MMTEC IPO: An Online Securities Trading Platform At An Early Stage Of Development

by: Wilsonville Capital
Summary

MMTEC, Inc. offers an online securities trading platform. The company’s systems offer securities dealers trading solutions, private fund investment management software, and mobile transaction capabilities.

The company does not report revenues as of today, which means that MMTEC is at an early stage of development.

It is offering 1.8 million common shares at $4.00-$4.50 per share.

Most operating subsidiaries are in China and United States. But the company is selling shares of the owner of these subsidiaries, which is located in the British Virgin Islands. This seems a clear risk.

This is not a name for non-venture capital investors. Non-experts should pass on this one.

Capitalizing on a large market that grows at an impressive rate, MMTEC (MMTEC) could report massive revenues in the future. With that, the company seems still at an early stage of development. The fact that no relevant venture capital firm decided to invest in the company is the first caveat. Additionally, with the company incorporated in the British Virgin Islands, the protection of shareholders is not that high. With this in mind, this name should be assessed by professional venture capitalists. Non-professional investors may do good by passing on this name.

WestPark Capital, Inc., the underwriter, is not large. But it has worked on very recent small IPOs. The images below show companies that received the help of this firm:

Source: Recent Deals of WestPark

Business

Source: Prospectus

Incorporated in the British Virgin Islands on January 4, 2018, and headquartered in Beijing, China, MMTEC, Inc. offers an online securities trading platform. The company's systems offer securities dealers trading solutions, private fund investment management software, and mobile transaction capabilities.

Financial institutions in China and Hong Kong can offer MMTEC's trading software to their clients. Additionally, hedge funds and proprietary trading groups can also utilize the systems of MMTEC for fund establishment, issuance, transaction and settlement among other services.

The company's securities dealers trading system offers several capabilities, but the most interesting seem to be the risk management solution and the transaction management. The first offers dynamic risk control every 30 minutes and rapid assessment of the trading risk with only one click. The latter provides one-click booking, and a fast transaction mechanism, including multidimensional risk control. The lines below provide certain details:

Source: Prospectus

Additionally, it is also interesting that MMTEC provides an application programming interface, which should permit algorithmic traders control order flow in an automatic manner. The prospectus does not mention the programming languages in which the application is written, but the website of the company mentions that it is available in C++, Java, and Fix. The company seems to be at an early stage of development, but the fact that it has already developed such a system seems beneficial. Application programming interfaces are never developed in a short period of time.

Source: Prospectus

Source: Company's Website

One of the subsidiaries of MMTEC is headquartered in New York, in Wall Street. Its name is MM iGlobal, which was registered with the SEC and is member of the FINRA:

Source: MM iGlobal

Due diligence on MM iGlobal Inc. reveals that the company was registered with the SEC and was established many years ago, in 1997. The image below provides further details:

Source: Broker Check

This broker dealer does not seem to hold large amount of securities in custody. Those interested in getting to know more details on the trading operations of MM iGlobal Inc. should study the information provided by Whale Wisdom.

Large Market Opportunity And Growing At A High Pace

A report issued by BCG in 2016 showed that the amount of money held by Chinese residents overseas was very low. Only 4.8% of the wealth of Chinese residents is overseas. However, this figure is expected to grow in the future. BCG expects this figure to be around 9.4% by 2020. With this in mind, the new market is large, equal to 1.87 trillion. The company seems well positioned to capitalize on this market.

That's not all. According to Securities Association of China, in 2017, the total amount of assets managed by China's 131 securities companies increased by 291%. If this amount of money keeps increasing, it will benefit MMTEC. If the company can commence selling products soon, it will do it exactly when the market is growing rapidly.

