UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 20192021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________ to _________________________
Commission file number 001-38036
TAKUNG ART CO., LTD
(Exact name of registrant as specified in its charter)
| Delaware | 26-4731758 | |
| State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) |
| 1325 Avenue of the Americas, Room 2740, 27th New York, | NY 10019 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code+852 3158-09771 (332) 250-4207
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | TKAT | NYSE American |
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the voting and non-voting common equitystock held by non-affiliates computed by reference toof the price at which the common equity was last sold, or the bid and ask priceregistrant as of such common equity, as ofJune 30, 2021, the last business day of the registrant’s 2019 second fiscal quarter, was $4,045,608.74 (6,038,222 shares of common stock held by non-affiliates, at $0.67 per share, the price at which the common equity was last sold on June 28, 2019).approximately $107,272,460.
Note .—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common share held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common share, as of the latest practicable date.
The number of shares of common share,stock, par value $0.001 outstanding as of May 8, 2020April 13, 2022 is 11,255,129.24,611,263.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.
Table of Contents
Table of Contents
i
Cautionary Statement Regarding Forward Looking Statements
The discussion contained in this Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Annual Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report or the date of documents incorporated by reference herein that include forward-looking statements.
Currency, exchange rate, and “China” and other references
Unless otherwise noted, all currency figures in this filing are in U.S. dollars.
References to “US$,” “$”, “dollars” and “U.S. dollars” are to the legal currency of the United States.
References to "yuan"“yuan” or "RMB"“RMB” are to the Chinese yuan, the lawful currency of China, which is also known as the “Renminbi”.
References to “HK$” are to the Hong Kong dollars, the legal currency of Hong Kong.
Our reporting currency is U.S. Dollars. This Annual Report also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of HK$ into U.S. dollars were made at HK$7.78947.7996 and HK$7.83057.7534 to US$1.00 and translations of Renminbi into U.S. dollars were made at RMB6.9618RMB6.373 and RMB6.8755RMB6.525 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 20192021 and December 31, 2018,2020, respectively. We make no representation that the HK$, Renminbi or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars,dollars, HK$ or Renminbi, as the case may be, at any particular rate or at all. As of May 8, 2020,March 31, 2022, the translations of HK$ and Renminbi into U.S. dollars were made at HK$7.75097.7744 and RMB7.0895RMB6.5696 to US$US$1.00, respectively.
References to “PRC” or “China” are to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Taiwan and the special administrative regions of Hong Kong and Macau.
References to “Hong Kong” are to “Hong Kong, Special Administrative Region of the People’s Republic of China”.
Unless otherwise specified or required by context, references to “we,” “the Company”, “Takung”, “our” and “us” refer collectively to (i) Takung Art Co., Ltd, (ii) the subsidiaries of Takung Art Co., Ltd, Hong Kong Takung Art Co., LtdCompany Limited (“Hong Kong Takung”) and Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) , a Hong Kong limited liability company, Hong Kong MQ Group Limited (“Hong Kong MQ”), a Hong Kong limited liability company and its wholly-owned PRC subsidiary, MQ (Tianjin) Enterprise Management Consulting Co. Ltd (“Tianjin MQ”), Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a wholly-owned subsidiariessubsidiary of Hong Kong Takung incorporated in the Shanghai Free-Trade Zone (SFTZ) in Shanghai, China and Tianjin Pilot Free-Trade Zone (TJFTZ) in Tianjin, China respectively.
References to Shanghai Takung’s “registered capital”, Tianjin Takung’s “registered capital”, and Tianjin MQ’s “registered capital” are is to the equity of Shanghai Takung, Tianjin Takung, and Tianjin MQ, respectively, which under PRC law is measured not in terms of shares owned but in terms of the amount of capital that has been contributed to a company by a particular shareholder or all shareholders. The portion of a limited liability company’s total capital contributed by a particular shareholder represents that shareholder’s ownership of the company, and the total amount of capital contributed by all shareholders is the company’s total equity. Capital contributions are made to a company by deposits into a dedicated account in the company’s name, which the company may access in order to meet its financial needs. When a company’s accountant certifies to PRC authorities that a capital contribution has been made and the company has received the necessary government permission to increase its contributed capital, the capital contribution is registered with regulatory authorities and becomes a part of the company’s “registered capital.”
ii
PART I
Overview
Takung Art Co., Ltd (the “Company”) is a holding company that, through Hong Kong Takung Art Co., Ltd. (“Hong Kong Takung”) and Hong Kong Takung Art Holdings Co., Ltd (“Takung Art Holdings”), Takung (Shanghai) Co., Ltd and Takung Cultural Development (Tianjin) Co. Ltd., Hong Kong Takung’s wholly-ownedincorporated in the state of Delaware. Thought our subsidiaries, in China (“Shanghai Takung” and “Tianjin Takung” respectively), operateswe currently operate an electronic online platform located at http:https://en.takungae.com/www.nftoeo.com/ for artists, art dealers and art investors to offer and trade in ownership units over valuable artwork. On June 19, 2019, Takung Art Co., Ltd purchased from Ms. Ma Hiu Ngai, the Company’s shareholder, one (1) ordinary share of Hong Kong MQ Group Limited (“Hong Kong MQ”), constituting 100% of its issued and outstanding shares, for a cash consideration of HK$1.00 and therefore made Hong Kong MQ its wholly-owned subsidiary. Hong Kong MQ incorporated MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”)artwork in the Pilot Free Trade Zone in Tianjin, PRC on July 9, 2019form of non-fungible token or NFT. In addition, we also provide NFT consulting with a registered capitalrespect to the strategic utilization of $100,000blockchain technology and will focus onNFT launch. Given our goal to create multiple potential revenue streams and continue to diverse the business model, we are also exploring NYF gaming business opportunities.including sales of in-game characters NFTs and sales of membership packs.
Through Hong Kong Takung, Shanghai Takung and Tianjin Takung, we offer on-linethe Company offers online listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investmentinvests in high-end and expensive artwork more accessible to ordinary people without substantial financial resources. We are in the midst of dissolving Takung Art Holdings and Shanghai Takung in an effort to streamline our business operations.
WeThe Company, through its operating subsidiaries, generate revenue from our services in connection with the offering and trading of artwork on ourits system, primarily consisting of listing fees, trading commissions, management fees, and management fees.consultancy service on the listing and trading of NFTs on our platform.
We areThe Company is headquartered in Hong Kong, Special Administrative Region, People’s Republic of China and conduct business in Hong Kong and Tianjin.New York, NY. Our principal executive office is located at 1325 Avenue of the Americas, Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Hong Kong2740, 27th and 28th Floors. New York, NY 10019.
Corporate History and Structure
We were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was focused on the development of novel biologic and peptide-based compounds and enhanced methods for local delivery of treatments for vascular diseases including peripheral artery disease and ischemic stroke.
Pursuant to the Stock Purchase Agreement dated as of July 31, 2014, Yong Li, an individual purchased a total of 22,185,230 (pre- Reverse Stock Split) restricted shares of common stock of the Company from a group of three former shareholders of the Company. In consideration for the shares, Mr. Li paid the sellers $399,344 in cash which came from his own capital. The sellers were Jerett A. Creed, the Company’s former Chief Executive Officer, Chief Financial Officer, director and formerly a controlling shareholder of the Company, the Creed Family Limited Partnership and Ralph Sinibaldi. The shares represented approximately 95% of the Company’s then issued and outstanding common stock. The sale was consummated on August 28, 2014. As a result of the transaction, there was a change in control of the Company.
On August 27, 2014, we entered into a Contribution Agreement with Cardigant Neurovascular. Pursuant to the Contribution Agreement, we assigned all our assets, properties, rights, title and interest used or held for use by our business, (except for certain excluded assets set forth therein) which was the treatment of atherosclerosis and plaque stabilization in both the coronary and peripheral vasculature using systemic and local delivery of large molecule therapeutics and peptide mimetics based on high density lipoprotein targets (“Cardigant Business”). In consideration for such contribution of capital, Cardigant Neurovascular agreed to assume all our liabilities raising from the Cardigant Business prior to the date of the Contribution Agreement and thereafter with regard to certain contributed contacts. We granted Cardigant Neurovascular an exclusive option for a period of 6 months to purchase the excluded assets for $1. Cardigant Neurovascular exercised this option October 20, 2014 and the excluded assets were assigned to Cardigant Neurovascular on October 20, 2014.
Also on October 20, 2014, we acquired the business of Hong Kong Takung through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 in exchange for 209,976,000 (pre-Reverse Stock Split) newly-issued restricted shares of our common stock to the shareholders of Hong Kong Takung.
Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.
As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conductingceased the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it is now our only operating wholly-owned subsidiary.operations.
On November 5, 2014, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of the State of Delaware to change our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”
On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s operations by receiving deposits from and making payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. On January 27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China. Management has recently determined to merge the operations ofOn May 8, 2020, Shanghai Takung was deregistered and its operations were merged with Tianjin Takung’s and eventually dissolve Shanghai Takung in order to save costs.administrative costs .
On August 10, 2015, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of our issued and outstanding shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). Upon filing of the Certificate of Amendment, every twenty-five shares of the Company’s issued and outstanding common stock were automatically converted into one issued and outstanding share of common stock, without any change in par value per share. No fractional shares will be issued as a result of the Reverse Stock Split. Shareholders who would otherwise be entitled to receive a fractional share will be entitled to rounding up their fractional shares to the nearest whole number.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was incorporated in Hong Kong on July 20, 2018 and operates as a holding company to operate an e-commerce platform for offering, selling and trading whole pieces of artwork instead of units of artwork. Takung Art Holdings incorporatedwas deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.
Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin China on September 7, 2018, but dissolved itis a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art. Art Era was deregistered on June 18, 2019.2019 due to Company’s plan to put off the e-commerce platform development.
Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise Management Consulting Co., Ltd (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ willwas expected to focus on exploring business opportunities.
Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed As a result of the Company’s effort in streamlining its operations, Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art. Art EraMQ was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.August 10, 2020.
NFT Digital Technology Limited (“NFT Digital”) was incorporated in Albany, New York on December 13, 2021 and is a wholly-owned subsidiary of Takung. This entity primarily provides administrative and technical supports for the development of NFT projects.
NFT Exchange Limited (“NFT Exchange”) was incorporated in Wyoming on January 7, 2022 and is a wholly owned by Takung. This entity facilitates the business and operation of the new NFT exchange market.
Metaverse Digital Payment Co., Limited (“Metaverse”) was formed in Hong Kong on January 27, 2022, and is wholly owned by NFT Exchange. This entity is engaged in digital payment service.
Recent Regulatory Developments
We are subject to certain legal and operational risks associated with our operations in China. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and, as a result, these risks may result in material changes in the operations of our PRC subsidiaries, significant depreciation of the value of our common stock, or a complete hindrance of our ability to offer or continue to offer our securities to investors. As of the date of this Report, we have not applied for any permission or approval from any PRC governmental authority in connection with our offshore listing or offering and, as such, no such permission or approval has been granted or denied. For instance, we believe that we are currently not required to obtain any permission or approval from the China Securities Regulatory Commission, or the CSRC and the Cyberspace Administration of China, or the CAC, in the PRC to offer securities to foreign investors. However, there is no guarantee that this will continue to be the case in the future in relation to a follow-on offering or the continued listing of our securities on a U.S. securities exchange, or even in the event such permission or approval is required and obtained, it will not be subsequently revoked or rescinded. In the event that such approval is required in the future and we do not receive or maintain such approval, our shares of common stock may significantly decline in value or become worthless, and our ability to offer or continue to offer securities to investors may be significantly limited or completely hindered.
In addition, we are subject to risks and uncertainties of the interpretations and applications of PRC laws and regulations, including but not limited to, limitations on foreign ownership in our industry. We are also subject to the risks and uncertainties about any future actions of the PRC government. If any future actions of the PRC government result in a material change in our operations, the value of our shares of common stock may depreciate significantly or become worthless. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”
Recently, the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. As of the date of this Report, our Company and our PRC subsidiaries have not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice or sanction. As of the date of this Report, we have not received any inquiry, notice, warning, or sanctions from the CSRC or any other PRC governmental authorities regarding the offering of our securities outside of the PRC. As of the date of this Report, there are currently no relevant laws or regulations in the PRC that prohibit companies whose entity interests are within the PRC from listing on overseas stock exchanges. In the event that an approval from Chinese authorities is required, if we do not receive or maintain required approvals, or we inadvertently conclude that such approvals are not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in the future, we may be subject to an investigation by Chinese regulators, fines or penalties, or an order prohibiting us from conducting an offering, and these risks could result in a material adverse change in our operations and the value of our shares of common stock, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless. In addition since these statements and regulatory actions are newly published, and official guidance and related implementation rules have not been issued, it is highly uncertain what the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and our ability to continue our listing on an U.S. exchange. See “Risk Factors — Risks Related to Doing Business in China — In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign exchange, we are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, our listing on NYSE American, financial condition, and results of operations.”
Due to the regulatory scrutiny by PRC governments on digital asset related business started in last quarter of 2021, the artwork unit trading platform operated by Tianjin Takung was suspended by the local authority. Management became aware of the suspension on or around November 8, 2021. The local authority indicated the suspension was to facilitate certain investigation although it did not announce the purpose of the investigation. The Company intends to fully cooperate with the local authority's investigation. As of the date of this report, there have been no further development in regards to this investigation.
Furthermore, pursuant to the Holding Foreign Companies Accountable Act, or the HFCAA, the Public Company Accounting Oversight Board, or the PCAOB, issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations. Our auditor, WWC, P.C., the independent registered public accounting firm that issues the audit report included in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess WWC, P.C.’s compliance with applicable professional standards. WWC, P.C. is headquartered in San Mateo, California with no branches or offices outside the United States and has been inspected by the PCAOB on a regular basis. Our auditor is not subject to the determinations announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China of the PRC or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong, however, recent developments with respect to audits of China-based companies create uncertainty about the ability of our PRC subsidiaries to fully cooperate with WWC, P.C.’s audit without the approval of the Chinese authorities. In the event it is later determined that the PCAOB is unable to inspect or investigate completely our auditor, then such lack of inspection could cause trading in our securities to be prohibited under the Holding Foreign Companies Accountable Act, and ultimately result in a determination by a securities exchange to delist our securities. A termination in the trading of our securities or any restriction on the trading in our securities would be expected to have a negative impact on us as well as on the value of our securities. See “Risk Factors — Risks Related to Doing Business in China — Although the audit report included in this prospectus is prepared by U.S. auditors who are currently inspected by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act (the “HFCA Act”) if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.”
Dividend Policy and Cash Transfers
We intend to retain all of our available funds and any future earnings to fund the development and growth of our business. As such, we do not expect to pay any cash dividends in the foreseeable future. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and only if we satisfy the applicable government registration and approval requirements.
Our PRC subsidiaries are permitted to pay dividends only out of their retained earnings. However, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, after making up for previous year’s accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such funds reaches 50% of registered capital. This portion of our PRC subsidiaries’ respective net assets are prohibited from being distributed to their shareholders as dividends. However, none of our PRC subsidiaries has made any dividends or distributions to our holding company or any U.S. investors as of the date of this Report. See “Risk Factors — Risks Related to Doing Business in China — We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements.”
In addition, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. See “Risk Factors — Risks Related to Doing Business in China — Restrictions on currency exchange may limit our ability to utilize our revenue effectively.”
A 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises. Any gain realized on the transfer of ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, which in case of dividends will be withheld at source if such gain is regarded as income derived from sources within the PRC. See “Risk Factors — Risks Related to Doing Business in China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income..”
Business History of Hong Kong Takung
Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Its authorized capital is 20,000,000 shares. Prior to the Reverse Merger, all its 20,000,000 issued and outstanding shares, par value $0.13 (HK$1) per share, were owned by Kirin Linkage Limited (4,000,000 shares) and Loyal Heaven Limited (16,000,000 shares), both Cayman Islands companies.
Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.
Corporate Structure
The diagram below illustrates our current corporate structure:
Our Trading Platform
Our proprietary platform is an all-electronic trading system, consisting of host computers, client-side terminals and an interconnected communication system. Our trading system supports the trading and payment/settlement of artwork ownership units. It is an electronic platform developed by a third partythird-party software development company and customized for us, primarily consisting of a matching system, a transaction monitoring system, an account managing system and a settlement system.
Matching is a core function of our trading platform. Our system concludes transactions by matching all the transactions submitted by the Traders.Traders (as defined below). Transaction monitoring system is responsible for monitoring the daily transactions in real-time to ensure fairness and accuracy in our trading platform. The settlement system verifies and reconciles daily statistical data with the banks’ transaction system, and completes the registration and settlement (or payment) of artwork units once the transaction data is verified.
Our website http:https://en.takungae.com/www.nftoeo.com/ is an essential part of our trading platform.
The website is important as it is the gateway to our trading platform. It publishes our membership and trading rules, trading information disclosure, and artwork introduction, and provides services to Traders, such as account management. Traders may open, close and manage their accounts with us on our website. Client-end terminal may be downloaded from our website. Through the terminal, Traders may access their account with us and conduct transactions in artwork units, such as purchasing and selling and submitting inquiries. Data transmission between the Traders and our trading system is encrypted to prevent data leaks.
The transaction on our trading platform are wholly settled in HKD. For RMB deposits and withdrawal in China, our trading platform through Enterprise Resources Planning (ERP) system, can directly connect trader bank accounts to our bank accounts under Bank of China, Ping An Bank, Minsheng Bank, China Citic Bank and Shanghai Pudong Development Bank (“SPD Bank”) to facilitate account and transaction enquiries. The transaction instructions will be submitted to our trading platform on a real-time basis for their deposit. Our trading platform subscribed the payment function from each of those banks which provides real-time payment and settlement service to make deposits quick and easy. If they would like to withdraw money from their trading account, the Traders will put in a request on our trading platform. After confirming the Traders’ accounts have sufficient money for withdrawal, we will transfer the money from the client-money bank account to the Traders’ individual bank account.
In order to execute a trade, a Trader logs into his online bank account and must first transfer funds from his bank account to his trading account with us. This ensures that he has sufficient funds to consummate a trade.
Offering and trading of artwork on our platform involves a number of parties, namely, Original Owner,Offering Agent, and Traders.
| An Original Owner is the original owner of the artwork to be offered and traded on our platform. Customarily, the Original Owner is also the artist or creator of the artwork although this is not always the case. The Original Owner must have good and marketable title to the artwork and have the right to dispose of the artwork. |
| An Offering Agent is an entity that is experienced with artwork or artwork investment and has a good reputation. The Offering Agent is engaged by the Original Owner to assist him or her with the offering and trading of artwork, such as preparation of listing application and assigning an investment value, research, organizing promotions and marketing activities, communicating with potential investors, etc. |
| A Trader is anyone who is 18 years or older or any entity that maintains a trading account with us through our electronic trading platform and participates in the trading of artwork units. Once a Trader acquires one or more units of an artwork, the Trader becomes a Co-Owner of that artwork. Presently, only residents of the People’s Republic of China, Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are eligible to become a Trader. |
Additional parties such as insurer, appraisal firm, trader service organizations and custodian for artworks will be retained in connection with the offering and trading of artwork on our system. A trader service organization is an independent legal entity pre-approved by us to provide business consulting services to our Traders.
Our trading system hardware platform is hosted by a rendered service from Amazon web and their server is in Singapore. Our clearing system hardware platform is hosted in Hong Kong and our disaster recovery system is set up in the CITIC Telecom IDC room, located in Hong Kong. The real-time data synchronization ensures the safety of transaction data.
Through our subsidiary, Shanghai Takung, we are able to receive deposits from and make payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. We disbanded the whole software development team in Hangzhou and will outsource the research and development work of our trading platform to a third partythird-party contractor when the need arises. Tianjin Takung is presently a back office for Hong Kong Takung and Shanghai Takung, which provides technology support and also carries out marketing and promotion activities in mainland China. Management has recently determined to mergeOn September 30, 2019, the operations of Shanghai Takung merged with Tianjin Takung’s which was completed on September 30, 2019,operations, and eventually dissolvethe management deregistered Shanghai Takung in order to save costs.costs on May 8, 2020.
Revenue
We generate revenue from our services in connection with the offering and trading of artwork on our system. Our revenue mainly falls into three broad categories: (i) listing fees, (ii) trading commissions, and (iii) management fees. To a much smaller extent, we have two additional sources of revenue, which we began earning start in 2015. We charge an annual fee for providing Traders and Offering Agents with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period. We also began earning authorized agent subscription revenue which is an annual service fee paid by authorized agents to grant them the right to bring their network of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period.
Offering
Offering
Artwork that is eligible for offering and trading on our platform includes calligraphy, paintings, sculptures, crafts, jade, jewelry, metal ware, ceramics, and antique furniture. The common denominator of our listed paintings is that they are from renowned living artists and are valuable.
For example, the 285As of December 31, 2021, a total of 310 sets of artwork were listed for trade on our platform through December 31, 2019, there have been 60the Platform —comprising 85 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,794,183$33,334,620 (HK$202,100,000)259,100,000); 35 pieces of jewelry with a total listing value of $9,273,653$9,384,103 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,852,369$16,987,662 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,124,925$12,222,265 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,680$669,008 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,840$334,504 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,862$1,093,571 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,316,384$1,326,952 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,631$128,655 (HK$1,000,000); and 7 pieces of sportsSports memorabilia with a listing value of $1,086,061$1,094,780 (HK$8,509,400), of which 22.5%22%-48% (for 6085 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of sportsSports memorabilia) of the listed values were charged as listing fees, respectively.
Traditionally, artwork is sold and transacted by the creator/owner of it through galleries, stores and agents.
Similarly, an artwork is presented to us for listing by the owner/artist (Original Owner) together with an agent (Offering Agent). Both the Original Owner and the Offering Agent would have discussed and proposed a price for the artwork in their listing application to us. An Offering Agent assists the Original Owner with the listing process, such as getting the artwork appraised by a third party professional, assigning an initial value for each trading unit at listing, performing research and preparing the marketing material and promotional activities to attract Traders’ interest. There may be circumstances in the future that the Original Owner will approach us for the listing, in which case, we will recommend an Offering Agent to assist the Original Owner with the listing process. However, we consider this to be a rare case. For the 285295 pieces of artwork that we have listed through December 31, 2019,2020, the listing processes were all initiated by Offering Agents.
On receipt of the application, we will assess and consider the merits of listing the artwork on our platform. Some of the factors we will consider are the appeal of the proposed artwork, the artist, the marketability of the artwork and the likelihood of its appreciation in the future.
Assuming that an artwork is accepted for listing, it will be divided into equal ownership units based on its appraised value. For example, a painting with a listing value of $1,531,569 (HK$12,000,000) may be divided into 12,000,000 units with each unit sold at $0.13 (HK$1). Traders would then be able to bid for and trade these units on our platform.
Qualification for Offering
We have quantified standards for artwork that is eligible for offering and trading in A-Tier on our platform. Except for the A-Tier standards, we do not have quantified standards for artwork that is eligible for offering and trading on our platform. However, we will generally require the artwork to meet the following qualifications:
| Clearly-established ownership |
| Having certain economic and artistic value |
| Having an appraisal report from professional appraisers |
We do not evaluate or appraise artwork but we rely on expert opinions from third parties on the value of the artwork.
Offering Process
To list an eligible artwork on our platform, the Original Owner and/or his/her Offering Agent must submit a listing application to us together with an investment value research report on the artwork and an offering statement. The investment value research report analyses all the factors that would affect the investment value of the artwork. The artwork should be appraised by a qualified appraisal firm appointed by the Original Owner and/or the Offering Agent.
Generally, an offering statement includes the following information:
| Introduction of the artwork, including name, author, date of creation | ||
| ● | Material facts on the offering, including type of artwork, total offering price, offering method, identity of Offering Agent, the number of artwork units offered, offering number, unit offering price, term of the offering, subscription period, minimum subscription amount, etc. | |
| ● | Offering details including subscription procedure, registration, etc. | |
| ● | Parties involved in the offering, including Offering Agent, appraisal firm, insurer, custodian | |
| ● | Appendices generally include related material documents such as appraisal report |
Prior to the sale to the public, the Original Owner may reserve a certain percentage of the artwork units and the Offering Agent may subscribe for a certain percentage of artwork units, generally 0-20%. These artwork units held by the Original Owner and the Offering Agent may not be traded until 180 days after the date when the artwork is listed.
The offering of ownership units in artwork will be considered successful if the units subscribed reach a prescribed percentage (“Offering Percentage”) of the total units offered. The Offering Percentage is determined by the Original Owner, the Offering Agent, if one is engaged, and us and is set forth in our Offering Agreement with them. The Offering Percentage for our existing listed artwork is 80%. If an Offering Agent is engaged, the total number of subscribed units by Traders and reserved units by the Original Owner should equal or exceed the Offering Percentage; otherwise, the offering is unsuccessful. If no Offering Agent is involved, the total subscribed units should exceed the Offering Percentage; otherwise, the offering is unsuccessful. In the event of an unsuccessful offering, the offer for subscriptions of the artwork units by Traders is voided.
If the total subscribed units exceed the Offering Percentage but are less than the total offered amount, then the Offering Agent is obliged to purchase the remaining units on the same offering terms or if no Offering Agent is engaged, the Original Owner shall retain the remaining units. In the former, the Offering Agent is required to link its bank accounts in PRC with its trading account with us to ensure that it has sufficient funds to purchase any remaining unsold units. The Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-48.5% of the total offering price for calligraphies, paintings, jewelry, ambers, precious stones, antique mammoth ivory carving, porcelain pastel paintings and porcelain, which are the major types of artwork listed and traded on our system as of December 31, 2019.2020 and 2021. The listing fee is earned when the units for the artwork are successfully subscribed for and trades on our platform.
The offering deposit is generally 22% of the total offering price and may vary based on the type of artwork, offering price and other factors. The offering deposit is paid by the Offering Agent through the linked accounts as described above and will be refunded if all offered artwork units are sold. In the event that the total number of units sold exceeds the Offering Percentage but does not reach all of the units offered, the offering deposit will be used to purchase the remaining artwork units that have not been subscribed by Traders.
Upon receipt of all required offering documents, we will review the offering application and decide on a case by case basis, if the artwork should be listed and traded on our platform. Our management team, with the assistance of art consultants (who are appointed by the Offering Agent), conducts a procedural review of the offering application and related documents. We will approve the artwork for offering and trading as long as all listing requirements are met.
As of December 31, 2019,2021, there were a total of 285310 pieces of artworks, including 6085 sets of paintings and calligraphies, 35 pieces of jewelry, 134 pieces of precious stones, 29 pieces of amber, 4 pieces of antique mammoth ivory carving, 2 pieces of porcelain pastel paintings, 7 pieces of porcelain, 6 sets of Unit+ products, 1 piece of Yixing collectable and 7 piecepieces of sports memorabilia successfully listed and trading on our system.
The Original Owner and the Offering Agent are required to disclose timely all material information regarding the artwork. The disclosure must be true, accurate, complete and not misleading. The Original Owner and the Offering Agent are responsible for their conduct in connection with the offering of the artwork. We also monitor and regulate their conduct. For more information, please refer to our disclosure under “Regulation of Market Participants.”
Subscription Process
Once the offering is approved, the Offering Agent will fund its trading account with the listing deposit and we then register the artwork units in our system. The Traders may log into their trading account to bid for the artwork units. If the artwork units are over-subscribed, we will conduct a lottery to determine which subscriptions will be accepted.
A Trader may receive a lower allocation than the number of units that he or she has applied for. Traders may also be allotted with more or fewer units than others who have applied for the same number of units. It is also possible that Traders are not allotted any units at all. The more units that a Trader applies for, the more likely a Trader is allotted with units. In order to subscribe for units, Traders need to set aside money in their brokerage accounts with us, which is “frozen” during the subscription period. After the announcement of the allotment, the money “frozen” will be released to us in a successful offering or back to the Traders’ accounts in an unsuccessful one. The funds from successful subscriptions will be disbursed to the Original Owner in accordance with the payment schedule provided in our Offering Agreement with him or her.
Pre-Listing Premium Pricing
In addition to charging a percentage of the total listing amount as listing fee, additional listing revenue may be generated by the Pre-Listing Premium processed by the Offering Agent.
In certain circumstances, if the Offering Agent believes that there are Traders who are willing to pay a premium to be able to purchase the units without entering the balloting process so they can be certain about purchasing the units, the Offering Agent can negotiate with the Original Owner and us to “lock-in” and purchase the units outright on the listing date at a premium. These units will not be entered into the balloting process. The Listing Agreement (between the Owner, Agent and us) would specify the maximum number of units that can be locked in by the Offering Agent. The premium, which is in addition to the total listing amount, is recognized as listing income.
Insurance and Storage of Artwork
We require insurance coverage for artwork offered and traded on our platform. The insurance policy has an insured value equal to the total offering price of the artwork and covers the entire trading period.
The listed artwork is also required to be stored at qualified facilities. The storage companies we select are experienced with artwork storage and transportation. Specifically, the storage facility should meet the following requirements:
| Has warehouses with constant temperature and humidity in different locations; |
| Has |
| Has professional artwork transportation equipment; and |
| Has security personnel. |
Once a Trader purchases certain artwork units, he will become a Co-Owner of this artwork and must abide by a Co-Owner Agreement, which, among other things, authorizes us to select and change, on behalf of the Co-Owners, the storage company and insurer for the artwork.
We pay the fees for the insurance and the storage out of the management fees paid to us by the Traders. Our management fee is calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.
In the event of a loss, we will receive the insurance monies from the insurer as beneficiary under the relevant insurance policy and then disburse them to all Co-Owners in accordance with the Co-Owner Agreement.
Trading
Our market is open for trading from Monday through Friday. Traders may only purchase or sell artwork units during trading hours. They may nevertheless log into their account and view the account information, such as the balance of funds, type and number of artwork units held during non-business hours.
Traders purchase and sell artwork units listed on our system through a client-end terminal – trading software. The software is available for download from our website http:at https://en.takungae.com/www.nftoeo.com/ and every Trader may commence trading in artwork units once he opens a trading account with us and has funded this account as described above. Each Trader is required to sign a Trading Agreement and abide by a Co-Owner Agreement. The aggregate number of units allowed to be traded per day by a Trader shall not exceed 5% of the total offered artwork units.
On April 1, 2016, we began to charge a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traders are selected by authorized agents and subject to our review. After review, we negotiate individually with each Trader to determine a fixed monthly fee. Pursuant to negotiations, different Traders may have different rates and once agreed upon, the monthly fee is fixed.
We charge trading commissions for purchase and sale of artwork units. The commission is typically 0.3% of the total amount of each transaction but as a promotion, we currently charge a reduced fee of 0.2% of the transaction value on both the purchase and sale sides resulting in an aggregate commission rate of 0.4%.
We also charge Traders management fees covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is deducted from proceeds from the sale of artwork units.
Currently, most of our Traders are from Mainland China and some portion from other countries such as Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are also eligible to register as Traders.
Trading Halt
We may halt the trading of a listed artwork upon occurrence of the following conditions:
| Occurrence of irregular trading activities; | ||
| ● | 10% or more of a listed artwork is involved in legal proceeding and has been frozen by relevant authorities; | |
| ● | Release of information in public media that may materially affect or have affected the trading price of the artwork; | |
| ● | The artwork is the subject of a legal proceeding regarding ownership; | |
| ● | Upon application by all the Co-Owners to change the terms of Co-Owner Agreement or arrangements regarding transportation, storage, insurance or exhibition of the artwork; | |
| ● | The artwork is involved in illegal transactions; and | |
| ● | Other circumstances that would make the listing unfit in our discretion. |
Delisting
Each offering statement will stipulate the term in which an artwork trades on our platform. An artwork may be delisted from our platform through voluntary withdrawal or successful sale of the artwork via auction at the end of the term.
Upon application of all the Co-Owners, an artwork may also be delisted from our system. The Co-Owners should submit a delisting application, upon receipt of which we will suspend the trading of the artwork units. If the application is approved, the artwork will be delisted from our platform; otherwise, it will resume trading. Once delisted, the artwork will be returned to the designee of all Co-Owners or the sole owner.
Upon expiration of the trading term as set forth in the offering statement, the trading of the artwork units will be suspended and the artwork will enter into an auction process. The offering price shall be the reserve price for the artwork. Once it is successfully sold through auction, the artwork will be delisted from our system. If the auction is not successful, the artwork units will resume trading for a term to be determined at the time its trading is resumed.
An artwork may also be delisted due to the following reasons:
| The artwork was lost in a theft or robbery; | ||
| ● | The artwork was irreparably damaged; | |
| ● | The artwork was adjudicated to be owned by a person other than the Original Owner; and | |
| ● | Other circumstances which we deem would render the listing unfit. |
A delisting report will be issued by us upon delisting of an artwork, which report will state the name of the delisted artwork, the delisting date, the delisting decision, related matters following the delisting, etc.
Registration and Settlement
Our trading platform’s settlement system reconciles all trades and payments on a daily basis.
The registration and settlement of the trading of artwork units is currently supervised and managed by our registration and settlement department. This department is responsible for trading account setup and management, registration of artwork units, including initial registration, transfer registration and delisting registration and providing information, consultation or training relating to the registration and settlement of artwork units.
Regulation of Market Participants
The Original Owner and the Offering Agent are required to comply with our rules in connection with the offering of artwork. If we discover any violation, we will request them to take corrective actions. If the Offering Agent engages in fraudulent activities, such as putting out false or misleading advertisement or disclosure on the artwork, it may be barred from participating in any offering for up to two years, in addition to any legal liabilities.
We monitor and regulate the conduct of Traders on a daily basis through our real time monitoring system. If there are irregular trading activities that may affect the trading price and volume of artwork units, we will seek clarification from the Trader(s) by sending inquiries and notices, and conducting interviews, etc. If there is any violation of our trading rules, we may take the following actions:
| issue oral or written warnings; | ||
| ● | request the Trader to submit written commitment; | |
| ● | impose a fine; | |
| ● | suspend or limit trading activities; and | |
| ● | revoke the qualifications of the Trader. |
Sales and Marketing
We are currently marketing our electronic trading platform through participation in culture and art exhibitions and internet advertising. Additionally, we encourage existing Traders to introduce new Traders. We used to pay referral fees but have ceased that practice in fiscal year 2019.
We have also instituted a trader service organization service program. Trader service organizations are separate, independent entities that provide business consultation services to some of our Traders such as providing training on the trading rules of our platform. Under the trader service organization service program, we will pay the relevant trader service organization up to 75% of all trading commissions generated from new Traders referred to us from Traders serviced by such trader service organization (“Service Fee”). The exact terms with each trader service organization which participates in this program vary on a case by case basis although in every case, the Service Fee is contingent on the ongoing business consultation relationship between the trader service organization and the Trader. In other words, if the business consultation relationship is terminated between a Trader and its trader service organization, that trader service organization will no longer earn a Service Fee from trading commissions generated from new Traders introduced by that Trader.
We utilize Google and Baidu Listing Search and Key Word Search services for search engine optimization in order to promote our website and platform.
In April 2016, we introduced a discount program to our VIP Traders with a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate will be waived. The discounted rate varies between the selected artworks. If VIP traders become delinquent on payment, we will cancel the discount program for those individuals and revert to charging them commission per transaction.
Besides this, we also instituted separate discount programs to VIP Traders by waiving their trading management fees during certain promotion periods.
Customers
Our customers are the Traders, Original Owners and Offering Agents. We are constantly marketing and increasing our customer base, it is difficult to ascertain if the loss of a single customer, or a few customers would have a material adverse effect on us. Suffice it to say, no one customer constitutes in the aggregate 10% or more of our consolidated revenue.
Seasonality
In view of our operating history, other than the Chinese New Year which could impact the number of listings and trading around that period, we believe the nature of our business is not cyclical.
Employees
As of March 31, 2020,2022, we had 387 full-time employees, comprising 27 employees who are based in the People’s Republic of China, and 116 employees who are based in Hong Kong. Ms. Fang MuMr Kwok Leung (Paul) Li is our Chief Executive Officer. Mr. Jehn Ming Lim is our Chief Financial Officer. As for the other 367 employees, 31 are from the Business Development department, 1 are from the Big Data AnalyticsHuman Resources and Administration department, 8 are from the IT department, 2 is from the Transaction Management department, 9 are from the Administrative department, 21 is from Customer Service department, 2 are from the Clearing and Settlement department, 1 is from the Uplisting department, 2 is from the Legal department, 53 are from the AccountAccounting and Finance Team and 1 is from Technical Department.Team.
There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
Regulation
Regulation
U.S. Regulations
On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31, 2017.
The Act establishes a flat corporate income tax rate of 21% which supersedes the current tax rate ranging from 15% through 35% and repeals the corporate alternative minimum tax (AMT) effective in 2018.
Under the Act, U.S. federal net operating losses (NOLs) carryforwards will be carried forward indefinitely while the two-year NOL carrybacks for NOLs arising in taxable years ending after December 31, 2017 was repealed. Furthermore, the Act imposes an annual limit of 80% on the amount of the taxable income that such NOLs can offset for the NOLs arising in taxable years ending December 31, 20182019 and thereafter.
The Act has significantly modified the U.S. international business tax regime, essentially transforming the framework by which U.S. and non-U.S. headquartered businesses are taxed. The significant changes consist of:
| A partial participation exemption system for profits derived by US-based multinationals from foreign subsidiaries, eliminating the friction of a US tax upon repatriation of overseas profits |
| A minimum tax on foreign earnings of US-based multinationals with foreign subsidiaries |
| A base erosion tax on transactions between US and non-US affiliated corporations, in structures involving US and non-US headquartered groups |
| A one-time tax on the estimated US$2-3 trillion of overseas earnings accumulated by US-based multinationals, payable over eight years, and thus allowing those profits to be repatriated without further US tax |
| Several other changes across the US international tax regime addressing the source of income, FTCs, deductibility of payments, and other issues, including ownership and transfers of intangible property (Global Intangible Low-Taxed Income or GILTI). |
The Coronavirus Aid, Relief and Economy Security Act (“the CARES Act”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for net operation loss (“NOL”) deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 2020 due to the recent enactment.
Hong Kong Regulations
As a business operating in Hong Kong, we are subject to various regulations and rules promulgated by the Hong Kong government. The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.
Securities & Futures
The securities and futures markets in Hong Kong are currently governed by the Securities & Futures Ordinance (“SFO”). The SFO consolidates and authorized the 10 previous ordinances regulating the securities and futures markets. The primary legislation and the subsidiary legislation commenced operation on April 1, 2003. By law, any person carrying on, among others, a business of dealing in securities in Hong Kong, has to be licensed by the Securities and Futures Commission (“SFC”) unless falling within one of the licensing exemptions.
The term “securities” under the SFO is defined as:
| (a) | shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, or which it is reasonably foreseeable will be issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority; |
| (b) | rights, options or interests (whether described as units or otherwise) in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes; |
| (c) | certificates of interest or participation in, temporary or interim certificates for, receipts for, or warrants to subscribe for or purchase, such shares, stocks, debentures, loan stocks, funds, bonds or notes; |
| (d) | interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities; |
| (e) | interests, rights or property, whether in the form of an instrument or otherwise, prescribed by notice under section 392 as being regarded as securities in accordance with the terms of the notice. |
Our business model does not qualify as dealing in securities, as such term is defined in the SFO and as such, we are not required to obtain the requisite license from the SFC.
Sale of Goods
In the event an artwork is “delisted” from our platform, we would arrange to sell the artwork on behalf of all owners of the artwork and then distribute the proceeds of sale to them. We will be considered a “Commercial Agent” under the Hong Kong Factors Ordinance and a “Seller” under the Hong Kong Sales of Goods Ordinance.
The Sale of Goods Ordinance (“SGO”) provides that goods for sale must be:
| Of merchantable (satisfactory) quality. Goods must meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price and all other relevant circumstances. The quality of goods includes their appearance and finish, their safety and their durability. Goods must be free from defects, even minor ones, except where these defects have been brought to your attention by the seller (section 16 of SGO); | ||
| ● | Fit for their purposes (section 16 of SGO); | |
| ● | As described on the package or a display sign, or by the seller (section 15 of SGO); and | |
| ● | Correspond with the sample (section 17 of SGO). |
If sellers fail to meet any one of the above conditions, they are in breach of contract. Under these circumstances, consumers are entitled to reject the goods and demand a full refund. We are accordingly bound by these implied warranties of sale in the event that we sell any artwork previously listed on our platform.
