Description

This is an Insider Lockup Expiration Short:  MMTec unlock day was yesterday, July 7^th, so look out below because 90% of the shares just became available for trading.  Short interest is listed at 1.5% of the float and 0.6 days to cover.  Temporarily, borrow is tight and quoted at 800 to 1000bps over the GC rate. 

It is a Chinese company with plans to build an electronic platform that “enables Chinese language speaking hedge funds, mutual funds, [RIAs, prop groups, & brokerage firms] to engage in securities market transactions and settlements globally.”  This includes “white label” middleware, where customers can insert their own logo and make the trading interface available to their own customer base.  They charge commissions of 1c/share and 70c for options contracts (before customer markup to ultimate clients).  Their intended target is smaller firms with $2 to $20m of AUM seeking access to US stock and options markets.  Based in Beijing, they report 33 employees.  

It is six months from their Jan 8, 2019 IPO at $4 per share, and fortunes have been made via their $373m market cap, up over four fold to $18.61 per share, from an $80m market cap at listing.  There is no debt, and there are 20.07m shares out having sold 2.07m shares in the IPO for net cash proceeds after underwriting discounts of $7.472m.

The Founders/Executive Team are a young group, making their first sizeable financial gain, and relatively light on past business experience.  The CEO is age 41, owns 16.3% of the company (a stake now valued at over $60m), and his 2018 salary was $18,000, up from $17,000 in 2017.  It’s a similar story for the Chairman (age 34 with 17.2%).  The pair had funded the company with shareholder loans outstanding of $203k and shareholder contributions of $74k during 2017 & 2018, which were presumably repaid from IPO proceeds.  2017 & 2018 Sales were $0 & $26,882.  The net loss in 2018 was $2.4m.

If you were in their shoes, think of what you would do if $60m+ just became semi-liquid.  It’s a perverse incentive, even if they know they’ll knock the stock in half or worse, back to where it was quite recently (Apr-May averaged $4.16).  Collectively the officers and directors, a group of 9 people, own 42.7%.   Other 5% owners have another 20.7% combined.  They are Length Technology; a Hong Kong based corp owned by Qingyi Luan with 11.6%, and Jishan Sun with 9.1%.  Also unlocking are another 26.6% of pre-IPO holders, who are all presumably below 5% each.

Our CEO & Chairman pair also have some related party business.  They co-own along with the company a broker dealer named MM Global Securities, Inc. (no broker code) that currently subs it’s transactions & statements out to a Los Angeles based broker dealer named Electronic Transaction Clearing Inc. (broker code ETBK).  The company owns 24.9% of the MM Global broker dealer, and the CEO and Chairman own 37.98% & 18.99% respectively. 

The $26k in revenue last year was likely non-BD, since the co is a minority and it’s on the equity method.  But they did have $79k of deferred revenue and total assets of $362k at year end 2018.  Also they noted that the Company’s proportionate share of losses in the BD exceed its investment by $19k.  The main operating entity is Gujia (Beijing) Technology Co which has paid in capital of RMB 6,752,500 (which is about US$1m). Beyond that, there’s nothing whatsoever here to justify a $373m market cap.  It’s a lot of speculation on only 2.07m shares in public hands until today, as they work on building out platforms for trading and other services.  Also indicative is an August 2018 transaction where the company bought back 36m shares from 14 stockholders for $36,000 or $0.001 per share… that’s less than a year ago.  

So far, they don’t yet have any real product or material revenues, nor a material amount of users/customers, and I expect the insiders to sell near term.  I’m not making a call on whether they can be successful over the long term, and this is simply unlock related.  Use of IPO proceeds is $3.13m for R&D, $1.86m for Sales and Marketing, and $2.48m for working capital. These funds will make a nice start, but are nowhere near what’s required to make a financial services platform worth hundreds of millions.

All the telltale signs seem to align on this one.  In addition to a young team with perverse incentives to sell, here’s a few other signs of note:

1) Their plan to attract new users has a bit of bait and switch to it, offering free services that they hope to charge for later.  It’s not illegal and many people do this with free trials, but theirs seems to hide the fact that it’s a trial.  The 20F states, “…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.”

2) The underwriter is third tier… no offense meant.  Quality deals tend to go to the large, white shoe firms.  There is a second tier of smaller brokerages, and then there is a third tier, which understandably takes the deals they can get, and tend to deal in penny stocks.  Westpark Capital was the underwriter for MTC.  Here’s their deal portfolio over the past few years:  http://www.wpcapital.com/transactions Note that they have a forte in SIPOs/reverse mergers into existing shells.

3) A Seeking Alpha editor named Pranav Ghumatkar must get regular data updates from Westpark because his frequent writings on daily stock movements make up the bulk of news, not only on MTC, but other Westpark names on the link above.

4) Westpark also lists another recently unlocked IPO that was similar for it’s Chinese background, this one in the Automotive e-commerce space.  See their listing of TuanChe Ltd (TC) which promptly went from $8 to $3 on increased market volumes after their unlock in mid May.  Another in the Chinese Auto lending space, DNJR, went from $12 to $6 during its unlock period in March.  I had wanted to post both of these on VIC but never found the time for a proper write-up, so I’m pleased to add MTC which seems as good or better.

5) The IPO proceeds were subject to a $500k two year escrow for potential indemnification obligations.  Normally there is an insurance policy for this, so presumably they were denied coverage.  The legal advisors were mostly small firms and I notice a quite longer than usual Risk Factors section, which in fairness also had to include PRC related risks.  But even so, it tells me they are covering extra bases on disclosures because they fear eventual shareholder lawsuits.  To this end, they have selected to be BVI based for their broker dealer parent co… a jurisdiction that largely prohibits shareholder derivative lawsuits, such as class actions.

6) The company has set up a bunch of “MM” branded entities in the Cayman Islands for the purposes of administration services, asset management, & investment services to clients.  All were dormant as of 12/31/2018.  They may have big plans, but these are unlikely to come to fruition during the unlock time frame.

7) They have been public since Jan, but are already delinquent on quarterly filings.  So, we don’t know the Q1 figures.  But even if business has picked up, I find it hard to see filing revenues as a catalyst for anywhere but down.  In a most optimistic scenario where they do $5m of Q1 top line, up from $26k last year, Price/revs will still be absurdly high.

8) Finally, they need specific permissions from the PRC government and there are no assurances they will get them on a timely basis, if at all.  It’s a touchy subject in Beijing, who wants to keep capital in-country, and prefers that investors support the domestic markets.

Catalyst

Catalysts:

-         -  Product delays, Diminimus revenues to report, Form 4s should start posting soon, Trading volumes to creep up, and borrow will become plentiful, etc.

-        -   Risks are PR shenanigans (likely), a buyout (unlikely), and or severe discipline among a diverse group of insider holders (which almost never happens… a real life multi-prisoner’s dilemma).