Balance Sheet

With an asset/liability ratio of 4.17x, $0.237 million in cash and $0.42 million in total liabilities, the financial shape of MMTEC seems beneficial. In addition, with total current assets of $0.35 million, the amount of liquidity seems abundant. The image below shows the list of assets:

Source: Prospectus

The assessment of liabilities is also beneficial. The company does not only show a small amount of liabilities, the financial debt seems to be non-existent. The most significant liability is salary payable, which is worth $0.101 million. The image below shows the list of liabilities:

Source: Prospectus

The amount of contractual obligations seems a bit different. The company shows a total amount of obligations of $0.428 million. In addition, MMTEC will have to pay $0.235 million in less than one year. It is a bit worrying as the company does not have this amount of cash in hand. The image below provides further details:

Source: Prospectus

Income Statement

Investors should appreciate the income statement a bit less than the balance sheet. There are several reasons. First of all, the company did not report revenues in 2016 and 2017. In addition, the amount of expenses seems very high. Keep in mind that the company reported total operating expenses of $0.918 million and $0.666 million in 2017 and 2016, respectively. As a result, the net losses are large, equal to -$0.919 million and -$0.661 million in 2016 and 2017, respectively. The losses are larger than the amount of assets in 2017. It is quite worrying. The image below provides further details on this matter:

Source: Prospectus

The cash flow statement shows a picture that is even worse than the previous one. The CFO was equal to -$0.633 million and -$0.961 million in 2016 and 2017, respectively. With $0.426 million in total assets, the company is burning cash at a high pace. Much more financing will be necessary if the company keeps burning cash at this rate. The image below shows the cash flow statement:

Source: Prospectus

Use Of Proceeds: R&D Seems To Be A Priority Of MMTEC

The use of proceeds shows that the company will conduct additional research and development operations. The company will use $3.13 million for R&D and $1.86 million for sales and marketing. With this in mind, investors should understand that the company seems to still developing its products. MMTEC may need additional time to design its solutions. It is uncertain when revenues will commence to flow. The lines below provide further details:

Source: Prospectus

Expected Capitalization - The Risk Seems Very High

The company expects to have 19.8 million common shares outstanding after the IPO. At $4.25 per share, the expected market capitalization should be $84 million. Deducting cash of $6.93 million expected after the IPO, the enterprise value should be $77 million. The image below provides further details on the expected capitalization:

Source: Prospectus

The company does not mention any competitors in the prospectus, which is not ideal. In addition, large amount of comparable peers does not seem to exist since the company does not report revenues. Most dealers and brokers do report revenues.

With that, fintech trading companies in China are raising similar amount of money right now. The following is the list of companies operating in China or Hong Kong that recently raised capital to fund their research and development activities. The main issue is that they are all private companies, which does not help in assessing the valuation of MMTEC:

Source: TechinAsia

MMTEC shows a target market that is much larger than its enterprise value. It is a very beneficial feature. If the company is successful, the revenues should be large. However, the company is at an early stage. This means that the risk for investors is really high.

Additionally, it is not beneficial that the company was not able to receive capital from private funders. Why is the company going public at this stage? If it has an interesting business model, seeders should have been interested. These are questions that investors should be able to answer.

Shareholders And Jurisdiction

The assessment of shareholders reveals that not many institutional investors decided to put money on the company. Directors own 40.5% stake, and the rest is owned by a few companies that are not well known investors or are controlled by members of the management. Let's tell it this way: this is not the profile of a successful startup. The company needs to find a few large institutional investors so that retail investors follow the lead. The image below shows further details on this matter:

Source: Prospectus

The company was incorporated in the British Virgin Islands, so the jurisdiction is that of this country. This means that judges in the United States should not be able to take actions against the Board of Directors or the management. Additionally, investors should know very well that the rights of shareholders in the British Virgin Islands are very different from that of the United States. Shareholders of MMTEC are less protected as the company law in this country is not that developed. The lines below provide further details on this matter:

Source: Prospectus

Investors can check the business structure of MMTEC below. Most operating subsidiaries are in China and United States. But the company is selling shares of the owner of these subsidiaries, which is located in the British Virgin Islands. This seems a clear risk.

Source: Prospectus

Conclusion

MMTEC seems to be positioned to capitalize on a large market that is growing at a large pace. With that, the company does not report revenues as of today, which means that the MMTEC is at an early stage of development. This is a clear risk. It is also a bit disturbing that the company did not receive capital from seeders prior to the IPO. Finally, the company is incorporated outside the United States, in the British Virgin Islands. As a result, the protection of shareholders will be less significant on this name. To sum up, this is not a name for non-venture capital investors. Non-experts should pass on this one.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.