Supply of Services
We provide a platform to trade in artwork units for which we are compensated by receiving listing fees, management fees and trading commissions. The Hong Kong Supply of Services (Implied Terms) Ordinance (“SSO”), provides that in the absence of provisions in the contract for services, services should be carried out with reasonable care and skill (which generally means the services must meet the standard that a reasonable person would regard as satisfactory) ( section 5 of the SSO), the services should be performed within a reasonable time if the time of performance has not been fixed by the contract (section 6 of the SSO); and a reasonable charge should be paid if the charge has not been fixed by the contract (section 7 of the SSO).
If service suppliers fail to meet any one of the above conditions, they would be “in breach of contract”. Under these circumstances, consumers are entitled to sue defaulting suppliers for compensation.
Section 8(1) of the SSO provides that as against a party to a contract for the supply of a service who deals as a consumer, the other party (the service supplier) cannot, by reference to any contract term, exclude or restrict any liability of his arising under the contract by virtue of this Ordinance. In other words, we cannot impose a contract term that excludes or restricts our liability on breach of contract.
In addition, the Hong Kong Control of Exemption Clauses Ordinance subject any attempt by us to exclude our liability for financial loss or damage to property during the course of the provision of our services to the test of “reasonableness”. Our exemption clauses are also controlled by the rules of common law. For example, an exemption clause must be incorporated into the contract, and the person who is seeking to rely on the exemption clause must show that reasonable steps have been taken to bring the clause to the attention of the other party.
The Hong Kong Unconscionable Contracts Ordinance only applies to a contract for the sale of goods or supply of services in which one of the contracting parties is dealing as a consumer. If the Court finds out that the contract or any part thereof was unconscionable (unfair/not sensible) in circumstances relating to the contract at the time when it was made, the Court would have the jurisdiction under section 5 of the Unconscionable Contracts Ordinance to refuse to enforce the contract, or to enforce the remainder of the contract without the unconscionable part, or to limit the application of, or to revise or alter, any unconscionable part so as to avoid any unconscionable result.
Fair Trading
The Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance 2012 (“Amendment Ordinance”) came into effect on July 19, 2013 and amended the Trade Descriptions Ordinance by prohibiting specified unfair trade practices that may be deployed against customers and strengthen the enforcement mechanism. The Customs and Excise Department is the principal enforcement agency under the Trade Descriptions Ordinance. Concurrent jurisdiction is conferred on the Office of the Communications Authority (“HKCA”) to enforce the new fair trading sections. The key amendments include:
| the expansion of the definition of trade descriptions in relation to goods, as well as the extension of the scope to cover services; |
| the creation of new criminal offences on unfair trade practices, namely misleading omissions, aggressive commercial practices, bait advertising, bait-and-switch and wrongly accepting payment; |
| the introduction of a compliance-based mechanism under which civil enforcement options, namely the acceptance of undertaking from Traders and the seeking of injunction from the court where necessary, can be drawn on to promote compliance with the new fair trading sections introduced by the Amendment Ordinance; and |
| the creation of a new private right of action for damages to facilitate consumer redress. |
On July 15, 2013, the Customs and Excise Department and the HKCA published the Enforcement Guidelines for the Amendment Ordinance to state the manner in which they will exercise their enforcement powers and provide guidance on the operation of the new legislative provisions.
Intellectual Property
Our business is dependent on a combination of trademarks, trademark application, trade secrets and industry know-how, and copyright, in order to protect our intellectual property rights. We have submitted trademark applications for “Takung” in Hong Kong, Mainland China, Macau and the United States.
In China, the Trademark Law and the Unfair Competition Law governs our marks. The Hong Kong SAR’s trade mark registration system is separate from the system operating in other parts of China. Trade mark registrations obtained in Chinese Trade Marks Office, or elsewhere in the world, do not automatically get protection in the Hong Kong SAR. Trade marks must be registered in the Hong Kong SAR before they can be protected in the Hong Kong SAR under the Trade Marks Ordinance.
Protection of Personal Data
We have access to certain of our Traders’, Original Owners’ and Offering Agents’ personal information as well as information of Qianrong’s network of art traders. The Hong Kong Personal Data (Privacy) (Amendment) Ordinance 2012 (“Amendment Ordinance”) which changes the Personal Data (Privacy) Ordinance (“PDPO”) governs our use of such personal information in direct marketing activities and in acquiring and transferring such personal data to third parties for direct marketing purposes.
The Amendment Ordinance creates a new direct marketing regime (Part VI A of the PDPO) to establish the rights and obligations of parties using personal information for direct marketing purposes or transferring personal information to a third party for marketing purposes. Under the new regime, an organization can only use or transfer personal information for direct marketing purposes if that organization has provided the required information and consent mechanism to the individual concerned, and obtained his or her consent. Under the Amendment Ordinance it is a criminal offense, punishable by fines and imprisonment, for an organization to fail to comply with any of these new requirements.
We are also now required to have in place procedures to ensure that any personal information transferred to any service provider is not retained for longer than necessary, and is protected against any unauthorized or accidental access, processing, erasure, loss, or use.
Employment
Some of our employees are employed in Hong Kong and we are subject to the Hong Kong Employment Ordinance (“EO”). The EO is the main employment legislation in Hong Kong. It guarantees certain minimum benefits, including:
| Paid annual leave. | ||
| Paid sick leave. | ||
| ● | Paid maternity leave. |
Subject to limited exceptions, the EO applies to all employees working in Hong Kong, regardless of their nationality. Observing the terms of the EO is generally considered to be mandatory, although it is not specifically expressed to be an overriding statute.
Other mandatory laws that are likely to apply to the employment relationship with our employees include:
| Personal Data (Privacy) Ordinance (PDPO). This ordinance regulates an |
| Mandatory Provident Fund Schemes Ordinance (MPFSO). Subject to very limited exceptions, this ordinance requires employers in Hong Kong to enroll employees in a Mandatory Provident Fund (MPF) Scheme (that is, a retirement scheme), to which the employer and employee must make certain contributions. Foreign nationals are exempt if they are posted in Hong Kong to work for a period not exceeding 13 months or belong to a retirement scheme outside of Hong Kong. In certain cases, a Hong Kong national working outside of Hong Kong may still be subject to this ordinance if the employment has sufficient connection with Hong Kong. | ||
| ● | Occupational Safety and Health Ordinance (OSHO). This ordinance imposes a duty on all employers, as far as is reasonably practical, to ensure the safety and health in the workplace of its employees. The OSHO covers most industrial and non-industrial workplaces in Hong Kong. | |
| ● | Employees’ Compensation Ordinance (ECO). If an employee suffers injury arising out of and in the course of employment in Hong Kong (or overseas, if the travel is authorized by the employer), the employer is usually liable to compensate the employee under the ECO. Eligible family members of an employee killed in an accident at work can also be entitled to compensation. If an employer carries on business in Hong Kong, its employees are protected under the ordinance. (An employee can work outside Hong Kong but his employment contract must have been entered into in Hong Kong.) All employers must maintain valid employees’ |
| Companies Ordinance. Protects employees of a Hong Kong company (including a Hong Kong subsidiary of a foreign company) in relation to wages and other entitlements if the company is wound up. The employees become preferential creditors in the winding-up. | ||
| ● | Sex Discrimination Ordinance (SDO), Disability Discrimination Ordinance (DDO), Family Status Discrimination Ordinance (FSDO) and Race Discrimination Ordinance (RDO). All legislate against various forms of discrimination. | |
| ● | Basic Law and the Hong Kong Bill of Rights Ordinance. These safeguard certain rights of individuals, although they have limited application in the context of employment law. | |
| ● | Labour Tribunal Ordinance. This ordinance empowers the Labour Tribunal to hear and resolve disputes relating to employment contracts as well as alleged breaches of the EO. It potentially covers disputes involving foreign nationals or Hong Kong residents working abroad. | |
| ● | Prevention of Bribery Ordinance (POBO). The POBO applies to employees, particularly to those who receive or solicit bribes from third parties (for example, an employee who receives bribes from a supplier of goods in return for placing orders with that supplier). In some cases, employees may also be subject to anti-corruption legislation in other jurisdictions. |
PRC Regulations
Although we currently no longer have any operation in the PRC, we may still be subject to certain PRC regulations as a result of our historical operations in the PRC.
Regulations on Digital Currency
On September 21, 2021, China’s central bank has announced that all transactions of digital currencies were suspended. However, under “One Country, Two Systems”, Hong Kong is part of China but retains its own systems. The Basic Law - Hong Kong’s constitutional document – gives legal effect to the “One Country, Two Systems” policy. As a result, Hong Kong is not bound by the regulation of China's central bank.
Currently there is no specific legislation aimed at restricting cryptocurrencies in Hong Kong, but the SFC regulates anyone involved in trading of cryptocurrencies that fall within the SFO definition of either “securities” or “futures contracts” by requiring them to be licensed. In the most recent development, the Hong Kong government has announced plans to close — within this year or next — the legal loopholes that have allowed most crypto exchanges to operate without restrictions, making licensing mandatory and restricting crypto trading to professional investors.
Although China is highly promoting digital currency, it is only referring to the DCEP (Digital Currency Electronical Payment). There are currently no existing laws regulating DCEP, although the expectation is that China will formulate standards and guidelines for DCEP soon. Early in 2016, the then governor of People’s Bank of China announced plans for China to issue a digital RMB. However, cryptocurrencies of any kind are currently still banned by the government. In recent years, the government has encouraged the NFT, which has to be related with art, music and digital collections, digital economy is a highly developing topic.
Regulations on Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth "permitted"“permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in the encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations. We conduct business operations that are restricted to foreign investment through our PRC consolidated affiliated entities.
Currently, the business scope of our wholly-owned subsidiary in the PRC, Shanghai Takung, mainly includes the business of wholesale, import and export of arts and crafts and related services, which are in the encouraged category. Under the PRC laws, the establishment of a wholly foreign owned enterprise is subject to the approval of the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry and commerce authority. We have duly obtained the approvals from the competent commerce authority for our interest in ShanghaiTianjin Takung and completed the registration of ShanghaiTianjin Takung with the competent industry and commerce authority.
Regulations Relating to Taxation
In January 2008, the PRC Enterprise Income Tax Law took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Our PRC subsidiary is subject to PRC enterprise income tax at the statutory rate of 25% on its PRC taxable income.
Under the PRC Enterprise Income Tax Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation regulations to the PRC 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 properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Please see “Risk Factors—We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
Regulations Relating to Labor
We are subject to laws and regulations governing our relationship with our PRC employees, including wage and hour requirements, working and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.
Pursuant to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008 and amended in 2012, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.
An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, an employee who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated at three times their normal salaries for each waived vacation day.
Pursuant to the Regulations on Occupational Injury Insurance effective in 2004, as amended in 2010, and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. The aforesaid measures are reiterated in the Social Insurance Law of China effective in July 2011, which stipulates the system of social insurance of China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity insurance. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.
Regulation on PRC Business Tax and Value-Added Tax
Prior to January 1, 2012, pursuant to Provisional Regulation of China on Business Tax and its implementing rules, any entity or individual rendering services in the territory of PRC is generally subject to a business tax at the rate of 5% on the revenues generated from provision of such services.
On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (“VAT”) reform program, or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Industries in Shanghai included industries involving the leasing of tangible movable property, transportation services, research and development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural and creative services,” are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in LieuIn lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was implemented throughout China. Shanghai and Tianjin Takung areis currently subject to a VAT of 6% on its gross revenue. This Pilot Program was officially launched and announced on November 19, 2017 subject to a VAT of 6% on its gross revenue.
Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned enterprises include the Company Law (2013 Amendment); the Wholly Foreign-Owned Enterprise Law (2000 Amendment) and the Wholly Foreign-Owned Enterprise Law Implementing Rules (2001 Amendment).
Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these wholly foreign-owned enterprises are required to set aside at least 10% of their respective accumulated after-tax profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital.
Approvals, Licenses and Certificates
We require a number of approvals, licenses and certificates in order to operate our business. Our principal approvals, licenses and certificates are set forth below.
Hong Kong Takung
| Certificate of Incorporation (No. 18013848) issued by Hong Kong Special Administrative Region, Registrar of Companies on September 17, 2012. |
| Business Registration Certificate for the year commencing September 17, |
ShanghaiTianjin Takung
Tianjin Takung
| Business License (Registration No. 91120118MA07H4322R) issued by Tianjin Pilot Free Trade Zone Market and Quality Supervisory Administration valid from January 27, 2016 through January 26, 2046. |
Takung Art HoldingsHong Kong MQ
Hong Kong MQ
| Certificate of Incorporation (No. 2770404) issued by Hong Kong Special Administrative Region, Registrar of Companies on November 27, 2018. |
| Business Registration Certificate for the year commencing November 27, 2019 to November 26, 2020. |
Tianjin MQCompetition
Competition
Traditionally art galleries and auction houses provide a platform for owners of artworks to sell their collections. However, their trading model is substantially different from ours. We believe we do not have any direct competition due to our unique business model of trading artwork ownership units instead of the artworks. We are not aware of any other companies engaging in a similar business.
Research and Development
We purchased the trading platform from a third party for approximately $232,261 (HK$1,800,000) in 2013. The cost of this software is amortized over its useful life and recorded as cost of revenue on the income statement. WeCurrently, we do not have internal IT teams who help maintain and operate the trading platform. We outsourced ourany research and development activitiesactivity. We are still connecting third parties toShenzhen Qianrong Cultural Investment Development Co., Ltd(“Qianrong”) and in 2014 and 2015, we entered into a software development agreement with Qianrong to develop ten trading modules. All of the additional costs for the platform system trading modules and additional equipment contributed to an increase in our cost of revenue through 2017. In 2017, we set up a software development team in Hangzhou to provide explore research and development services toprojects that will help us expand our trading platform but we eventually dismissed the whole team in August 2018 and charged the payroll for the Hangzhou team as research and development expenses in 2018. We plan to outsource our future research and development activities to third parties when the need arises.business.
Intellectual Property
Our business is dependent on a combination of trademarks, copyrights, trade secrets and industry know-how. In order to protect our intellectual property rights, we have registered trademarks in Hong Kong, Mainland China, Macau and the United States.
Set forth below is a detailed description of our trademarks registered by our subsidiary Hong Kong Takung as of March 31, 2020:2021:
| Trademark | |||||||||
| Country/Area | Trademark | number | Classes | Status | |||||
| 303101679 | 14, 16, | Registered on August 14, 2014. | |||||||
| Hong Kong | ![[LOGO]](https://files.docoh.com/10-K/0001104659-20-058897/logo_10k.jpg){kind=logo} | 35, 36, 42 | Effective until August 13, 2024. | ||||||
| Macau | | N/090131 | 14 | ||||||
| N/090132 | 16 | Registered on February 26, 2015. | |||||||
| N/090133 | 35 | Effective until February 26, 2022. | |||||||
| N/090134 | 36 | ||||||||
| N/090135 | 42 | ||||||||
| United States | | 86372887 | 14 | Registered on July 11, 2017 Effective until July 10, 2027 | |||||
| 4983954 | 16 | ||||||||
| 4983955 | 35 | Registered on June 21, 2016 | |||||||
| 4983956 | 36 | Effective until June 20, 2026 | |||||||
| 4983957 | 41 | ||||||||
| Mainland China | | ||||||||
| 15247645 | 36 | Registered on December 14, 2015. | |||||||
| 15247714 | 42 | Effective until December 13, 2025. |
| Trademark | ||||||||
| Country/Area | Trademark | number | Classes | Status | ||||
| Hong Kong |  | 303101679 | 14, 16, 35, 36, 42 | Registered on August 14, 2014. Effective until August 13, 2024. | ||||
| Macau | | N/090131 N/090132 | 14 16 |
Registered on February 26, 2015. | ||||
| N/090133 | 35 | Effective until February 26, 2022. | ||||||
| N/090134 | 36 | |||||||
| N/090135 | 42 | |||||||
| United States | |
86372887 |
14 | Registered on July 11, 2017 Effective until July 10, 2027 | ||||
| 4983955 | 35 | Registered on June 21, 2016 | ||||||
| 4983956 | 36 | Effective until June 20, 2026 | ||||||
| 4983957 | 41 | |||||||
| Mainland China | | 15247645 15247714 | 36 42 | Registered on December 14, 2015. Effective until December 13, 2025. |
Set forth below is a detailed description of our registered domain names.
| Domain name | Registrant | Registration date | Expiry date | |||
| takungae.com.hk | Hong Kong Takung | June 28, 2013 | June 28, 2021 | |||
| takungae.com | Tianjin Takung | June 19, 2013 | June 19, 2021 | |||
| takungae.net | Hong Kong Takung | June 19, 2013 | June 19, 2021 | |||
| takungonline.com.hk | Hong Kong Takung | August 4, 2015 | August 4, | |||
| takungunit.com.hk | Hong Kong Takung | August 4, 2015 | August 4, | |||
| takungonline.com | Tianjin Takung | August 4, 2015 | August 4, | |||
| takungunit.com | Hong Kong Takung | August 4, 2015 | August 4, | |||
| takung-tj.com | Tianjin Takung | March 21, 2018 | March 21, 2023 | |||
| taking-sh.com | Tianjin Takung | October 9, 2016 | October 9, 2021 | |||
| takungsports.com | Hong Kong Takung | November 27, 2017 | November 27, 2022 | |||
| Hong Kong Takung | January 25, 2018 | January 25, 2023 | ||||
We own our trading system and related software.
The Impacts of COVID-19
While the ongoing coronavirus pandemic is spreading throughout the world, our operations have fully resumed in March 2020. Overall, we had additional pieces of artwork listed, involved a higher number trading transaction volume initiated by VIP traders during the year ended December 31, 2021. We introduced consulting services related to NFT and started establishing our NFT business since the third quarter of 2021. Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of the global situation of COVID-19. The Company continues to monitor and assess the evolving situation closely to evaluate its potential exposure.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this report before deciding to invest in our common stock.
RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION
We are transitioning our business from PRC based business to internationally operated with a focus in U.S. Our business plan is at its early stage of development.
Starting from summer of 2021, we started to expand our business to provide block chain based consulting services to the companies engaged in releasing NFT and related businesses. In late, the artwork unit trading platform operated by Tianjin Takung was suspended by the local authority as a result of the regulatory scrutiny by PRC governments on digital asset related business started. Since beginning of 2022, we made strategic decision to diversify our revenue stream while focusing on utilizing NFT related technologies. We are currently in an early development stage and may be subject to growth-related risks.
Although our management believes that our current business strategy has significant potential, our Company may never attain profitable operations and our management may not succeed in realizing its business objectives. If it is not able to execute our business strategy as anticipated, the Company may not be able to achieve profitability, and our business and financial condition may be adversely affected.
Our consolidated financial statements may be materially and adversely affected by the deconsolidation of Tianjin Takung
Due to the deconsolidation of Tianjin Takung, the ending balance of our restricted cash totaling $52,215,458 and $9,144,610 as of December 31, 2021 and 2020, respectively, was not included in our consolidated financial statements and was reclassified to current assets – a deconsolidated entity. During 2021, we recorded $16.3 million in asset impairments due to the deconsolidation of Tianjin Takung as a result of the loss of control in this entity.
The loss of control of Tianjin Takung would have a material adverse impact on our financial position and operating results. In addition, we could be exposed to claims made by shareholders due to the loss of control of Tianjin Takung or claims by the PRC customers for the return of their deposits from Tianjin Takung‘s restricted cash accounts. Any claims against Hong Kong Takung, though it is a limited company, that are ultimately successful, could have a material adverse effect on the Company’s financial position, operating results and cash holdings unless Hong Kong Takung is disposed or wound down.
The global economy and the financial markets may negatively affect our business and clients, as well as the supply of and demand for works of art.
Our business is affected by global, national and local economic conditions since the services we provide are discretionary and we depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in Hong Kong and Mainland China. These factors include economic conditions and perceptions of such conditions by Traders, employment rates, the level of Traders’ disposable income, business conditions, interest rates, availability of credit and levels of taxation in regional and local markets. There can be no assurance that our services will not be adversely affected by changes in general economic conditions in Hong Kong and globally.
The art market is influenced over time by the overall strength and stability of the global economy and the financial markets, although this correlation may not be immediately evident. In addition, political conditions and world events may affect our business through their effect on the economies, as well as on the willingness of potential buyers and sellers to invest and sell art in the wake of economic uncertainty. On August 13, 2018, we announced the suspension of new listings of artwork on our trading platform. We attribute the decline in appetite for artwork investments to the overall bearish sentiments in China as a result of the declines in both of the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We resumed new listings in the first quarter of 2019 and 2020. There is no guarantee that we will never suspend them again.
Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19)pandemic(COVID-19).
An outbreak of respiratory illness caused by COVID-19 emerged in late 2019 and has spread within the PRC and globally. The coronavirus is considered to be highly contagious and poses a serious public health threat. The World Health Organization labeled the coronavirus a pandemic on March 11, 2020, given its threat beyond a public health emergency of international concern the organization had declared on January 30, 2020.
Our revenues and workforce are concentrated in China (including Hong Kong). The epidemic has resultedTo date, this pandemic and preventive measures taken to contain or mitigate the pandemic have caused, and may continue to cause, business slowdowns or shutdowns in lockdown of cities, travel restrictions,affected areas and significant disruption in the temporary closure of stores and facilitiesfinancial markets both in China for the past few months.and globally. These events have led to and could continue to materially impact our business and results of operations. The negative impacts of the COVID-19 outbreak on our business have included:
| the uncertain economic conditions may refrain the traders from their investment activities on our trading platform; |
| ● | quarantines impeded our ability to recruit new service agents and traders. Travel restrictions limited other parties’ ability to visit and meet us in person. Although most communication could be achieved via video calls, this form of remote communication may be less effective in building trust and engaging new agents and traders. |
| ● | the operations of our existing authorized agents and service agents have been and could continue to be negatively impacted by the epidemic, which may in turn adversely impact the listing and trading transactions on our platform or result in loss of customers or disruption to our operations. |
The above adverse impacts might be mitigated as quarantines across China have been largely lifted as of late March andWe continue to monitor the Chinese government has rolled out an array of favorable fiscal measures.latest developments regarding the pandemic. While we do not expect that the viruspandemic will have a material adverse effect on our business or financial results at this time, we are unable to accurately predict the impact that the coronavirus will have due to various uncertainties, including the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and effectiveness of the actions that may be taken by governmental authorities.
Additionally, the pandemic has affected our overall ability to react timely to mitigate the impact of this event and has substantially hampered our efforts to provide our investors with timely information and comply with our filing obligations with the Securities and Exchange Commission.
A decline in trading volumes will decrease our trading revenues.
Trading volumes are directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of artworks and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated depending on market conditions and other factors beyond our control. Because a significant percentage of our revenues are tied directly to the trading volumes on our markets, a general decline in trading volumes would lower revenues and may adversely affect our operating results. Declines in trading volumes have also impacted our market share or pricing structures and adversely affected our business and financial condition.
Our recently launched NFT platform may not be successful and may expose us to legal, regulatory, and other risks. Given the nascent and evolving nature of cryptocurrencies, NFTs, and our NFT platform, we may unable to accurately anticipate or adequately address such risks or the potential impact of such risks. The occurrence of any such risks could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects.
In July 2021, the Company appointed Mr. Kwok Leung Li as the CEO to lead the new direction with three initiatives to develop blockchain and NFT related businesses, including consultancy service, NFT marketplace and blockchain-based online games. NFTs are digital assets recorded on a blockchain ledger for verification of authenticity and ownership of a unique digital asset, such as artwork. Given the increased scrutiny of digital assets as well as cryptocurrencies for regulatory and anti-money laundering purposes, it is possible that the United States and other jurisdictions will engage in increased scrutiny and regulation of NFTs and our business. While NFTs and cryptocurrencies are similar in that both are based on blockchain technology, unlike cryptocurrency units, which are fungible, NFTs have unique identification codes and represent content on the blockchain. The record of ownership of the NFT, which establishes authenticity and may also carry other rights, cannot be duplicated. As NFTs are a relatively new and emerging type of digital asset, the regulatory, commercial, and legal framework governing NFTs (as well as cryptocurrencies) is likely to evolve both in the United States and internationally and implicates issues regarding a range of matters, including, but not limited to, intellectual property rights, privacy and cybersecurity, fraud, anti-money laundering, sanctions, and currency, commodity, and securities law implications.
For example, NFTs raise various intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright, and other right of use issues. The creator of an NFT will often have all rights to the content of the NFT and can determine what rights to assign to a buyer, such as the right to display, modify, or copy the content. To the extent we are directly or indirectly involved in a dispute between creators and buyers on our NFT trading platform, it could materially and adversely affect the success of our NFT platform and harm our business and reputation. NFTs, and our NFT platform, may also be an attractive target for cybersecurity attacks. For example, a perpetrator could seek to obtain the private key associated with a digital wallet holding an NFT to access and sell the NFT without valid authorization, and the owner of the NFT may have limited recourse due to the nature of blockchain transactions and of cybercrimes generally. NFT marketplaces, including our NFT platform, may also be vulnerable to attacks where an unauthorized party acquires the necessary credentials to access user accounts. The safeguards we have implemented or may implement in the future to protect against cybersecurity threats may be insufficient. If our NFT platform were to experience any cyberattacks, it could negatively impact our reputation and market acceptance of our platform.
NFTs, and our NFT platform, may also be subject to regulations of the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury and the Bank Secrecy Act. Further, the Office of Foreign Assets Controls (“OFAC”) has signaled sanctions could apply to digital transactions and has pursued enforcement actions involving cryptocurrencies and digital asset accounts. The nature of many NFT transactions also involve circumstances which present higher risks for potential violations, such as anonymity, subjective valuation, use of intermediaries, lack of transparency, and decentralization associated with blockchain technology. In addition, the Commodity Futures Trading Commission has stated that cryptocurrencies, with which NFTs have some similarities, fall within the definition of “commodities.” If NFTs were deemed to be a commodity, NFT transactions could be subject to prohibitions on deceptive and manipulative trading or restrictions on manner of trading (e.g., on a registered derivatives exchange), depending on how the transaction is conducted. Moreover, if NFTs were deemed to be a “security,” it could raise federal and state securities law implications, including exemption or registration requirements for marketplaces for NFT transactions, sellers of NFTs, and the NFT transactions themselves, as well as liability issues, such as insider trading or material omissions or misstatements, among others. NFT transactions may also be subject to laws governing virtual currency or money transmission. For example, New York has legislation regarding the operation of virtual currency businesses. NFT transactions also raise issues regarding compliance with laws of foreign jurisdictions, many of which present complex compliance issues and may conflict with one another. Our launch and operation of our NFT platform expose us to the foregoing risks, among others, any of which could materially and adversely affect the success of our NFT platform and harm our business, financial condition, results of operations, reputation, and prospects.
As the market for NFTs is relatively nascent, it is difficult to predict how the legal and regulatory framework around NFTs will develop and how such developments will impact our business and our NFT platform. Further, market acceptance of NFTs is uncertain as buyers may be unfamiliar or uncomfortable with digital assets generally, how to transact in digital assets, or how to assess the value of NFTs. The launch of our NFT platform also subjects us to risks similar to those associated with any new platform offering, including, but not limited to, our ability to accurately anticipate market demand and acceptance, our ability to successfully launch our new NFT platform offering, creator and buyer acceptance, technical issues with the operation of our new NFT platform, and legal and regulatory risks as discussed above. We believe these risks may be heightened with respect to our NFT platform, as NFTs are still considered a relatively novel concept. If we fail to accurately anticipate or manage the risks associated with our NFT platform or with our facilitation of cryptocurrency transactions, or if we directly or indirectly become subject to disputes, liability, or other legal or regulatory issues in connection with our NFT platform or cryptocurrency transactions, our NFT platform may not be successful and our business, financial condition, results of operations, reputation, and prospects could be materially harmed.
Our facilitation of transaction in digital works on our NFT platform exposes us to risks under U.S. and foreign tax laws.
Although under U.S. federal tax laws, cryptocurrencies are currently considered property versus currency, we are obligated to report transactions involving cryptocurrencies in U.S. dollars and must determine their fair market value on each transaction date. The U.S. federal taxing authorities have issued limited guidance on cryptocurrency transactions. The current guidance treats the use of cryptocurrency to purchase a NFT as a taxable disposition of the cryptocurrency, which subjects the holder to taxable gain that such holder must report for federal and state tax purposes. Similarly, a seller of a NFT is subject to tax on the sale of the NFT. Congress is currently proposing legislation that could require us to report such transactions to the IRS. Our failure to accurately record or report the cryptocurrency and NFT sales transacted through our NFT platform, or held by us, would expose us to adverse tax consequences, penalties, and interest. Moreover, the IRS, in connection with audits of cryptocurrency exchanges, has successfully sued to obtain account holder transaction and tax information. The applicability of tax laws in the United States and foreign jurisdictions with respect to cryptocurrency and NFTs will continue to evolve. This uncertainty increases the risk of non-compliance with tax laws, which in turn could result in adverse tax consequences, penalties, investigations or audits, litigation, account holder lawsuits, or the need to revise or restate our financial statements and associated consequences therewith, among other things. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects.
System limitations or failures could harm our business.
Our businesses depend on the integrity and performance of the technology, computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new services. These consequences could result financial losses and decreased customer service and satisfaction. If trading volumes increase unexpectedly or other unanticipated events occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.
A variety of uncontrollable events may reduce our ability to provide our trading services, impair our ability to provide our services or increase the cost of providing our services.
Our headquarters are in Hong Kong SAR and our servers are in Hong Kong SAR, Macau and mainland China, which are historically susceptible to adverse weather conditions such as typhoons, excessive heat or rain, earthquakes and floods. Those natural disasters may result in significant and extensive damage to our network equipment. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past several years, in 2009, the outbreak of influenza A (H1N1) and more recently, the coronavirus outbreak. In 2010, an earthquake registering 7.1 on the Richter scale struck Qinghai Province. In April 2013, another major earthquake registering 7.0 on the Richter scale struck Ya’an region of Sichuan Province. In 2013, certain areas of China suffered from severe floods. We are unable to predict the effect, if any, that any other future natural disasters and health hazards may have on our business. Any future natural disasters and health hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, natural disasters and health hazards may severely restrict the level of economic activities in affected areas, which may in turn materially adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations. These events and others, such as fluctuations in energy costs and computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide our services or to obtain insurance coverage with respect to these events.
We have insufficient insurance coverage
We presently do not have any insurance to cover certain events such as physical damage to our office premises and resulting business interruption, certain injuries occurring on our property and liability for breach of legal responsibilities as we believe, based on our organization, business model and the remote possibility of the incurrence of substantial damages from such events, that the costs of such insurance greatly exceeds the benefits of having it. However, in the possible event of a significant loss from such an event, this may severely impact our performance or continue as a going concern.
The success of our business depends on our ability to market and advertise the services we provide effectively.
Our ability to establish effective marketing campaigns is the key to our success. Our advertisements promote our corporate image and our services. If we are unable to increase awareness of our brand, the benefits of using our trading platform to invest in artwork and that such investment is secure, we may not be able to attract new Traders. Our marketing activities may not be successful in promoting our services or in retaining and increasing our Trader base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
Our success is dependent on the receptiveness of Traderstraders of artwork to our platform.
We believe the demand for artwork listings will be generated by our Traders. We hope to educate our Traders on the merits of using our platform to invest in artwork. Not only in the subject artwork secure and insured, it requires less capital for our Traders to invest as they need only invest in artwork units and not purchase the entire piece of artwork. We hope that they will see their investment as less risky as they are presented with the opportunity to diversify their investments through various pieces of artwork. Our success would accordingly depend on the receptiveness of Traders to the merits of investments on our platform.
If we are unable to renew the lease of our property, our operations may be adversely affected.
We do not directly own the land over the property we lease. We may lose our leases or may not be able to renew it when it is due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting our operations or increasing our cost of operations.
The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for our services or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of the date of this Annual Report, we have 388 full time employees. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of supplies, development of new products and services, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
If adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plan and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.
Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management and operational and technical expertise of certain key personnel. In addition, we will require an increasing number of experienced and competent executives and other members of senior management to implement our growth plans. If we lose the services of any member of our senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.
We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations.
We must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
Our financial results may fluctuate because of many factors and, as a result, investors should not rely on our historical financial data as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
| vulnerability of our business to a general economic downturn in Hong Kong and mainland China; |
| fluctuation and unpredictability of the prices of the products we sell; |
| changes in the laws and regulations of Hong Kong and mainland China that affect our operations; and |
| our ability to obtain necessary government certifications and/or licenses to conduct our business. |
If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results in accordance with U.S. GAAP could be materially and adversely affected. In addition, investor confidence in us and the market price of our equities could decline significantly if we conclude that our internal control over financial reporting is not effective.
Since 2016, we enhanced our internal controls over financial reporting by making the following changes: (i) we established a desired level of corporate governance with regard to identifying and measuring the risk of material misstatement, (ii) we set up a key monitoring mechanism including independent directors and audit committee to oversee and monitor our risk management, business strategies and financial reporting procedure, (iii) we have a Chief Financial Officer with SEC and US GAAP expertise and (iv) we have strengthened our financial team by employing more qualified accountant(s) to enhance the quality of our financial reporting function. We conducted out an evaluation using the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission with the participation of our management, including Fang Mu,Kwok Leung Paul Li, the Company’s Chief Executive Officer and Jehn Ming Lim,Jianguang Qian, the Company’s Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2019.2021. Based upon that evaluation, we concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. However, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Accordingly, if in spite of such changes and improvements, our internal controls are still ineffective in our ability to accurately and timely report our financial results in accordance with U.S. GAAP, this could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. This, in turn, could result in a material adverse impact on us and undermine investor confidence in us and the market price of our equities could decline significantly.
Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.
If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our Traders or other participants, the communication infrastructure, or the e-platform on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.
Future inflation may inhibit our ability to conduct business profitably.
In recent years,Recently, the US economy in China including Hong Kong has experienced periods of rapid expansion and high rates of inflation. High inflation may in the future cause the Chinese and Hong KongUS governments to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and Hong Kong,US, and thereby harm the market for our services.
Currency fluctuations may adversely affect our business, including reducing our revenues and profits in U.S. dollar terms if RMB were to decline in value.
Our reporting currency is the U.S. dollar. Our operations of Takung, Takung Art Holdings, Hong Kong MQ, Tianjin Takung and Shanghai Takung use Hong Kong dollar and Art Era and Tianjin MQ use Renminbi (RMB) as their functional currencies. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against the U.S. dollar.
The income statements of our China and Hong Kong operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of RMB and Hong Kong dollar -denominated transactions results in increased revenues, operating expenses and net income for our non-U.S. operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our non-U.S. subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the non-U.S. subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Restrictions on currency exchange may limit our ability to convert RMB into foreign currencies to fund our business activities outside China, or to repay non-RMB denominated obligations.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenues may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
The Company’s requirements could exceed the amount of time or level of experience that our officer and directors may have.
Our success largely depends on the continuing services of our chief executive officer, Fang Mu,Kwok Leung Paul Li, our co-Chief Executive Officer, Kuangtao Wang, our chief financial officer, Jehn Ming LimJianguang Qian, and our directors, Xiaoyu Zhang, Jiangping (Gary) XiaoTak Ching (Anthony) Poon and Lv Li.Ronggang (Jonanthan) Zhang. Our continued success, also, depends on our ability to attract and retain qualified personnel. We believe that Messrs. Mu, Lim,Li, Wang, Qian, Zhang, XiaoPoon and LiZhang possess valuable business development and marketing knowledge, experience and leadership abilities that would be difficult in the short term to replicate. The loss of their services could have an adverse effect on our business, results of operations and financial condition as our potential future revenues.
There can be no assurance that we will be able to attract and hire officers or directors with similar experience to operate our business, in the event that any one of them is otherwise unsuccessful in doing so.
Because our funds are held in banks which may not be covered by sufficient insurance, the failure of any bank in which we deposit our funds could affect our ability to continue our business.
Banks and other financial institutions in Hong Kong and China may not be covered by sufficient insurance for funds held on deposit. The Hong Kong Deposit Protection Board manages and supervises the operation of the Deposit Protection Scheme, which protects deposit amounts up to only $63,815$64,487 (HK$500,000). On May 1, 2015, the State Council of People’s Republic of China, released the Regulations on Deposit Insurance, with a scheme that would insure up to $72,739$76,628 (RMB500,000) in deposits made by businesses and individuals per bank. The scheme is backed by a fund run by the People’s Bank of China.
As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue in business.
Our annual effective income tax rate can change significantly as a result of a combination of changes in our U.S. and foreign earnings and other factors, including changes in tax laws or changes made by regulatory authorities.
Our consolidated effective income tax rate is equal to our total income tax expense (benefit) as a percentage of total book income (loss) before tax. However, income tax expense and benefits are recognized on a jurisdictional or legal entity basis instead of worldwide or consolidated level basis. Losses in one jurisdiction may not be used to offset profits in other jurisdictions and may cause an increase in our tax rate. Changes in statutory income tax rates and laws, as well as initiation of tax audits by local and foreign authorities, could impact the amount of income tax liability and income taxes we are required to pay. In addition, any fluctuation in the earnings (or losses) of the jurisdictions and assumptions used in the calculation of income taxes could have a significant effect on our consolidated effective income tax rate. Furthermore, our effective tax rate could increase if we are unable to generate sufficient future taxable income in certain jurisdictions, or if we are otherwise required to increase our valuation allowances against our deferred tax assets.
We are subject to taxation in multiple jurisdictions. As a result, any adverse development in the tax laws of any of these jurisdictions or any disagreement with our tax positions could have a material adverse effect on our business, consolidated financial condition or results of operations.
We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions particularly in the United States, People’s Republic of China and Hong Kong SAR. In addition, tax authorities in any applicable jurisdiction, including the United States, may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. In the event any applicable tax authorities effectively sustained their positions which are different from our tax treatment of any of our transactions, it could have a significant adverse impact on our business, consolidated results of our operations as well as consolidated financial condition.
Our financial position and results of operations may be significantly impacted by any unfavorable tax consequences due to the changes to the fiscal policies or tax regulations.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"“Tax Act”) which includes significant changes to the U.S. corporate income tax system and U.S. international tax regime. The effect of the international provisions of the Tax Act resulted in a one-time deemed repatriation tax on unremitted foreign earnings and profits (a "transition tax"“transition tax”), a minimum tax on foreign earnings of U.S.-based multinationals with foreign subsidiaries, a base erosion tax on transactions between U.S. and non-U.S. affiliated corporations, in structures involving U.S. and non-US headquartered groups, a partial participation exemption for dividends from foreign subsidiaries and several other changes across the U.S. international tax provisions addressing the source of income, FTCs, deductibility of payments and other issues, including ownership and transfers of intangible property (Global Intangible Low-Taxed Income or GILTI).
The remaining international tax provisions will be effective for taxable years beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. See our discussion and analysis of income tax inItem 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The growth of aging receivables and a deterioration in the collectability of these accounts could adversely affect our results of operations.
We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts, and the general condition of the industry. In the year endedDuring December 31, 20192021 and 2018, no2020, we recognized $154,387 and nil, respectively, in provision for doubtful accounts related to the receivable from our traders was recorded.accounts. Due to the difficulty in assessing future trends, we could be required to further increase our provisions for doubtful accounts. As our accounts receivable age and become uncollectible our cash flow and results of operations are negatively impacted.
While the management exercised its caution in the entry into agreements with authorized agents, who in turn select Traders and the Company reviewed the Traders, certain Traders could pay arrears the monthly fee and owe debts to the Company for a long period. In the event the Company has to write off the amount of uncollectible receivables of the authorized agent subscription fee and commission fee from the selected Traders, and if such write-off is material, it may have adverse impact on our financial results.
RISKS RELATED TO DOING BUSINESS IN HONG KONG
The Hong Kong legal system embodies uncertainties which could limit the legal protections available to you and us.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China had to accept some conditions such as Hong Kong'sKong’s Basic Law before its return. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people'speople’s rights and freedom for fifty years from 1997. This agreement had given Hong Kong the freedom to function in a high degree of autonomy. The Special Administrative Region (“SAR”) of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
Some international observers and human rights organizations have expressed doubts about the future of the relative political freedoms enjoyed in Hong Kong, and about the PRC'sPRC’s pledge to allow a high degree of autonomy in Hong Kong. They considered, for example, that the proposals in Article 23 of the Basic Law in 2003 (which was withdrawn due to mass opposition) might have undermined autonomy. On June 10, 2014, Beijing released a new report asserting its authority over the territory. This ignited criticism from many people in Hong Kong, who said that the Communist leadership was reneging on its pledges to abide by the "one“one country, two systems"systems” policy that allows for a democratic, autonomous Hong Kong under Beijing'sBeijing’s rule.
