Metalpha Technology (US:MATH)2025-07-30 21:27PART I Item 3. Key Information The company operates as a holding company with significant business, jurisdictional, and stock-related risks - Metalpha Technology Holding Limited is a Cayman Islands holding company that conducts its operations through subsidiaries in the British Virgin Islands, Panama, and Hong Kong25 Risk Factors The company faces substantial risks from its limited operating history, customer concentration, regulatory landscape, and PFIC status - The company has a limited operating history in the wealth management sector, having started in December 2021, and previously ceased all business operations in mainland China in March 202333 - For FY2025, the top three customers accounted for approximately 35.7% of the total transaction size, indicating a significant, though decreasing, customer concentration risk42211 - The company relies on its substantial shareholder, Northstar Digital Holding, which accounted for 10.5% of the total transaction size in FY2025 and provides critical technical and customer referral services3940 - The company has received multiple non-compliance notifications from Nasdaq regarding minimum bid price and timely filing of reports, although compliance was subsequently regained for each instance109110111 - Based on its analysis, the company believes it was a Passive Foreign Investment Company (PFIC) for the fiscal year ended March 31, 2025, which can lead to adverse U.S. federal income tax consequences for U.S. shareholders125366 Item 4. Information on the Company The company transitioned from supply chain management to a digital asset wealth management service provider History and Development of the Company The company rebranded, divested its China business, and expanded into North America through a joint venture - The company changed its corporate name from Dragon Victory International Limited to Metalpha Technology Holding Limited in November 2022127 - In March 2023, the company completed the disposition of all its business operations in mainland China, terminating its VIE structure and shifting focus away from the region135 - In April 2024, the company partnered with Algos Electronics Corp. to establish a joint venture, NOWLIT FinTech Solutions Corp., in Canada to target the North American market137 Business Overview The business generates income from cryptocurrency derivatives and a new licensed securities advising segment in Hong Kong Income from Wealth Management Services (FY2023-FY2025) | Fiscal Year Ended March 31, | 2023 | 2024 | 2025 | | :--- | :--- | :--- | :--- | | Income from Wealth Management Services | $5.7 million | $16.8 million | $41.4 million | - In FY2025, securities advising and asset management services, a new business line, accounted for 11.2% of total income141146 - The company's strategy focuses on large institutions and high-net-worth individuals, offering structured derivative products based on major cryptocurrencies like Bitcoin and Ethereum to provide risk-adjusted returns143153 - The company's Hong Kong subsidiary, LSQ Capital Limited, holds Type 1 (Dealing in Securities), Type 4 (Advising on Securities), and Type 9 (Asset Management) licenses from the SFC146217 Item 5. Operating and Financial Review and Prospects The company's strategic shift to crypto wealth management drove significant income growth and a return to profitability in FY2025 Financial Performance from Continuing Operations (FY2023-FY2025) | Fiscal Year Ended March 31, | 2023 | 2024 | 2025 | | :--- | :--- | :--- | :--- | | Income | $5.7 million | $16.8 million | $46.6 million | | Profit/(Loss) | ($11.9 million) | ($3.7 million) | $15.9 million | - Customer concentration has decreased over the past three years; the top three customers represented 90.3% of transaction size in FY2023, 53.2% in FY2024, and 35.7% in FY2025211 Results of Operations The company achieved a significant turnaround in FY2025 with a $15.9 million net profit, driven by a 166% revenue increase Consolidated Results of Operations (FY2023-FY2025) | For the fiscal year ended March 31, | 2025 (US$) | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | :--- | | Revenue | 44,567,257 | 16,763,545 | 5,692,056 | | Gross profit | 21,302,293 | 5,627,748 | 2,020,658 | | Profit (loss) for the year from continuing operation | 15,894,755 | (3,679,409) | (11,919,338) | | Profit (loss) for the year | 15,894,755 | (3,679,409) | (20,167,351) | | EPS - basic and diluted (US$) | 0.41 | (0.11) | (0.76) | Liquidity and Capital Resources Cash increased to $6.9 million in FY2025, supported by positive operating cash flow and financing from a private placement Summary of Cash Flows (FY2023-FY2025) | For the Fiscal Year Ended March 31, | 2025 (US$) | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 71,990 | (11,599,148) | (1,140,324) | | Net cash (used in)/from investing activities | (23,309) | 32,678 | (20,423) | | Net cash from financing activities | 2,108,179 | 9,733,969 | 2,595,088 | | Cash and cash equivalents at end of year | 6,919,869 | 4,880,413 | 6,748,115 | Critical Accounting Estimates Critical estimates involve valuing digital assets as inventory at fair value, with payables using complex Level 3 models - Digital assets are accounted for as inventories under IAS 2 for commodity broker-traders and are measured at fair value less costs to sell, with changes in fair value recognized in profit or loss257556 Fair Value Hierarchy Summary (As of March 31, 2025) | Description | Level 1 (US$) | Level 3 (US$) | Total (US$) | | :--- | :--- | :--- | :--- | | Digital assets | 221,162,809 | - | 221,162,809 | | Listed equity securities | 13,538,564 | - | 13,538,564 | | Unlisted equity securities | - | 240,001 | 240,001 | | Digital assets payable | - | (138,224,157) | (138,224,157) | | Digital assets payable – related party | - | (10,702,814) | (10,702,814) | - The fair value of Level 3 digital asset payables is determined using the Binomial Option Pricing Model and Black-Scholes Pricing Model, which rely on significant unobservable inputs like expected volatility (ranging from 51.57% to 88.84%)264668 Item 6. Directors, Senior Management and Employees Leadership