -       -     $ (30,170 )   $ (30,170 )
                                                                 
Balance, December 31, 2019     56,070,000     $ 56,070     $ 11,229,339       (36,000,000 )   $ (36,000 )   $ (6,375,303 )   $ (119,394 )   $ 4,754,712  

  

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

F-5

 

 

MMTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN U.S. DOLLARS)

 

    For the Year Ended     For the Year Ended  
    December 31,
2019
    December 31,
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (2,243,234 )   $ (2,349,002 )
Adjustments to reconcile net loss from operations to net cash used in operating activities:                
Depreciation expense     25,839       27,311  
Loss on equity method investment controlled by major shareholders     49,413       61,876  
Noncash lease expense     340,132       -  
Loss on disposal of property and equipment     2,721       -  
Noncash other expense     85,302       -  
Changes in operating assets and liabilities:                
Prepaid rent     -       (17,373 )
Operating lease liabilities     (231,485 )     -  
Accounts receivable     59,599       -  
Security deposits     (102,967 )     (14,073 )
Prepaid expenses and other current assets     (82,494 )     (62,644 )
Deferred revenue     (14,819 )     82,123  
Salary payable     12,550       91,667  
Accrued liabilities and other payables     (39,713 )     309,762  
                 
NET CASH USED IN OPERATING ACTIVITIES     (2,139,156 )     (1,870,353 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Payment in cost method investment     (144,959 )     -  
Payment for acquisition of subsidiaries, net of cash acquired     (109,494 )     -  
Purchase of property and equipment     (129,800 )     (23,863 )
Loan to third party     (79,510 )     -  
Loan to employee     (173,951 )     -  
Payment in equity method investment     (87,762 )     (42,450 )
                 
NET CASH USED IN INVESTING ACTIVITIES     (725,476 )     (66,313 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash contribution from shareholders     -       1,661,420  
Capital contribution from shareholders     -       5,448  
Advances from related parties     14,496       206,205  
Proceeds from issuance of stocks     6,851,401       -  
Repayments to related parties     (427,681 )     (24,179 )
                 
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 )
                 
CASH AND CASH EQUIVALENTS - beginning of year     93,625       237,561  
                 
CASH AND CASH EQUIVALENTS - end of year   $ 3,642,521     $ 93,625  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid for:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Repurchase of common stock on credit as due to related parties   $ -     $ 36,000  
Proceeds from issuance of stocks deposited in escrow   $ 500,000     $ -  
Expense paid by related parties on behalf of the Company   $ 179,503     $ 26,480  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-6

 

  

 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.

 

F-7

 

 

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.

 

F-8

 

 

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.

 

F-9

 

 

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.

 

F-10

 

 

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.

 

F-11

 

 

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.

 

F-12

 

 

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.

 

F-13

 

 

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.

 

F-14

 

 

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.

 

F-15

 

 

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.

 

F-16

 

 

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.

 

F-17

 

 

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.

 

F-18

 

 

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.

 

F-19

 

 

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.

 

F-20

 

 

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 %

  

F-21

 

 

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

 

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