If the PRC were to, in fact, renege on its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of our contractual rights. This could, in turn, materially and adversely affect our business and operation. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong 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, including our ability to enforce our agreements with our customers.
It will be difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in Hong Kong.
Substantially all of our assets will be located in Hong Kong and mainland China and our officers and our present directors (save for Mr. Xiao) reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws.
We may have difficulty establishing adequate management, legal and financial controls in Hong Kong, which could impair our planning processes and make it difficult to provide accurate reports of our operating results.
Although we will be required to implement internal controls, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in Hong Kong and mainland China in these areas. As a result of these factors, we may experience difficulty in establishing the required controls, making it difficult for management to forecast its needs and to present the results of our operations accurately at all times. If we are unable to establish the required controls, market makers may be reluctant to make a market in our stock and investors may be reluctant to purchase our stock, which would make it difficult for you to sell any shares of common stock that you may own or acquire.
RISKS RELATED TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.
Some of our operations are conducted in the People’s Republic of China (“PRC”) and part of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China'sChina’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.
Because some of our operations are in China, our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our common stock.
Some of our operations are conducted in China, we are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government directives in the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions may:
| ● | Delay or impede our development; |
| ● | Result in negative publicity or increase our operating costs; |
| ● | Require significant management time and attention; |
| ● | Subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices. |
The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which we conduct our business and could require us to change certain aspects of our business to ensure compliance, which could decrease demand for our products, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected as well as materially decrease the value of our common stock.
If the Chinese government were to impose new requirements for approval from the PRC Authorities to issue our shares of common stock to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
As of the date of this prospectus, we and our PRC subsidiaries, (1) are not required to obtain permissions from any PRC authorities to operate or issue our shares of common stock to foreign investors, (2) are not subject to permission requirements from the CSRC, CAC or any other entity that is required to approve of our PRC subsidiaries’ operations, and (3) have not received or were denied such permissions by any PRC authorities. Nevertheless, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment, it is uncertain when and whether we or our PRC subsidiaries, will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required for overseas listings, including this offering. As of the date of this prospectus, we have not received any inquiry, notice, warning, sanctions or regulatory objection to this offering from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. According to the Administration Provision and the Measures (Draft for Comments), only new initial public offerings and refinancing by existent overseas listed Chinese companies will be required to go through the filing process with PRC administrations; other existent overseas listed companies will be allowed sufficient transition period to complete their filing procedure, which means if we complete the offering prior to the effectiveness of Administration Provisions and Measures, we will certainly go through the filing process in the future, perhaps because of refinancing or given by sufficient transition period to complete filing procedure as an existent overseas listed Chinese company. However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently drafted. If it is determined in the future that the approval of the CSRC, the CAC or any other regulatory authority is required for this offering, we may face sanctions by the CSRC, the CAC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our securities. The CSRC, the CAC, or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of our shares of common stock. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the CAC or other regulatory PRC agencies later promulgate new rules requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities.
In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign exchange, we are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, our listing on NYSE American, financial condition, and results of operations.
We are subject relating various risks and costs associated with to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. This data is wide ranging and relates to our investors, users, and other counterparties and third parties. Our compliance obligations include those relating to the relevant PRC laws in this regard. These PRC laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries in China, and among us, our subsidiaries in China, and other parties with which we have commercial relations. These laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.
Pursuant to the PRC Cybersecurity Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the CAC. Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear. On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the “new Cybersecurity Review Measures”) to replace the original Cybersecurity Review Measures. The new Cybersecurity Review Measures took effect on February 15, 2022. Pursuant to the new Cybersecurity Review Measures, if critical information infrastructure operators purchase network products and services, or network platform operators conduct data processing activities that affect or may affect national security, they will be subject to cybersecurity review. A network platform operator holding more than one million users/users’ individual information also shall be subject to cybersecurity review before listing abroad. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments and risk of network data security after going public overseas. As advised by our PRC counsel, we are not subject to cybersecurity review, because: (i) we do not collect or maintain personal information in our business operations and (ii) data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the authorities. In addition, we currently do not have over one million users’ personal information and do not anticipate to collect over one million users’ personal information in the foreseeable future. If we ever became subject to the cybersecurity review of CAC in the future as the applicable rules, regulations, policies or the interpretation thereof change, during such review, we may be required to suspend our operation or experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources.
Furthermore, if we were found to be in violation of applicable laws and regulations in China during such review, we could be subject to administrative penalties, such as warnings, fines, or service suspension. Therefore, cybersecurity review could materially and adversely affect our business, financial condition, and results of operations.
In addition, the PRC Data Security Law, which was promulgated by the Standing Committee of the National People’s Congress on June 10, 2021 and took effect on September 1, 2021, requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security. As the Data Security Law was recently promulgated, we may be required to make further adjustments to our business practices to comply with this law. If our data processing activities were found to be not in compliance with this law, we could be ordered to make ‘corrections, and under certain serious circumstances, such as severe data divulgence, we could be subject to penalties, including the revocation of our business licenses or other permits. Furthermore, the recently issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law require (i) speeding up the revision of the provisions on strengthening the confidentiality and archives management relating to overseas issuance and listing of securities and (ii) improving the laws and regulations relating to data security, cross-border data flow, and management of confidential information. As there remain uncertainties regarding the further interpretation and implementation of those laws and regulations, we cannot assure you that we will be compliant such new regulations in all respects, and we may be ordered to rectify and terminate any actions that are deemed illegal by the regulatory authorities and become subject to fines and other sanctions. As a result, we may be required to suspend our relevant businesses, shut down our website, take down our operating applications, or face other penalties, which may materially and adversely affect our business, financial condition, and results of operations.
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law of the PRC, or the PIPL, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the PIPL provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court. As uncertainties remain regarding the interpretation and implementation of the PIPL, we cannot assure you that we will comply with the PIPL in all respects, we may become subject to fines and/or other penalties which may have material adverse effect on our business, operations and financial condition.
While we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures undertaken by us. However, compliance with any additional laws could be expensive, and may place restrictions on our business operations and the manner in which we interact with our users. In addition, any failure to comply with applicable cybersecurity, privacy, and data protection laws and regulations could result in proceedings against us by government authorities or others, including notification for rectification, confiscation of illegal earnings, fines, or other penalties and legal liabilities against us, which could materially and adversely affect our business, financial condition, results of operations and the value of our common stock. In addition, any negative publicity on our website or platform’s safety or privacy protection mechanism and policy could harm our public image and reputation and materially and adversely affect our business, financial condition, and results of operations.
Although the audit report included in this prospectus is prepared by U.S. auditors who are currently inspected by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act (the “HFCA Act”) if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as NYSE American, may determine to delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
As an auditor of companies that are registered with the SEC and publicly traded in the United States and a firm registered with the PCAOB, our auditor is required under the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards.
Although we operate through our subsidiaries substantially in mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Inspections of other auditors conducted by the PCAOB outside mainland China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in mainland China prevents the PCAOB from regularly evaluating auditors’ audits and their quality control procedures. As a result, if there is any component of our auditor’s work papers become located in mainland China in the future, such work papers will not be subject to inspection by the PCAOB. As a result, investors would be deprived of such PCAOB inspections, which could result in limitations or restrictions to our access of the U.S. capital markets.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular mainland China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress which, if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate the audit work performed by a foreign public accounting firm completely. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (“EQUITABLE”) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as NYSE American of issuers included on the SEC’s list for three consecutive years. It is unclear if this proposed legislation will be enacted. Furthermore, there have been recent deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act (the “HFCA Act”), which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The U.S. House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020. Additionally, in July 2020, the U.S. President’s Working Group on Financial Markets issued recommendations for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal agencies and department with respect to Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the United States. In response, on November 23, 2020, the SEC issued guidance highlighting certain risks (and their implications to U.S. investors) associated with investments in China-based issuers and summarizing enhanced disclosures the SEC recommends China-based issuers make regarding such risks. On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year (as defined in the interim final rules) under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above. Under the HFCA Act, our securities may be prohibited from trading on NYSE American or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our common stock being delisted. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“HFCAA”), which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. The Public Company Accounting Oversight Board (the “PCAOB”) issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC, and (2) Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations. Our auditor, WWC, P.C. is headquartered in San Mateo, California, not mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. Therefore, our auditor is not currently subject to the determinations announced by the PCAOB on December 16, 2021, and it is currently subject to PCAOB inspections.
While our auditor is based in the U.S. and is registered with PCAOB and has been inspected by the PCAOB on a regular basis, in the event it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the our securities to be prohibited under the Holding Foreign Companies Accountable Act, and ultimately result in a determination by a securities exchange to delist the our securities. In addition, the recent developments would add uncertainties to our listing and we cannot assure you whether NYSE American or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what the SEC’s implementation process related to the above rules will entail or what further actions the SEC, the PCAOB or NYSE American will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market). In addition, the above amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our common stock could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.
While we understand that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that we will be able to comply with requirements imposed by U.S. regulators. Delisting of our common stock would force holders of our common stock to sell their shares. The market price of our common stock could be adversely affected as a result of anticipated negative impacts of these executive or legislative actions upon, as well as negative investor sentiment towards, companies with significant operations in China that are listed in the United States, regardless of whether these executive or legislative actions are implemented and regardless of our actual operating performance.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
As some of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries, Shanghai Takung, Tianjin Takung, and Tianjin MQ are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate 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 have entered into and could materially and adversely affect our business, financial condition and results of operations.
PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where the parties'parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.
If we grow to a certain threshold level, any proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. As a result of, many of the transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM'sMOFCOM’s practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions in the future in a timely manner or at all.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our operating subsidiaries in the PRC, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our operating subsidiaries incur additional debt, the instruments governing the debt may restrict its ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under PRC laws, rules and regulations, our subsidiaries incorporated in China are required to set aside a portion of their net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Limitations on the ability to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including making investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.
The services conducted by our wholly-foreign owned enterprises might be regarded as a form of online advertising or as part of services requiring an Internet content provider license or other licenses and subjecting us to other laws, rules and regulations as well as increased taxes.
Our online platform to list artwork for sale at fixed prices and other related services are currently not classified as a form of online advertising in China or as part of services requiring an ICP license or other licenses. We conduct our fixed price sale of artwork and other related business through our wholly-foreign owned enterprises in the PRC, which are not qualified to operate an online advertising business and do not hold an ICP license. However, we cannot assure you that the PRC government will not classify our business and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. If new regulations characterize our business and other related services as a form of online advertising or as part of ICP services requiring an ICP license or other licenses, we may have to conduct our business through other entities, which are qualified to operate online advertising business and hold ICP or other licenses.
If we conducted our business through other entities, we may face increased scrutiny from the tax authorities and may incur additional taxes on any services fees paid by such entities to our wholly-foreign owned enterprise. In addition, advertising services are subject to a cultural construction fee under PRC law, which is a 3% surcharge in addition to the applicable value-added tax. If our business and other related services were to be considered a form of online advertising, our revenue from those services would be subject to the 3% surcharge. If that were to occur, our margins would decline and our net income could be reduced. In addition, the substantial revenue streams attributable to our business would then be collected from such other entities and subject to the risks associated with these entities. If the change in classification of our business and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and late payment interest.
Moreover, PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator'sviolator’s license for operating an advertising business.
In addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertising distributors must confirm that the advertisers have obtained requisite government approvals, including the advertiser'sadvertiser’s operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities. If we become subject to PRC advertising laws, we would need to take steps to monitor, and to ensure that our third-party marketing affiliates monitor, the content of any advertisements displayed on our platforms. This could require considerable resources and time, and could significantly affect the operation of our business, while also subjecting us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with such laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations. Any change in the classification of our business and other related services by the PRC government may also significantly disrupt our operations and materially and adversely affect our business and prospects.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with "de“de facto management bodies"bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. "De“De facto management body"body” refers to 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 State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de“de facto management body"body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation'sTaxation’s general position on how the "de“de facto management body"body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate only a small portion of our revenues offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de“de facto management body."”
Dividends payable to our foreign investors and gains on the sale of our common stock by our foreign investors may become subject to PRC taxation.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable by a resident enterprise to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of common stock by such investors is also subject to PRC tax at a current rate of 5%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our common stock, and any gain realized by the investors from the transfer of our common stock, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of our common stock by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, holders of our common stock would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas and to claim foreign tax credit if applicable. If dividends payable to our non-PRC investors, or gains from the transfer of our common stock by such investors are subject to PRC tax, the value of your investment in our common stock may decline significantly.
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax and Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an "indirect transfer"“indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.
According to Bulletin 7, "PRC“PRC taxable assets"assets” include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable“reasonable commercial purpose"purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
There are uncertainties as to the application of Bulletin 7. As Bulletin 7 was promulgated recently, it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiary may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC subsidiary may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively.
A significant portion of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the "current“current account,"” which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital“capital account,"” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current“current account transactions,"” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue is denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt or otherwise do not have the liquidity to pay us during our deposit period.
On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency. Under this regulation, depositors will be fully indemnified for their deposits and interests in an aggregate amount up to a limit of RMB500,000. Deposits or interests over such limit will only be covered by the bank’s liquidation assets. Therefore, although this requirement to purchase deposit insurance may help, to a certain extent, prevent Chinese banks from going bankrupt, it would not be effective in providing effective protection for our accounts, as our aggregate deposits are much higher than the compensation limit.
RISKS RELATING TO INVESTMENT IN OUR SECURITIES
An active public market for our common stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the public market.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained.
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
Holders of a significant number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate shareholder (or shareholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.
If we fail to maintain effective internal controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial condition, results of operations and reputation could be materially and adversely affected.
We are a public company and our internal controls are essential to the integrity of our business and financial results. Our public reporting obligations place a strain on our management, operational and financial resources and systems. Although we have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal controls, if we encounter difficulties in improving our internal controls and management information systems, we may incur additional costs and management time in meeting our improvement goals. We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective internal controls in the future, our business, financial condition, results of operations and reputation may be materially and adversely affected.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
We do not foresee paying cash dividends in the near future.
We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.
Item 1B. Unresolved Staff Comments.
Not applicable.
We signed a new Hong Kong office lease on January 1, 2019December 15, 2020 for approximately 1,821885 square feet of office space at Room 1105709 on the 11th Floor7th floor of Wing On Plaza, Tsim Sha Tsui,Tower II of Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong. The lease expires on December 31, 202014, 2022 and provides for a monthly rent of $11,388$5,123 (HK$89,229)39,825) and a monthly servicesbuilding management fee of $1,080$574 (HK$ 8,470)4,460).
Hong Kong Takung leased approximately 345236 square feet of storage space at Private Storage Area 23, Unit 2 on the 23rd Floor of Global Gateway, Tsuen Wan, Hong Kong. This lease expired on January 4, 202031, 2022 and provided for a monthly rent of $3,242 (HK$25,408)$2,688(HK$20,900). It then signed a new lease for approximately 236 square feet of storage area at GG23 PSA Room 07 on the 23rd Floor of Global Gateway, Tuen Mun, Hong Kong on February 1, 2020. The lease provides for a monthly rent of $2,667 (HK$20,900) and is auto renewable after one year.
Hong Kong Takung also leasesleased approximately 2,153 square feet of storage space at Lingtong Gongyuan, Southeast of Hebin Park, Tanggu, Binhai New Area, Tianjin City, China. The lease expires on July 14, 2025 and provides for a monthly rent and monthly service fee of $1,206$1,292 (RMB 8,333).
On August 15, 2017, Shanghai Takung leased approximately 414 square feet of office space at Room 2226, Life Insurance Plaza, No.707 Zhangyang Road, Pudong New District, Shanghai, China. The lease expires on August 14, 2020 and provides for a monthly rent of $3,206 (RMB 22,150).
Tianjin Takung lease approximately 538.2 square feet of storage space at the Linji Building A, No. 8 Street 8, Shunyi District, Beijing, China 101300. The lease expires on February 14, 20212022 and provides for a monthly rent of $1,375$1,473 (RMB 9,500) and a monthly service fee of $83$88 (RMB 570).
On August 14, 2018, Tianjin Takung leased approximately 2,624 square feet of office space at Room 101, No. 21 Dong Peng Zhi Gu, Bei Chen, Tianjin, China. The lease expired on September 30, 2019 and provided for a monthly rent of $1,848 (RMB 12,770) and a monthly services fee of $87 (RMB 603).is auto renewable after one year.
On November 12, 2018, Tianjin Takung leased approximately 2,968 square feet of office space at Room 1505, Xin Shi Jie Financial Center, Xiao Shan, Hangzhou, China. The lease was terminated on May 10, 2019 and provided for a monthly rent of $3,137 (RMB 21,672).
On October 9, 2019, Tianjin Takung renew leased approximately 660 square feet of office space at Room 1706 & 1707 of Hong Jun Building, Bei Chen, Tianjin, China. The lease expires on October 8, 2020 and provides for a monthly rent of $881 (RMB 6,083).
On NovemberMarch 1, 2019, Tianjin Takung leased approximately 1,324 square feet of office space at Room 1703 and 1705 of Hong Jun Building, Bei Chen, Tianjin, China. The lease expires on October 31, 2020 and provides for a total monthly rent of $651 (RMB 4,500).
On May 13, 2019,2021, Tianjin Takung leased approximately 22,503 square feet of office space at Room 2901-2908 of Tianjin World Financial Center Office Tower, No. 2 Dagu Bridge North, HePing Distrist, Tianjin, China. The lease expires on May 12, 2021February 2, 2022 and provides for a total monthly rent of $34,979 (RMB 241,640).$20,152 (RMB130,000)
On June 1, 2019, Tianjin Takung leased 7 parking space as B213, B214, B215, B216, B217, B218 and B219 on 3/G, Jinta Apartment, Tianjin, China. The lease expired on May 31, 2020 and provided for a monthly rent of $861 (RMB 5,950) and monthly management fee of $152 (RMB 1,050).
On October 9, 2018, Art Era Internet leased approximately 4,361 square feet of office space at 4th Floor of Zhong Bao Cai Xin Building, Hong Qiao, Tianjin, China. The lease was terminated on September 30, 2019 and provided for a monthly rent of $3,788 (RMB 26,166).
On October 16, 2019, Tianjin MQ leased approximately 15,884 square feet of office space at Room 2909-2915 of Tianjin World Financial Center Office Tower, No. 2 Dagu Bridge North, HePing Distrist, Tianjin, China. The lease expires on October 15, 2020 and provides for a total monthly rent of $24,690 (RMB 170,563).
From November 2019 to MarchOn or around July 2020, there were a total of seven individual claimsthird claim was filed against Shanghai Takung in the Shanghai Pudong People’s Court, China as a resultagainst Hong Kong Takung on the basis of contractual disputes and misrepresentations over ownership units made by certain service agents. These claims amountedalleged breaches of contract. The claim amount has yet to approximately $0.11 million. These claims have allbe determined. A court hearing will be held on July 20, 2021. On June 9, 2021, the court of final appeal unanimously agreed with the previous court ‘s judgment, which is in favor Hong Kong Takung. Accordingly, the legal case has been settled asand closed.
Due to the increased regulatory scrutiny by PRC government on digital asset related businesses, the artwork unit trading platform operated by the PRC subsidiary, Tianjin Takung, was suspended by the local authority. The management became aware of present datethe suspension on or around November 8, 2021. The local authority indicated that the suspension was to facilitate certain investigation although it did not announce the purpose of the investigation. The Company intended to fully cooperate with the voluntary dismissal bylocal authority’s investigation. As of the claimants.date of this report, there has been no development in regard with this investigation.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market for Common Equity and Related Shareholder MattersInformation
Our common sharestock was originally quoted on the OTCBB from October 2013 under the designation “CARD”. On November 5, 2014, we amended our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd” and on November 12, 2014, our symbol was changed to “TKAT”. Our common sharestock began trading on the NYSE American from March 22, 2017. Until November 25, 2015, there had been no trading in our common share. The table below presents the high and low bid for our common share for the quarter from January 1, 2018 through December 31, 2019. These prices reflect inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions.
| Year ended December 31, 2018 | High | Low | ||||||
| 1st Quarter | $ | 2.95 | $ | 2.01 | ||||
| 2nd Quarter | $ | 2.37 | $ | 1.26 | ||||
| 3rd Quarter | $ | 1.68 | $ | 0.75 | ||||
| 4th Quarter | $ | 0.94 | $ | 0.57 | ||||
| Year ended December 31, 2019 | High | Low | ||||||
| 1st Quarter | $ | 0.854 | $ | 0.561 | ||||
| 2nd Quarter | $ | 0.939 | $ | 0.550 | ||||
| 3rd Quarter | $ | 0.739 | $ | 0.352 | ||||
| 4th Quarter | $ | 0.670 | $ | 0.427 | ||||
Holders of Our Common ShareStock
As of December 31, 2019,April 13, 2022, we had 132198 registered shareholders of our common share,stock, which does not include the shares held in street name by brokerage firms. The holders of common sharestock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the common sharestock have no preemptive rights and no right to convert their common sharestock into any other securities. There areis no redemption or sinking fund provisions applicable to the common share.stock.
Dividends
We have not paid dividends on our common sharestock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our Hong Kong and China operation entities for our funds and Hong Kong and Chinese regulations may limit the amount of funds distributed to us from our Hong Kong and Chinese operation entities, which will affect our ability to declare any dividends.
Share Option and Warrant Grants
On August 26, 2015, we approved our 2015 Incentive Share Plan, allowing for the issuance of up to 1,037,000 shares of our common share. On August 27, 2015, we registered the shares of common share reserved for issuance under our 2015 Incentive Share Plan with the SEC on a registration statement on Form S-8 under the Securities Act. On August 28, 2015, we issued 300,000 shares of our common share under the 2015 Incentive Share Plan as partial compensation to third party consultants. We have since increased the Share Plan by an additional 500,000 shares.
During 2018, we did not grant any share options and 164,522 share options were forfeited by the employees.
During 2019, we did not grant any share options and 153,348 share options were forfeited by the employees.
The outstanding share options as of December 31, 2019 are 100,890.
Registration Rights
We have no other obligation to register under the Securities Act any of our shares of common stock.
Equity Compensation Plans
On August 26, 2015, we approved our 2015 Incentive Stock Plan, allowing for the issuance of up to 1,037,000 shares of our common stock. On August 27, 2015, we registered the shares of common stock reservedFor information on securities authorized for issuance under our 2015 Incentive Stock Plan with the SEC on a registration statement on Form S-8existing equity compensation plan, see Item 12 under the Securities Act. On August 28, 2015, we issued 300,000 sharesheading “Security Ownership of our common stock as partial compensation to third party consultants. On November 20, 2015, we issued 487,000 restricted shares of our common stock as partial compensation to third party consultants. On November 30, 2016, we issued 50,000 shares of our common stock to a third party consultant for general financial advisoryCertain Beneficial Owners and banking service. On October 2, 2017, we issued 20,000 shares of our common stock to a third party consultant. These issuance of shares were under the 2015 Incentive Stock Plan.Management and Related Stockholder Matters.”
During 2017, we granted nil and forfeited 9,765 stock options. The outstanding stock options as of December 31, 2017 was 418,760.
On March 22, 2017, we issued an aggregate of 19,606 restricted shares of our common stock to three of our former non-executive directors, namely, Messrs. Joseph Levinson, John Levy and Kwok Keung William Tsui under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On May 16, 2018, we issued an aggregate of 17,143 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On April 24, 2019, we issued an aggregate of 29,104 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
Stock Transfer Agent
Our stock transfer agent is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, New York 11598.
Dividends
We have not declared or paid any dividends on our common stock and presently do not expect to declare or pay any such dividends in the foreseeable future. We have not yet formulated a future dividend policy in the event restrictions on our ability to pay dividends are created.
Repurchase of Equity Securities by Takung Art Co., Ltd and Affiliated Purchasers
None.
Recent Sales of Unregistered Securities
None.On May 28, 2021, the Company entered into a Securities Purchase Agreement with a company incorporated in British Virgin Islands (“BVI entity”). In exchange for an aggregate amount of 86,560 shares of common stocks of the BVI entity, the Company shall remit $500,000 in cash and issue 572,000 restricted shares of the Company to the BVI entity. On August 21, 2021, both parties entered into an Amendment to Securities Purchase Agreement and the number of restricted shares of the Company to be issued to the BVI entity was increased to 1,558,480. The Company remitted the cash payment of $500,000 to the BVI entity on August 20, 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted shares at a price of $6.5 was issued to the BVI entity. The Company recognized the carrying amount of this equity investment, $10,630,120, in noncurrent asset.
On July 12, 2021, pursuant to the terms of that certain Securities Purchase Agreement dated July 8, 2021, the Company sold 571,429 shares of its common stock, to an institutional investor at a price of $8.75 per share, for gross proceeds of $5,000,000 before deducting the placement agent fee and offering expenses.
Item 6. Selected Financial Data.[Reserved]
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that may be deemed “forward-looking statements” within the meaning of United States of America securities laws. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
These statements include, without limitation, statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues, our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission.
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under "Special“Special Note Regarding Forward-Looking Statements"Statements”, our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
Overview
Overview
We, were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development of novel biologic and peptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke.
Pursuant to the Stock Purchase Agreement dated as of July 31, 2014, Yong Li, an individual purchased a total of 887,410 restricted shares (22,185,230 restricted shares before the Reverse Stock Split) of common stock of the Company from a group of three former shareholders of the Company. In consideration for the shares, Mr. Li paid the sellers $399,344 in cash which came from his own capital. The sellers were Jerett A. Creed, the Company’s former Chief Executive Officer, Chief Financial Officer, director and formerly a controlling shareholder of the Company, the Creed Family Limited Partnership and Ralph Sinibaldi. The shares represented approximately 95% of the Company’s then issued and outstanding common stock. The sale was consummated on August 28, 2014. As a result of the transaction, there was a change in control of the Company.
On August 27, 2014, we entered into a Contribution Agreement with Cardigant Neurovascular. Pursuant to the Contribution Agreement, we assigned all our assets, properties, rights, title and interest used or held for use by our business, (except for certain excluded assets set forth therein) which was the treatment of atherosclerosis and plaque stabilization in both the coronary and peripheral vasculature using systemic and local delivery of large molecule therapeutics and peptide mimetics based on high density lipoprotein targets (“Cardigant Business”). In consideration for such contribution of capital, Cardigant Neurovascular agreed to assume all our liabilities arising from the Cardigant Business prior to the date of the Contribution Agreement and thereafter with regard to certain contributed contracts. We granted Cardigant Neurovascular an exclusive option for a period of 6 months to purchase the excluded assets for $1. Cardigant Neurovascular exercised this option October 20, 2014 and the excluded assets were assigned to Cardigant Neurovascular on October 20, 2014.
Also on October 20, 2014, we acquired all the issued and outstanding shares of Hong Kong Takung, a privately held Hong Kong corporation, pursuant to the Share Exchange Agreement and Hong Kong Takung becamethrough our wholly owned subsidiary, in a reverse merger, or the “Merger”. Pursuant to the Merger, all of the issued and outstanding shares of Hong Kong Takung, common stock were converted, at an exchange ratio of 10.4988-for-1, into an aggregate of 8,399,040 shares (209,976,000 shares before the Reverse Stock Split) of our common stock and Hong Kong Takung became a wholly owned subsidiary of us. The holders of our common stock as of immediately prior to the Merger held an aggregate of 933,236 shares (23,330,662 shares before the Reverse Stock Split) of our common stock, The accompanying financial statements share and per share information has been retroactively adjusted to reflect the exchange ratio in the Merger. Subsequent to the Merger, our name was changed from “Cardigant Medical Inc.,” to “Takung Art Co., Ltd.”
Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Hong Kong Takung was incorporated in 2012, it did not commence business operations until late 2013.
As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operatesoperate an electronic online platform located at http:https://en.takungae.com www.nftoeo.com/for artists, art dealers and art investors to offer and trade valuable artwork.
Through Hong Kong Takung, we We offer on-lineonline listing and trading services that allow artists, art dealers and owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees,fee, trading commissions, management fee and management fees.consultancy service fee on NFT projects.
In July 2021, Takung appointed Mr. Kwok Leung Li as the CEO to lead the new direction with three initiatives to develop our blockchain and NFT related businesses.
The company’s NFT business outlook can be described in several aspects below.
NFT Market Insights
Digital artwork based on NFT technology is becoming a hot asset. The earliest NFT projects can be traced back to the 2017 bull market CryptoKitties (the encrypted cats), which had the properties of scarcity and value anchoring of ownership. At its peak, a virtual cat could sell for more than $100,000. In terms of NFT artwork, in March 2021, artist Beeple’s NFT work “Every Day: The First 5,000 Days” sold for $69.346 million, making it the third-highest price for a living artist. According to a report by Invezz, the NFT market was worth $338 million in 2020, and it ahs grown by 800% to reach $490 million in 2021. With the help of the bull market wave, NFT has grown rapidly., As of the first quarter of 2021, the total transaction volume of the NFT market has exceeded 1.5 billion US dollars, an increase of more than 2627% from the previous quarter. In April 2021, the total market value of NFTs exceeded $30 billion for the first time, setting a new all-time high. Currently, NFTs can be used in the fields including games, artworks, domain names, insurance, collectibles, virtual assets, real assets, identities, etc. With the vigorous development of the digital world, many business will appear in the form of digital original ecology, and the huge application space and technological imagination of NFT are expected to become more and more attractive in the new digital economy world.
New business model
TKAT's business model revolves around the theme of "free circulation of value and creation of a unique digital work exchange platform", allowing each user to create, buy and sell various irreplaceable digital works to realize the value of works.
New business types
| A. | Providing consulting services such as artwork valuation/appreciation potential |
Away from poor offline communication and incomplete information, there is no misunderstanding of the pain points, and to tap the needs of users to provide comprehensive consulting services such as labor cost, artist influence, artistic value of works, and channels for obtaining works, which not only serves customers but also creates value for the company.
| B. | NFT trading service |
TKAT has built a fully functional NFT trading platform, which is in the stage of testing to be launched. The platform can meet the categories of digital works including: artwork, music videos, collectibles, game props, sports, metaverse, virtual world, social tokens, and meet the needs of various users as much as possible. And it can realize the whole business process of user registration-certification-work uploading-work casting-work trading. The platform will be officially launched and put into use before the end of March 2022. In the transaction process, it not only meets the needs of customers for uploading and purchasing digital works, but the company extracts a portion of the handling fee (including token minting, first sale, and second sale) to create value.
| C. | Advertising service |
After the TKAT platform has a certain user base, it can provide advertising and publicity services for users or the company itself. The business model is not limited to categories and industries, such as investment promotion, work promotion, and industry promotion.
New Strategic Direction
TKAT is committed to creating a digital original ecological platform that integrates games, artworks, domain names, insurance, collectibles, virtual assets, real assets, identity and other fields, and changes the market status of traditional industries through its own efforts. Strategic goals: basic platform building-targeted population entry-providing services (consulting services, transaction services, advertising services)-optimizing the platform and expanding the scope of services-full service.
Competitor analysis
Opensea is an NFT market exchange. It has more than 20,000 users. Compared with projects in the popular decentralized finance (“DeFi”) field, it is second only to Uniswap, kyber and Compound, and higher than maker, 0x, etc. As a trading platform with a relatively high status in the NFT field, OpenSea has a complete range of collections, equivalent to Taobao in the NFT world. At present, the trading market of OpenSea has nearly 40,000 users, and the monthly transaction volume exceeds 5 million US dollars. Coinbase’s new NFT platform hits 1.4 million signups. The Coinbase platform has an active population of 50,000 users. The service rates for each service are as follows: 1. Rarible’s minting fees are borne by the creators themselves, and the royalties are also set by the creators themselves, with default amounts of 10%, 20% and 30%. 2. VIV3’s NFT minting costs and profits come from the 12.5% service fee it collects on the first and second sales. 3. OpenSea does not need gas fee to mint NFT. 4. Rarible charges a 2.5% service fee on the first sale. On the SuperRare platform, a 15% commission is charged on the first sale and a 3% fee (paid by the buyer) is charged on the second sale.
Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong and Tianjin. Our new principal executive offices are located at Room 1105 Wing On Plaza, 62 Mody709, Tower 2, Admiralty Centre, 18 Harcourt Road, Tsim Sha Tsui, Kowloon,Admiralty, Hong Kong.
Competitive Advantages
On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Shanghai
The advantages of Takung in Shanghai Free-Trade Zone (SFTZ)the NFT transaction and blockchain market are as follows:
Innate industry advantages
In recent years, digital artworks of NFT technology based on blockchain technology are becoming popular assets. The NFT online platform the Company built can effectively solve the current situation such as unclear ownership of property, difficulty in Shanghai, China, with a registered capitaldistinguishing authenticity and low efficiency of $1 million. Shanghai Takung is engaged in providing services to its parent company Hong Kong Takung by receiving depositsartwork circulation. Convert business development from and making paymentsoffline to online artwork traders for and on behalfoperation, so that the value of Hong Kong Takung. Shanghaidigital works can be freely circulated online.
Advantages of the core management team
The core team members of Takung set up a new officehave experience in Hangzhou, PRC on November 20, 2016 forblockchain technology development and it was closed onAugust 28, 2018.
On January 27, 2016, Hong Kong Takung incorporated another subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”),NFT trading platform operation, which can ensure a limited liability company, with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China. Tianjin Takung provides technologysmoother development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork. We arebusiness operation in the midstlater stage.
Takung’s platform advantages
The currently developed and launched NFT online trading platform supports multi-category product uploads, including: Digital art, Digital oil painting, Produced by Gallery, Personal products, Artist signature, Oil on canvas, Print, Paper ink, Device, Comprehensive media, Derivative, and It will be continuously enriched and improved according to customer interests. The NFT trading platform has stable performance, high security and easy to maintain. At the front end of dissolving Takung Art Holdings. Its subsidiary, Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”),the system, the Company will continuously improve the operability and user experience of the system focusing on improving the user experience.
Technical advantages
The Takung’s digital works exchange platform that has been dissolved.
Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018launched is built by a professional technical team. Each technician has rich industry experience, can work under a short development cycle or high pressure, and currently has no operations. On June 19, 2019, as a resultnumber of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company.relevant industry benchmarking projects experience. The net asset of Hong Kong MQ was $nil ascapability of the acquisition date. technical team ensures the strong technical support in the later system optimization and iterative update.
Marketing advantages
The consideration paid forCompany has a professional marketing team. After the ownership transfer, which represent 100%platform goes online, it can be promoted online and offline simultaneously, so as to quickly increase the popularity of the issuedplatform, and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise Management Consulting Co., Ltd (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019use professional marketing solutions to attract more creators and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 locateddemanders to join in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities and promoting our artwork trading business.platform.
Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.
Since July 28, 2016, we expanded access to our trading platform to residents of Russia, Mongolia, Australia and New Zealand – our first major expansion of operations outside of China. To further stimulate trading interest, we have added selected portfolios from these countries to our platform, which now comprises 285 artworks including three Russian painting portfolios and fifteen Mongolian paintings.
Since July 3, 2017, we introduced a new "A" tier to our trading platform comprised of portfolios that meet an elevated set of standards including higher levels of liquidity, market value, number of owners, and number of VIP Traders.
Since September 2017, we launched Unit+, a new unit trading platform for collectibles, with each Unit+ portfolio containing multiple numbers of the same item for Traders to opt for direct ownership with physical delivery by trading the units they own for one or more items in the portfolio. In 2017, we entered the sports memorabilia market by launching our sports memorabilia product consisting of an exclusive, limited edition collection of signed replicas of jersey on the Unit+ platform.
Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s and eventually dissolve Shanghai Takung in order to save costs.
Recent Developments
While the ongoing coronavirus pandemic is spreading throughout the world, the Company’sour operations have fully resumed in March 2020. Overall, we had additional pieces of artwork listed, involved a higher number trading transaction volume during the year ended December 31, 2021 as discussed underneath. Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, it is not possible to predict the COVID-19 may affectunanticipated consequence of the Company'spandemic on our future business performance in 2020 overall. The extentand liquidity due to which the COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of global situation of COVID-19. To minimize the impact of the uncertainties from the ongoing coronavirus outbreak and suspension of the actions to contain the coronavirus or treat its impact, among others.operation of Tianjin Takung, we modified our business model by investing in a cultural and NFT projects as discussed aforementioned.
Results of Operation of Takung
Hong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading of artwork ownership units on our system, primarily consisting of listing fees,fee, trading commissions,commission, management fee and management fees. consultancy service fee.
For the years ended December 31, 20192021 and 20182020
The following tables set forth our consolidated statements of operations data:
| For the Year Ended December 31 | ||||||||||||||||
| 2019 | % of revenue | 2018 | % of revenue | |||||||||||||
| Revenue | ||||||||||||||||
| Listing fee | $ | 284,210 | 8.9 | $ | 3,907,301 | 46.0 | ||||||||||
| Commission | 2,438,756 | 76.9 | 3,818,852 | 45.0 | ||||||||||||
| Management fee | 450,048 | 14.2 | 569,098 | 6.7 | ||||||||||||
| Authorized agent subscription revenue | - | - | 191,385 | 2.3 | ||||||||||||
| Annual fee | - | - | 378 | - | ||||||||||||
| Online artwork sales | - | - | 8,409 | - | ||||||||||||
| Total revenue | 3,173,014 | 100.0 | 8,495,423 | 100.0 | ||||||||||||
| Cost of revenue | 1,861,577 | 58.7 | 2,578,764 | 30.4 | ||||||||||||
| Gross profit | 1,311,437 | 41.3 | 5,916,659 | 69.6 | ||||||||||||
| Selling expense | 301,460 | 9.5 | 898,006 | 10.6 | ||||||||||||
| Impairment loss | - | - | 352,669 | 4.1 | ||||||||||||
| General and administrative expense | 4,662,313 | 146.9 | 11,324,469 | 133.3 | ||||||||||||
| Total expenses | 4,963,773 | 156.4 | 12,575,144 | 148.0 | ||||||||||||
| Loss from operations | (3,652,336 | ) | (115.1 | ) | (6,658,485 | ) | (78.4 | ) | ||||||||
| Total other loss | (367,201 | ) | (11.6 | ) | (1,453,379 | ) | (17.1 | ) | ||||||||
| Loss before provision for income taxes | (4,019,537 | ) | (126.7 | ) | (8,111,864 | ) | (95.5 | ) | ||||||||
| Income taxes (expense) benefit | (73,269 | ) | (2.3 | ) | 479,901 | 5.7 | ||||||||||
| Net loss | $ | (4,092,806 | ) | (129.0 | ) | $ | (7,631,963 | ) | (89.8 | ) | ||||||
| For the year ended December 31 | ||||||||||||
| 2021 | 2020 | Variance | ||||||||||
| Revenue | ||||||||||||
| Listing fee | $ | - | $ | - | - | |||||||
| Commission | - | - | - | |||||||||
| Management fee | - | - | - | |||||||||
| Consultancy service fee | 120,000 | - | 120,000 | |||||||||
| Total revenue | 120,000 | - | 120,000 | |||||||||
| Cost of revenue | - | - | - | |||||||||
| Gross profit | 120,000 | - | 120,000 | |||||||||
| Selling expense | - | (7,041 | ) | 7,041 | ||||||||
| General and administrative expenses | (13,565,548 | ) | (780,697 | ) | (12,784,851 | ) | ||||||
| Non-marketable investment impairment | (1,333,506 | ) | - | (1,333,506 | ) | |||||||
| Gain on extinguishment of debt | 1,331,191 | - | 1,331,191 | |||||||||
| Total expenses | (13,567,863 | ) | (787,738 | ) | (12,780,125 | ) | ||||||
| Loss from operations | (13,447,863 | ) | (787,738 | ) | (12,660,125 | ) | ||||||
| Total other (expense) income | (93 | ) | 17,665 | (17,758 | ) | |||||||
| Loss before income taxes | (13,447,956 | ) | (770,073 | ) | (12,677,883 | ) | ||||||
| Income tax expense | - | - | - | |||||||||
| Net loss from continuing operations | (13,447,956 | ) | (770,073 | ) | (12,677,883 | ) | ||||||
| Net (loss) income from discontinued operations, net of income taxes | (16,625,555 | ) | 157,435 | (16,782,990 | ) | |||||||
| Total net loss | $ | (30,073,511 | ) | $ | (612,638 | ) | (29,460,873 | ) | ||||
Revenue
Revenue by category
The following table presents our revenue by category:
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Listing fee | $ | 876,658 | $ | 815,748 | ||||
| Commission | 2,088,920 | 3,288,077 | ||||||
| Management fee | 1,482,610 | 463,397 | ||||||
| Consultancy service fee | 120,000 | - | ||||||
| Subtotal | 4,568,188 | 4,567,222 | ||||||
| Less: Revenue- discontinued operations | (4,448,188 | ) | (4,567,222 | ) | ||||
| Total revenue - continuing operations | $ | 120,000 | $ | - | ||||
Revenue by customer type
The following table presents our revenue by customer type:
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Artwork owners | $ | - | $ | 815,748 | ||||
| Non - VIP traders | - | 2,674,125 | ||||||
| VIP traders | - | 1,077,349 | ||||||
| Corporate advisee | 120,000 | - | ||||||
| Subtotal | 4,568,188 | 4,567,222 | ||||||
| Less: Revenue - discontinued operations | (4,448,188 | ) | (4,567,222 | ) | ||||
| Total revenue – continuing operations | $ | 120,000 | $ | - | ||||
Revenue
Effective January 1, 2018, the Company adopted Topic 606 using modified retrospective approach applied to its contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605. The discussion of our adoption of ASC606 contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.
| (i) | Listing fee revenue |
Listing fee revenue is calculated based on a percentage of the listing value and transaction value of artworks.