compensation totaled $0.5 million in FY2025, with share ownership concentrated in its largest shareholder, Northstar Digital Holding Major Shareholders (as of May 31, 2025) | Name of Beneficial Owners | Percentage of Ordinary Shares | Percentage of Aggregate Voting Power | | :--- | :--- | :--- | | Northstar Digital Holding | 27.8% | 27.8% | | LSQ Investment Fund SPC-Disruptive Opportunity Fund II SP | 9.4% | 9.4% | | Xianqun Hu | 9.3% | 9.3% | | Folius Digital Opportunities Master Fund Ltd. | 8.9% | 8.9% | | All directors and executive officers as a group | 5.9% | 5.9% | - For the fiscal year ended March 31, 2025, the aggregate cash compensation paid to directors and executive officers was approximately $0.5 million280 - The company has a 2022 and a 2024 Share Incentive Plan to grant awards to employees and other eligible persons; the 2024 plan includes an evergreen provision to increase the share reserve annually281282 Item 7. Major Shareholders and Related Party Transactions The company has significant operational and financial interdependence with its major shareholder and key customer, Northstar Digital Holding - Substantial shareholder Northstar Digital Holding is also a key customer and provides technical management and customer introduction services, indicating a high degree of operational and financial interdependence302 Balances with Northstar Digital Holding | As of March 31, | 2023 (US$) | 2024 (US$) | 2025 (US$) | | :--- | :--- | :--- | :--- | | Digital assets payables | 21.1 million | 2.9 million | nil | | Payables to customers | 4.6 million | 3,548 | 10,483 | - For FY2025, the aggregate value of derivative products entered into with other related parties (shareholders, directors, officers) was approximately $28.7 million305 Item 10. Additional Information Key disclosures include material financing contracts and the company's classification as a Passive Foreign Investment Company (PFIC) - The company believes it was a Passive Foreign Investment Company (PFIC) for its taxable year ended March 31, 2025, subjecting U.S. Holders to special adverse tax rules366368 - The company entered into a securities subscription and warrant purchase agreement with Northstar Technologies in November 2022 for an aggregate consideration of $4.5 million, which included shares, Type A warrants, and Type B warrants345 - As a Cayman Islands company, it is not subject to profits, income, gains, or appreciation taxes in its jurisdiction of incorporation351 Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to digital asset price volatility, counterparty credit risk, and concentration risk - The company's primary market risk is price risk due to the significant price volatility of digital assets like Bitcoin and Ethereum392393 - As of March 31, 2025, two counterparties accounted for more than 10% of digital assets payable, and two counterparties accounted for more than 10% of payables to customers, indicating concentration risk398672 - The company's quantitative trading strategies are vulnerable to significant losses during unforeseen and extreme market events, and also face risks from defective algorithms, hacking, and counterparty failure396660 PART II Item 15. Controls and Procedures Management concluded disclosure controls were ineffective as of March 31, 2025, due to a lack of qualified accounting personnel - Management concluded that disclosure controls and procedures were not effective as of March 31, 2025, due to a lack of qualified internal accounting personnel with sufficient knowledge of IFRS and SEC reporting standards405 - The company is a non-accelerated filer and is therefore exempt from the auditor attestation requirement for its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act410411 Item 16. Corporate Governance and Other Matters Key governance matters include a recent change in auditor, reliance on home country rules, and new cybersecurity disclosures - On April 3, 2024, the company dismissed its independent auditor WWC, P.C. and appointed OneStop Assurance PAC; WWC, P.C.'s prior audit report included a going concern paragraph422423 - As a foreign private issuer, the company follows its home country (Cayman Islands) practices, exempting it from certain Nasdaq shareholder approval requirements for equity issuances427428 - The company has implemented cybersecurity risk management processes overseen by the audit committee, with day-to-day management handled by a team including the CEO, COO, and CFO433438439 PART III Item 18. Financial Statements The audited IFRS financial statements show a return to profitability, with the auditor identifying digital asset accounting as a Critical Audit Matter Report of Independent Registered Public Accounting Firm The current auditor issued an unqualified opinion with a Critical Audit Matter, while the prior auditor's report included a going concern warning - The auditor for FY2025 and FY2024, OneStop Assurance PAC, identified the accounting for digital asset transactions and balances as a Critical Audit Matter, citing the materiality, estimation, judgment, and complex calculations involved459460 - The previous auditor, WWC, P.C., included a 'Substantial Doubt about the Company's Ability to Continue as a Going Concern' paragraph in their audit report for the financial statements as of March 31, 2023465 Consolidated Financial Statements Financials show significant growth in assets and equity, with a $15.9 million profit in FY2025 reversing prior year losses Consolidated Statement of Financial Position Highlights | As of March 31, | 2025 (US$) | 2024 (US$) | | :--- | :--- | :--- | | Total Assets | 246,771,615 | 174,718,509 | | Digital assets | 221,162,809 | 126,468,184 | | Total Liabilities | 210,213,086 | 157,867,334 | | Digital assets payable (incl. related party) | 148,926,971 | 80,364,190 | | Total Equity | 36,558,529 | 16,851,175 | Consolidated Statement of Profit or Loss Highlights | For the year ended March 31, | 2025 (US$) | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | :--- | | Income from principal activities | 44,567,257 | 16,763,545 | 5,692,056 | | Profit (loss) for the year | 15,894,755 | (3,679,409) | (20,167,351) |