Listing value is the total offering price of an artwork when the ownership units are initially listed on our trading platform. We utilize an appraised value as a basis to determine the appropriate listing value for each artwork, or portfolio of artworks.
As of December 31, 2019,2021, a total of 285310 sets of artwork were listed for trade on the Platform —comprising 85 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $33,334,620 (HK$259,100,000); 35 pieces of jewelry with a total listing value of $9,384,103 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,987,662 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,222,265 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $669,008 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $334,504 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,093,571 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,326,952 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,655 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,094,780 (HK$8,509,400), of which 22%-48% (for 85 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the year ended December 31, 2021, there were 15 new sets of painting listed on the Platform. The total listing value was $3,859,663 (HK$30,000,000) for the painting, of which 22% (for the painting) of the listed value was charged as the listing fee.
As of December 31, 2020, a total of 295 sets of artwork were listed for trade on our platform —comprising 6070 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists ranging in listing value from $127,630$128,934 (HK$1,000,000) to $1,531,569$1,547,209 (HK$12,000,000), 35 pieces of jewelry ranging in listing value from $25,526$25,787 (HK$200,000) to $1,276,307$1,289,341 (HK$10,000,000), 134 pieces of precious stones ranging in listing value from $12,763$12,893 (HK$100,000) to $765,785$773,605 (HK$6,000,000), 29 pieces of amber ranging in listing value from $63,815$64,467 (HK$500,000) to $1,021,046$1,031,473 (HK$8,000,000), 4 pieces of antique mammoth ivory carving ranging in listing value from $127,630$128,934 (HK$1,000,000) to $255,262$257,868 (HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value from $102,105$103,147 (HK$800,000) to $229,735$232,081 (HK$1,800,000), 7 pieces of porcelain in listing value from $38,289$38,680 (HK$300,000) to $382,892$386,802 (HK$3,000,000), 6 sets of Unit+ product with listing values from $127,630$128,934 (HK$1,000,000) to $391,316$395,312 (HK$3,066,000), 1 piece of Yixing Purple Clay with a listing value of $127,630$128,934 (HK$1,000,000) and 7 pieces of sports culture with listing values from $127,630$128,934 (HK$1,000,000) to $255,262$257,868 (HK$2,000,000).
We listed a total of 610 pieces of artwork in 2019.2020. The listing fees ranged from 22.9%22.83% to 28 %25% of the listing value of the paintings and calligraphies. The total listing value of artwork during 20192020 was $1,148,677$3,481,221 (HK$9,000,000)27,000,000).
As of December 31, 2018, a total of 279 sets of artwork were listed for trade on our platform —comprising 54 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists ranging in listing value from $127,590 (HK$1,000,000) to $1,531,081 (HK$12,000,000), 35 pieces of jewelry ranging in listing value from $25,518 (HK$200,000) to $1,275,901 (HK$10,000,000), 134 pieces of precious stones ranging in listing value from $12,759 (HK$100,000) to $765,540 (HK$6,000,000), 29 pieces of amber ranging in listing value from $127,590 (HK$1,000,000) to $1,020,721 (HK$8,000,000), 4 pieces of antique mammoth ivory carving ranging in listing value from $127,590 (HK$1,000,000) to $255,180 (HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value from $102,072 (HK$800,000) to $229,662 (HK$1,800,000), 7 pieces of porcelain in listing value from $38,277 (HK$300,000) to $382,770 (HK$3,000,000), 6 sets of Unit+ product with listing values from $127,590 (HK$1,000,000) to $391,191 (HK$3,066,000), 1 piece of Yixing Purple Clay with a listing value of $127,590 (HK$1,000,000) and 7 pieces of sports culture with listing values from $127,590 (HK$1,000,000) to $255,180 (HK$2,000,000).
We listed a total of 38 pieces of artwork in 2018. The listing fees ranged from 41.7% to 47.3 % of the listing value of paintings and calligraphies, 24.0% to 46.0% of the listing value of the precious stones, 25.0% to 48.0% of the listing value of the porcelain, 45% of the listing value of the Unit+ products, and 45.0% of the listing value of sports culture collectibles. The total listing value of artwork during 2018 was $9,320,577 (HK$73,051,000).
The decreaseincrease in the number of listings of artwork for the year ended December 31, 2019,2021, compared to the same period in 2018,2020, resulted in a decrease in thehigher listing fee revenue in 2019. During2021 as our listing fee was charged based on the fiscal yearlisting value of 2019, we focused on promoting the trading of our existing listed artwork as opposed to new listings. We also felt that any new listings would be unfavorably impacted by current market conditions. We will be more discreet about the future listings of more valuable artworks. artwork.
| (ii) | Commission fee revenue |
For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. On November 7, 2018 we lowered the minimum charge to $0.0013 (HK$0.01).
For selected Traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traderstraders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected Traders receive access to our trading platform to make unlimited trades for specific artwork.
We define Tradersdefined a selected Trader as “inactive traders” if they meettrader” who meets the following criteria;
| The Trader | ||
| The Trader did not incur any transactions in the month of reassessment; | ||
| The service agent |
Once an inactive traderTrader has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.
We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
The Company offered commission to Traders and service agents. Effective January 1, 2019, we no longer offered commission to our traders. For service agents, we offeredWe offer a total of 40% to 75% of the commission earned from transactions with new Traderstraders to the service agents when they bring in an agreed number of Traders to the trading platform.
The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.
Since the second half of 2018, there was a decrease in our trading volume and transaction value amounts because of the deteriorating economy in China due to the under-performance of its financial stock markets as well as the fall-out from the P2P (peer-to-peer) lending market.
Total commissionCommission revenue decreased by $1,380,096 or 36.14% for the year ended December 31, 2019 to $2,438,756 compared to $3,818,8522021 reduced by $1,199,157, from $3,288,077 for the year ended December 31, 2018, primarily because2020 to $2,088,920 for the same period in 2021. Although we incurred a higher trading transaction volume in 2021, majority of decrease inthe trading transactions were mainly initiated by selected traders during 2021. We earned a fixed fee from those selected traders regardless of the volume and transaction value drivenof the trading transactions initiated by the depressed economy in China.them.
| (iii) | Management fee revenue |
We charge Traders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which areis calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is recognized when the artwork is sold and is deducted from proceeds from the sale of artwork units.ownership shares when there is a purchase and sale transaction.
During the year ended December 31, 2019,2021, management fee revenue decreasedincreased by $119,050,$1,019,213, from $569,098$463,397 for the year ended December 31, 20182020 to $450,048$1,482,610 for the same period in 2019, which was primarily2021 due to our waiver of management fees for certain VIP traders since September 1, 2017, as well as the decrease ina higher trading volume during year ended December 31, 2019. The waiver was recognized as a reduction of management fee revenue.in 2021.
During the year ended December 31, 2019, we did not recognize any annual fee revenue, a decrease of $378 from $378 for the year ended December 31, 2018.
During the year ended December 31, 2019, authorized agent subscription revenue was nil, compared to $191,385 for the same period ended in 2018. The Company did not receive any subscriptions from the authorized agents due to the slowdown in the PRC economy.
From the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.
Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artwork, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped directly from third-party merchants to end customers. Upon successful sales on our online platform, we charge the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed.
Sales of artwork-related merchandise: We also offer our own artwork-related merchandise through our online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.
During the year ended December 31, 2019, commission from online artwork sales and sales of our artwork-related merchandise were $0 comparing to $8,409 for the year ended December 31, 2018. The dormant activity of online artwork sales in 2019 was primarily triggered by the economic downturn in the PRC.
Revenue by customer type
The following table presents our revenue by customer type:
For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Artwork owners | $ | 284,210 | $ | 3,907,301 | ||||
| Non - VIP traders | 2,256,192 | 2,324,441 | ||||||
| VIP traders | 632,612 | 2,063,887 | ||||||
| Authorized agents | - | 191,385 | ||||||
| Online artwork sales | - | 8,409 | ||||||
| Total | $ | 3,173,014 | $ | 8,495,423 | ||||
Cost of Revenue
Cost of revenue primarily includes the following: commission paid to service agents, depreciation, internet service charges, artwork insurance and artwork storage costs.
For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Commission paid to service agents | $ | 1,053,789 | $ | 1,214,912 | ||||
| Depreciation | 460,749 | 632,440 | ||||||
| Internet service charge | 208,941 | 396,254 | ||||||
| Artwork insurance | 48,322 | 220,089 | ||||||
| Artwork storage | 89,320 | 110,070 | ||||||
| Others | 456 | 4,999 | ||||||
| Total | $ | 1,861,577 | $ | 2,578,764 | ||||
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Commission paid to service agents | $ | 1,099,540 | $ | 1,691,411 | ||||
| Depreciation | 114,215 | 340,001 | ||||||
| Internet service charge | 47,696 | 141,059 | ||||||
| Artwork insurance | 50,878 | 49,956 | ||||||
| Artwork storage | 47,096 | 63,716 | ||||||
| Others | - | 1,261 | ||||||
| Subtotal | 1,359,425 | 2,287,404 | ||||||
| Less: Cost of revenue – discontinued operations | (1,359,425 | ) | (2,287,404 | ) | ||||
| Total | $ | - | $ | - | ||||
Cost of revenue for the years ended December 31, 20192021 and 20182020 were $1,861,577$1,359,425 and $2,578,764,$2,287,404 respectively. The decrease in the cost of revenue was mainly due to the decrease in the commission paid to service agents by $161,123. Management focused on resuscitating interest in listed artwork and no new artwork had been listed since the second quarter of 2019. Besides the decrease in commission paid to the service agents, the decrease in cost of revenue was also due to a fall in the depreciation and amortization of hardware and software on our trading platform by $171,691 as a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decline in internet services charges by $187,313 due to the termination of two network lines between Macau and Hong Kong, the decrease in artwork insurance expense by $171,767 due to a negotiated lower premium in our new insurance contract for 2019, the decrease in artwork storage fees by $20,750 and the drop in other expenses by $4,543.
Gross Profit
Gross profit was $1,311,437 for the year ended December 31, 2019,2021 compared to $5,916,659the same period in 2020 was mainly due to a decrease in the commissions paid to service agents by $591,871. This decrease was driven by a higher concentration of trading transaction initiated by the selected traders that have flat rate of transaction fee during the year ended December 31, 2021 as discussed above. The decrease in total cost of revenue was also intensified by the deconsolidation of Tianjin Takung in 2021. For the year ended December 31, 2021, the cost of revenue incurred by Tianjin Takung, $139,363, was deconsolidated. Our internet service charge was also significantly reduced by $93,363 as we downsized of our office locations.
Gross Profit
Gross profit for our continuing operations was $120,000 for the year ended December 31, 2018. The decrease was primarily due2021, compared to decreased revenue resulting from less artworks being listed on our platform as discussed above.
Gross profit margin decreased by 28.3% to 41.3%nil for the year ended December 31, 20192020. The gross profit for our continuing operations in 2021 was generated from 69.6%the provision of consultancy service related to NFT business. Due to the suspension of Tianjin’s operation, we reclassified listing revenue, commission revenue and management revenue as well as the corresponding cost of revenue to net income or loss from discontinued operations.
Operating Expenses
General and administrative expenses for the continuing operations were $13,565,548 for the year ended December 31, 2018, primarily due2021, compared to the significant decline in listing revenue.
Operating Expenses
General and administrative expenses were $4,662,313$780,697 for the year ended December 31, 2019, compared2020. The spike in general and administrative expense by $12,784,851 or 1638% was primarily attributed to $11,324,469a significant increase in share-based compensation by $10,844,440 as we granted 910,000 restricted shares to our consultants, independent directors and employees, an increase in consultancy fee by $216,141 due to an engagement of consultants for NFT business, an increase in legal and professional fees by $718,956 as a result of additional amounts paid to legal counsels, brokerage firms, investment specialists for the closing of private placement and review of agreements as well as fees paid to auditors for regulatory filing and annual filing, and others, $944,723 which chiefly a payment to an exhibition company which assisted us in locating the potential investors.
General and administrative expenses from the discontinued operations were $2,990,228 for the year ended December 31, 2018. The significant plunge2021 compared to $6,917,060 for the same period in general and administrative expense2020, with a decline by $6,662,156 was attributed to a decrease in salary and welfare by $3,074,609 due to the reduction in manpower since July 2018, a decrease in insurance and rental expenses by $498,482 due to the relocation of our$3,926,832. During 2021, Hong Kong office to a non-central business district location, a decrease in legalTakung lost its control over the operation of Tianjin Takung and professional fees by $320,470 as we obtained discounts from our professional service providers, a decrease in travelingthe assets, liabilities and accommodation expenses by $492,311 as a resultresults of fewer marketing events, a decrease in non-deductible input VAT by $218,008, a decrease in consultancy fees by $982,917 as we had paid for consultants to assist us in business setupoperations of our new subsidiaries and planning for new business in 2018 but we terminated most of the services by consultants in 2019, a decrease in shares-based compensation by $161,268 due to forfeiture of the stock options, a decrease in depreciation by $125,922 due to the disposal of the leasehold improvements of our wholly-owned subsidiary in Hong Kong, a decline in research and development expenses by $355,691 due to the closure of our software development center in Hangzhou, a decline in bad debt expense by $323,892 as the allowance we provided for the short-term borrowing to third parties in 2018Tianjin Takung was higher than that in 2019, which also caused a decrease in other expenses by $108,586.deconsolidated.
The following table sets forth the main components of our general and administrative expenses of our continuing operations and for discontinued operations for the years ended December 31, 20192021 and 2018.2020. Amounts for the year ended December 31, 2020 had been reclassified due to the deconsolidation of Tianjin Takung.
| For the year ended December 31, 2019 | For the year ended December 31, 2018 | |||||||||||||||
| Amount($) | % of Total | Amount($) | % of Total | |||||||||||||
| Salary and welfare | 1,700,186 | 36.5 | % | 4,774,795 | 42.2 | % | ||||||||||
| Office, insurance and rental expenses | 1,076,164 | 23.1 | % | 1,574,646 | 13.9 | % | ||||||||||
| Legal and professional fees | 850,974 | 18.3 | % | 1,171,444 | 10.3 | % | ||||||||||
| Consultancy fee | 275,934 | 5.9 | % | 1,258,851 | 11.1 | % | ||||||||||
| Non-deductible input VAT expense | 177,244 | 3.8 | % | 395,252 | 3.5 | % | ||||||||||
| Depreciation expenses | 136,905 | 3.0 | % | 262,827 | 2.3 | % | ||||||||||
| Traveling and accommodation expenses | 109,244 | 2.3 | % | 601,555 | 5.3 | % | ||||||||||
| Bad debt expense | 53,605 | 1.2 | % | 377,497 | 3.3 | % | ||||||||||
| Share-based compensation | 38,843 | 0.8 | % | 200,111 | 1.8 | % | ||||||||||
| Research & development expenses | 28,111 | 0.5 | % | 383,802 | 3.5 | % | ||||||||||
| Others | 215,103 | 4.6 | % | 323,689 | 2.8 | % | ||||||||||
| Total general & administrative expenses | $ | 4,662,313 | 100 | % | $ | 11,324,469 | 100 | % | ||||||||
| For the year ended December 31, 2021 | For the year ended December 31, 2020 | |||||||||||||||
| Amount($) | % of Total | Amount($) | % of Total | |||||||||||||
| Salary and welfare | 97,234 | 0.6 | % | 31,692 | 0.4 | % | ||||||||||
| Office, insurance and rental expenses | 304,890 | 1.8 | % | 301,455 | 3.9 | % | ||||||||||
| Legal and professional fees | 1,028,884 | 6.2 | % | 309,928 | 4.0 | % | ||||||||||
| Consultancy fee | 216,141 | 1.3 | % | - | - | % | ||||||||||
| Depreciation expenses | 117 | 0.0 | % | 5,229 | 0.1 | % | ||||||||||
| Traveling and accommodation expenses | 28 | 0.0 | % | 3,302 | 0.0 | % | ||||||||||
| Share-based compensation | 10,881,967 | 65.7 | % | 37,527 | 0.5 | % | ||||||||||
| Others | 1,036,287 | 6.3 | % | 91,564 | 1.2 | % | ||||||||||
| Total general & administrative expenses-continuing operations | 13,565,548 | 81.9 | % | 780,697 | 10.1 | % | ||||||||||
| Total general & administrative expenses-a discontinued operations | 2,990,228 | 18.1 | % | 6,917,060 | 89.9 | % | ||||||||||
| Total | $ | 16,555,776 | 100.0 | % | $ | 7,697,757 | 100.0 | % | ||||||||
| Elimination of intercompany transaction related to service expenses to Tianjin Takung | - | - | (4,242,507 | ) | - | |||||||||||
| Total general & administrative expenses as previously reported | $ | - | 100.0 | % | $ | 3,455,249 | 100.0 | % | ||||||||
The Companycontinuing operation also incurred a total of $301,460$nil and $898,006$7,041 in selling expenses from its continuing operations for the years ended December 31, 20192021 and 2018,2020, respectively. The decrease in selling expensesexpense by $7,041 was due to fewer promotion and advertising eventsthe deconsolidation of Tianjin Takung during 2019.2021.
The continuing operations recognized an impairment loss, $1,333,506, against its non-marketable investment. Management assessed that the future undiscounted cash flow was less than the carrying cost of our non-marketable investment.
The continuing operations reported a gain on the extinguishment of debt, $1,331,191, which pertained to the payable to Tianjin Takung related to the operational support from Tianjin Takung. This amount was not included in the year ended December 31, 2020 as the loss of control incurred in the fourth quarter of 2021.
Total operating
Other (expenses) income
Other expenses from the continuing operations for the year ended December 31, 2019 were $4,963,773, a decline of $7,611,3712021 was $93 compared to $12,575,144other income $17,665 for the same period in 2018.2020. The significant plummetdecrease was driven by the decrease in general and administrative as well as selling expenses as discussed above. The plunge was also triggered by a decrease in an impairment loss of $352,669 that was recognized in 2018. The impairment loss included the written down of the value of our construction-in-progress of our software development of $195,377 by our subsidiary in Shanghai due to the restructuring of our business in this subsidiary and impairment loss in the cost of e-commerce trading platform of $157,292 by our subsidiary in Tianjinpredominantly due to a declinesignificant decrease in appetiteforeign currency exchange gain, arising from the depreciation of the Hong Kong dollar against the US dollar during 2021.
Loss (income) before income taxes
Our continuing operations incurred loss before income taxes $13,447,956 and $770,073 for artworkthe years ended December 31, 2021 and 2020, respectively. Loss before income taxes of our continuing operations was significantly higher in China2021 as we incurred a higher share-based compensation in 2021.
Our discontinued operations incurred loss before income taxes, $16,113,160 for the year ended December 31, 2018.
Other2021 while generated income (loss) and expenses
Other loss and expenses for the year ended December 31, 2019 was $367,201, compared to $1,453,379 forbefore income taxes, $169,985 in the same period in 2018. The significant decrease was primarily attributed2020. Due to the exchange loss arisingof control in and deconsolidation of Tianjin Takung in November 2021, Hong Kong Takung recognized impairment charges against its receivables from Tianjin Takung, $16,388,254 and investment in Tianjin Takung, $150,527 in 2021. The entire asset impairment charges resulted in a higher loss before income taxes in 2021 compared to the fluctuation of the exchange rate between RMB and the U.S. dollar.same period in 2020.
Income tax expense
The Company’s effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate at 8.25% for the first HK$ 2 million (approximately $255,261)$257,311) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $255,261)$257,311) (16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act introduced significant changes to the U.S. income tax regulations. The Tax Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent and created new tax rules on certain foreign-sourced earnings. Except for the one-time Deemed Repatriation Transition Tax ("Transition Tax"), most of these provisions go into effect starting January 1, 2018.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB118”) was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As of December 22, 2018, the Company has completed the assessment of the income tax effect of the Tax Act and there were no adjustments recorded to the provisional amounts.
The Global Intangible Low-taxed Income (GILTI) is a new provision introduced by the Tax Act. U.S. shareholders, who are domestic corporations, of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current period expense when incurred. As of December 31, 20192021 and 2018,2020, the Company does not have any aggregated positive tested income; and as such, does not have additional provision amount recorded for GILTI tax.
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The company does not anticipate a material impact on its financial statements as of December 31, 20192020 due to the recent enactment.
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HK$ 2 million (approximately $255,261)$257,868) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. We elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Takung Art Holdings and Hong Kong MQ still apply the original tax rate of 16.5% for its provision for current income and deferred taxes.
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the year ended December 31, 20192021 and 2018.2020.
The income tax expense for the year ended December 31, 2019 was $73,269, while the income tax benefit for the year ended December 31, 2018 was $479,901. The decrease in income tax benefit by $553,170 primarily resulted from the reduction in pre-tax book loss of our foreign subsidiaries in Hong Kong and the provision of valuation allowance against the deferred tax asset of Tianjin Takung. Due to the impact of the economy slowdown in the PRC on our business, we provided deferred tax asset valuation allowance for Tianjin Takung, $236,732 for the year ended December 31, 2019, as it’s more likely than not that Tianjin Takung will not utilize its deferred tax asset especially its net operating loss before it expires.
Our effective tax ratescontinuing operations for the years ended December 31, 20192021 and 20182020 were (1.8)%nil as a full valuation allowance was recognized against the net operating loss carryforwards generated by the Company and 5.9%,Hong Kong MQ. Management believed that it is more likely than not that these two entities will not generate sufficient taxable income to utilize the net operating loss carryforward in a near future.
The income tax expense from the discontinued operations for the years ended December 31, 2021 and 2020 were $512,395 and $12,550, respectively.
During the year ended December 31, 2021, we derecognized the deferred tax assets incurred by Hong Kong Takung as the Company expected that the net operating loss or deferred tax assets may not be utilized or reversed in a near future due to the shift of its operations from its legacy artwork trading to NFT business.
Net Loss
As a result of our operations aforementioned, our net losses after income taxes for continuing operations for the years ended December 31, 20192021 and 20182020 were $4,092,806$13,447,956 and $7,631,963,$770,073, respectively.
Our discontinued operations generated net loss after income tax $16,625,555 for the year ended December 31, 2021 while net income after income tax $157,435 for the year ended December 31, 2020.
Foreign currency translation gainloss
We had a foreign currency translation gainloss for the years ended December 31, 20192021 and 20182020 of $29,673$(13,059) and $17,588, respectively, primarily due to the appreciation of US dollar to Renminbi.$(55,001), respectively.
Comprehensive loss
As a result of the above, we posted a comprehensive loss of $4,063,133$30,086,570 and $7,614,375$667,639 for the years ended December 31, 20192021 and 2018,2020, respectively.
Liquidity and Capital Resources
The following tables set forth our consolidated statements of cash flow:
| For the years ended December 31 | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities-continuing operations | $ | (3,188,435 | ) | $ | (977,294 | ) | ||
| Net cash used in operating activities- discontinued operations | (12,923,713 | ) | (6,845,506 | ) | ||||
| (16,112,148 | ) | (7,482,800 | ) | |||||
| Net cash used in investing activities- continuing operations | (507,024 | ) | - | |||||
| Net cash used in investing activities- discontinued operations | (457 | ) | (454,736 | ) | ||||
| (507,481 | ) | (454,736 | ) | |||||
| Net cash provided by financing activities-continuing operations | 5,180,485 | - | ||||||
| Net cash provided by financing activities-discontinued operations | - | - | ||||||
| 5,180,485 | - | |||||||
| Effect of exchange rate change on cash and cash equivalents, and restricted cash from continuing operations | (13,061 | ) | - | |||||
| Effect of exchange rate change on cash and cash equivalents, and restricted cash from discontinued operations | (548,845 | ) | 311,127 | |||||
| (561,906 | ) | 311,127 | ||||||
| Net (decrease) increase in cash and cash equivalents - continuing operations | 1,471,965 | (977,294 | ) | |||||
| Net (decrease) increase in cash and cash equivalents and restricted cash- discontinued operations | (13,473,015 | ) | (6,989,115 | ) | ||||
| (12,001,050 | ) | (7,986,409 | ) | |||||
| Cash and cash equivalents, beginning balance- continuing operations | 31,188 | 1,028,482 | ||||||
| Cash and cash equivalents and restricted cash, beginning balance- discontinued operations | 13,811,557 | 20,800,672 | ||||||
| 13,842,745 | 21,829,154 | |||||||
| Cash and cash equivalents and restricted cash, ending balance- discontinued operations | $ | 1,503,153 | $ | 31,188 | ||||
| Cash and cash equivalents and restricted cash, ending balance- discontinued operations | 338,542 | 13,811,557 | ||||||
| 1,841,695 | 13,842,745 | |||||||
For the years ended December 31 | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by (used in) operating activities | $ | 9,841,840 | $ | (23,035,965 | ) | |||
| Net cash provided by (used in) investing activities | 224,608 | (1,846,325 | ) | |||||
| Net cash (used in) provided by financing activities | (699,526 | ) | 928,293 | |||||
| Effect of exchange rate change on cash and cash equivalents and restricted cash | (61,854 | ) | (662,499 | ) | ||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | 9,305,068 | (24,616,496 | ) | |||||
| Cash and cash equivalents and restricted cash, beginning balance | 12,524,086 | 37,140,582 | ||||||
| Cash and cash equivalents and restricted cash, ending balance | $ | 21,829,154 | $ | 12,524,086 | ||||
We adopted ASU 2016-18 on January 1, 2018. The adoption
Sources of this guidance results in an inclusion of our restricted cash balances within the overallLiquidity
The cash and cash equivalent balance and removal offrom the changes in restricted cash activity.
Sources of Liquidity
The cash and restricted cash balancecontinuing operations as of December 31, 20192021 was $21,829,154.$1,503,153. Out of this amount, we had $825,886$273,151 denominated in U.S. dollars deposited in the financial institutions in the United States, Hong Kong and PRC, $1,163,168 dominated$1,230,002, denominated in HK$ in Hong Kong financial institutions, and $19,834,157 dominated in RMB in the financial institutions in the PRC. institutions.
During the year ended December 31, 2019,2021, net cash generatedused in operating activities from operating activities was $3,188,435 which predominantly related to the net loss from the continuing operations, $13,447,956 and a non-cash gain on extinguishment of debts, $1,331,191, was primarily offset by non-cash item share-based compensation, $10,881,967 and non-marketable investment impairment, $1,333,506. The investing cash outflow from the continuing operations totaled $9,841,840$507,024 which includesincluded the purchase of equipment, $7,024 and investment in cultural projects, $500,000. The financing cash inflows from the following: an increase in client deposits by $11,855,739 placed by the customers for upcoming transactions, non-cash item such as depreciation, $597,654, decrease in prepayment and other current assets, $386,557, collection from accounts receivable, $568,757, an increase in lease liabilities, current, $166,987, an increase in lease liabilities, noncurrent, $48,856, and repayments from related party, $340,044. Thecontinuing operations totaled $5,180,485, which included cash inflows were offset by the net loss, $4,092,806. Net cash generated from investing activities totaled $224,608. The cash inflows from investing activities included the repayment of loans from third party, $2,380,065, offset by the outflow of loans made to third parties, $2,080,211 and purchase of property and equipment, $75,246. Net cash used in financing activities totaled $699,526 was resultedreceipts from the repayment of loans to third parties, $2,499,500, offsetstock option exercised by proceedsour employees, $180,485, and cash receipts from short-term borrowings, $1,799,974. The resulting change in cash for the period was an increase of $9,305,068. The cash balance at the beginning of the period was $12,524,086. The cash balance on December 31, 2019 was $21,829,154.a private investment, $5,000,000.
The cash and restricted cash equivalent balance from the discontinued operations as of December 31, 20182021 was $12,524,086.$338,542. Out of this amount, we had $53,037$112,397 denominated in U.S. dollars deposited in the financial institutions in Hong Kong, $226,145, denominated in HK$ in Hong Kong financial institutions.
During the year ended December 31, 2021, net cash used in operating activities from discontinued operations was $12,923,713, which included net loss from Hong Kong Takung, $16,625,555 and a decrease in customer deposits, $9,144,610, offset by deferred tax expense, $639,025, deconsolidation of Tianjin Takung, $11,021,710 and change in foreign currency exchange rate, $1,259,010. Net cash used in investing activities from discontinued operations was $457 which was related to the purchase of office equipment by Hong Kong Takung. There was no cash inflow or outflow from financing activities from our discontinued operations in 2021.
The cash and cash equivalent balance from the continuing operations as of December 31, 2020 was $31,188. Out of this amount, we had $25,879 denominated in U.S. dollars deposited in the financial institutions in the United States, $695,329$5,309 denominated in HK$ in Hong Kong financial institutions $2,512,382
During the year ended December 31, 2020, net cash used in operating activities by the continuing operations totaled $997,294 which primarily due to a net loss from the continuing operations, $770,073, prepayments made to vendors, $78,662, repayments to related party, $61,761, payments to vendors and $760,841$6,305. There was no cash inflows or outflows from the investing or financing activities from our continuing operations.
The cash and cash equivalent balance from the discontinued operations as of December 31, 2020 was $13,811,557. Out of this amount, we had $578,369 denominated in U.S. dollars deposited in the financial institutions in Hong Kong and China respectively, and $8,502,497the PRC, $316,195, denominated in RMB and deposited in financial institutionsHK$ in Hong Kong financial institutions and China. $12,916,993, denominated in renminbi in the PRC financial institutions.
During the year ended December 31, 2018,2020, net cash used in operating activities by our discontinued operations totaled $23,035,965.$6,845,506. The cash outflows from operating activities from our discontinued operations was mainly attributable to the decrease in customer deposits by $7,260,331 and deferred tax benefit, $112,365, offset by the net income, $157,435 and depreciation, $455,070. Net cash used in investing activities totaled $1,846,325. Net cash provided byfrom discontinued operations, $454,736, included purchase of equipment, $20,218 and a loan to a third party, $434,518 during the year. There were no financing activities totaled $928,293. The resulting change in cash forfrom the period was a decrease of $24,616,496, which was primarily due to refund of customer deposits.discontinued operations.
As of December 31, 2019, the Company had $25,947,490 in2021, total current liabilities from the continuing operations, $143,429, which included $629,666was related to accrued expenses and other payables of US Takung and Hong Kong MQ. Total current liabilities from the discontinued operation, Hong Kong Takung, totaled $8,733,624 which consisted of $273,390 in accrued expenses and other payables, $16,404,941 in customer deposits, $1,868,345 in short-term borrowings from third parties, $6,862,713$6,410,585 in amount due to related parties, $8,788$21,854 in advance from customers, $166,987$1,965,398 in short-term borrowings from a third party and $62,397 in lease liabilities and $6,050 in tax payables. liabilities.
As of December 31, 2018,2021, the Company had $14,099,778 in total current liabilities, which included $641,692 in accrued expenses and other payables, $8,995 in advance from customers, $4,549,202 in customer deposits, $2,499,500 in short-term borrowings from third parties, $6,385,288 in amount due to related parties, and $15,101 in tax payables.
The Company’s total liabilities as of December 31, 2019 and 2018 amounted to $25,996,346 and $14,099,778, respectively.
The Company’s net assets amounted to $6,445,157 and $10,469,447 as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Companycontinuing operation had cash and cash equivalents of $5,424,213 and$1,503,153, a working capital of $4,178,440. This can assure$1,649,632 and the net assets amounted to $10,953,269. The Company’s discontinued operations, which primarily related to Hong Kong Takung, had cash and cash equivalents of $338,542, a working deficit of $8,360,145 and net liabilities of $8,176,586. In order to continue to maintain the liquidity requirements, the Company introduced NFT business in the fourth quarter of 2021 and developed consultancy service fee on NFT projects. The Company also seeks to negotiate and extend financing arrangements with the related party and the third party. In February 2022, the Company entered into certain securities purchase agreement with certain “non-U.S. persons” and expected to raise approximately $30 million from this offering. Management believed that these measures provided sufficient liquidity and adequate capital to fund the operations and reasonably meet the anticipated liquidity requirements for at least the next twelve months.
As of December 31, 2020, the continuing operations of the Company had $8,011 in total current liabilities which was related to accrued expenses and other payables of US Takung and Hong Kong MQ. Total current liabilities from the discontinued operations, Tianjin Takung and Hong Kong Takung, totaled $18,486,713, which consisted of $720,078 in accrued expenses and other payables, $1,977,109 in short-term borrowings from a third party, $6,448,784 in amount due to related parties, $17,412 in advance from customers, $72,367 in lease liabilities, $9,144,610 in customer deposits, and $106,353 in tax payables.
Total liabilities of the Company’s continuing operations as of December 31, 2021 and 2020 amounted to $143,430 and $8,011, respectively. Total liabilities of the Company’s discontinued operations as of December 31, 2021 and 2020 were $8,733,624 and $18,590,092, respectively.
Net assets of the Company’s continuing operations amounted to $10,953,269 and $165,567 as of December 31, 2021 and 2020, respectively. During the 2021, we invested in a cultural project, $10,630,120, which was partially funded by a capital raised through a private investment in public equity, $5,000,000, during 2021.
The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RMB is only currently convertible under the "current“current account,"” which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital“capital account,"” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current“current account transactions,"” including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary'ssubsidiary’s registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.
If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.
Future Financings
We may sell our common stock in order to fund our business growth. Issuances of additional shares will result in dilution to existing shareholders. There is no assurance that we will achieve sales of the equity securities or arrange for debt or other financing to fund our growth in case it is necessary, or if we are able to do so, there is no guarantee that existing shareholders will not be substantially diluted.
Critical Accounting Policies
We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management'smanagement’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.
Recent Accounting Pronouncements
The discussion of the recent accounting pronouncements contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Stockholders of |
| Takung Art Co., Ltd. |
To the Shareholders and Board of Directors of Takung Art Co., Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Takung Art Co., Ltd. (theand subsidiaries (collectively the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’stockholders’ equity, and cash flows for each of the two years in the two-year period ended December 31, 2019,2021, 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, 20192021 and 2018,2020, and the results of its operations and its cash flows for each ofyear in the two years in thetwo-year period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the suspended operations of the Company’s PRC subsidiary raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(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 auditsaudit 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'sCompany’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.
Critical Audit Matter
The critical audit matter communicated below is a matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Investments
As described in Note 4, the Company has a non-marketable investment in a privately held company incorporated in British Virgin Islands without readily determinable market values. Measurement of the carrying value of the investment requires significant management judgement. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, conducting enquiry, vouching certain details and inputs, evaluating the appropriateness of valuation models and the reasonableness of key assumptions. The accounts that are affected are the investment accounts, related valuation allowance, and impairment expense.
/s/ Marcum Bernstein & Pinchuk LLPWWC, P.C.
WWC, P.C.
Certified Public Accountants
PCAOB ID: 1171
We have served as the Company’s auditor since 2016.
Beijing, China
May 8, 2020
BEIJING OFFICE • Unit 2419-2422 • Kerry Center South Tower • 1 Guang Hua Road • Chaoyang District, Beijing • 100020
Phone 8610.8518.7992 • Fax 8610.8518.7993 • www.marcumbp.com
2021.
San Mateo, California
April 15, 2022
TAKUNG ART CO., LTD AND SUBSIDIARIES
(Stated in U.S. Dollars except Number of Shares)
| As of December 31, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,503,153 | $ | 31,188 | ||||
| Account receivables, net | 120,000 | - | ||||||
| Prepayment and other current assets, net | 169,908 | 142,250 | ||||||
| Current assets – discontinued operations | 373,479 | 22,938,347 | ||||||
| Total current assets | 2,166,540 | 23,111,785 | ||||||
| Non-current assets | ||||||||
| Property and equipment, net | 6,883 | - | ||||||
| Intangible assets | 140 | 140 | ||||||
| Non-marketable investment, net | 9,296,614 | - | ||||||
| Non-current assets – discontinued operations | 183,559 | 1,301,223 | ||||||
| Total non-current assets | 9,487,196 | 1,301,363 | ||||||
| Total assets | $ | 11,653,736 | $ | 24,413,148 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accrued expenses and other payables | $ | 143,429 | $ | 8,011 | ||||
| Current liabilities – discontinued operations | 8,733,624 | 18,486,713 | ||||||
| Total current liabilities | 8,877,053 | 18,494,724 | ||||||
| Noncurrent liabilities | - | - | ||||||
| Noncurrent liabilities-discontinued operations | - | 103,379 | ||||||
| Total noncurrent liabilities | - | 103,379 | ||||||
| Total liabilities | 8,877,053 | 18,598,103 | ||||||
| COMMITMENTS AND CONTINGENCIES | - | - | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock (1,000,000,000 shares authorized; $0.001 par value; 14,372,353 shares issued and outstanding as of December 31, 2021; 11,255,129 shares issued and outstanding as of December 31, 2020) | 14,372 | 11,271 | ||||||
| Additional paid-in capital | 32,547,585 | 6,358,115 | ||||||
| Accumulated deficits | (29,444,185 | ) | (226,311 | ) | ||||
| Accumulated other comprehensive loss | (341,089 | ) | (328,030 | ) | ||||
| Total stockholders’ equity | 2,776,683 | 5,815,045 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,653,736 | $ | 24,413,148 | ||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 5,424,213 | $ | 7,974,884 | ||||
| Restricted cash | 16,404,941 | 4,549,202 | ||||||
| Account receivables, net | - | 568,757 | ||||||
| Prepayment and other current assets, net | 451,248 | 955,249 | ||||||
| Amount due from a related party | 5,834,554 | 5,907,789 | ||||||
| Loan receivables | 2,010,974 | 2,391,350 | ||||||
| Total current assets | 30,125,930 | 22,347,231 | ||||||
| Non-current assets | ||||||||
| Property and equipment, net | 859,826 | 1,445,679 | ||||||
| Intangible assets | 22,401 | 22,284 | ||||||
| Deferred tax assets, net | 540,279 | 611,738 | ||||||
| Operating leaseright-of-use assets | 731,469 | - | ||||||
| Amount due from a related party | 104,128 | - | ||||||
| Other non-current assets | 57,470 | 142,293 | ||||||
| Total non-current assets | 2,315,573 | 2,221,994 | ||||||
| Total assets | $ | 32,441,503 | $ | 24,569,225 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accrued expenses and other payables | $ | 629,666 | $ | 641,692 | ||||
| Customer deposits | 16,404,941 | 4,549,202 | ||||||
| Advance from customers | 8,788 | 8,995 | ||||||
| Short-term borrowings from third parties | 1,868,345 | 2,499,500 | ||||||
| Amount due to related parties | 6,862,713 | 6,385,288 | ||||||
| Operating lease liabilities, current | 166,987 | - | ||||||
| Tax payables | 6,050 | 15,101 | ||||||
| Total current liabilities | 25,947,490 | 14,099,778 | ||||||
| Operating lease liabilities, non-current | 48,856 | - | ||||||
| Total noncurrent liabilities | 48,856 | - | ||||||
| Total liabilities | 25,996,346 | 14,099,778 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of December 31, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018) | 11,255 | 11,226 | ||||||
| Additional paid-in capital | 6,320,604 | 6,281,790 | ||||||
| Retained earnings | 386,327 | 4,479,133 | ||||||
| Accumulated other comprehensive loss | (273,029 | ) | (302,702 | ) | ||||
| Total shareholders’ equity | 6,445,157 | 10,469,447 | ||||||
| Total liabilities and shareholders’ equity | $ | 32,441,503 | $ | 24,569,225 | ||||
The accompanying notes are an integral part of these consolidated financial statements
TAKUNG ART CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Stated in U.S. Dollars except Number of Shares)
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||
| 2019 | 2018 | |||||||
| Revenue | ||||||||
| Listing fee | $ | 284,210 | $ | 3,907,301 | ||||
| Commission | 2,438,756 | 3,818,852 | ||||||
| Authorized agent subscription revenue | - | 191,385 | ||||||
| Management fee | 450,048 | 569,098 | ||||||
| Online artwork sales | - | 8,409 | ||||||
| Annual fee | - | 378 | ||||||
| Total revenue | 3,173,014 | 8,495,423 | ||||||
| Cost of revenue | (1,861,577 | ) | (2,578,764 | ) | ||||
| Gross profit | 1,311,437 | 5,916,659 | ||||||
| Operating expenses | ||||||||
| General and administrative expenses | (4,662,313 | ) | (11,324,469 | ) | ||||
| Selling expenses | (301,460 | ) | (898,006 | ) | ||||
| Impairment loss | - | (352,669 | ) | |||||
| Total operating expenses | (4,963,773 | ) | (12,575,144 | ) | ||||
| Loss from operations | (3,652,336 | ) | (6,658,485 | ) | ||||
| Other income and expenses: | ||||||||
| Other (expenses) income | (63,221 | ) | 457,552 | |||||
| Loan interest expense | (57,474 | ) | (573,765 | ) | ||||
| Exchange loss | (246,506 | ) | (1,337,166 | ) | ||||
| Total other loss | (367,201 | ) | (1,453,379 | ) | ||||
| Loss before income tax expense | (4,019,537 | ) | (8,111,864 | ) | ||||
| Income taxes (expense) benefit | (73,269 | ) | 479,901 | |||||
| Net loss | (4,092,806 | ) | (7,631,963 | ) | ||||
| Foreign currency translation adjustment | 29,673 | 17,588 | ||||||
| Comprehensive Loss | $ | (4,063,133 | ) | $ | (7,614,375 | ) | ||
| Loss per share of common stock– basic | $ | (0.36 | ) | $ | (0.68 | ) | ||
| Loss per share of common stock– diluted | $ | (0.36 | ) | $ | (0.68 | ) | ||
| Weighted average number of common shares outstanding –basic | 11,246,119 | 11,218,534 | ||||||
| Weighted average number of common shares outstanding –diluted | 11,246,119 | 11,218,534 | ||||||
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Revenue | ||||||||
| Listing fee | $ | - | $ | - | ||||
| Commission | - | - | ||||||
| Management fee | - | - | ||||||
| Consultancy service fee | 120,000 | - | ||||||
| Total revenue | 120,000 | - | ||||||
| Cost of revenue | - | - | ||||||
| Gross profit | 120,000 | - | ||||||
| Operating expenses | ||||||||
| General and administrative expenses | (13,565,548 | ) | (780,697 | ) | ||||
| Selling expense | - | (7,041 | ) | |||||
| Non-marketable investment impairment | (1,333,506 | ) | - | |||||
| Gain on extinguishment of debt | 1,331,191 | - | ||||||
| Total operating expenses | (13,567,863 | ) | (787,738 | ) | ||||
| Loss from operations | (13,447,863 | ) | (787,738 | ) | ||||
| Other income and expenses: | ||||||||
| Other (expenses) income | (93 | ) | 6,666 | |||||
| Exchange gain | - | 10,999 | ||||||
| Total other (expenses) income | (93 | ) | 17,665 | |||||
| Loss before income taxes | (13,447,956 | ) | (770,073 | ) | ||||
| Income tax expense | - | - | ||||||
| Net loss from continuing operations | (13,447,956 | ) | (770,073 | ) | ||||
| (Loss) Income from discontinued operations, net of income taxes: | ||||||||
| (Loss) Income from discontinued operations | (16,113,160 | ) | 169,985 | |||||
| Income tax expense | - | (101,756 | ) | |||||
| Deferred tax (expense) benefit | (512,395 | ) | 89,206 | |||||
| Net (loss) income from discontinued operations | (16,625,555 | ) | 157,435 | |||||
| Net loss | (30,073,511 | ) | (612,638 | ) | ||||
| Foreign currency translation adjustment | (13,059 | ) | (55,001 | ) | ||||
| Comprehensive Loss | $ | (30,086,570 | ) | $ | (667,639 | ) | ||
| Loss from continuing operations per share of common stock – basic | $ | (1.09 | ) | $ | (0.07 | ) | ||
| Loss from continuing operations per share of common stock – diluted | $ | (1.09 | ) | $ | (0.07 | ) | ||
| Income from discontinued operations per share of common stock – basic | $ | (1.34 | ) | $ | 0.01 | |||
| Income from discontinued operations per share of common stock – diluted | $ | (1.34 | ) | $ | 0.01 | |||
| Weighted average number of common stock outstanding – basic | 12,383,741 | 11,264,128 | ||||||
| Weighted average number of common stock outstanding – diluted | 12,383,741 | 11,363,417 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’STOCKHOLDERS’ EQUITY
(Stated in U.S. Dollars except Number of Shares)
| Number | Common | Additional Paid-in | Retained | Accumulated other comprehensive | ||||||||||||||||||||
| of shares | Stock | capital | earnings | (loss) income | Total | |||||||||||||||||||
| Balance, December 31, 2017 | 11,188,882 | $ | 11,189 | $ | 6,116,216 | $ | 12,111,096 | $ | (320,290 | ) | $ | 17,918,211 | ||||||||||||
Issuance of common stock for restricted share award | 37,143 | 37 | 41,118 | - | - | 41,155 | ||||||||||||||||||
| Share-based compensation | - | - | 124,456 | - | - | 124,456 | ||||||||||||||||||
| Net loss for the year | - | - | - | (7,631,963 | ) | - | (7,631,963 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 17,588 | 17,588 | ||||||||||||||||||
| Balance, December 31, 2018 | 11,226,025 | 11,226 | 6,281,790 | 4,479,133 | (302,702 | ) | 10,469,447 | |||||||||||||||||
Issuance of common stock for restricted share award | 29,104 | 29 | - | - | - | 29 | ||||||||||||||||||
| Share-based compensation | - | - | 38,814 | - | - | 38,814 | ||||||||||||||||||
| Net loss for the year | - | - | - | (4,092,806 | ) | - | (4,092,806 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 29,673 | 29,673 | ||||||||||||||||||
| Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||
| Number of shares | Common Stock | Additional Paid-in capital | Retained earnings | Accumulated other comprehensive (loss) income | Total | |||||||||||||||||||
| Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||
| Issuance of common stock for restricted share award | 16,250 | - | - | - | - | |||||||||||||||||||
| Share-based compensation | - | 16 | 37,511 | - | - | 37,527 | ||||||||||||||||||
| Net loss from continuing operations | - | - | - | (770,073 | ) | - | (770,073 | ) | ||||||||||||||||
| Net income from discontinued operations | - | - | - | 157,435 | - | 157,435 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (55,001 | ) | (55,001 | ) | ||||||||||||||||
| Balance, December 31, 2020 | 11,271,379 | 11,271 | 6,358,115 | (226,311 | ) | (328,030 | ) | 5,815,045 | ||||||||||||||||
| Issuance of common stock for restricted share award | 3,039,909 | 3,040 | 26,005,328 | - | - | 26,008,368 | ||||||||||||||||||
| Stock option exercised | 61,065 | 61 | 180,424 | - | - | 180,485 | ||||||||||||||||||
| Share-based compensation | - | - | 3,718 | - | - | 3,718 | ||||||||||||||||||
| Net loss from continuing operations | - | - | - | (13,447,956 | ) | - | (13,447,956 | ) | ||||||||||||||||
| Net loss from discontinued operations | (16,625,555 | ) | (16,625,555 | ) | ||||||||||||||||||||
| Deconsolidation of subsidiary | - | - | - | 855,637 | - | 855,637 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (13,059 | ) | (13,059 | ) | ||||||||||||||||
| Balance, December 31, 2021 | 14,372,353 | $ | 14,372 | $ | 32,547,585 | $ | (29,444,185 | ) | $ | (341,089 | ) | $ | 2,776,683 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
| For the Year | For the Year | |||||||
| Ended | Ended | |||||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,092,806 | ) | $ | (7,631,963 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | 597,654 | 895,267 | ||||||
| Interest expense | 57,474 | 289,819 | ||||||
| Bad debt expense | 53,605 | 377,497 | ||||||
| Changes in exchange rate | 246,506 | 1,337,166 | ||||||
| Share-based compensation | 38,843 | 200,111 | ||||||
| Impairment loss | - | 352,668 | ||||||
| Loss on fixed asset disposals | 57,180 | 23,210 | ||||||
| Deferred taxes | 71,459 | (320,308 | ) | |||||
| Changes in operating assets and liabilities (Increase) decrease in: | ||||||||
| Prepayment and other current assets | 386,557 | 123,418 | ||||||
| Other non-current assets | 84,823 | 614,942 | ||||||
| Account receivables | 568,757 | 1,799,370 | ||||||
| Operating lease right-of-use assets | (731,469 | ) | - | |||||
| Amount due to related parties | 340,044 | - | ||||||
| Customer deposits | 11,855,739 | (20,724,415 | ) | |||||
| Tax payables | 108,393 | 435,640 | ||||||
| Advance from customers | (207 | ) | (161,083 | ) | ||||
| Accrued expenses and other payables | (16,555 | ) | (647,304 | ) | ||||
| Operating lease liabilities, current | 166,987 | - | ||||||
| Operating lease liabilities, non-current | 48,856 | - | ||||||
| Net cash provided by (used in) operating activities | 9,841,840 | (23,035,965 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (75,246 | ) | (579,948 | ) | ||||
| Purchase of available-for-sale investments | (22,975,927 | ) | (89,877,440 | ) | ||||
| Maturity and redemption of available-for-sale investments | 22,975,927 | 89,877,440 | ||||||
| Repayment of loans by third party | 2,380,065 | 5,103,432 | ||||||
| Loans to related party | - | (6,369,809 | ) | |||||
| Loans to third parties | (2,080,211 | ) | - | |||||
| Net cash provided by (used in) investing activities | 224,608 | (1,846,325 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term borrowings | 1,799,974 | - | ||||||
| Proceeds from related party loans | - | 6,369,589 | ||||||
| Loan repayment to a related party | - | (482,290 | ) | |||||
| Loan repayments to third parties | (2,499,500 | ) | (4,959,006 | ) | ||||
| Net cash (used in) provided by financing activities | (699,526 | ) | 928,293 | |||||
| Effect of exchange rate change on cash and cash equivalents, and restricted cash | (61,854 | ) | (662,499 | ) | ||||
| Net increase (decrease) in cash and cash equivalents, and restricted cash | 9,305,068 | (24,616,496 | ) | |||||
| Cash and cash equivalents, and restricted cash beginning balance | 12,524,086 | 37,140,582 | ||||||
| Cash and cash equivalents, and restricted cash ending balance | $ | 21,829,154 | $ | 12,524,086 | ||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||
| Cash and cash equivalents | 5,424,213 | 7,974,884 | ||||||
| Restricted cash | 16,404,941 | 4,549,202 | ||||||
| Total cash, cash equivalents, and restricted cash | $ | 21,829,154 | $ | 12,524,086 | ||||
| Supplemental cash flows information: | ||||||||
| Cash paid for interest | $ | 156,519 | $ | 319,670 | ||||
| Cash paid for income tax | $ | - | $ | 271,105 | ||||
| For the Year | For the Year | |||||||
| Ended | Ended | |||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | (13,447,956 | ) | $ | (770,073 | ) | ||
| Net (loss) income from discontinued operations | (16,625,555 | ) | 157,435 | |||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 117 | 5,229 | ||||||
| Changes in exchange rate | (612,639 | ) | (123,249 | ) | ||||
| Share-based compensation | 10,881,967 | 37,527 | ||||||
| Gain on extinguishment of debts | (1,331,191 | ) | - | |||||
| Non-marketable investment impairment | 1,333,506 | - | ||||||
| Changes in operating assets and liabilities (decrease) increase in: | ||||||||
| Prepayment and deposits | (5,557 | ) | - | |||||
| Other non-current assets | (22,101 | ) | (78,662 | ) | ||||
| Account receivables | (120,000 | ) | - | |||||
| Amount due to related parties | - | (61,761 | ) | |||||
| Accrued expenses and other payables | 135,419 | (6,305 | ) | |||||
| Net cash used in operating activities-continuing operations | (3,188,435 | ) | (997,294 | ) | ||||
| Net cash used in operating activities-discontinued operations | (12,923,713 | ) | (6,845,506 | ) | ||||
| Net cash used in operating activities | (16,112,148 | ) | (7,842,800 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (7,024 | ) | - | |||||
| Purchase of a non-marketable investment | (500,000 | ) | - | |||||
| Net cash used in investing activities-continuing operations | (507,024 | ) | - | |||||
| Net cash used in investing activities-discontinued operations | (457 | ) | (454,736 | ) | ||||
| Net cash used in investing activities | (507,481 | ) | (454,736 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from stock option exercised | 180,485 | - | ||||||
| Proceeds from a private placement | 5,000,000 | - | ||||||
| Net cash provided by financing activities-continuing operations | 5,180,485 | - | ||||||
| Net cash provided by financing activities-discontinued operations | - | - | ||||||
| Net cash provided by financing activities | 5,180,485 | - | ||||||
| Effect of exchange rate change on cash and cash equivalents, and restricted cash from continuing operations | (13,061 | ) | - | |||||
| Effect of exchange rate change on cash and cash equivalents, and restricted cash from discontinued operations | (548,845 | ) | 311,127 | |||||
| (561,906 | ) | 311,127 | ||||||
| Net change in cash and cash equivalents, and restricted cash from continuing operations | 1,471,965 | (997,294 | ) | |||||
| Net change in cash and cash equivalents, and restricted cash from discontinued operations | (13,473,015 | ) | (6,989,115 | ) | ||||
| (12,001,050 | ) | (7,986,409 | ) | |||||
| Cash and cash equivalents, and restricted cash beginning balance from continuing operations | 31,188 | 1,028,482 | ||||||
| Cash and cash equivalents, and restricted cash beginning balance from discontinued operations | 13,811,557 | 20,800,672 | ||||||
| Cash and cash equivalents, and restricted cash beginning balance | 13,842,745 | 21,829,154 | ||||||
| Cash and cash equivalents, and restricted cash ending balance from continuing operations | 1,503,153 | 31,188 | ||||||
| Cash and cash equivalents, and restricted cash ending balance from discontinued operations | 338,542 | 13,811,557 | ||||||
| Cash and cash equivalents, and restricted cash ending balance | $ | 1,841,695 | $ | 13,842,745 | ||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||
| Cash and cash equivalents-continuing operations | $ | 1,503,153 | $ | 31,188 | ||||
| Total cash and cash equivalents -continuing operations | 1,503,153 | 31,188 | ||||||
| Cash and cash equivalents-discontinued operations | 338,542 | 4,666,947 | ||||||
| Restricted cash – discontinued operations | - | 9,144,610 | ||||||
| Total cash, cash equivalents and restricted cash – discontinued operations | 338,542 | 13,811,557 | ||||||
| Total cash, cash equivalents, and restricted cash | $ | 1,841,695 | $ | 13,842,745 | ||||
| Supplemental cash flows information: | ||||||||
| Cash paid for interest-continuing operations | $ | - | $ | - | ||||
| Cash paid for interest-discontinued operations | $ | 86,795 | $ | - | ||||
| Cash paid for income taxes-continuing operations | $ | - | $ | - | ||||
| Cash paid for income taxes-discontinued operations | $ | 86,137 | $ | 58,843 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars except Number of Shares)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd and Subsidiaries (“Takung”, “Company”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Co., Ltd.Company Limited (“Hong Kong Takung”), a Hong Kong company and its wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading artwork. The Company generates revenue from its services in connection with the offering and trading of artwork on its system, primarily consisting of listing fees, trading commissions, and management fees. The Company conducts business primarily in Hong Kong, People’s Republic of China.
Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Takung Cultural Development (Tianjin) Co., Ltd.
Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) provides technology development services to Hong Kong Takung and also carries out marketing and promotion activities in mainland China. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung when Shanghai Takung was deregistered. On November 8, 2021, the Management became aware of the suspension of the operation of Tianjin Takung by the local authority.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork.
Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of its wholly-owned subsidiary, Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”)Ltd., formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing its e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.2019.
Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018, and currently has no operations.is engaged in blockchain and non-fungible tokens (“NFT”) businesses, including consultancy service for NFT launch projects, developing its own NFT marketplace to facilitate users to buy and sell NFTs, as well as development of block chain-based online games. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focusfocused on exploring business opportunities and promoting its artwork trading business.
Tianjin MQ was deregistered on August 10, 2020 due to the Company streamlining its operation.
NFT Digital Technology Limited (“NFT Digital”) was incorporated in Albany, New York on December 13, 2021 and is a wholly-owned subsidiary of Takung. This entity primarily provides administrative and technical supports for the development of NFT projects.
NFT Exchange Limited (“NFT Exchange”) was incorporated in Wyoming on January 7, 2022 and is wholly owned by Takung. This entity facilitates the business and operation of the new NFT exchange market.
Metaverse Digital Payment Co., Limited (“Metaverse”) was formed in Hong Kong on January 27, 2022, and is wholly owned by NFT Exchange. This entity is engaged in digital payment service.
Cultural Objects Provenance Holdings Limited
Cultural Objects Provenance Holdings Limited is an investment holding company. Its wholly-owned subsidiary is headquartered in Hong Kong, with global outposts in China (Shenzhen), Europe (Germany), and USA (NY/LA). It is an artwork authentication platform powered by blockchain. According to company home page, the subsidiary is the official technology partner for NANZUKA Gallery in Tokyo, Japan. It authenticated some sought-after editions and limited edition works from some of the world’s most prolific artists, including Hajime Sorayama, Javier Calleja, Daniel Arsham, James Jarvis, and more.
On May 28, 2021, Takung entered into a Securities Purchase Agreement (the “SPA”) with Cultural Objects Provenance Holdings Limited (“Cultural Objects”), a British Virgin Islands company with a wholly-owned subsidiary in Hong Kong engaging in an operation of an artwork authentication platform powered by blockchain with global presence in China, Germany and the United States. Takung shall invest in Cultural Objects through paying certain purchase that consists of cash consideration, $500,000 and issuance of 282,000 shares of common stock of Takung in exchange for 54,100 shares of common stock of Cultural Objects and 290,000 unvested restricted shares of common stock of Takung to Cultural Objects in exchange for 32,460 unvested shares of common stock of Cultural Objects.
On August 21, 2021, Takung and Cultural Objects entered to an amendment to the SPA. The amendment provides that the original purchase price was amended to be $500,000 in cash and the issuance of 771,040 restricted shares of common stock of Takung to Cultural Objects in exchange for 54,100 shares of common stock of Cultural Objects, and, subject to the satisfaction of the conditions stipulated in the SPA, the issuance of 787,440 unvested restricted shares of common stock of Takung to Cultural Objects in exchange for 32,460 unvested shares of common stock of Cultural Objects. The cash consideration of $500,000 was paid to Cultural Objects by the end of August 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted shares of common stock of Takung issued to Cultural Objects in an exchange for an aggregate 86,560 shares of common stock of Cultural Objects. Together with the cash consideration paid $500,000 and the total value of the restricted shares issued to Cultural Objects, $10,130,120, the total value of the investment in Cultural Objects was $10,630,120. As of December 31, 2021, the initial cost of this investment was adjusted to $9,296,614 after an impairment charge, $1,333,506 was recorded (see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States ("(“U.S. GAAP"GAAP”).
This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. dollars.
Use of estimates
The preparation of 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 consolidated financial statements and the amount of revenues and expenses during the reporting periods. Actual results could differ materially from those results.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung, Tianjin Takung, Takung Art Holdings, Art Era, Hong Kong MQ and Tianjin MQ. All intercompany transactions and balances have been eliminated on consolidation.
Discontinued operations
The Company has adopted ASC Topic 205 “Presentation of Financial Statements” Subtopic 20-45, in determining whether any of its business component(s) classified as held for sale, disposed of by sale or other than by sale is required to be reported in discontinued operations. In accordance with ASC Topic 205-20-45-1, a discontinued operation may include a component of an entity or a group of components of an entity, or a business or non-profit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: (1) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; (3) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).
For the component disposed of other than by sale in accordance with paragraph 360-10-45-15, the Company adopted ASC Topic 205-20-45-3 and reported the results of operations of the discontinued operations, less applicable income tax expenses or benefits as a separate component in in the statement where net income (loss) is reported for current and all prior periods presented. Due to the suspension of the operation of Tianjin Takung by the local authority in the fourth quarter of 2021, Hong Kong Takung lost its control over Tianjin Takung. The Company plans to dispose Hong Kong Takung, and is actively locating buyers for Hong Kong Takung and related operations in order to focus on its blockchain and NFT business operation. As of December 31, 2021, the operation of Hong Kong Takung was classified as a discontinued operation and as of December 31, 2020, both the operations of Hong Kong Takung and Tianjin Takung were presented as discontinued operations.
Deconsolidation
Under the ASC Subtopic 810-10-40, “Consolidation-Overall-Derecognition”, a reporting entity will deconsolidate a subsidiary in the period when the loss of control over such subsidiary incurred as a result of one or more of the following events: (i) a parent sells all or part of its ownership interest in its subsidiary; (ii) the expiration of a contractual agreement that gave control of the subsidiary to the parent; (iii) the subsidiary issues shares which reduces the parent’s ownership interest in the subsidiary to an extent that the parent no longer has a controlling financial interest in such subsidiary; (iv) the subsidiary becomes subject to the control of a government, court, administrator, or regulator. Upon deconsolidation, the reporting entity would no longer include the subsidiary’s assets, liabilities and results of operations in its consolidated financial statements. Due to the suspension of the operation of Tianjin Takung by the local authority, the loss of control over Tianjin Takung was resulted. The financial information of Tianjin Takung was deconsolidated for the year ended December 31, 2021.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation in order to reflect the deconsolidation of Tianjin Takung. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.
Fair value measurements
The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 31, 20192021 and 2018.2020.
Comprehensive loss
The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. For the yearyears ended December 31, 20192021 and 2018,2020, the Company’s comprehensive loss includes net loss and foreign currency translation adjustment.
Foreign currency translation and transaction
The functional currency of Hong Kong Takung, Takung Art Holdings, Hong Kong MQ Tianjin Takung and ShanghaiTianjin Takung are the Hong Kong Dollar (“HKD”).
The functional currency of Art Era and Tianjin MQ areis the Renminbi (“RMB”).
The reporting currency of the Company is the United States Dollar (“USD”).
Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at period-end are included in income statement of the period.
For the purpose of presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed in USD at the exchange rate on the balance sheet’s dates, which is 7.78947.7996 and 7.83057.7534 as of December 31, 20192021 and December 31, 2018,2020, respectively; shareholder’sstockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 7.83517.7727 and 7.83767.7559 for the years ended December 31, 20192021 and 2018,2020, respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the exchange rate on the balance sheet date, which is 6.96186.373 and 6.87556.525 as of December 31, 20192021 and December 31, 20182020 respectively. Shareholder’sStockholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 6.90816.4508 and 6.60906.9042 for the years ended December 31, 20192021 and December 31, 2018.2020.
The resulting translation adjustments are reported under accumulated other comprehensive loss in the shareholders’stockholders’ equity section of the balance sheets.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash in bank with no restrictions, as well as highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when initially purchased.
A significant portion of the Company’s cash and cash equivalents is denominated in RMB, and deposited in the financial institutions of China. Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB denominated cash into foreign currencies for current account items, but conversion of RMB denominated cash into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currencies to fund the business activities outside China, or to repay non-RMB denominated obligations.
Restricted cash
Restricted cash
Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the shares, the seller will send instructions to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management fee as per Takung, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to use any funds in the broker’s account except for instructing the bank to deduct the commission and management fee. Our restricted cash is denominated in RMB and is deposited in the financial institutions of China. Due to the deconsolidation of Tianjin Takung, the ending balance of our restricted cash totaling $52,215,458 and $9,144,610 as of December 31, 2021 and 2020, respectively, was not included in our consolidated financial statements and reclassified to current assets – a deconsolidated entity.
Short term investments
Short term investments consist of held-to-maturity investments and available-for-sale investments.
The Company’s held-to-maturity investments consist of financial products purchased from banks, which are not allowed for the early withdrawal. The Company’s short term held-to-maturity investments are classified as short-term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.
Investments classified as available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized.
The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.
As of December 31, 2019 and 2018, there were no short-term investments.
Accounts receivablesreceivable and allowance for doubtful accounts
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates for the allowance for doubtful accounts based upon the assessment of various factors, including historical, experience, the age of the accounts receivable balances, credit quality of the customers, current economic conditions, and other factors that may affect customers'customers’ ability to pay.
Loan receivable
Loan receivables
Loan to third parties is presented under current asset of the balance sheets based on the nature and loan period of time.
Prepayment and other current assets, net
Prepayment and other current assets mainly consist of the prepayment for income taxes, maintenance of online trading system, the advertising and promotional services, prepaidinsurances, financial advisory, and bankingprofessional services, rental deposits, as well as other current assets.
Other non-current assets
A portion of the deposits, are presented under the non-current section of the balance sheets based on the expected collection date.
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service.
The Company developed systems and solutions for solely internal use. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. Unamortized capitalized costs are included in computer trading and clearing system, within property and equipment, net in the Consolidated Balance Sheets. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software of 5 years. Amortization of these costs is included in depreciation and amortization expense in the Consolidated Statements of Operations.
Estimated useful lives are as follows, taking into account the assets'assets’ estimated residual value:
| Classification | Estimated useful life | |
| Furniture, fixtures and equipment | 5 years | |
| Leasehold improvements | Shorter of the remaining lease terms and the estimated 3 years | |
| Computer trading and clearing system | 5 years |
Long-lived assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Company assesses the recoverability of these long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted cash flow is less than the carrying amount of the assets, the Company recognizes an impairment equal to the difference between the carrying amount and fair value of these assets.
Intangible assetsDuring 2021, we recorded $16.3 million in asset impairments due to the deconsolidation of Tianjin Takung as a result of the loss of control in this entity. Please refer to Note 5 for details. In addition, we determined that the future undiscounted cash flow was less than the carrying cost of our non-marketable investment and recognized an impairment charge, $1,333,506, against our non-marketable investment. Please refer to Note 4 for details.
Intangible assets
Intangible assets represent the licensing cost for the trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 20192021 and 2018.
2020.
Customer deposits
Customer deposits represent the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place.
Advance from customers
Advance from customers represent trading commissions one month in advance charged to the VIP traders. Starting from April 1, 2016, the Company charges a monthly commission to VIP traders, instead of charging per transaction.
Revenue Recognition
The Company generates revenue from its services in connection with the offering and trading of artworks on the Company’s system, primarily consisting of listing fee, trading commission, and management fee.
Effective January 1, 2018, the Company adopted Topic 606 using modified retrospective approach applied to its contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605.
Under ASC 606, an entity recognizes revenue as the Company satisfies a performance obligation when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) 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 Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.
The Company recognizes revenue when control of the promised services is transferred to the traders and service agents. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to the traders and service agents. The revenue mainly falls into the following broad categories: (i) listing fee, (ii) commission, and (iii) management fee, (iv) authorized agent subscription fee, (v) annual fee, and (vi) online artwork sales. fee.
Listing fee
The Company recognizes the listing fee revenue at a point in time when the ownership units of the artwork are listed and available for trading on the Company’s system, at an amount of an agreed percentage of the total offering price. The amount is collected from the money raised from the issuance of such units.
Commission
The Company generates commission fee from non-VIP traders and selected traders.
For non-VIP traders, the commission is calculated based on a percentage of transaction value of artworks when there is purchase and sale of the ownership shares of the artworks. The commission revenue is recognized at a point in time when each purchase and sale transaction is completed.
For selected traders, starting from April 1, 2016, the Company charged a predetermined monthly commission fee which allows the selected traders to conduct unlimited trades for specific artworks. The commission revenue is recognized on a monthly basis as the Company continuously satisfied its performance obligation.
Management fee
The Company provides custody and insurance service for artworks listed and traded on the Company’s platform, and charges managementplatform. Management fee to traders onis calculated at a daily basis.rate of $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is recognized as revenue ratably over time, and is deducted from proceeds from the sale of artwork ownership shares when there is a purchase and sale transaction. A discount program is offered to waive the management fee during certain promotion periods. Such discounts are recognized as a reduction of the revenue.
Authorized agent subscription revenue
The Company charges an annual authorized agent subscription fee to certain authorized agents, for them to have the right to introduce artwork owners to list their artwork on Takung’s trading platform. This revenue is recognized ratably over the annual agreement period for each agent.
Annual fee
The Company charges an up-front annual fee to certain traders for premium services, including providing in-depth information and tools on the trading platform. This revenue is recognized ratably over the service agreement period for each trader. There is no such fee charged during the year ended December 31, 2019.
Online artwork sales
From the second quarter of 2018, the Company started to offer artwork and artwork related merchandise for sales on Takung’s online platform. There are no such sales during the year ended December 31, 2019.
The Company provides third-party merchants the access to Takung’s online platform for sales of artworks, and charges commission fee to third-party merchants, at an amount of an agreed percentage of the total transaction price. The revenue is recognized at a point in time when the artwork sales transaction is completed. The Company also sells its own artwork related merchandise through its online platform. Revenue is recognized when control
Consultancy service fee revenue
Beginning in the third quarter of the goods is transferred2021, we incurred a consultancy service fee revenue, $120,000, which was pertinent to providing consultancy services with respect to the customer, which generally occurs uponstrategic utilization of blockchain technology and NFT launch to a third party. Management has determined that consultancy service fee revenue is a single performance obligation that is recognizer over time as services are rendered. For this type of service, the deliveryCompany expects for customers to pay subsequent to the carrier orrendering of services; however, this is a new type of services so payment terms may change in the customer.future.
Revenue by customer type
The following table presents the revenue by customer type for the years ended December 31, 20192021 and 2018:2020:
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Artwork owners | $ | 284,210 | $ | 3,907,301 | ||||
| Non - VIP traders | 2,256,192 | 2,324,441 | ||||||
| VIP traders | 632,612 | 2,063,887 | ||||||
| Authorized agents | - | 191,385 | ||||||
| Online artwork sales | - | 8,409 | ||||||
| Total | $ | 3,173,014 | $ | 8,495,423 | ||||
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Artwork owners | $ | 876,658 | $ | 815,748 | ||||
| Non - VIP traders | 2,110,492 | 2,674,125 | ||||||
| VIP traders | 1,461,038 | 1,077,349 | ||||||
| Corporate advisee | 120,000 | - | ||||||
| Subtotal | 4,568,188 | 4,567,222 | ||||||
| Less: Revenue- discontinued operations | (4,448,188 | ) | (4,567,222 | ) | ||||
| Total | $ | 120,000 | $ | - | ||||
Cost of revenue
These costsThe Company’s cost of revenue primarily includedconsists of expenses associated with the following:delivery of its service. These include expenses related to the operation of the data centers, such as facility and lease of the server equipment, development and maintenance of the platform system, as well as the cost of insurance, storage and transportation of the artworks. Cost of revenue also includes commission paid to service agent, depreciation, internet service charge, artwork insurance and artwork storage:agent.
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Commission paid to service agents | $ | 1,053,789 | $ | 1,214,912 | ||||
| Depreciation | 460,749 | 632,440 | ||||||
| Internet service charge | 208,941 | 396,254 | ||||||
| Artwork insurance | 48,322 | 220,089 | ||||||
| Artwork storage | 89,320 | 110,070 | ||||||
| Others | 456 | 4,999 | ||||||
| Total | $ | 1,861,577 | $ | 2,578,764 | ||||
| For the year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Commission paid to service agents | $ | 1,099,540 | $ | 1,691,411 | ||||
| Depreciation | 114,215 | 340,001 | ||||||
| Internet service charge | 47,696 | 141,059 | ||||||
| Artwork insurance | 50,878 | 49,956 | ||||||
| Artwork storage | 47,096 | 63,716 | ||||||
| Others | - | 1,261 | ||||||
| Subtotal | 1,359,425 | 2,287,404 | ||||||
| Less: Cost of revenue – discontinued operations | (1,359,425 | ) | (2,287,404 | ) | ||||
| Total | $ | - | $ | - | ||||
The Company has elected to apply the practical expedient in ASC 606-10 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
The Company does not have amounts of contract assets that it has right to consideration in exchange for services that the Company has transferred to customers when that right is conditioned on something other than the passage of time. The contract liabilities are the Company’s obligation to transfer services to traders for which the Company has received consideration from the traders. All contract liabilities are expected to be recognized as revenue within one month and are presented in Advance from Customers in the Condensed Consolidated Balance Sheet.
Cost of revenue
The Company’sFor the year ended December 31, 2021, the cost of revenue consists primarily of expenses associated with the delivery of its service. These include expenses related to the operation of the data centers, such as facility and lease of the server equipment, development and maintenance of the platform system, as well as the cost of insurance, storage and transportation of the artworks. Cost of revenue also includes commission paid to service agent.
incurred by Tianjin Takung was $139,363.
Leases
In February 2016, the FASB issued ASU 2016-12, Leases (ASC Topic 842), which amends the leases requirements in ASC Topic 840, Leases. Under the new lease accounting standard, a lessee will be required to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The new standard also modifies the classification criteria and accounting for sales-type and direct financing leases, and enhances the disclosure requirements. Leases will continue to be classified as either finance or operating leases.
The Company adopted ASC Topic 842 using the modified retrospective transition method effective January 1, 2019. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. As a result of the adoption, the Company recognized a lease liability and right-of-use asset for each of the existing lease arrangement. The adoption of the new lease standard does not have a material impact on the consolidated income statements or the consolidated statements of cash flows.
The Company determines if an arrangement is a lease at inception. The lease payments under the lease arrangements are fixed. Non-lease components include payments for building management, utilities and property tax. It separates the non-lease components from the lease components to which they relate.
Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because the interest rate implicit in the leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the lease assets and liabilities.
Income taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31, 2017.
Certain activities conducted in foreign jurisdictions may result in the imposition of U.S. corporate income taxes on Takung when its subsidiaries, controlled foreign corporations (“CFCs”), generate income that is subject to Subpart F or GILTI under the U.S. Internal Revenue Code beginning after December 31, 2017.
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 20192020 due to the recent enactment.
The Company accounts for an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. The Company considers and estimates interest and penalties related to the gross unrecognized tax benefits and includes as part of its income tax provision based on the applicable income tax regulations.
The Company did not accrue any liability, interest or penalties related to uncertain tax positions in the provision for income taxes line of the consolidated statements of operations for the year ended December 31, 2019 and 2018. The2021. During the year ended December 31, 2020, the Company does not expect that its assessment regardingrecorded an unrecognized tax positions will materially change overbenefit from an uncertain tax position based on the next 12 months.
income tax examination as discussed in Note 15.
Earnings or loss(loss) per share
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted-average number of shares of common sharesstock outstanding during the year. Diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common sharesstock outstanding during the period adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive (Note 15)18).
Concentration of risks
Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, account receivables. The carrying values of the financial instruments approximate their fair values due to their short-term maturities. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Account receivables primarily comprise of amounts receivable from the trader customers. With respect to the prepayment to service suppliers, the Company performs on-going credit evaluations of the financial condition of these suppliers. The Company establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific service providers and other information.
Concentration of customers
There arewere no revenues from customers that individually represent greater than 10% of the total revenues during the years ended December 31, 20192021 and 2018.2020.
Concentration of customer deposits
As of December 31, 2019, two2021 and 2020, there were no traders accounted for 25.64% and 10.80% of the Company’s total customer deposits. As of December 31, 2018, there was no individual traderthat individually accounted for greater than 10% of the Company’s total customer deposits.
RecentlyAccounting standards adopted accounting standardson January 1, 2020
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
In May 2014, the Financial Accounting Standards Board (FASB) issued Topic 606, which supersedes the revenue recognition requirements in Topic 605. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. See Note 2 “Revenue Recognition” above for further details.
Adoption of ASC Topic 842, “Leases”
In February 2016, the FASB issued ASU 2016-12, Leases (ASC Topic 842), which amends the leases requirements in ASC Topic 840, Leases.
The Company adopted ASC Topic 842 using the modified retrospective transition method effective January 1, 2019. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. See Note 2 “Leases” above for further details.
Adoption of ASU2016-18
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, as a result, the Company no longer presents transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Furthermore, an additional reconciliation will be required to reconcile Cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Consolidated Statement of Cash Flows. The Company has already disclosed the restricted cash separately on its Consolidated Statements of Financial Position. Beginning the first quarter of 2018, the Company has adopted and included the restricted cash balances on the Consolidated Statement of Cash Flows and reconciliation of Cash, cash equivalent, and restricted cash within its Consolidated Statements of Financial Positions that sum to the total of the same such amounts shown in Consolidated Statement of Cash Flows. This guidance has been applied retrospectively to the Consolidated Statement of Cash Flows for the year ended December 31, 2017 which required the Company to recast each prior reporting period presented. As a result, the Company no longer discloses transfers between cash and restricted cash in the consolidated cash flow statements.
Accounting pronouncements issued but not yet adopted
Financial Instruments - Credit Losses: In June 2017, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2017-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of this standard on the Company’s consolidated financial statements and related disclosures.
Fair Value Measurement: In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effectiveUnder this guidance, entities will no longer be required to disclose the amount of and the rationale for public entitiestransfers between level 1 and level 2 of the fair value hierarchy. For level 3 fair value measurement, disclosures for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures.the range and weighted average used to establish significant unobservable inputs are required. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expectadopted this guidance will have a materialon January 1, 2020 and there was no impact onto its consolidated financial statements.
Accounting standards adopted on January 1, 2021
Income Taxes: On December 18, 2019, the FASB issued ASU No. 2019-12, Income taxes (Topic 740), Simplifying the Accounting for Income Taxes. This guidance amends ASC Topic 740 and addresses several aspects including 1) evaluation of step-up tax basis of goodwill when there is not a business combination, 2) policy election to not allocate consolidated taxes on a separate entity basis to entities not subject to income tax, 3) accounting for tax law changes or rates during interim periods, 4) ownership changes from equity method investment to subsidiary or vice versa, 5) elimination of exception to intraperiod allocation when there is gain in discontinued operations and a loss from continuing operations, 6) treatment of franchise taxes that are partially based on income. The guidance isCompany adopted ASU2019-12 effective for calendar year-end public entities on January 1, 20212021.
Accounting pronouncements issued but not yet adopted
Financial Instruments - Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and other entities on January 1, 2022.Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the impactpotential effects of this guidanceadopting the provisions of ASU No. 2016-13 on its consolidated financial statements.statements, particularly its recognition of allowances for accounts receivable.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.
3. GOING CONCERN
Due to the recent regulatory scrutiny by PRC governments on digital asset related business, the artwork unit trading platform operated by the PRC subsidiary Tianjin Takung was suspended by the local authority. The Management became aware of the suspension on or around November 8, 2021. The local authority indicated the suspension was to facilitate certain investigation although it did not announce the purpose of the investigation. The Company intends to fully cooperate with the local authority’s investigation.
In the event that the suspension carries on for a substantial period of time or the investigation results in unfavourable outcome, the Company is subject to various risks, including, but not limited to, permanent discontinuation of the artwork unit trading platform business, material loss of Tianjin Takung’s carrying assets, material impact to the Company’s financial performance and liquidity, and being involved in litigation.
3.The following table sets forth the carrying value of the assets and liabilities of Tianjin Takung whose operation was suspended as disclosed above, which were deconsolidated from the accompanying consolidated financial statements as of December 31, 2021:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 6,039,063 | $ | 3,922,665 | ||||
| Restricted cash | 52,215,458 | 9,144,610 | ||||||
| Prepayment and other current assets, net | 134,943 | 79,539 | ||||||
| Amount due from affiliated entities | 1,455,506 | 1,379,393 | ||||||
| Amount due from related parties | 6,374,007 | 6,225,134 | ||||||
| Loan receivables | 2,196,906 | 2,609,748 | ||||||
| Total current assets | 68,415,883 | 23,361,089 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Property and equipment, net | 86,921 | 231,939 | ||||||
| Deferred tax assets, net | - | 125,190 | ||||||
| Total non-current assets | 86,921 | 357,129 | ||||||
| TOTAL ASSETS | $ | 68,502,804 | $ | 23,718,218 | ||||
| CURRENT LIABILITIES | ||||||||
| Accrued expenses and other payables | $ | 549,756 | $ | 436,674 | ||||
| Customer deposits | 52,215,458 | - | ||||||
| Amount due to affiliated entities | 16,690,356 | 23,974,218 | ||||||
| Tax payable | - | 20,003 | ||||||
| Total current liabilities | 69,455,570 | 24,430,895 | ||||||
| NON-CURRENT LIABILITIES | - | - | ||||||
| TOTAL LIABILITIES | $ | 69,455,570 | $ | 24,430,895 | ||||
Management has assessed the Company’s ability to continue as a going concern in accordance with the requirements of ASC 205-40 and, based on the above factors, the management has concluded that there is substantial doubt about its ability to continue as a going concern within one year from the issuance date of the Company’s consolidated financial statements. Management’s plan to alleviate the going concern risk includes, but not limited to, (1) equity or debt financing, (2) increasing cash generated from new business model operations, and (3) financing from domestic banks and other financial institutions. The management of the Company has made the following plans to mitigate these adverse conditions and to increase the liquidity of the Company.
Management’s Plan
Private Investment in Public Equity (“PIPE”) Transaction
The Company entered into certain securities purchase agreement on February 23, 2022 (the “SPA”) with certain non-affiliated and accredited “non-U.S. Persons”, (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to which the Company agreed to sell 11,952,190 units, each consisting of one share of Common Stock (the “Shares”) and a warrant (the “Warrant”) to purchase three Shares.
On March 9, 2021, the Company and the Purchasers agreed to amend and restate the SPA (the “A&R SPA”) to amend the number of units sold, per unit purchase price, and the terms of the warrants underlying the units. Pursuant to the terms of the A&R SPA, the Company agreed to sell 10,238,910 units (the “Units”), each Unit consisting of one Share and a Warrant to purchase three Shares with a purchase price per Unit of $2.93.
On April 14, 2022, the transaction contemplated by the A&R SPA closed. The gross proceeds to the Company from this offering were approximately $30 million.
New Business Model Operations
The Company plans to further develop its operations of blockchain and NFT related businesses, including consultancy services, development of NFT marketplace and “Play-to-Earn” style blockchain-based online games. “Play to Earn” is essentially a business model powered by blockchain technology, where players can acquire in-game assets or token ownership by recharging and playing games.
Meanwhile, the Company is actively seeking other strategic partners with resources that can expand its blockchain and NFT businesses.
The Company has recruited a global management team and technology research and development team to develop new products and new business directions that combine education and technology to provide online service in Metaverse. In order to diversify the political and legal risks result from the scrutiny from the PRC regulations in regard with the digital assets, the Company has also decided to expand its business outside China, such as United States and Canada.
The Company has set up the new corporate structure for its new business stream as follows:
4. INVESTMENTS
We adopted ASU 2016-01 on January 1, 2018. This guidance requires us to measure all equity investments that are not accounted for under the equity method or result in consolidation at fair value and recognize any changes in net income. For equity investments with readily determinable and observable fair values, we use quoted market prices to determine the fair value of equity securities. For equity investments without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Equity investments with readily determinable fair values that are not accounted for under the equity method classified as trading are not assessed for impairment, since they are carried at fair value with the change in fair value included in net income. Similarly, prior to the adoption of ASU 2016-01, equity investment classified as trading was not tested for impairment.
Equity investments without readily determinable fair values are reviewed each reporting period to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. When such events or changes occur, we assess the fair value compared to our cost basis in the investment. We also perform this assessment every reporting period for each investment for which our cost basis has exceeded the fair value.
For investments in privately-held companies, management’s assessment of fair value is based on valuation methodologies such as discounted cash flows, estimates of revenue and appraisals, as applicable. We consider and apply the assumptions that we believe market participants would use in evaluating estimated future cash flows when utilizing the discounted cash flow or estimates of revenue valuation methodologies. In the event the fair value of an investment declines below our cost basis, management determines if the decline in fair value is other than temporary and records an impairment accordingly.
As of December 31, 2021, our investment merely includes a non-marketable investment in a privately held company incorporated in British Virgin Islands without readily determinable market values. We elected the measurement alternative under which we measured the investment at cost minus impairment with an adjustment to the changes from observable price changes in orderly transactions for the similar investments of the same issuer.
Management considered market conditions as the result of the global pandemic and other global macroeconomic conditions and the potential impact on the value of the Company’s investment; accordingly, management conducted a review of each of its investments. After its review management determined that the future undiscounted cash flows were less than the carrying cost of our non-marketable investment and recognized an impairment charge, $1,333,506, against our non-marketable investment. Management estimated future revenues and costs, and the related cash flows regarding this investment, as well as applying assumptions regarding the proper inputs into the weighted average cost of capital which included the consideration of comparable market participants and the Company’s own capital structure in developing a discounted flow model to determine an update carrying value for the private-held investment.
The carrying value is measured as the total initial cost minus impairment. The carrying value for our non-marketable investment is summarized below:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Total initial cost | $ | 10,630,120 | $ | — | ||||
| Cumulative net gain (loss) | — | — | ||||||
| Provision for impairment | (1,333,506 | ) | — | |||||
| Total carrying value | $ | 9,296,614 | $ | — | ||||
For the year ended December 31, 2021, we did not incur any unrealized gain or loss in connection with the non-marketable investment. Since the investment was acquired in August 2021, there was no unrealized gain or loss incurred for the year ended December 31, 2020.
5. ASSET IMPAIRMENTS
Our subsidiary, Hong Kong Takung, recorded asset impairment charges totally $16,538,781, as a result of the deconsolidation of Tianjin Takung due to the loss of control of Tianjin Takung in the fourth quarter of 2021. Hong Kong Takung considered the receivables from Tianjin Takung to be uncollectible and wrote off its investment in Tianjin Takung. These charges have been included in the loss from discontinued operations for the year ended December 31, 2021.
The following represents the detail of the asset impairments for the year ended December 31, 2021.
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Receivables from Tianjin Takung | $ | 16,388,254 | $ | — | ||||
| Investment in Tianjin Takung | 150,527 | — | ||||||
| Subtotal | 16,538,781 | — | ||||||
| Less: asset impairments – discontinued operations | $ | (16,538,781 | ) | $ | — | |||
| Total | — | — | ||||||
6. PREPAYMENT AND OTHER CURRENT ASSETS, NET
Prepayment and other current assets mainly consist of the prepaid tax, the prepaid services for maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets.
| December 31, 2021 | December 31, 2020 | |||||||
| Prepaid tax | $ | - | $ | 32,262 | ||||
| Prepaid service fees | 196,497 | 202,647 | ||||||
| Staff advance | - | 2,299 | ||||||
| Deposit | 5,557 | 35,879 | ||||||
| Other current assets | 2,791 | 6,300 | ||||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Subtotal | 204,845 | 279,387 | ||||||
| Less: Prepayment and other current assets, net – discontinued operations | (34,937 | ) | (137,137 | ) | ||||
| Prepayment and other current assets, net | $ | 169,908 | $ | 142,250 | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| Prepaid tax | $ | 281,582 | $ | 399,026 | ||||
| Prepaid service fees | 132,064 | 140,934 | ||||||
| Staff advance | 18,380 | 93,676 | ||||||
| Prepaid repair and maintenance | - | 1,201 | ||||||
| Deposit | 316 | 241,827 | ||||||
| Short-term borrowings to third parties | 53,919 | 436,332 | ||||||
| Other current assets | 18,906 | 78,585 | ||||||
| Less: allowance for doubtful accounts | (53,919 | ) | (436,332 | ) | ||||
| Prepayment and other current assets, net | $ | 451,248 | $ | 955,249 | ||||
For the years ended December 31, 20192021 and 2018,2020, the Company has recordeddid not incur provision for doubtful accounts, $53,605 and $453,926, respectively.accounts.
4.7. ACCOUNT RECEIVABLES, NET
Account receivables consisted of the following:
| December 31, 2021 | December 31, 2020 | |||||||
| Listing fee | $ | 154,771 | $ | 154,771 | ||||
| Consultancy service | 120,000 | - | ||||||
| Less: allowance for doubtful accounts | (154,771 | ) | - | |||||
| Subtotal | 120,000 | - | ||||||
| Less: Accounts receivables, net- discontinued operations | - | (154,771 | ) | |||||
| Account receivables, net | $ | 120,000 | $ | - | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| Listing fee | $ | - | $ | 568,757 | ||||
| Authorized agent subscription revenue | 560,780 | 557,837 | ||||||
| Monthly commission fee | 1,385,420 | 1,378,148 | ||||||
| Others | 53,909 | 53,626 | ||||||
| Less: allowance for doubtful accounts | (2,000,109 | ) | (1,989,611 | ) | ||||
| Account receivables, net | $ | - | $ | 568,757 | ||||
NoDuring December 31, 2021 and 2020, we recognized $154,387 and nil, respectively, in provision for doubtful accounts was recognized during the year ended December 31, 2019. The Company recovered the provision for doubtful accounts approximately $76,429 in 2018.accounts.
5.8. LOAN RECEIVABLES
The following table sets forth a summary of the loan agreements in loan receivables balance:balance, which had been excluded from the consolidated financial statements due to the deconsolidation of Tianjin Takung:
| Date | Borrower | Lender | Original Amount (RMB) | Outstanding Balance (RMB) | Amount in Reporting Currency (USD) | Annual Interest Rate | Repayment Due Date | |||||||||||||||
| 7/18/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 718,205 | 0 | % | 7/17/2020 | |||||||||||||
| 8/29/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 718,205 | 0 | % | 8/28/2020 | |||||||||||||
| 9/20/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | $ | 574,564 | 0 | % | 9/19/2020 | |||||||||||||
| Total | $ | 2,010,974 | ||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Amount in | Amount in | |||||||||||||||||||||||||
| Original | Outstanding | Reporting | Reporting | Annual | | |||||||||||||||||||||
| Amount | Balance | Currency | Currency | Interest | Repayment | |||||||||||||||||||||
| Date | Borrower | Lender | (RMB) | (RMB) | (USD) | (USD) | Rate | Due Date | ||||||||||||||||||
| 7/18/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 784,609 | $ | 766,284 | 0 | % | 4/1/2022 | |||||||||||||||
| 8/29/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | 784,609 | 766,284 | 0 | % | 4/1/2022 | |||||||||||||||||
| 9/20/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | 627,688 | 613,027 | 0 | % | 4/1/2022 | |||||||||||||||||
| 11/30/2020 | Tianjin Zhiyuan Enterprise Management Co., Ltd | Tianjin Takung | 6,500,000 | 3,028,603 | - | 464,153 | 6 | % | 2/2/2021 | |||||||||||||||||
| 2,196,906 | 2,609,748 | |||||||||||||||||||||||||
| Less: | Loan receivable-a discontinued operations | (2,196,906 | ) | (2,609,748 | ) | |||||||||||||||||||||
| Total | $ | - | $ | - | ||||||||||||||||||||||
All the transactions entered with Chongqing Aoge Import and Export co. were aimed to meet the Company’s working capital needs in U.S. Dollars, which are freely convertible to Hong Kong Dollar.
| ● | The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company. |
| ● | Hong Kong Takung entered into loan agreements (the “Hong Kong Dollar Loans”) with Friend Sourcing Ltd., a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum (See Note 10). Friend Sourcing is a non-related party to the Company. |
The transactions with Friend Sourcing were aimed to meet the Company’s working capital needs in Hong Kong Dollars.
Through an understanding between Chongqing Aoge Import and Export Co. and Friend Sourcing, the Hong Kong Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that the Hong Kong Dollar Loans and the RMB Loans will be repaid simultaneously.
6.On November 30, 2020, Tianjin offered a short-term financing in an amount of $996,169 (RMB6,500,000) with an annual interest rate at 6% to a non-related third party, Tianjin Zhiyuan Enterprise Management Co., Ltd. The loan is matured on February 2, 2021. As of December 31, 2020, the outstanding balance of this loan receivable was $464,153 (RMB3,028,603), inclusive of the outstanding principal balance, $459,770 (RMB3,000,000) and interest receivable, $4,383 (RMB28,603). This loan receivable was fully repaid on January 27, 2021.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Furniture, fixtures and equipment | $ | 201,093 | $ | 156,656 | ||||
| Leasehold improvements | 343,697 | 447,048 | ||||||
| Computer trading and clearing system | 3,379,654 | 3,382,168 | ||||||
| Transport equipment | 103,330 | 104,628 | ||||||
| Sub-total | 4,027,774 | 4,090,500 | ||||||
| Less: accumulated depreciation | (3,167,948 | ) | (2,644,821 | ) | ||||
| Property and equipment, net | $ | 859,826 | $ | 1,445,679 | ||||
| December 31, 2021 | December 31, 2020 | |||||||
| Furniture, fixtures and equipment | $ | 63,392 | $ | 218,430 | ||||
| Leasehold improvements | 23,078 | 23,216 | ||||||
| Computer trading and clearing system | 2,429,883 | 3,468,346 | ||||||
| Transport equipment | - | 110,245 | ||||||
| Sub-total | 2,516,353 | 3,820,237 | ||||||
| Less: accumulated depreciation | (2,428,936 | ) | (3,382,241 | ) | ||||
| Subtotal | 87,417 | 437,996 | ||||||
| Less: Property and equipment, net – discontinued operations | (80,534 | ) | (437,996 | ) | ||||
| Property and equipment, net | $ | 6,883 | $ | - | ||||
Depreciation expense for the continuing operations was $597,654$117 and $895,267$5,229 for the years ended December 31, 2021 and 2020, respectively.
Depreciation expense for the discontinued operations was $125,189 and $454,286 for the years ended December 31, 2021 and 2020, respectively
As of December 31, 2021, the ending balance of the property and equipment, net for Tianjin Takung was $80,534 and the respective depreciation expense for the year ended December 31, 2019 and 2018, respectively.2021 was $149,975.
The impairment loss charged to property and equipment was nil and $352,669 for the years ended December 31, 2019 and 2018, respectively. The impairment loss was recorded in the third quarter in 2018 as a result of the close of the Hanzhou branch office where the internal use software and technology developments took place. The Company deemed that no sufficient future economic benefits would be generated from these software developments and charged $352,669 to impairment loss.
7.10. INTANGIBLE ASSETS
Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $22,401 and $22,284 as of December 31, 2019 and 2018, respectively.
| December 31, 2021 | December 31, 2020 | |||||||
| Intangible assets | $ | 22,372 | $ | 22,504 | ||||
| Less: accumulated amortization | - | - | ||||||
| Subtotal | 22,372 | 22,504 | ||||||
| Less: Intangible assets – discontinued operations | (22,232 | ) | (22,364 | ) | ||||
| Total Intangible assets | $ | 140 | $ | 140 | ||||
8.
11. OTHER NON-CURRENT ASSETS
Other non-current assets as of December 31, 20192021 and 20182020 consisted of:
| December 31, 2019 | December 31, 2018 | |||||||
| Deposit – non-current | $ | 53,431 | $ | 57,965 | ||||
| Prepayment – non-current | 4,039 | 84,328 | ||||||
| Total other non-current assets | $ | 57,470 | $ | 142,293 | ||||
| December 31, 2021 | December 31, 2020 | |||||||
| Deposit – non-current | $ | 18,396 | $ | 18,312 | ||||
| Prepayment – non-current | - | 282 | ||||||
| Subtotal | 18,396 | 18,594 | ||||||
| Less: Other non-current assets – discontinued operations | (18,396 | ) | (18,594 | ) | ||||
| Total other non-current assets | $ | - | $ | - | ||||
9.12. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of December 31, 20192021 and 20182020 consisted of:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Accruals for consulting fees | $ | 311,122 | $ | 264,793 | ||||
| Accruals for professional fees | 168,040 | 49,518 | ||||||
| Payroll payables | 79,710 | 104,437 | ||||||
| Trading and clearing system | 50,295 | 86,208 | ||||||
| Other payables | 20,499 | 136,736 | ||||||
| Total accrued expenses and other payables | $ | 629,666 | $ | 641,692 | ||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accruals for consulting fees | $ | 266,304 | $ | 267,427 | ||||
| Accruals for professional fees | 90,642 | 365,634 | ||||||
| Payroll payables | 55,964 | �� | 80,026 | |||||
| Trading and clearing system | 2,364 | - | ||||||
| Other payables | 1,546 | 15,001 | ||||||
| Subtotal | 416,820 | 728,088 | ||||||
| Less: Accrued expenses and other payables- discontinued operations | (273,391 | ) | (720,077 | ) | ||||
| Total accrued expenses and other payables | $ | 143,429 | $ | 8,011 | ||||
10.13. SHORT-TERM BORROWINGS FROM A THIRD PARTIESPARTY
In July 2019, Hong Kong Takung entered into a loan agreement (the “HKD Loan”)HKD Loans with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum. The HKD Loan isLoans are to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company. On April 1, 2021, Hong Kong Takung extended the due date of the HKD Loans with Friend Sourcing to July 30, 2021. On August 1, 2021, Hong Kong Takung further extended the financing with Friend Souring to April 1, 2022. An interest payment, $86,795, was made on October 22, 2021.
In the meantime, Tianjin Takung entered an interest-free loan (the “RMB Loan”) toRMB Loans with another third party as a guarantee for the HKD Loan.Loans. The loan amount was $ 2,010,974$2,172,766 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan isLoans are “secured” by the RMB Loan.Loans. It is an understanding between the parties that when the HKD Loans isare repaid, the RMB LoanLoans will be repaid at the same time. On August 1, 2021, Tianjin Takung further extended the financing with the third party to April 1, 2022.
| Date | Borrower | Lender | December 31, 2019 (USD) | December 31, 2018 (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||||
| 8/24/2016 | Hong Kong Takung | Merit Crown Limited | $ | - | $ | 1,499,500 | 8 | % | 1/2/2019 | |||||||||||
| 12/19/2017 | Hong Kong Takung | Merit Crown Limited | $ | - | $ | 500,000 | 8 | % | 1/2/2019 | |||||||||||
| 12/22/2017 | Hong Kong Takung | Merit Crown Limited | $ | - | $ | 500,000 | 8 | % | 1/2/2019 | |||||||||||
| 7/18/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 714,808 | $ | - | 8 | % | 7/17/2020 | |||||||||||
| 8/29/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 696,202 | $ | - | 8 | % | 8/28/2020 | |||||||||||
| 9/20/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 556,961 | $ | - | 8 | % | 9/19/2020 | |||||||||||
| Less: Discount loan payable | $ | (99,626 | ) | $ | - | |||||||||||||||
| Total | $ | 1,868,345 | $ | 2,499,500 | ||||||||||||||||
| Date | Borrower | Lender | December 31, 2021 (USD) | December 31, 2020 (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||
| 7/18/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 713,874 | $ | 718,127 | 8 | % | 4/1/2021 | |||||||||
| 8/29/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 695,291 | $ | 699,434 | 8 | % | 4/1/2021 | |||||||||
| 9/20/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 556,233 | $ | 559,548 | 8 | % | 4/1/2021 | |||||||||
| Less: Discount loan payable | $ | - | $ | - | ||||||||||||||
| 1,965,398 | 1,977,109 | |||||||||||||||||
| Less: Short-term borrowings from third party- discontinued operations : | (1,965,398 | ) | (1,977,109 | ) | ||||||||||||||
| Total | $ | - | $ | - | ||||||||||||||
The U.S. Dollar loan from Merit Crown Limited of $2,499,500 as of December 31, 2018 was settled on January 2, 2019.
The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of December 31, 2019.2021 and 2020. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings were $686,884$1,965,398 and $2,499,500$1,247,691 for the years ended December 31, 20192021 and 2018,2020, respectively. The interest expenses for the short-term borrowings were $57,474$86,795 and $569,556$163,401 for the years ended December 31, 20192021 and 2018,2020, respectively.
11.14. RELATED PARTY BALANCES AND TRANSACTIONS
The following is a list of directors and related parties to which the Company has transactions with:
(a) Song Wang (“Wang”), the General Manager of Tianjin Takung and Shanghai Takung, and Director of Hong Kong Takung, Tianjin Takung and Shanghai Takung. Mr. Wang resigned as the director of Hong Kong Takung on May 31, 2019.
| (a) | Jianping Mao (“Mao”), Human Resources Management Director of Hong Kong Takung; |
(b) Zhenying Liu (“Liu”), the former Vice President of Hong Kong Takung. Liu resigned from the Company on September 30, 2018.
| (b) | Jing Wang (“Wang”), former Chief Financial Officer of the Company from June 1, 2020 through June 1, 2021 and former legal representative of Tianjin Takung during period from May 28, 2020 to September 24, 2020. On June 1, 2021, the term of the employment of Wang expired; |
(c) Jianping Mao (“Mao”), the Human Resources Management Director of Hong Kong Takung.
| (c) | Sze Chan (“Chan”), Vice President of Hong Kong Takung since November 17, 2020. |
(d) Shuhai Li (“Li”), the legal representative of Tianjin Takung.
(e) Di Xiao (“Xiao”), Former Chief Executive Officer who resigned from the Company on November 19, 2018.
Amount due from related parties
Amount due from related parties consisted of the following as of the years indicated:
For the year ended December 31, | For the year ended December 31, | |||||||
| Wang (a)(i) | $ | $ | 5,907,789 | |||||
| Li (d)(i) | 5,834,554 | - | ||||||
| Total current amount due from related parties | $ | 5,834,554 | $ | 5,907,789 | ||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Chan (c)(i) | $ | - | $ | - | ||||
| Wang(b)(i) | - | 6,225,134 | ||||||
| Mao(a)(ii) | - | 111,099 | ||||||
| Less: allowance for doubtful accounts (ii) | - | (111,099 | ) | |||||
| Subtotal | $ | - | $ | 6,225,134 | ||||
| Less : Amount due from related parties – discontinued operations | - | (6,225,134 | ) | |||||
| Total | $ | - | $ | 0 | ||||
Amount due from related parties of Tianjin Takung as of December 31, 2021 was $6,374,007. This amount consisted of the loan receivable due from Chan.
For the year ended December 31, | For the year ended December 31, | |||||||
| Mao (c) (ii) | $ | 104,128 | $ | - | ||||
| Total noncurrent amount due from a related party | $ | 104,128 | $ | - | ||||
Amount due to related parties
Amount due to related parties consisted of the following as of the years indicated:
For the year ended December 31, | For the year ended December 31, | |||||||
| Wang (a) (i) | $ | - | $ | 6,385,288 | ||||
| Li (d) (i) | 6,418,980 | - | ||||||
| Mao (c) (ii) | 443,733 | - | ||||||
| Total current amount due to related parties | $ | 6,862,713 | $ | 6,385,288 | ||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Chan (c)(i) | $ | 6,410,585 | $ | — | ||||
| Wang (b)(i) | — | 6,448,784 | ||||||
| Subtotal | 6,410,585 | 6,448,784 | ||||||
| Less: amount due to related parties – discontinued operations | (6,410,585 | ) | (6,448,784 | ) | ||||
| Total | $ | — | $ | — | ||||
Related party transactions
The expenses incurred to the related parties consisted of the following for the years indicated:
For the year ended December 31, | For the year ended December 31, | |||||||
| Mao (c) – interest expense | $ | - | $ | 4,209 | ||||
| Xiao (e) – consulting fee expense | - | 278,146 | ||||||
| Total | $ | - | $ | 282,355 | ||||
| (i) | Amount due |
On May 16, 2018,29, 2020, Hong Kong Takung entered into an interest-free loan agreement (the "HK“HK Dollar Working Capital Loan"Loan”) with Liu that was transferred to Wang on October 18, 2018 for the loan of $6,418,980$6,410,585 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan as May 15, 2019. On May 15, 2019,2021. Hong Kong Takung entered into an extension agreementextended the loan with Wang to extendwith the HK Dollar Working Capital Loan with a duematurity date on May 15, 2020.2022. On September 16, 2019, WangMay 29, 2021, the loan agreement was transferred this loan to Shuhai Li, the legal representative of Tianjin TakungChan with the same extendedidentical maturity date.
In thea meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB“RMB Working Capital Loan"Loan”) with Liu that was transferred to Wang on October 18, 2018 for the loan of $5,834,554$6,374,007 (RMB40,619,000) with the maturity date of the loan as May 15, 2019. On May 15, 2019,2021. Tianjin Takung entered intois currently negotiating an extension agreementof the loan with Wang. Tianjin Takung extended the loan arrangement with Wang to extendwith the RMB Working Capital Loan with a duematurity date on May 15, 2020.2022. On September 16, 2019, WangMay 29, 2021, the loan agreement was transferred this loan to Li, the legal representative of Tianjin TakungChan with the same extendedidentical maturity date.
Through an understanding between LiChan and the Company, the HK Dollar Working Capital Loan is "secured"“secured” by the RMB Working Capital Loan. It is the understanding between the parties that the HK Dollar Working Capital Loan and the RMB Working Capital Loan will be repaid simultaneously.
The amount due from Chan was recognized by Tianjin Takung and was deconsolidated as of December 31, 2021.
(ii) Amount due to and due from Mao
The amount due from Mao is primarily related to the lease deposit from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease willwas set to expire on May 12, 2021. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $208,256 (RMB1,449,838.04)$224,753 (RMB1,449,838) every six months and a deposit of $104,128 (RMB724,919.02)$111,099 (RMB724,919). The deposit is refundableOn May 12, 2020, the Company terminated the lease and recognized bad debt expense of $113,755 related to the Company. The totaldeposit paid to Mao due to the remote likelihood of collecting the rent deposit. No related lease liability was $376,218, which was included in current portionrecognized as of December 31, 2019.2020 and December 31,2021.
On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Ms. Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The lease will be expired on October 15, 2020. Monthly rent payment is approximately $24,690 (RMB 170,563).As of December 31, 2019, the amount due to Mao pertinent to this lease agreement was $61,250.
As of December 31, 2019, Mao also lent a startup deposit of $6,265 to Hong Kong MQ.
During the year ended December 31, 2018, the Company has engaged Xiao for consulting services, and accrued service fee of $278,146. The amount related to this consulting service for the year ended December 31, 2019 was nil.
12.15. INCOME TAXES
Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung, Tianjin Takung Art Era and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.
United States of America
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act introduced significant changes to the U.S. income tax regulations. The Tax Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent and created new tax rules on certain foreign-sourced earnings. Except for the one-time Deemed Repatriation Transition Tax ("Transition Tax"), most of these provisions go into effect starting January 1, 2018.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB118”) was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As of December 22, 2018, the Company has completed the assessment of the income tax effect of the Tax Act and there were no adjustments recorded to the provisional amounts.
The Global Intangible Low-taxed Income (GILTI) is a new provision introduced by the Tax Act. U.S. shareholders, who are domestic corporations, of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current period expense when incurred. As of December 31, 2019 and 2018, the Company does not have any aggregated positive tested income; and as such, does not have additional provision amount recorded for GILTI tax.
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 20192020 due to the recent enactment.
As of December 31, 20192021 and 2018,2020, the Company in the United States had $2,167,494$11,935,256 and $1,332,438$1,454,286 in net operating loss carry forwards available to offset future taxable income, respectively. NetFor net operating losslosses arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable income and carryforward the NOL indefinitely. NOLs generated from the tax yearprior to January 1, 2018 will not be carryforward indefinitely undersubject to the Tax Act.taxable income limitation and will begin to expire in 2033 if not utilized.
Hong Kong
Two-tier Profits Tax Rates
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $255,261)$257,311) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Takung Art Holdings and Hong Kong MQ still apply the original tax rate of 16.5% for its provision for current income and deferred taxes.
As of December 31, 20192021 and 2018,2020, the Company’s subsidiaries in Hong Kong had $7,453,397$6,194,177 and 5,501,087$6,327,044 in net operating loss carry forwards available to offset future taxable income, respectively. These net operating losslosses will be carryforward indefinitely under Hong Kong Profits Tax regulation.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the year ended December 31, 20192021 and 2018.2020. As of December 31, 20192021 and 2018,2020, the Company in PRC had $1,263,472$215,555 and $760,660$38,985 in net operating loss carryforwards available to offset future taxable income, respectively. According to PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted. If not utilized, the PRC net operating loss of $482,179, $21,601, $156,921$153,521 and $602,771$62,034 will expire in 2021, 2022, 20232025 and 2024,2026, respectively.
The income tax expense (benefit) was $73,269$512,395 and $(479,901)$12,550 for the years ended December 31, 20192021 and 2018,2020, respectively, related primarily to the Company’s subsidiaries located outside of the U.S. The loss before provision for income taxes for the years ended December 31, 20192021 and 20182020 was as follows:
The income tax provision consists of the following components:
For the year ended December 31, | For the year ended December 31, | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Foreign | - | (145,910 | ) | |||||
| Total Current | $ | - | $ | (145,910 | ) | |||
| Deferred: | ||||||||
| Federal | $ | - | $ | 37,398 | ||||
| State | - | - | ||||||
| Foreign | 73,269 | (371,389 | ) | |||||
| Total Deferred | $ | 73,269 | $ | (333,991 | ) | |||
| Total provision for income taxes | $ | 73,269 | (479,901 | ) | ||||
For the year ended | For the year ended | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Foreign | - | - | ||||||
| Total current income tax expenses, continuing operations | - | - | ||||||
| Current income tax expenses, discontinued operations | - | 101,756 | ||||||
| Total current | $ | - | $ | 101,756 | ||||
| Deferred: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Foreign | - | - | ||||||
| Total deferred income tax expenses, continuing operations | - | - | ||||||
| Deferred income tax expenses, discontinued operations | 512,395 | (89,206 | ) | |||||
| Total deferred | $ | 512,395 | $ | (89,206 | ) | |||
| Total income tax expense | $ | 512,395 | $ | 12,550 | ||||
Deferred tax expense in an amount of $126,630 which was pertinent to the derecognition of deferred tax assets of Tianjin Takung for the year ended December 31, 2021 and was excluded from the consolidated financial statements for the year ended December 31, 2021 due to the deconsolidation of Tianjin Takung.
A reconciliation between the Company’s actual provision for income taxes and the provision at the Hong Kong statutory rate is as follow:
Continuing operations
For the year ended December 31, | For the year ended December 31, | |||||||
| Loss before income tax expense | $ | (4,019,537 | ) | $ | (8,111,864 | ) | ||
| Computed tax benefit with statutory tax rate | (663,224 | ) | (1,338,456 | ) | ||||
| Impact of different tax rates in other jurisdictions | (113,115 | ) | (149,425 | ) | ||||
| Effect of preferred tax rates | 189,288 | 356,949 | ||||||
| Tax effect of non-deductible expenses | 110,044 | 188,538 | ||||||
| Changes in valuation allowance | 543,150 | 505,433 | ||||||
| Previous years unrecognized tax effects | 7,126 | (42,940 | ) | |||||
| Total Provision for Income Taxes | $ | 73,269 | $ | (479,901 | ) | |||
The effective tax rate for the continuing operations was (1.8)% and 5.9%0% for the years ended December 31, 20192021 and 2018,2020, respectively.
For the year | For the year | |||||||
| Loss before income tax expense | $ | (13,447,956 | ) | $ | (770,073 | ) | ||
| Computed tax benefit with statutory tax rate | (2,824,071 | ) | (161,715 | ) | ||||
| Impact of different tax rates in other jurisdictions | (1,384 | ) | (5,365 | ) | ||||
| Effect of preferred tax rate | - | - | ||||||
| Tax effect of non-deductible expenses | 775 | 383,723 | ||||||
| U.S. tax on foreign entities | - | 280,444 | ||||||
| Changes in valuation allowance | 2,920,437 | (497,087 | ) | |||||
| Previous years unrecognized tax effects | (95,757 | ) | - | |||||
| Total income tax expense | $ | - | $ | - | ||||
Discontinued operations
The effective tax rate for the discontinued operations was (3.2)% and 7.4% for the years ended December 31, 2021 and 2020, respectively.
For the year ended | For the year ended | |||||||
| (Loss) Income before income tax expense | $ | (16,113,160 | ) | $ | 169,985 | |||
| Computed tax benefit with statutory tax rate | (3,383,764 | ) | 35,696 | |||||
| Impact of different tax rates in other jurisdictions | (81,864 | ) | 29,994 | |||||
| Effect of preferred tax rate | 2,136,292 | (72,807 | ) | |||||
| Tax effect of non-deductible expenses | 1,370,731 | 74,581 | ||||||
| U.S. tax on foreign entities | - | - | ||||||
| Changes in valuation allowance | 474,442 | (127,988 | ) | |||||
| Previous years unrecognized tax effects | (3,442 | ) | 73,074 | |||||
| Total income tax expense | $ | 512,395 | $ | 12,550 | ||||
The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities are as follows:
Continuing operations
| As of December 31, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred tax assets | ||||||||
| Tax loss carried forward | $ | 2,506,404 | $ | 305,400 | ||||
| Provision for impairment loss | 280,036 | - | ||||||
| Unvested restricted shares | 444,465 | - | ||||||
| Total deferred tax assets | 3,230,905 | 305,400 | ||||||
| Less: valuation allowance | (3,230,905 | ) | (305,400 | ) | ||||
| Total Deferred tax assets, net of valuation allowance | - | - | ||||||
| Deferred tax liabilities | ||||||||
| Total Deferred tax liabilities | $ | - | $ | - | ||||
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | - | $ | - | ||||
Discontinued operations
| As of December 31, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred tax assets | ||||||||
| Tax loss carried forward | $ | 510,890 | $ | 530,459 | ||||
| Deferred advertising expenses | - | 1,149 | ||||||
| Provision for doubtful accounts | 153,854 | 114,943 | ||||||
| PPE, due to difference in depreciation | 2,010 | - | ||||||
| Others | - | (7,691 | ) | |||||
| Total deferred tax assets | 666,754 | 638,860 | ||||||
| Less: valuation allowance | (666,754 | ) | (638,860 | ) | ||||
| Total Deferred tax assets, net of valuation allowance | - | - | ||||||
| Deferred tax liabilities | ||||||||
| Total Deferred tax liabilities | $ | - | $ | - | ||||
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | $ | - | $ | - | ||||
| As of December 31, | As of December 31, | |||||||
| 2019 | 2018 | |||||||
| Deferred tax assets | ||||||||
| Tax loss carried forward | $ | 1,460,573 | $ | 997,880 | ||||
| Unvested restricted share carried forward | 1,105 | 7,721 | ||||||
| Deferred advertising expenses | 55,178 | 55,921 | ||||||
| Accrued rental expense | 8,264 | - | ||||||
| Provision for doubtful accounts | 107,731 | 109,083 | ||||||
| Others | 459 | 465 | ||||||
| Total deferred tax assets | 1,633,310 | 1,171,070 | ||||||
| Less: valuation allowance | (1,093,031 | ) | (553,442 | ) | ||||
| Total Deferred tax assets, net of valuation allowance | 540,279 | 617,628 | ||||||
| Deferred tax liabilities | ||||||||
| PPE, due to difference in depreciation | - | (5,890 | ) | |||||
| Total Deferred tax liabilities | $ | - | $ | (5,890 | ) | |||
| Deferred tax assets, net of valuation allowance and deferred tax liabilities | 540,279 | 611,738 | ||||||
Deferred tax assets and valuation allowance against the deferred assets in an amount of $173,259 of Tianjin Takung was excluded from the consolidated financial statements as of December 31, 2021 due to the deconsolidation of Tianjin Takung. As of December 31, 2020, the deferred tax asset balance for Tianjin Takung was $125,190.
Uncertain tax positions
The reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
| December 31, 2021 | December 31, 2020 | |||||||
| Uncertain tax liabilities, beginning of period, discontinued operations | $ | 101,789 | $ | - | ||||
| Additions for tax position of current period | 101,789 | |||||||
| Settlements with tax authority during current year | (101,789 | ) | ||||||
| Uncertain tax liabilities, end of period, discontinued operations | $ | - | $ | 101,789 | ||||
13. LEASESThe Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the consolidated financial statements as of December 31, 2021 and 2020. The Company anticipated that the settlements with the taxing authority are remitted within one year.
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil as of December 31, 2021 and 2020, respectively.
Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended December 31, 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of September 30, 2021 and December 31, 2020, the Company had $nil and $101,789, respectively, of uncertain tax liabilities related to the different methodology of certain non-deductible tax expenses applied by the IRD. The examination had been concluded in May 2021 and the ultimate resolution of the tax examination concurred with the uncertain tax liabilities previously accrued. Hong Kong Takung settled the entire tax liabilities in June 2021. The Company does not expect the position of uncertain tax liabilities will significantly fluctuate within the next twelve months.
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on which it was filed, whichever is later.
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
16. LEASES
The Company has operating leases for its office facilities and artwork storages. The Company'sCompany’s leases have remaining terms of less than one year to approximately nine years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The following table provides a summary of leases by balance sheet location as of December 31, 2019:2021 and 2020:
| Assets/liabilities | Classification | As of December 31, 2021 | As of December 31, 2020 | |||||||
| Assets | ||||||||||
| Operating lease right-of-use assets, continuing operations | Operating lease assets | $ | - | $ | - | |||||
| Operating lease right-of-use assets, discontinued operations | Operating lease assets | 62,397 | 183,409 | |||||||
| Total operating lease right-of-use assets | $ | 62,397 | $ | 183,409 | ||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liability – current, continuing operations | Current operating lease liabilities | $ | - | $ | - | |||||
| Operating lease liability – current, discontinued operations | Current operating lease liabilities | 62,397 | 72,367 | |||||||
| Total operating lease liability – current | $ | 62,397 | $ | 72,367 | ||||||
| Long-term | ||||||||||
| Operating lease liability – non-current, continuing operations | Long-term operating lease liabilities | $ | - | $ | - | |||||
| Operating lease liability – non-current, discontinued operations | Long-term operating lease liabilities | - | 103,379 | |||||||
| Total operating lease liability – non-current | $ | - | $ | 103,379 | ||||||
| Total lease liabilities – continuing operations | $ | - | $ | - | ||||||
| Total lease liabilities – discontinued operations | $ | 62,397 | $ | 175,746 | ||||||
| Assets/liabilities | Classification | As of December 31, 2019 | ||||
| Assets | ||||||
| Operating lease right-of-use assets | Operating lease assets | $ | 731,469 | |||
| Liabilities | ||||||
| Current | ||||||
| Operating lease liability - current | Current operating lease liabilities | $ | 166,987 | |||
| Amount due to related parties | 376,218 | |||||
| Long-term | ||||||
| Operating lease liability - non-current | Long-term operating lease liabilities | 48,856 | ||||
| Amount due to related parties, non-current | - | |||||
| Total lease liabilities | $ | 592,061 | ||||
The operating lease expense, including two lease arrangements from a related party, for the year ended December 31, 20192021 and 2020 was as follows:
| For the year ended | ||||||
| Lease Cost | Classification | December 31, 2019 | ||||
| Operating lease cost | Cost of revenue, general and administrative expenses | $ | 812,586 | |||
| Total lease cost | $ | 812,586 | ||||
Future minimum
| For the year ended | For the year ended | |||||||||
| Lease Cost | Classification | December 31, 2021 | December 31, 2020 | |||||||
| Operating lease cost | Cost of revenue, general and administrative expenses | $ | 108,580 | $ | 593,962 | |||||
| Total lease cost | $ | 108,580 | $ | 593,962 | ||||||
| Operating lease cost-discontinued operations | Cost of revenue, general and administrative expenses | (108,580 | ) | (593,962 | ) | |||||
| Total lease cost | $ | - | $ | - | ||||||
Operating lease payments ascost of Tianjin Takung for the year ended December 31, 2018 were as follows:2021 was $286,878. This amount was excluded from the consolidated financial statements due to the deconsolidation of Tianjin Takung.
| Lease (1) | ||||
| Year ending December 31, 2019 | $ | 396,243 | ||
| Year ending December 31, 2020 | 230,683 | |||
| Year ending December 31, 2021 | 14,737 | |||
| Year ending December 31, 2022 | 14,737 | |||
| Year ending December 31, 2023 and thereafter | 37,457 | |||
| Total | $ | 693,857 | ||
Maturities of operating lease liabilities as of December 31, 20192021 were as follow:
| Maturity of Lease Liabilities | Operating Leases | |||
| 2020 | $ | 574,600 | ||
| 2021 | 14,364 | |||
| 2022 | 14,364 | |||
| 2023 | 14,364 | |||
| 2024 | 14,364 | |||
| Thereafter | - | |||
| Total lease payments | $ | 632,056 | ||
| Less: interest | (39,995 | ) | ||
| Present value of lease payments | $ | 592,061 | ||
| Maturity of Lease Liabilities | Operating Leases | |||
| 2022 | $ | 65,021 | ||
| 2023 | - | |||
| 2024 | - | |||
| 2025 | - | |||
| 2026 | - | |||
| Thereafter | - | |||
| Total undiscounted lease payments | $ | 65,021 | ||
| Less: interest | (2,624 | ) | ||
| Present value of lease payments | $ | 62,397 | ||
Supplemental information related to operating leases was as follows:
For the year ended December 31, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 724,769 | |
| New operating lease assets obtained in exchange for operating lease liabilities | $ | 1,017,815 |
| For the year ended December 31, 2021 | For the year ended December 31, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities – continuing operations | $ | - | $ | - | ||||
| Cash paid for amounts included in the measurement of lease liabilities – discontinued operations | $ | 66,793 | $ | 243,077 | ||||
| New operating lease assets obtained in exchange for operating lease liabilities – continuing operations | $ | - | $ | - | ||||
| New operating lease assets obtained in exchange for operating lease liabilities – discontinued operations | $ | - | $ | 124,760 | ||||
| Weighted average remaining lease term – continuing operations | - | - | ||||||
| Weighted average remaining lease term – discontinued operations | 1.0 year | 2.7 years | ||||||
| Weighted average discount rate – continuing operations | - | - | ||||||
| Weighted average discount rate – discontinued operations | 8 | % | 8 | % | ||||
As of December 31, 2019, the operating leases had a weighted average remaining lease term of 1.7 years and a weighted average discount rate of 8%.
14.17. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company purchased propertyandproperty and equipment which the payment was due within one year. As of December 31, 20192021 and 2018,2020, the Company hashad no capital commitments of $3,591 and $53,920, respectively.commitments.
Contingencies
Contingencies
From November 2019 to MarchOn or around July 2020, there were a total of seven individual claimsclaim was filed against Shanghai Takung in the Shanghai Pudong People’s Court, China as a resultagainst Hong Kong Takung on the basis of contractual disputes and misrepresentations over ownership units made by certain service agents. These claims amountedalleged breaches of contract. The claim amount has yet to approximately $0.11 million. These claims have all been settled asbe determined. A court hearing was initially scheduled on July 20, 2021 but the Company never received any court order or subpoena. As of present date with the voluntary dismissal by the claimants. For the year ended December 31, 2019,filing of this report, the Company did not accruehave further details nor received any liabilities pertainingcourt order related to these claims.this claim.
AsExcept for the above, as of December 31, 2019,2021 and through the issuance date of the consolidated financial statements included in this Form 10-K, the Company diddoes not have any other significant indemnification claims.
15.Due to the deconsolidation of Tianjin Takung, the ending balance of our restricted cash totaling $52,215,458 and $9,144,610 as of December 31, 2021 and 2020, respectively, was not included in our consolidated financial statements and was reclassified to current assets – a deconsolidated entity. The Company could be exposed to claims made by the PRC customers for the return of their deposits at the Tianjin Takung’s restricted cash accounts. Any claims against Hong Kong Takung, though it is a limited company, that are ultimately successful, could have a material adverse effect on the Company’s financial position, operating results and cash holdings unless Hong Kong Takung is disposed or wound dowm.
18. NET LOSS(LOSS) EARNINGS PER SHARE
The computation of the Company’s basic and diluted net loss per share is as follows:
| For the year ended December 31, 2021 | For the year ended December 31, 2020 | |||||||
| Numerator: | ||||||||
| Net loss-continuing operations | $ | (13,447,956 | ) | $ | (770,073 | ) | ||
| Net (loss) income – discontinued operations | (16,625,555 | ) | 157,435 | |||||
| Total net loss | (30,073,511 | ) | (612,638 | ) | ||||
| Denominator: | ||||||||
| Weighted-average shares outstanding-Basic | 12,383,741 | 11,264,128 | ||||||
| Stock options and restricted shares | - | 99,289 | ||||||
| Weighted-average shares outstanding-Diluted | 12,383,741 | 11,363,417 | ||||||
| Loss per share-continuing operations | ||||||||
| -Basic | $ | (1.09 | ) | $ | (0.07 | ) | ||
| -Diluted | $ | (1.09 | ) | $ | (0.07 | ) | ||
| (Loss) earnings per share-discontinued operations | ||||||||
| -Basic | $ | (1.34 | ) | $ | 0.01 | |||
| -Diluted | $ | (1.34 | ) | $ | 0.01 | |||
| For the year ended December 31, 2019 | For the year ended December 31, 2018 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (4,092,806 | ) | $ | (7,631,963 | ) | ||
| Denominator: | ||||||||
| Weighted-average shares outstanding-Basic | 11,246,119 | 11,218,534 | ||||||
| Stock options and restricted shares | - | - | ||||||
| Weighted-average shares outstanding-Diluted | 11,246,119 | 11,218,534 | ||||||
| Earnings per share | ||||||||
| -Basic | (0.36 | ) | (0.68 | ) | ||||
| -Diluted | (0.36 | ) | (0.68 | ) | ||||
Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
Due to the loss for the year ended December 31, 2018,2020, approximately 254,238100,890 options were excluded from the calculation of diluted net loss per share for the continuing operations. For the net income from a deconsolidated entity, $86,831 for the year 2020, a weighted average of potential common stock to be issued, 99,289 shares, was included in the calculation of diluted earnings from a deconsolidated entity per share if all options were exercised and 22,438converted into common stock.
As of December 31, 2021, there were no outstanding stock options and restrictedno other securities that would potentially be converted to additional shares respectively,of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued were excluded from the calculation of diluted net loss per share.
Due to the loss for the year ended December 31, 2019, approximately 100,890 and 6,250 options and restricted shares, respectively, were excluded from the calculation of diluted net loss per share.
16. SHAREHOLDERS’ EQUITY
On August 26, 2015, the 2015 Incentive Share Plan (“2015 Plan”) was approved by the Board of Directors for rewarding the Company’s directors, executives and selected employees and consultants for making major contributions to the success of the Company. 1,037,000 shares were registered on August 27, 2015.
On October 2, 2017, the Company entered into a prepaid retainer contract with Regeneration Capital Group, LLC to render consulting and advisory services in connection with investor relations. The Company recognized the cost of the 20,000 shares at the current fair value of $46,000 as of October 2, 2017 as prepayment, and amortized the cost subsequently in a straight-line method until Regeneration has completed its performance for one year ended October 2, 2018. Accordingly, the share-based compensation related to this consulting agreement was nil and $34,500 for the years ended December 31, 2019 and 2018, respectively. On January 22, 2018, the Company issued 20,000 restricted shares of common stock to Regeneration.
19. STOCKHOLDERS’ EQUITY
Share-based Compensation PlansShare Options:
On March 1, 2018, 12,438 of restricted share-based awards were granted. 17,143 of restricted share-based awards were vested during the fiscal year ended December 31, 2018.
On December 1, 2018, 10,000 of restricted share-based awards were granted.
On March 1, 2019, 5,000 of restricted share-based awards were granted. 8,323 of restricted share-based awards were vested during the fiscal year ended December 31, 2019.
The exercise price of share options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years.
47,60010,178 share options have been vested and 164,522 share options were forfeited by employees during the fiscal year ended December 31, 2018,2020, and no share options were forfeited nor exercised in the year ended December 31, 2018.2020.
10,178 share options have been vested and 153,348 share options were forfeited by employees during the fiscal year ended December 31, 2019,2021. 56,000 and no5,065 stock options were exercised on April 12, 2021 and May 25, 2021, respectively. As a result of the exercise, 61,065 shares of common stock were issued. The remaining 39,825 share options were exercisedunexercised and expired in the year ended December 31, 2019.2021.
Share Options:
The number of share options as of December 31, 20192021 is as follows:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, beginning of year | 254,238 | 3.13 | 1.30 | - | ||||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited or expired | (153,348 | ) | 3.17 | 0.76 | - | |||||||||||
| Outstanding, end of year | 100,890 | 3.08 | 0.59 | - | ||||||||||||
| Exercisable, end of year | 80,534 | 3.03 | 0.44 | - | ||||||||||||
| Expected to vest | 20,356 | 3.24 | 1.16 | - | ||||||||||||
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, beginning of year | 100,890 | $ | 3.08 | 0.07 | - | |||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | (61,065 | ) | 2.96 | - | - | |||||||||||
| Forfeited or expired | (39,825 | ) | 3.26 | - | - | |||||||||||
| Outstanding, end of year | - | - | - | - | ||||||||||||
| Exercisable, end of year | - | - | - | - | ||||||||||||
| Expected to vest | - | $ | - | - | - | |||||||||||
Award of restricted shares:
On May 27, 2020, 10,000 shares of common stock were granted to the Company’s SEC legal counsel as a compensation for legal advisory services rendered.
On April 21, 2021, the board of directors of the Company approved an issuance of 335,000 shares of common stock as share-based awards to its independent directors, employees and consultants under the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $6,863,815 in connection with this issuance in April 2021.
On May 28, 2021, the Company entered into a Securities Purchase Agreement with a company incorporated in British Virgin Islands (“BVI entity”). In exchange for an aggregate amount of 86,560 shares of common stock of the BVI entity, the Company shall remit $500,000 in cash and issue 572,000 restricted shares of the Company to the BVI entity. On August 21, 2021, both parties entered into an Amendment to Securities Purchase Agreement and the number of restricted shares of the Company to be issued to the BVI entity was increased to 1,558,480. The Company remitted the cash payment of $500,000 to the BVI entity on August 20, 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted shares at a price of $6.5 was issued to the BVI entity. The Company recognized the net carrying amount of this equity investment, $9,296,614, an initial cost of $10,630,120 with an impairment charge, $1,333,506, in noncurrent asset.
On July 12, 2021, pursuant to the terms of that certain Securities Purchase Agreement dated July 8, 2021, the Company sold 571,429 shares (the “Shares”) of its common stock, par value $0.001 per share (the “Common Stock”), to an institutional investor (the “Investor”) at a price of $8.75 per share, for gross proceeds of $5,000,000 before deducting the placement agent fee and offering expenses (the “Private Placement”).
On July 9, 2021, the Company entered into an Advisory Agreement with an independent institutional contractor for exploring potential investors and projects to advance new business development. Upon signing the agreement, an aggregate of 160,000 shares of common stock at a price of $11.86 was awarded to the contractor under the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $1,897,600 in connection with this issuance in July 2021.
On November 30, 2021, the board of directors of the Company approved an issuance of 415,000 shares of common stock as restricted share-based awards to its independent consultants and employees under the Rule 144 of the Securities Act of 1933. The restricted shares were issued on November 30, 2021. The Company recognized a share-based compensation of $2,116,500 in relation to this issuance in November 2021.
The following table sets forth changes in compensation-related restricted share awards during year ended December 31, 2019.2021. The Company uses fair market value of its common stock publicly traded on the date of the grant to determine the fair value of restricted shares.
| Number of | Weighted Average Grant Date | Weighted Average Remaining Contractual | ||||||||||
| Shares | Fair Value | Term | ||||||||||
| Unvested at December 31, 2018 | 11,240 | $ | 0.95 | 0.78 year | ||||||||
| Granted | 5,000 | 0.68 | 0.00 year | |||||||||
| Forfeited | (7,917) | 0.70 | ||||||||||
| Vested | (8,323 | ) | 1.03 | |||||||||
| Unvested at December 31, 2019 | - | $ | - | 0.00 year | ||||||||
| Number of | Weighted Average Grant Date | Weighted Average Remaining Contractual | ||||||||||
| Shares | Fair Value | Term | ||||||||||
| Unvested at December 31, 2020 | - | $ | - | 0.00 year | ||||||||
| Granted | 910,000 | 11.95 | 0.41 year | |||||||||
| Forfeited | - | - | - | |||||||||
| Vested | (495,000 | ) | 5.10 | 0.00 year | ||||||||
| Unvested at December 31, 2021 | 415,000 | $ | 5.10 | 0.41 year | ||||||||
As of December 31, 2019, the unrecognized share-based compensation expenses under the 2015 Stock Incentive Plan were $51,111, which is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive income (loss) before February 2021.
The share-based compensation expenses recognized, including the forfeitureoffering of share option,restricted shares, were $38,843$10,881,967 and $200,111$37,527 during the years ended December 31, 20192021 and 2018,2020, respectively.
20. SUBSEQUENT EVENT
On January 7, 2022, the Company incorporated a wholly-owned subsidiary, NFT Exchange Limited, in Wyoming.
17. SUBSEQUENT EVENTOn January 27, 2022, the Company incorporated a wholly-owned subsidiary of NFT Exchange, Metaverse Digital Payment Co., Limited (“Metaverse”) in Hong Kong.
The spread of COVID-19 around China and other partsOn February 16, 2022, the Company entered into certain securities purchase agreement (the “Feb 16 SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the world inSecurities Act of 1933, as amended (the “Securities Act”), pursuant to which the first quarterCompany agreed to sell 11,770,240 units, each consisting of 2020 has caused significant volatility in the markets of China, U.S., and restone share of the world. Therecommon stock of the Company, par value $0.001 per share (the “Common Stock”) and a warrant to purchase three shares of Common Stock. The purchase price of each Unit is significant uncertainty around$2.5488. The gross proceeds to the breadthCompany from this offering will be approximately $30 million.
On February 23, 2022, the Company and duration of business disruptions relatedthe Purchasers agreed to COVID-19, as well as its impactterminate the Feb 16 SPA pursuant to certain Termination Agreement and entered into a new securities purchase agreement (the “Feb 23 SPA”). The Feb 16 SPA and the Feb 23 SPA are substantially on the economysame terms except the per Unit purchase price. Pursuant to the Feb 23 SPA, the Company agreed to sell 11,952,190 units (the “Units”), each consisting of China, U.S.one share of Common Stock (the “Shares”) and international markets and, as such,a warrant (the “Warrant”) to purchase three shares of Common Stock. The purchase price of each Unit is $2.51. The gross proceeds to the extentCompany from this offering will be approximately $30 million. The Warrants are exercisable at any time after the six-month anniversary of the business disruptionissuance date at an initial exercise price of $3.1375 for cash (the “Warrant Shares”). The Warrants may also be exercised cashlessly if at any time after the nine-month anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares. The Warrants shall expire five and a half years from its date of issuance. The Warrants are subject to customary anti-dilution provisions reflecting stock dividends and splits or other similar transactions.
On March 9, 2022, the Company and the related financial impact cannot be reasonably estimated atPurchasers agreed to amend and restated the Feb 23 SPA to make amendments to the number of units, per unit purchase price and the term of warrants underlying the units (the “Amended SPA”). Pursuant to the Amended SPA, the Company agreed to sell 10,238,910 units (the “Units”), each consisting of one share of Common Stock (the “Shares”) and a warrant (the “Warrant”) to purchase three shares of Common Stock. The purchase price of each Unit is $2.93. On April 14, 2022, the transaction contemplated by the Amended SPA closed. The gross proceeds to the Company from this time.offering were approximately $30 million.
TheOther than the events aforementioned, the Company has evaluated subsequent events through the date of issuance of the consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the consolidated financial statements.
PROFORMA CONDENSED DECONSOLIDATED FINANCIAL STATEMENTS
TAKUNG ART CO., LTD AND SUBSIDIARIES
PROFORMA CONDENSED DECONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2020
| December 31, 2020 As previously reported | Less: Tianjin Takung | Reclassification | December 31, 2020 Deconsolidated | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 4,698,135 | $ | 3,922,665 | $ | (744,282 | )(1) | $ | 31,188 | |||||||
| Restricted cash | 9,144,610 | 9,144,610 | - | - | ||||||||||||
| Account receivables, net | 154,771 | - | (154,771 | )(1) | - | |||||||||||
| Prepayment and other current assets, net | 279,387 | 79,539 | (57,598 | )(1) | 142,250 | |||||||||||
| Amount due from related parties | 6,225,134 | 6,225,134 | - | - | ||||||||||||
| Loan receivables | 2,609,748 | 2,609,748 | - | - | ||||||||||||
| Amount due from affiliated entities | - | 1,379,393 | 1,379,393 | (1) | - | |||||||||||
| Current assets-discontinued operations | - | - | 22,938,347 | (1) | 22,938,347 | |||||||||||
| Total current assets | 23,111,785 | 23,361,089 | 23,361,089 | 23,111,785 | ||||||||||||
| Non-current assets | ||||||||||||||||
| Property and equipment, net | 437,996 | 231,939 | (206,057 | )(1) | - | |||||||||||
| Intangible assets | 22,504 | - | (22,364 | )(1) | 140 | |||||||||||
| Deferred tax assets, net | 638,860 | 125,190 | (513,670 | )(1) | - | |||||||||||
| Operating lease right-of-use assets | 183,409 | - | (183,409 | )(1) | - | |||||||||||
| Other non-current assets | 18,594 | - | (18,594 | )(1) | - | |||||||||||
| Non-current assets- discontinued operations | - | - | 1,301,223 | (1) | 1,301,223 | |||||||||||
| Total non-current assets | 1,301,363 | 357,129 | 357,129 | 1,301,363 | ||||||||||||
| Total assets | $ | 24,413,148 | $ | 23,718,218 | 23,718,218 | 24,413,148 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| LIABILITIES | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accrued expenses and other payables | $ | 728,088 | $ | 436,674 | (283,403 | )(1) | 8,011 | |||||||||
| Customer deposits | 9,144,610 | - | (9,144,610 | )(1) | - | |||||||||||
| Advance from customers | 17,412 | - | (17,412 | )(1) | - | |||||||||||
| Short-term borrowings from a third party | 1,977,109 | - | (1,977,109 | )(1) | - | |||||||||||
| Amount due to related parties | 6,448,784 | - | (6,448,784 | )(1) | - | |||||||||||
| Operating lease liabilities, current | 72,367 | - | (72,367 | )(1) | - | |||||||||||
| Amount due to affiliated entities | - | 23,974,218 | 23,974,218 | (1) | - | |||||||||||
| Tax payables | 106,354 | 20,003 | (86,351 | )(1) | - | |||||||||||
| Current liabilities- discontinued operations | - | - | 18,486,713 | (1) | 18,486,713 | |||||||||||
| Total current liabilities | 18,494,724 | 24,430,895 | 24,430,895 | 18,494,724 | ||||||||||||
| Operating lease liabilities, non-current | 103,379 | - | (103,379 | ) | - | |||||||||||
| Noncurrent liabilities-discontinued operations | - | - | 103,379 | 103,379 | ||||||||||||
| Total noncurrent liabilities | 103,379 | - | - | 103,379 | ||||||||||||
| Total liabilities | 18,598,103 | 24,430,895 | 24,430,895 | 18,598,103 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,271,379 shares issued and outstanding as of December 31, 2020) | 11,271 | - | - | 11,271 | ||||||||||||
| Additional paid-in capital | 6,358,115 | 144,163 | 144,163 | (1) | 6,358,115 | |||||||||||
| Accumulated deficits | (226,311 | ) | (855,637 | ) | (855,637 | )(1) | (226,311 | ) | ||||||||
| Accumulated other comprehensive loss | (328,030 | ) | (1,203 | ) | (1,203 | )(1) | (328,030 | ) | ||||||||
| Total stockholders’ equity | 5,815,045 | (712,677 | ) | (712,677 | ) | 5,815,045 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 24,413,148 | $ | 23,718,218 | 23,718,218 | 24,413,148 | ||||||||||
TAKUNG ART CO., LTD AND SUBSIDIARIES
PROFORMA CONDENSED DECONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2020
| December 31, 2020 As previously reported | Less: Tianjin Takung | Reclassification | December 31, 2020 Deconsolidated | |||||||||||||
| Revenue | ||||||||||||||||
| Listing fee | $ | 815,748 | $ | - | $ | (815,748 | )(2) | $ | - | |||||||
| Commission | 3,288,077 | - | (3,288,077 | )(2) | - | |||||||||||
| Management fee | 463,397 | - | (463,397 | )(2) | - | |||||||||||
| Service income | - | 4,242,507 | 4,242,507 | (2) | - | |||||||||||
| Total revenue | 4,567,222 | 4,242,507 | (324,715 | ) | - | |||||||||||
| Cost of revenue | (2,287,404 | ) | (1,901,264 | ) | 386,140 | (2) | - | |||||||||
| Gross profit | 2,279,818 | 2,341,243 | 61,425 | - | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | (3,455,249 | ) | (1,307,224 | ) | 1,367,328 | (2) | (780,697 | ) | ||||||||
| Selling expense | (390,112 | ) | (383,071 | ) | - | (7,041 | ) | |||||||||
| Total operating expenses | (3,845,361 | ) | (1,690,295 | ) | 1,367,328 | (787,738 | ) | |||||||||
| (Loss) income from operations | (1,565,543 | ) | 650,948 | 1,428,753 | (787,738 | ) | ||||||||||
| Other income and expenses: | ||||||||||||||||
| Other income | 239,788 | 108,449 | (124,673 | )(2) | 6,666 | |||||||||||
| Loan interest expense | (163,401 | ) | - | 163,401 | (2) | - | ||||||||||
| Exchange gain (loss) | 889,068 | (9,559 | ) | (887,628 | )(2) | 10,999 | ||||||||||
| Total other income | 965,455 | 98,890 | (848,900 | ) | 17,665 | |||||||||||
| (Loss) income before income taxes | (600,088 | ) | 749,838 | 579,853 | (2) | (770,073 | ) | |||||||||
| Income tax (expense) benefit | (12,550 | ) | 118,314 | 130,864 | (2) | - | ||||||||||
| Net (loss) income from continuing operations | (612,638 | ) | 868,152 | 710,717 | (770,073 | ) | ||||||||||
| Income from a discontinued operation, net of income taxes: | ||||||||||||||||
| Income from the operation of discontinued operations | - | - | 169,985 | (2) | 169,985 | ) | ||||||||||
| Current tax expense – discontinued operations | - | - | (101,756 | )(2) | (101,756 | ) | ||||||||||
| Deferred tax benefit- discontinued operations | - | - | 89,206 | (2) | 89,206 | |||||||||||
| Net loss from discontinued operations | - | - | 157,435 | 157,435 | ||||||||||||
| Net loss | (612,638 | ) | 868,152 | 868,152 | (612,638 | ) | ||||||||||
| Foreign currency translation adjustment | (55,001 | ) | (51,869 | ) | (51,869 | ) | (55,001 | ) | ||||||||
| Comprehensive (loss) income | $ | (667,639 | ) | $ | 816,283 | $ | 816,283 | $ | (667,639 | ) | ||||||
| Loss (earnings) per share on proforma basis | ||||||||||||||||
| Basic | $ | (0.05 | ) | $ | 0.08 | $ | - | $ | - | |||||||
| Diluted | $ | (0.05 | ) | $ | 0.08 | $ | - | $ | - | |||||||
| Loss per share from continuing operations | ||||||||||||||||
| Basic and diluted | $ | - | $ | - | $ | - | $ | (0.07 | ) | |||||||
| Earnings per share from discontinued operations | ||||||||||||||||
| Basic | $ | - | $ | 0.08 | $ | - | $ | 0.01 | ||||||||
| Diluted | $ | - | $ | 0.08 | $ | - | $ | 0.01 | ||||||||
| Weighted average number of shares of common stock outstanding –basic | 11,264,128 | 11,264,128 | - | 11,264,128 | ||||||||||||
| Weighted average number of shares of common stock outstanding –diluted | 11,264,128 | 11,363,417 | - | 11,363,417 | ||||||||||||
TAKUNG ART CO., LTD AND SUBSIDIARIES
ROFORMA CONDENSED DECONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2019
| December 31, 2019 As previously reported | Less: Tianjin Takung | Reclassification | December 31, 2019 Deconsolidated | |||||||||||||
| Revenue | ||||||||||||||||
| Listing fee | $ | 284,210 | $ | - | $ | (284,210 | )(3) | $ | - | |||||||
| Commission | 2,438,756 | - | (2,438,756 | )(3) | - | |||||||||||
| Management fee | 450,048 | - | (450,048 | )(3) | - | |||||||||||
| Service income | - | 2,622,025 | 2,622,025 | (3) | - | |||||||||||
| Total revenue | 3,173,014 | 2,622,025 | (550,989 | ) | - | |||||||||||
| Cost of revenue | (1,861,577 | ) | (1,285,768 | ) | 575,809 | (3) | - | |||||||||
| Gross profit | 1,311,437 | 1,336,257 | 24,820 | - | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | (4,662,313 | ) | (1,695,311 | ) | 1,947,340 | (3) | (1,019,662 | ) | ||||||||
| Selling expense | (301,460 | ) | (270,981 | ) | 15,828 | (3) | (14,651 | ) | ||||||||
| Total operating expenses | (4,963,773 | ) | (1,966,292 | ) | 1,963,168 | (1,034,313 | ) | |||||||||
| (Loss) income from operations | (3,652,336 | ) | (630,035 | ) | 1,987,988 | (1,034,313 | ) | |||||||||
| Other income and expenses: | ||||||||||||||||
| Other (expenses) income | (63,221 | ) | 73,040 | 33,794 | (3) | (102,467 | ) | |||||||||
| Loan interest expense | (57,474 | ) | - | 57,474 | (3) | - | ||||||||||
| Exchange (loss) gain | (246,506 | ) | 1,962 | 363,918 | (3) | 115,450 | ||||||||||
| Total other income | (367,201 | ) | 75,002 | 455,186 | 12,983 | |||||||||||
| Loss before income taxes | (4,019,537 | ) | (555,033 | ) | 2,443,174 | (3) | (1,021,330 | ) | ||||||||
| Income tax expense | (73,269 | ) | (236,732 | ) | (163,463 | )(3) | - | |||||||||
| Net loss from continuing operations | (4,092,806 | ) | (791,765 | ) | 2,279,711 | (1,021,330 | ) | |||||||||
| Loss from discontinued operations, net of income taxes: | ||||||||||||||||
| Loss from the operation of discontinued operations | - | - | (2,998,207 | )(3) | (2,998,207 | ) | ||||||||||
| Income tax expense - discontinued operations | - | - | (73,269 | )(3) | (73,269 | ) | ||||||||||
| Net loss from discontinued operations | - | - | (3,071,476 | ) | (3,071,476 | ) | ||||||||||
| Net loss | (4,092,806 | ) | (791,765 | ) | (791,765 | ) | (4,092,806 | ) | ||||||||
| Foreign currency translation adjustment | 29,673 | 15,350 | 15,350 | 29,673 | ||||||||||||
| Comprehensive loss | $ | (4,063,133 | ) | $ | (776,415 | ) | $ | (776,415 | ) | $ | (4,063,133 | ) | ||||
| Loss per share on proforma basis | ||||||||||||||||
| Basic and diluted | $ | (0.36 | ) | $ | (0.07 | ) | $ | - | $ | - | ||||||
| Loss per share from continuing operations | ||||||||||||||||
| Basic and diluted | $ | - | $ | - | $ | - | $ | (0.09 | ) | |||||||
| Loss per share from discontinued operations | ||||||||||||||||
| Basic and diluted | $ | - | $ | (0.07 | ) | $ | - | $ | (0.27 | ) | ||||||
| Weighted average number of shares of common stock outstanding –basic and diluted | 11,246,119 | 11,246,119 | - | 11,246,119 | ||||||||||||
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The company’s subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) was deconsolidated as a result of a loss of control over Tianjin Takung as discussed in Note 3.
The following unaudited consolidated condensed pro forma financial statements (“pro forma financial statements”) are based upon the historical consolidated financial statements of Takung Art Co., Ltd and Subsidiaries (“Takung”), adjusted to reflect the deconsolidation of Tianjin Takung and reclassification of Hong Kong Takung to a discontinued operation. Tianjin Takung will be deconsolidated from the Takung’s consolidated financial statements prospectively. Subsequent to the deconsolidation, we will derecognize our investment in Tianjin Takung, which is reflected as a pro forma adjustment in the unaudited consolidated condensed pro forma balance sheet (“pro forma balance sheet”).
The unaudited pro forma condensed consolidated statement of operations and comprehensive income for the year ended December 31, 2020 and 2019 gives effect to the deconsolidation of Tianjin Takung and reclassification of Hong Kong Takung from a continuing operation to a discontinued operation as if it had occurred on January 1, 2020 and January 1, 2019, respectively. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2020 gives effect to the deconsolidation of Tianjin Takung and discontinued operation of Hong Kong Takung as if it had occurred on December 31, 2020.
The pro forma consolidated financial information has not been audited and has been furnished for informational purposes only. The pro forma consolidated financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K previously filed with the SEC.
PROFORMA ADJUSTMENTS
| Entry No. | Description | |
| (1) | Deconsolidation of assets, liabilities and equity of Tianjin Takung and reclassification of Hong Kong Takung from continuing operations to discontinued operations as of December 31, 2020 | |
| (2) | Deconsolidation of revenue and expenses of Tianjin Takung and reclassification of Hong Kong Takung from continuing operations to discontinued operations for the year ended December 31, 2020 | |
| (3) | Deconsolidation of revenue and expenses of Tianjin Takung and reclassification of Hong Kong Takung from continuing operations to discontinued operations for the year ended December 31, 2019 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC'sSEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company'sCompany’s management, including the Company'sCompany’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Fang Mu,Kwok Leung Paul Li, the Company’s Chief Executive Officer (“CEO”), and Jehn Ming Lim,Jianguang Qian, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2019.2020. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.2020. In making this assessment, management used the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that, as of December 31, 2019,2020, the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of its registered independent public accounting firm regarding the Company'sCompany’s internal control over financial reporting because the Company is not required to include such attestation report in this annual report.
Changes in Internal Controls over Financial Reporting
We have not made any changes in internal controls over financial reporting during the year ended December 31, 2019.
2020.
Limitations on Controls
Management does not expect that the Company'sCompany’s disclosure controls and procedures or the Company'sCompany’s internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. The Company'sCompany’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company'sCompany’s chief executive officer and chief financial officer have concluded that the Company'sCompany’s disclosure controls and procedures are effective at that reasonable assurance level.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent Inspections
Not applicable
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following are our officers and directors as of May 8, 2020. Other than Mr. Jiangping (Gary) Xiao,March 31, 2022. Most of our officers and other directors reside year-round in either the PRC or Hong Kong and, therefore, it may be difficult for investors to effect service of process within the U.S. upon the latter or to enforce judgments against them obtained from the United States courts.
The following table sets forth certain information concerning our directors and executive officer:
| Name | Age | Position | ||
| Kwok Leung Paul Li | 36 | |||
| Chief Executive Officer | ||||
| Co-Chief Executive Officer | ||||
| Jianguang Qian | 38 | Chief Financial Officer | ||
| Director | ||||
| Director | ||||
The following is a summary of the biographical information of our directors and officers:
FANG MUKWOK LEUNG PAUL LI was appointed as our Chief Executive Officer on July 20, 2021. He has years of experience in the crypto project investment analysis and blockchain advisory area. In January 2021, Mr. Li co-founded Alpha Block Capital, focusing on crypto investment in early stage and incubating potential blockchain projects. In July 2015, he co-founded Minex, a company providing crypto mining machine rental services, and he had been working there since then until February 2021. From August 2018 to September 2019, Mr. Li served as a blockchain advisor at Silkchain, where he provided consulting services on blockchain development. Mr. Li received his Bachelor of Social Science from Hong Kong Shue Yan University in 2008, his Master of Social Science from Hong Kong Polytechnic University in 2014 and his Master of Arts in Christian Studies from Chinese University of Hong Kong in 2017..
KUANGTAO WANG was appointed as our Co-Chief Executive Officer on January 4, 2022. Mr. Wang is a veteran businessman in the art exchange industry. He has been in the art exchange business as general manager of Yongbao Culture and Media Co. Ltd in China since 2007 and he founded an offline art exchange platform. Mr. Wang has extensive experience in corporatebusiness management and an in-depth understanding and vision for the non-fungible token industry. Mr. Wang graduated from Beijing International Business Administration Institute in 2012 with a bachelor’s degree.
JIANGUANG QIAN was appointed as our Chief Financial Officer on January 5, 2022. He has over 15 years of financial management experience in manufacturing, engineering, internet and internet plus enterprises. He is proficient in finance, taxation, financing and financial information management. He has large-scale financial department management experience and cross-functional team management experience. From June 2018 to June 2020, he was a financial director of the Shared Accounting Center of Lv Ma Ma, a listed company on the National Equities Exchange and Quotations in China. He was responsible for Lv Ma Ma ’s accounting and human resource management. She is familiar with artwork storage, appraisal,taxation, and other facets relatedhad a team of 70 subordinates; he was also in charge of supervising the proposed listing of Lv Ma Ma in Hong Kong, as well as investor relations. He was also responsible for the establishment of and IT transformation of the business finance system of Lv Ma Ma. From April 2013 to July 2014, he worked as the tradinghead of art works. Her experience also includes budgeting, forecasting, financial planning and analysis, human source management and commercial insurance. She hasfinance at Minmetalscondo Co, Ltd, an affiliated company of Minmetals Land (HKG: 0230). In addition, Jianguang Qian served as the Chief Financial Officer during the working period of Merit-link. He was in charge of the business process reengineering of Merit-link, the innovation and financial empowerment of the industrial internet business, and took the lead in the financing and listing of Merit-link during his tenure as the Chief Financial Officer of Youland Group from November 2014 to June 2018. Jianguang Qian’s responsibilities included has financial management, financial and operational analysis and internal audit responsibilities of the Youland Group
TAK CHING (ANTHONY) POON, has over 14 years of experience in the field of banking, accounting and corporate finance. He joined ALE Corporate Services Limited, a Hong Kong company providing accounting and corporate consulting services to small and medium-sized businesses and served as its Chief Executive Officer since April 2018. He is also the Chief Executive Officer and Chairman of ALE Group Holding Ltd., the parent company of ALE Corporate Services Limited. In July 2019, Mr. Poon was appointed as an Independent Non-Executive Director of Precious Dragon Technology Holdings Limited (HKEX 1861) being the Chairman for Audit Committee. From July 2004 to July 2016, he worked in the Hong Kong and Shanghai Banking Corporation Limited under commercial banking department managing corporate relationship team in diverse industry sectors including Textile and Garment, Toys, Electronics and Printing, Property Developer / Non-bank Financial Institution and provide structured financing solution for their funding need. His last position was Senior Vice President in Large Corporates department. Mr. Poon obtained his Bachelor’s degree in Business Administration from the Chinese University of Takung Cultural Development (Tianjin) Co. Ltd, oneHong Kong in December 2004, majoring in Professional Accountancy and admitted as a member of the Company’s subsidiaries since 2016. She has relinquished this position with effect from August 6, 2019. From 2009 to 2016, Ms. Mu worked as Financial ControllerAssociation of Tianjin Cultural and Artwork Exchange Company. From 2008 to 2009, Ms. Mu served as an assistant auditor of Tianjin Zhong He Xin Cheng CPA Firm. Ms. Mu was recently qualified as a Professional Art Appraiser by the Beijing Open University in 2019. She graduated from Tianjin University of Finance and Economics in 2008 with a double degree in Audit and Finance.Chartered Certified Accountants.
JEHN MING LIMRONGGANG (JONATHAN) ZHANG, has extensive experience in investment and finance in the industries of international engineering, renewable energy, eco-agriculture, infrastructure. He is also an outstanding consultant in the fields of international laws, blockchain, metaverse, digital economy and crypto currency. Mr. Zhang currently is also acting as a director of SOS Ltd. (NYSE: SOS), a listed company on The New York Stock Exchange, which engages in the business of providing financial accountinga wide range of data mining and advisoryanalysis services to publiccorporate and private companiesindividuals. He is the Chief Executive Officer of 5CGroup International Asset Management Co., Ltd. and Strategic Development Consultant of SG & CO PRC Lawyers, positions he has been engaging in this profession for more than 14 years. Prior to joining the Companyheld since 2015. Mr. Zhang has served since 2015 as its Chief Financial Officer on February 18, 2019, Mr. Lim has been a managing director of a financial consulting firm since January 2013 and was mainly responsible for overseeing SEC reporting, GAAP technical consultation, financial statement audit preparation, due diligence and internal controls compliance services. Mr. Lim also has extensive experience in auditing private and public companies in his stints as audit manager and senior auditor of two regional accounting firms in the United States from October 2008 through December 2012 and from September 2006 through October 2008, respectively and as an auditor at Ernst & Young in the United States from September 2004 through to July 2006. Mr. Lim graduated with High Honors from the University of California, Santa Barbara, with a Bachelor of Arts degree in Business Economics.
XIAOYU ZHANG, has been an internal audit manager at the Bank of China (New Zealand) Limited from January 2019. From November 2018 to December 2018, she was an auditor with PricewaterhouseCoopers at its New Zealand Auckland office since November 2018. Prior to that, she was a seniormaster’s supervisor of Internal Audit Department with the headquarterZhejiang Sci-Tech University and visiting professor of Tianjin Kin Cheng Bank in China. Ms.Zhejiang NDRC Training Center. Mr. Zhang had been an associate and senior associate with PricewaterhouseCoopers China from 2009 to 2015. Ms. Zhang obtained her Bachelor of Financial Management from Tianjin University, located in China and Master of Business Administration from Nankai University, located in China, and Postgraduate Diploma in Accounting from Massey University, located in New Zealand.
JIANGPING (GARY) XIAOhas been the Vice President of Finance and Accounting at Hilco IP Merchant Bank since 2019. Prior to that, he was the Chief Financial Officer of Professional Diversity Network, Inc., from March 2017 to March 2019. From 2013 to 2016, Mr. Xiao was the Chief Financial Officer and Controller of Petstages. Earlier in his career, Mr. Xiaopreviously served as the ControllerDepartment Chief of the Operations Management GroupCommercial Bureau of The Jordan Company, a private equity firm, from August of 2008 to May of 2013,HEDA between 2003 and 2015 and as a Senior Finance Associate, Financial PlanningChief of Investment Bureau of Ningbo Free Trade Zone between 2000 and Analysis of United Airlines from June 20062003. Mr. Zhang received his bachelor’s degree at Hubei University in 1987, and Visiting Scholar to August of 2008. Mr. Xiao obtained a Master of Business Administration from the Ross School of Business Management at the University of MichiganNewcastle upon Tyne, UK in 2006 and a B.A. in Accounting from Tsinghua University in Beijing, China in 2000.1996.
LI LV is a corporate management expert with 12 years of financial, accounting and business experience. From August 2010 to December 2018, she served as a General Manager of Hua Xia Investment, a PRC Investment consultancy firm. From April 2006 to May 2010, she served as an Assistant Branch Manager in Rural Commercial Bank. Ms. Lv graduated from the Hebei University of Technology as a Bachelor of Engineering Cost in 2005.
Directors and Officers of Hong Kong Takung
Ms. Fang Mu is aYimmei Yu was appointed as director of Hong Kong Takung.Takung on June 10, 2021. Under Hong Kong Takung’s Articles of Association and Hong Kong law, Hong Kong Takung is managed by the General Manager who is appointed and supervised by its Board of Directors. A director is appointed by the shareholdersstockholders for a term of one year or until the next Annual General Meeting and can be re-elected for consecutive terms.
Mr. Lim, our Chief Financial Officer, has been appointed Chief Financial Officer of Hong Kong Takung effective February 18, 2019.
Directors and Officers of Shanghai Takung and Tianjin Takung
Ms. Fang Mu is Shanghai Takung and Tianjin Takung’s General Manager and also theMr. Xian Gang Luo was appointed as director of the Tianjin Takung, Shanghai Takung.
Directors and Officers of Takung Art Holdings
Mr. Di Xiao is a director of Takung Art Holdings. Under Takung Art Holdings’ Articles of Association and Hong Kong law, Takung Art Holdings is managed by the General Manager who is appointed and supervised by its Board of Directors. A director is appointed by the shareholders for a term of one year or until the next Annual General Meeting and can be re-elected for consecutive terms.Tianjin Takung since September 24, 2020.
Directors and Officers of Hong Kong MQ
Ms. Hiu Ngai Ma is aYimmei Yu was appointed as director of Hong Kong MQ.MQ on June 10, 2021. Under Hong Kong MQ’s Articles of Association and Hong Kong law, Hong Kong MQ is managed by the General Manager who is appointed and supervised by its Board of Directors. A director is appointed by the shareholdersstockholders for a term of one year or until the next Annual General Meeting and can be re-elected for consecutive terms.
Directors and Officers of Tianjin MQ
The positions of directors and officers are still vacant as Tianjin MQ is still a startup company as of December 31, 2019.
Term of Office
Our directors hold their positions until the next annual meeting of shareholdersstockholders and until their successor is elected and qualified by our shareholders,stockholders, or until their earlier death, retirement, resignation or removal.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to the shareholders.stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. Our Board believes that there are general requirements for service on the Board that are applicable to directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board considers the qualifications of director and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by the shareholders,stockholders, the Board will consider the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors it determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board conducts interviews of potential director candidates to assess intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the board as a whole, in light of the Company’s current needs and its business priorities. The Board believes that it should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a Chief Executive Officer or a President or like position. Marketing is the core focus of our business and the Company seeks to develop and deploy the world’s most innovative and effective marketing and technology. Therefore, the Board believes that marketing and technology experience should be represented on the Board. The Company is involved in the on-line trading business in Hong Kong and the PRC. Therefore, the Company’s business also requires compliance with a variety of regulatory requirements and relationships with various governmental entities. Therefore, the board believes that governmental, political or diplomatic expertise should be represented on the Board.
Set forth below are a chart and a narrative disclosure that summarize the specific qualifications, attributes, skills and experiences described above. An “X” in the chart below indicates that the item is a specific reason that the director has been nominated to serve on the Company’s Board. The lack of an “X” for a particular qualification does not mean that the director does not possess that qualification or skill. Rather, an “X” indicates a specific area of focus or expertise of a director on which the board currently relies.
Doug Buerger | Ronggang (Jonathan) Zhang | (Anthony) Poon | ||||||
High level of financial literacy | X | X | ||||||
| Extensive knowledge of the Company’s business | X | |||||||
Marketing/Marketing related technology experience | X | |||||||
Relevant Chief Executive/President or like experience | X | X | ||||||
| Corporate Governance expertise | X | X |
Doug Buerger
Marketing/Marketing related technology experience - Mr. Buerger is a scientific consultant with experience leading teams in all phases of pharmaceutical and medical device lifecycle development including research, development, manufacturing, business development, quality, clinical, and regulatory.
Xiaoyu ZhangRelevant Chief Executive/President experience - Mr. Buerger served as a manager for product development at Hercon Pharmaceuticals, LLC, where he was in charge of coordination of development pipeline, foster innovation mentality and problem-solving skills development in scientific staff personnel, developed and maintained annual departmental budgets
Tak Ching (Anthony) Poon
High level of financial literacy and Relevant Chief Executive experience – Mr. Poon has over 14 years of experience in the field of banking, accounting, and corporate finance. He joined ALE Corporate Services Limited, a Hong Kong company providing accounting and corporate consulting services to small and medium-sized businesses and served as its Chief Executive Officer since April 2018. He is also the Chief Executive Officer and Chairman of ALE Group Holding Ltd., the parent company of ALE Corporate Services Limited. In July 2019, Mr. Poon obtained his Bachelor’s degree in Business Administration from the Chinese University of Hong Kong in December 2004, majoring in Professional Accountancy and admitted as a member of the Association of Chartered Certified Accountants.
Corporate Governance Expertise – Mr. Poon served as an Independent Non-Executive Director of Precious Dragon Technology Holdings Limited (HKEX 1861) being the Chairman for Audit Committee.
Ronggang (Jonathan) Zhang
High level of financial literacy– Ms.Mr. Zhang obtained her Bachelorhas extensive experience in investment and finance in the industries of Financial Management from Tianjin University, located in China, Masterinternational engineering, renewable energy, eco-agriculture, infrastructure. Mr. Zhang previously served as the Department Chief of Business Administration from Nankai University, located in China,Commercial Bureau of HEDA between 2003 and Postgraduate Diploma in Accounting from Massey University, located in New Zealand.
Jiangping (Gary) Xiao
High level of financial literacy - Mr. Xiao obtained a Master of Business Administration from the Ross School of Business Management at the University of Michigan in 2006 and a B.A. in Accounting from Tsinghua University in Beijing, China in 2000.
Marketing/Marketing related technology experience, Relevant Chief Executive/President or like experience and Corporate Governance Expertise –Mr. Xiao has held many leadership positions in private and public companies, more recently as Vice President of Finance and Accounting at Hilco IP Merchant Bank since 20192015 and as Chief Financialof Investment Bureau of Ningbo Free Trade Zone between 2000 and 2003.
Extensive knowledge of the Company’s business – Mr. Zhang an outstanding consultant in the fields of international laws, blockchain, metaverse, digital economy and crypto currency.
Relevant Chief Executive experience – He is the Chief Executive Officer of Professional Diversity Network, Inc.5CGroup International Asset Management Co., Ltd.
Corporate Governance Expertise – Mr. Zhang currently is also acting as a director of SOS Ltd., a Nasdaq-listedlisted company from March 2017on The New York Stock Exchange, which engages in the business of providing a wide range of data mining and analysis services to March 2019. In his previous roles, he had garnered valuable knowledgecorporate and experience in marketing, managing and advising a U.S. public company and public company corporate governance.
Li Lv
High level of financial literacy – Ms. Lv is a corporate management expert with 12 years of financial, accounting and business experience. She was previously an Assistant Branch Manager at the Rural Commercial Bank.
Marketing/Marketing related technology experience, Relevant Chief Executive/President or like experience– Ms. Lv served as a General Manager of Hua Xia Investment, a PRC Investment consultancy firm and is a corporate management expert. She has invaluable experience is marketing and advising on financial, accounting and business issues.
individuals.
Directors or Executive Officers involved in Bankruptcy or Criminal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries), has:
| Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. |
| Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses. |
| Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. |
| Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. |
| Been the subject to, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Board Committees
Our business, property and affairs are managed by or under the direction of the Board of Directors. Members of the Board of Directors are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.
Our Board of Directors has three committees - the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. The Audit Committee currently consists of Ms. XiaoyuTak Ching (Anthony) Poon, Ronggang (Jonathan) Zhang and Ms. Li Lv,Doug Buerger with Jiangping (Gary) Xiao)Tak Ching (Anthony) Poon serving as Chairman. The Compensation Committee currently consists of Mr. Jiangping (Gary) XiaoTak Ching (Anthony) Poon, Ronggang (Jonathan) Zhang and Ms. Li Lv,Doug Buerger with Ms. Xiaoyu ZhangDoug Buerger serving as Chairwoman.Chairman. The Governance and Nominating Committee (the “Nominating Committee”) currently consists of Mr. Jiangping (Gary) Xiaowith Tak Ching (Anthony) Poon, Ronggang (Jonathan) Zhang and Ms. XiaoyuDoug Buerger with Ronggang (Jonathan) Zhang with Ms. Li Lv serving as Chairwoman.Chairman.
Our Audit Committee is involved in discussions with our independent auditor with respect to the scope and results of our year-end audit, our quarterly results of operations, our internal accounting controls and the professional services furnished by the independent auditor. Our Board of Directors has determined that both Mr. Levinson and Mr. LevyTak Ching (Anthony) Poon qualify as audit committee financial experts and have the accounting or financial management expertise as required under NYSE Rule 303A.07(a). Our Board of Directors has also adopted a written charter for the audit committee which the audit committee reviews and reassesses for adequacy on an annual basis. A copy of the audit committee’s current charter is available at our corporate website at http://www.takungart.com/content.equisolve.net/_1f010bf36ebf8949a247a2400b90e89f/takungae/db/225/642/file/Audit%20Committee%20Charter%20-%20v443235_TAKUNG_ART_CO.%2c_LTD._8K_20160623%20-%2099.1.pdf.
The Compensation Committee oversees the compensation of our chief executive officer and our other executive officers and reviews our overall compensation policies for employees generally. If so authorized by the Board of Directors, the committee may also serve as the granting and administrative committee under any option or other equity-based compensation plans which we may adopt. The Compensation Committee does not delegate its authority to fix compensation; however, as to officers who report to the chief executive officer, the compensation committee consults with the chief executive officer, who may make recommendations to the Compensation Committee. Any recommendations by the chief executive officer are accompanied by an analysis of the basis for the recommendations. The committee will also discuss compensation policies for employees who are not officers with the chief executive officer and other responsible officers. A copy of the compensation committee’s current charter is available at our corporate website at http://www.takungart.com/content.equisolve.net/_1f010bf36ebf8949a247a2400b90e89f/takungae/db/225/643/file/Compensation%20Committee%20Charter%20-%20v443235_TAKUNG_ART_CO.%2c_LTD._8K_20160623%20-%2099.2.pdf.
The Governance and Nominating Committee is involved in evaluating the desirability of and recommending to the Board any changes in the size and composition of the board, evaluation of and successor planning for the chief executive officer and other executive officers. The qualifications of any candidate for director will be subject to the same extensive general and specific criteria applicable to director candidates generally. A copy of the nominating committee’s current charter is available at our corporate website at http://www.takungart.com/content.equisolve.net/_1f010bf36ebf8949a247a2400b90e89f/takungae/db/225/644/file/Governance%20and%20Nominating%20Committee%20Charter%20-%20v443235_TAKUNG_ART_CO.%2c_LTD._8K_20160623%20-%2099.3.pdf.
Board Meetings
The Board of Directors and its committees held the following number of meetings during 2019:2021:
| Board of Directors | 5 | |||
| Audit Committee | 5 | |||
| Compensation Committee | 5 | |||
| Nominating Committee | 5 |
The above table includes meetings held by means of a conference telephone call but notand the actions taken by unanimous written consent.
Each director attended at least 75% of the total number of meetings of the Board of Directors and those committees on which he served during the year.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officers and principal financial officer, principal accounting officer or controller, or persons performing similar functions and also to other employees. The Code is current available on our website at http://www.takungart.com/content.equisolve.net/_1f010bf36ebf8949a247a2400b90e89f/takungae/db/225/645/file/Code%20of%20Business%20Conduct%20and%20Ethics%20-%20v443235_TAKUNG_ART_CO.%2c_LTD._8K_20160623%20-%2099.4.pdf.
Board Leadership Structure and Role in Risk Oversight
Ms. Xiaoyu ZhangDoug Buerger is the Company’s Chairman of Board of Director and Mr. Jehn Ming Lim is our Chief Financial Officer.Director. We have three independent directors. Ms. Fang MuKwok Leung Paul Li is our chief executive officerCo-Chief Executive Officer and Mr. Kuangtao Wang is our Co-Chief Executive Officer. Mr. Jianguang Qian is our Chief Financial Officer. They are best situated to serve as our business and industry most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well. The Board’s role in the risk oversight of the Company includes, among other things:
| appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting; |
| approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
| reviewing annually the independence and quality control procedures of the independent auditors; |
| reviewing and approving all proposed related party transactions; |
| discussing the annual audited financial statements with the management; and |
| meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management. |
Our Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for related person transactions.
Limitations on Liability
Article VI of our Bylaws limits the liability of our directors, officers and employees to the fullest extent permitted by Delaware law. Consequently, our directors and officers may not be personally liable for monetary damages regarding their duties as directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholdersstockholders are required by the SEC regulations to furnish our Company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2019,2020, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis, save that one officer who filed an erroneous report, which has since been rectified.
Item 11. Executive Compensation.
The following table sets forth information with respect to the compensation of each of the named executive officers for services provided in all capacities to Takung Art Co., Ltd and its subsidiaries, Hong Kong Takung Art Co., Ltd,Company Limited, Hong Kong Takung Art Holdings Co., Ltd,Company Limited, Takung (Shanghai) Co., Ltd, Takung Cultural Development (Tianjin) Co., Ltd, Art Era Internet Technology (Tianjin) Co., Ltd, Hong Kong MQ Group Limited, NFT Digital Technology Limited, and Tianjin MQ Enterprise Management Consulting Co., Ltd in the fiscal years ended December 31, 20192021 and 20182020 in their capacity as such officers. Mr. Ming Cheng receives no additional consideration for his services as director of the Company. No other executive officer or former executive officer received more than $100,000 in compensation in the fiscal years reported.
Summary Compensation Table
| Name & Principal Position | Fiscal Year | Base Compensation (annual, unless otherwise noted) | Bonus | Share Award | Total Annual | |||||||||||||
| Kuangtao Wang1 | 2021 | |||||||||||||||||
| Co-Chief Executive Officer | 2020 | |||||||||||||||||
| Kwok Leung Paul Li2 | 2021 | $ | 55,452 | $ | — | $ | 765,000 | $ | 820,452 | |||||||||
| Chief Executive Officer | 2020 | $ | — | $ | — | — | $ | — | ||||||||||
| Jianguang Qian3 | 2021 | $ | — | $ | — | — | $ | — | ||||||||||
| Chief Financial Officer | 2020 | $ | — | $ | — | — | $ | — | ||||||||||
| Zhihua Yang4 | 2021 | $ | 43,947 | $ | — | — | $ | 43,947 | ||||||||||
| Former Chief Executive Officer | 2020 | $ | 23,402 | $ | — | — | $ | 23,402 | ||||||||||
| Jing Wang5 | 2021 | $ | 21,915 | $ | — | — | $ | 21,915 | ||||||||||
| Former Chief Financial Officer | 2020 | $ | 32,056 | $ | — | — | $ | 32,056 | ||||||||||
| Fang Mu6 | 2021 | $ | — | $ | — | — | $ | — | ||||||||||
| Former Chief Executive Officer | 2020 | $ | 45,127 | $ | — | — | $ | 45,127 | ||||||||||
| Jehn Ming Lim7 | 2021 | $ | — | $ | — | — | $ | — | ||||||||||
| Former Chief Financial Officer | 2020 | $ | 41,904 | $ | 7,605 | — | $ | 41,904 | ||||||||||
| Name & Principal Position | Fiscal Year | Base Compensation (annual, unless otherwise noted) | Bonus | Share Options * | Total Annual | |||||||||||||||
| Fang Mu1 | 2019 | $ | 38,687 | 5,984 | — | $ | 44,671 | |||||||||||||
| Chief Executive Officer | ||||||||||||||||||||
| Jehn Ming Lim2 | 2019 | $ | 90,367 | $ | 7,605 | — | $ | 97,972 | ||||||||||||
| Chief Financial Officer | ||||||||||||||||||||
| Di Xiao3 | 2019 | — | — | — | — | |||||||||||||||
| Former Chief Executive Officer and | 2018 | $ | 178,626 | $ | 46,555 | $ | 9,900 | $ | 235,081 | |||||||||||
| Director of the Company and Hong Kong Takung, Director of Takung Art Holdings | ||||||||||||||||||||
| Chun Hin Leslie Chow4 | 2019 | $ | 121,561 | — | — | $ | 121,561 | |||||||||||||
| Former Chief Executive Officer, former Chief Financial Officer | 2018 | $ | 208,325 | $ | 104,417 | $ | 7,059 | $ | 319,801 | |||||||||||
| Zishen Li5 | 2019 | — | — | — | — | |||||||||||||||
| Former Vice President, Hong Kong Takung General | 2018 | $ | 67,022 | $ | 57,530 | $ | 11,738 | $ | 136,290 | |||||||||||
| Manager, Shanghai Takung and Tianjin Takung | ||||||||||||||||||||
| (1) |
|
| (2) | Mr. Li was appointed as our Chief Executive Officer on July 20, 2021. He received restricted share-based 150,000 share ($765,000) awards on November 30, 2021. |
| (3) | Mr. Qian was appointed as our Chief Financial Officer on January 5, 2022. Mr. Qian will receive an annual base salary of $60,000 and discretionary share compensation of up to $35,000 per year for |
| (4) | Ms. Yang was appointed as our Chief Executive Officer September 22, 2020 and resigned on July 20, 2021. |
| (5) | Ms. Wang was appointed as our Chief Financial Officer on May 26, 2020.and resigned on September 30, 2021. |
| (6) | Ms. Mu was appointed as the Company’s |
On August 14, 2019, Ms. Mu entered into a consulting agreement with our indirect wholly-owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd to provide management services, consulting services to clients, administration and human resources management and financial and accounting management services. In consideration for her services, Ms. Mu will be paid RMB 30,000 (approximately $4,343) per month on an after-tax basis and be reimbursed for all incidental expenses. The term of her engagement will be for an initial period of one year beginning August 14, 2019 through August 13, 2020 and will automatically renew for successive one (1) year periods unless terminated by either party. The consulting agreement was approved by our Audit Committee on August 12, 2019.
The amount from both of above agreements was treated as the executive compensation to Ms. Mu.
| On February 18, 2019, our Nominating and Compensation Committees nominated and appointed Mr. Jehn Ming Lim as our and our Hong Kong subsidiary, Hong Kong |
Mr. Lim’s compensation as Chief Financial Officer of both the Company and its Hong Kong subsidiary is set forth in an employment agreement between Mr. Lim and Hong Kong Takung Art Co., Ltd dated February 18, 2019. Pursuant to the agreement, Mr. Lim will receive a monthly salary of HK$65,000 (approximately $8,296) for his services as Chief Financial Officer. He will be subject to a 3-month probationary period, during which either party may terminate his employment without notice or payment in lieu of notice during his first month and thereafter, with seven (7) days’ notice in writing or seven (7) days’ salary in lieu of notice for the remainder of his probationary period. After his probation, either party may terminate his employment with one (1) month’s written notice or one (1) month’s salary in lieu of notice. Mr. Lim’s employment is also subject to customary benefits such as paid time off, sickness allowance and other rights and benefits provided under the Hong Kong Employment Ordinance, Minimum Wage Ordinance, Mandatory Provident Fund Schemes Ordinance, Employee’s Compensation Ordinance and other applicable ordinances.
On March 1, 2016, Mr. Xiao was granted share options to purchase 50,000 shares of common stock of the Company at an exercise price of $3.30 per share pursuant to the Company’s 2015 Incentive Share Plan. The options are exercisable during the term of his employment in three equal installments of 16,666 shares of common stock, the first installment being exercisable on the date of issue and thereafter on each successive anniversary thereof.
Mr. Xiao became a Director of Takung Art Holdings on July 20, 2018. He resigned all his other positions on November 19, 2018 except that he remains a Director of Takung Art Holdings but receives no compensation for his position.
*The value reported for each executive is the cost recognized in our financial statements during fiscal year 2019, calculated in accordance with Accounting Standards Codification Topic 718 "Share-based Compensation”.
Operating Subsidiary Executive Compensation Summary
The table below sets forth the positions and compensations for the officers of Hong Kong and Tianjian Takung for the years ended December 31, 20192021 and 2018.2020.
| Name | Year | Annual Salary ($) | Bonus ($) | Total ($) | ||||||||||
| Kwok Leung Paul Li1 | 2021 | 55,452 | - | 55,452 | ||||||||||
| Chief Executive Officer | 2020 | - | - | - | ||||||||||
| Yimmei Yu 2 | 2021 | 27,018 | - | 27,018 | ||||||||||
| Former Director | 2020 | - | - | - | ||||||||||
| Jehn Ming Lim 3 | 2021 | - | - | - | ||||||||||
| Former Chief Financial Officer | 2020 | 41,904 | - | 41,904 | ||||||||||
| Fang Mu 4 | 2021 | - | - | - | ||||||||||
| Former Chief Executive Office | 2020 | 45,127 | - | 45,127 | ||||||||||
| Name | Year | Annual Salary ($) | Bonus ($) | Total ($) | ||||||||||
| Di Xiao | 2019 | - | - | - | ||||||||||
| Former Chief Executive Officer and Director | 2018 | 178,626 | (1) | 46,555 | 225,181 | |||||||||
| Leslie Chow | 2019 | 121,561 | (2) | - | 121,561 | |||||||||
| Former Chief Executive Officer, former Chief Financial Officer | 2018 | 208,325 | 104,417 | 312,742 | ||||||||||
| Jehn Ming Lim | 2019 | 90,367 | (3) | 7,605 | 97,972 | |||||||||
| Chief Financial Officer | 2018 | - | - | - | ||||||||||
| Fang Mu | 2019 | 38,687 | (4) | 5,984 | 44,671 | |||||||||
| Chief Executive Office | 2018 | - | - | - | ||||||||||
| Song Wang | 2019 | 28,175 | (5) | - | 28,175 | |||||||||
| Former Director | 2018 | 22,422 | 3,038 | 25,460 | ||||||||||
| (1) | Mr. |
| (2) | Ms. Yu received a monthly compensation of $3,860 (HKD$30,000) as |
| (3) | Mr. Lim’s compensation as Chief Financial Officer of both the Company and its Hong Kong subsidiary is set forth in an employment agreement between Mr. Lim and Hong Kong Takung |
| (4) | Ms.Mu’s compensations as Chief Executive Officer of the Company and its Hong Kong subsidiary |
Operating Subsidiary Employment Agreements
Mr. Xiao entered into an employment agreement with Hong Kong Takung on June 1, 2014 whereby he agreed to serve as Hong Kong Takung’s General Manager and Managing Director. Pursuant to such employment agreement, Mr. Xiao is entitled to a monthly salary of $7,658 (HK$60,000), which will be reviewed annually in January. On March 2015, Mr. Xiao’s salary was adjusted to $10,210 (HK$80,000), and was adjusted to $12,763 (HK$100,000) on October 2015, and was adjusted to $15,316 (HK$120,000) on April 2016, and further adjusted to $17,868 (HK$140,000) on February 2017. The employment agreement may be terminated by either party upon one month’s advance notice. Mr. Xiao became a director of Takung Art Holdings on July 20, 2018. He resigned all his other positions on November 19, 2018.
On February 22, 2016, the board of directors of the Company approved the appointment of Mr. Chow as Chief Financial Officer of the Company and the Company’s wholly-owned Hong Kong subsidiary, Hong Kong Takung Art Co., Ltd, effective February 22, 2016. The employment agreement may be terminated by either party upon three months’ advance notice. On November 16, 2019, Mr. Chow took over as acting Chief Executive Officer, replacing Mr. Xiao who resigned that day. There was no change in Mr. Chow’s employment terms. Mr. Chow’s positions as our Chief Financial Officer and Chief Financial Officer of Hong Kong Takung has been filled by Mr. Jehn Ming Lim since February 18, 2019. Mr. Chow resigned as Chief Executive Officer on August 6, 2019.
Ms. Mu,Li, as Chief Executive Officer of the Company, entered into a consulting agreement with our wholly-owned subsidiary, Hong Kong Takung Art Co., Ltd to provide management services and the effective day of August 6, 2019.July 20, 2021.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
It is not uncommon for Hong Kong private companies to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We have formed a compensation committee to oversee the compensation of our named executive officers. All the members of the compensation committee are independent directors.
Compensation of Directors
The following table sets forth the compensation received by our directors in fiscal years 2019of 2021 and 20182020 in their capacity as directors.
| Name and Principal Position | Year | Fee earned or paid in Cash ($) | Base Compensation and bonus ($) | Share Awards ($) | Option Awards ($) | Non-equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Xiaoyu Zhang1 | 2019 | - | $ | 10,986 | — | — | — | — | — | $ | 10,986 | |||||||||||||||||||||||||
| Director | 2018 | - | — | — | - | - | - | - | - | |||||||||||||||||||||||||||
| (Chairperson) | ||||||||||||||||||||||||||||||||||||
| Jiangping (Gary) Xiao2 | 2019 | - | $ | 10,000 | — | — | — | — | — | $ | 10,000 | |||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| Li Lv2 | 2019 | - | $ | 5,000 | — | — | — | — | — | $ | 5,000 | |||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| Di Xiao3 | 2018 | — | $ | 225,181 | — | $ | 9,900 | — | — | — | $ | 235,081 | ||||||||||||||||||||||||
| Former Chief Executive Officer and Director | ||||||||||||||||||||||||||||||||||||
| Joseph Levinson4 | 2019 | $ | 15,000 | — | $ | 1,760 | — | — | — | — | $ | 16,760 | ||||||||||||||||||||||||
| Former Director | 2018 | $ | 40,000 | — | $ | 23,178 | — | $ | 63,178 | |||||||||||||||||||||||||||
| William Kwok Keung Tsui4 | 2019 | $ | 15,000 | — | $ | 1,760 | — | — | — | — | $ | 16,760 | ||||||||||||||||||||||||
| Former Director | 2018 | $ | 40,000 | — | $ | 23,178 | — | — | — | — | $ | 63,178 | ||||||||||||||||||||||||
| John Levy5 | 2019 | $ | 15,000 | — | $ | 5,178 | — | — | — | — | $ | 20,178 | ||||||||||||||||||||||||
| Former Director | 2018 | $ | 40,000 | — | $ | 27,579 | — | — | — | — | $ | 67,579 | ||||||||||||||||||||||||
| Zishen Li6 | 2018 | — | $ | 124,552 | — | $ | 11,738 | — | — | — | $ | 136,290 | ||||||||||||||||||||||||
| Former Director | ||||||||||||||||||||||||||||||||||||
| Ming Cheng7 | 2018 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||||||||||
| Name and Principal Position | Year | Fee earned or paid in Cash ($) | Base Compensation and bonus ($) | Share Awards ($) | Option Awards ($) | Non-equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Xiaoyu Zhang1 | 2021 | — | $ | 10,000 | 163,920 | — | — | — | — | $ | 173,920 | |||||||||||||||||||||||||
| Former Director | 2020 | — | $ | 10,000 | — | — | — | — | — | $ | 10,000 | |||||||||||||||||||||||||
| Doug Buerger | 2021 | |||||||||||||||||||||||||||||||||||
| Director and Chairman | 2020 | |||||||||||||||||||||||||||||||||||
| Ronggang (Jonathan) Zhang2 | 2021 | — | $ | — | — | — | — | — | — | $ | — | |||||||||||||||||||||||||
| Director | 2020 | — | $ | — | — | — | — | — | — | $ | — | |||||||||||||||||||||||||
| Tak Ching (Anthony) Poon3 | 2021 | — | $ | — | — | — | — | — | — | $ | — | |||||||||||||||||||||||||
| Director | 2020 | — | $ | — | — | — | — | — | — | $ | — | |||||||||||||||||||||||||
| Jiangping (Gary)4 Xiao2 | 2021 | — | $ | 20,000 | 163,920 | — | — | — | — | $ | 183,920 | |||||||||||||||||||||||||
| Former Director | 2020 | — | $ | 20,000 | — | — | — | — | — | $ | 20,000 | |||||||||||||||||||||||||
| Li Lv5 | 2021 | — | $ | 10,000 | 102,450 | — | — | — | — | $ | 112,450 | |||||||||||||||||||||||||
| Former Director | 2020 | — | 5,000 | — | — | — | — | — | $ | 5,000 | ||||||||||||||||||||||||||
| (1) |
| Ms. Xiaoyu Zhang was appointed director and Chairperson of the board of directors | |
| (2) | |
| (3) | Mr. Tak Ching (Anthony) Poon was appointed director of the board of directors on November 24, 2021. Mr. Poon will receive an annual compensation of $40,000. He received no share awards for the years ended December 31, 2021. | |
| (4) | Mr. Jianping (Gary) Xiao joined the board of directors on July 8, 2019 and he received 8,000 shares ($163,920) awards for the years ended December 31, |
| (5) | Ms. Li Lv joined the board of directors on July 8, 2019 and he received 5,000 shares ($102,450) awards for the years ended December 31, 2021 and no share awards on December 31, 2020. On December 3, 2021, Ms. Li Lv resigned as a member of the board of directors. |
Option Grants Table
During the years ended December 31, 20192021 and 2018,2020, the Company did not grant new share options under the 2015 Plan.
Outstanding Equity Awards at Fiscal Year-End
During year ended December 31, 2018, 22,438 of restricted share-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The total unvested restricted share was 11,240 shares as of December 31, 2018.
During year ended December 31, 2019, 5,0002020, 10,000 restricted share-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The total unvested restricted shares Nil shares as of December 31, 2019.2020.
During year ended December 31, 2021, Nil restricted share-based awards were granted. Each of the awards is subject to service-based vesting restrictions. The total unvested restricted shares Nil shares as of December 31, 2021.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
194,51410,178 share options have been vested during the fiscal year ended December 31, 2020, and 164,522no share options were forfeited duringnor exercised in the year ended December 31, 2018. As of December 31, 2018, the number of options outstanding and exercisable were 254,238 and 194,514, respectively.2020.
80,53410,178 share options have been vested and 153,348 share options were forfeited during the fiscal year ended December 31, 2019.2021. 56,000 and 5,065 stock options were exercised on April 12, 2021 and May 25, 2021, respectively. As a result of the exercise, 61,065 shares of common stock were issued. The remaining 39,825 share options were unexercised and expired in the year ended December 31, 2019, the number of options outstanding and exercisable were 100,890 and 80,534 respectively. 2021.
Long-Term Incentive Plan (“LTIP”) Awards Table
There were no awards made in the last completed fiscal year under any LTIP.
Pension and Retirement Plans
Currently, except for contributions to the PRC government-mandated social security retirement endowment fund for those employees who have not waived their coverage, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with our company, or from a change in our control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related ShareholderStockholder Matters.
Equity Compensation Plans
On August 26, 2015, we approved our 2015 Incentive Stock Plan, allowing for the issuance of up to 1,037,000 shares of our common stock. On August 27, 2015, we registered the shares of common stock reserved for issuance under our 2015 Incentive Stock Plan with the SEC on a registration statement on Form S-8 under the Securities Act. On August 28, 2015, we issued 300,000 shares of our common stock as partial compensation to third party consultants. We have since increased the Share Plan by an additional 500,000 shares. On November 20, 2015, we issued 487,000 restricted shares of our common stock as partial compensation to third party consultants. On November 30, 2016, we issued 50,000 shares of our common stock to a third-party consultant for general financial advisory and banking service. On October 2, 2017, we issued 20,000 shares of our common stock to a third-party consultant. These issuance of shares were under the 2015 Incentive Stock Plan.
On March 22, 2017, we issued an aggregate of 19,606 restricted shares of our common stock to three of our former non-executive directors, namely, Messrs. Joseph Levinson, John Levy and Kwok Keung William Tsui under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On May 16, 2018, we issued an aggregate of 17,143 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On April 24, 2019, we issued an aggregate of 29,104 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On May 27, 2020, 10,000 shares of common stock were granted to the Company’s SEC legal counsel as a compensation for legal advisory services rendered.
On June 8, 2020, we issued an aggregate of 6,250 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Joseph Levinson under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.
On April 21, 2021, the board of directors of the Company approved an issuance of 335,000 shares of common stock as share-based awards to its independent directors, employees and consultants under the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $6,863,815 in connection with this issuance in April 2021.
On May 28, 2021, the Company entered into a Securities Purchase Agreement with a company incorporated in British Virgin Islands (“BVI entity”). In exchange for an aggregate amount of 86,560 shares of common stocks of the BVI entity, the Company shall remit $500,000 in cash and issue 572,000 restricted shares of the Company to the BVI entity. On August 21, 2021, both parties entered into an Amendment to Securities Purchase Agreement and the number of restricted shares of the Company to be issued to the BVI entity was increased to 1,558,480. The Company remitted the cash payment of $500,000 to the BVI entity on August 20, 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted shares at a price of $6.5 was issued to the BVI entity. The Company recognized the carrying amount of this equity investment, $10,630,120, in noncurrent asset.
On July 9, 2021, the Company entered into an Advisory Agreement with an independent institutional contractor for exploring potential investors and projects to advance new business development. Upon signing the agreement, an aggregate of 160,000 shares of common stock at a price of $11.86 was awarded to the contractor under the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $1,897,600 in connection with this issuance in July 2021.
On November 30, 2021, the board of directors of the Company approved an issuance of 415,000 shares of common stock as restricted share-based awards to its independent consultants and employees under the Rule 144 of the Securities Act of 1933. The restricted shares were issued on November 30, 2021. The Company recognized a share-based compensation of $2,116,500 in relation to this issuance in November 2021.
On December 28, 2021, our stockholders have approved an amended 2015 Incentive Stock Plan to increase the total number of shares authorized for issuance under the 2015 Incentive Stock Plan by 1,166,745 shares from 1,537,000 shares to 2,703,745 shares of common stock.
As of the date of this report, the total number of shares reserved and available for delivery in connection with awards under the amended 2015 Incentive Stock Plan are 41,832.
The following table provides information regarding shares outstanding and available for issuance under our existing equity compensation plans.
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of remaining future plans securities in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Equity compensation plans approved by security holders | - | $ | - | 41,832 | ||||||||
| Totals | - | $ | - | 41,832 | ||||||||
The Company granted 431,525 stock options during 2016. The exercise price of share options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years.
10,178 share options have been vested during the fiscal year ended December 31, 2021. 56,000 and 5,065 stock options were exercised on April 12, 2021 and May 25, 2021, respectively. As a result of the exercise, 61,065 shares of common stock were issued. The remaining 39,825 share options were unexercised and expired in the year ended December 31, 2021.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and (iv) all executive officers and directors as a group as of May 8, 2020.March 29, 2022.
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o Takung Art Co., Ltd, Flat/RM 05 11/F Wing On Plaza 62 Mody Road, Tsim Sha Tsui,Room 709, Tower 2, Admiralty Centre, 18 Harcourt Rd, Admiralty, Hong Kong.
| Number of Shares | Percentage Ownership of Shares of | |||||||||
| Beneficial Ownership | Title of Class | Beneficially Owned(1) | Common Share | |||||||
| Owner of more than 5% of Class | ||||||||||
| Jian Xiao No. 503, Unit 1, Block 22, Dan Yang Li, Zong Shu Ying District, Xi Shan Qu, Kun Ming City, Yunnan Province, People’s Republic of China | Common Stock | 3,000,000 | 20.873 | % | ||||||
| CEDE & CO PO BOX 20 Bowling Green Station New York NY 10014 | Common Stock | 9,088,682 | 63.237 | % | ||||||
| Directors and Officers | ||||||||||
| Kwok leung (Paul) Li | Common Stock | 150,000 | 1.044 | % | ||||||
| Jianguang Qian | Common Stock | - | * | |||||||
| Xiaoyu Zhang | Common Stock | -- | * | |||||||
| Jiangping (Gary) Xiao | Common Stock | -- | * | |||||||
| Li Lv | Common Stock | -- | * | |||||||
| All Officers and Directors (Six persons) | - | * | ||||||||
| Less than one percent (1%) of the issued and outstanding shares of common stock as of March 30, 2022. |
| Number of Shares | Percentage Ownership of Shares of | |||||||||
| Name and Address | Title of Class | Beneficially Owned(1) | Common Share | |||||||
| Owner of more than 5% of Class | ||||||||||
| Hiu Ngai Ma | Common Stock | 2,216,907 | 19.697 | % | ||||||
| 2A, Block H3, Chi Fu Fa Yuen, Pok Fu Lam, Hong Kong | ||||||||||
Xiao Jian No. 503, Unit 1, Block 22, Dan Yang Li, Zong Shu Ying District, Xi Shan Qu, Kun Ming City, Yunnan Province, People’s Republic of China | Common Stock | 3,000,000 | 26.655 | % | ||||||
| CEDE & CO PO BOX 20 Bowling Green Station New York NY 10014 | Common Stock | 1,356,972 | 12.056 | % | ||||||
| Directors and Officers | ||||||||||
| Fang Mu(2) | Common Stock | -- | * | |||||||
| Jehn Ming Lim(3) | Common Stock | 5,000 | * | |||||||
| Xiaoyu Zhang(4) | Common Stock | -- | * | |||||||
| Jiangping (Gary) Xiao(5) | Common Stock | -- | * | |||||||
| Li Lv(5) | Common Stock | -- | * | |||||||
| All Officers and Directors (Six persons) | 5,000 | * | ||||||||
* Less than one percent (1%) of the issued and outstanding shares of common stock as of May 8, 2020.
| (1) | In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Except for the ownership of our securities, and except as set forth below, none of the directors, executive officers, holders of more than five percent of our outstanding common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our company.
On November 20, 2015, we entered into a Consulting Agreement with Regeneration Capital Group, LLC for the provision of certain consulting and advisory services, including without limitation, assisting in the preparation of Company financial projections, business plans, executive summaries and website, and recruiting qualified directors and officers. In consideration for providing such services, the Company issued to Capital Group, LLC 487,000 restricted shares of common stock (the “Compensation Shares”) which are placed in an escrow account maintained with the Company’s attorneys until either (i) the Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, whereupon the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, the Compensation Shares shall be returned to the Company for cancellation. Regeneration Capital Group, LLC shall be entitled to “piggy-back” registration rights with respect to the Compensation Shares.
Other Related Transactions of Hong Kong Operating Entity, Shanghai Operating Entity, Tianjin Operating Entity and Tianjin MQ.
Related Transactions Prior to Reverse-Merger
Except as disclosed above, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to us at any timecompany since the beginning of our fiscal year 2015.2021.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Director Independence
NYSE listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that XiaoyuDoug Buerger, Tak Ching (Anthony) Poon and Ronggang (Jonathan) Zhang Jiangping (Gary) Xiao and Li Lv are “independent directors” as defined in the NYSE listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Secured Loan Agreements
On MaySeptember 16, 2018,2019, Hong Kong Takung entered into an interest-free loan agreement (the "HK“HK Dollar Working Capital Loan"Loan”) with Mr. Zhenying LiuShuhai Li (“Liu”Li”), the former Vice President of Hong Kong Takung,that was transferred to Mr. Song Wang (“Wang”), the former General Managerlegal representative of Tianjin Takung, and Shanghai Takung and the Directorfor an amount of Hong Kong Takung, Tianjin Takung and Shanghai Takung, on October 18, 2018 for the loan of $6,418,980$6,448,784 (HK$50,000,000) to Hong Kong Takung.. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan as May 15, 2019.2020. On May 15, 2019,2020, Hong Kong Takung entered into an extension agreement with WangLi to extend the HK Dollar Working Capital Loan with a due date on May 15, 2020.2021. On September 16, 2019, WangMay 29, 2020, Li transferred this loan to Shuhai LiJing Wang (“Li”Wang”), the legal representative of Tianjin Takungour Chief Financial Officer with the same extended maturity date.
In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB“RMB Working Capital Loan"Loan”) with Liu that was transferred to Wang on October 18, 2018Li for the loan of $5,834,554$6,225,134 (RMB40,619,000) with the maturity date of the loan as May 15, 2019.2020. On May 15, 2019,2020, Tianjin Takung entered into an extension agreement with WangLi to extend the RMB Working Capital Loan with a duematurity date on May 15, 2020.2021. On September 16, 2019, WangMay 29, 2020, the loan was transferred this loan to Li, the legal representative of Tianjin Takung with the same extended maturity date.Wang.
Through an understanding between LiWang and the Company, the HK Dollar Working Capital Loan is "secured"“secured” by the RMB Working Capital Loan. It is the understanding between the parties that the HK Dollar Working Capital Loan and the RMB Working Capital Loan will be repaid simultaneously.
Lease Agreements
Hong Kong office lease on December 15, 2020 for approximately 885 square feet of office space at Room 709 on the 7th floor of Tower II of Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong. The lease expires on December 14, 2022 and provides for a monthly rent of $5,135 (HK$39,825) and a monthly building management fee of $575 (HK$4,460).
On March 1, 2021, Tianjin Takung andleased approximately 22,503 square feet of office space at Room 2901-2908 of Tianjin MQ entered into lease agreements with Jianping Mao (“Mao”), the Human Resources Management Director of Hong Kong Takung for their office facilities in Tianjin.
On May 13, 2019,World Financial Center Office Tower, No. 2 Dagu Bridge North, HePing Distrist, Tianjin, Takung entered into a non-cancellable lease agreement with Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters.China. The lease will be expiredexpires on May 12, 2021. Tianjin Takung is chargedFebruary 2, 2022 and provides for a total monthly rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $208,256 (RMB1,449,838.04) every six months and a deposit of $104,128 (RMB724,919.02). The deposit is refundable to the Company. The total lease liability was $376,218, which was included in current portion as of December 31, 2019.$20,152 (RMB130,000)
On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The lease will be expired on October 15, 2020. Monthly rent payment is approximately $24,690 (RMB 170,563).The total lease liability was $61,250, which was included in current portion as of December 31, 2019.
Consulting Agreements
During the year ended December 31, 2018, the Company has engaged Xiao for consulting services, and accrued service fee of $278,146.
On August 15,1, 2019, the Company has engaged Chun Hin Leslie Chow as an external consultant after his resignation as the Company’s Chief Executive Officer.Officer and accrued a monthly service fee of $11,398 (HK$88,400). The service agreement is renewable annually. The agreement was renewed on August 1, 2021 with a monthly service fee of $10,290 (HK$80,000).
On September 16, 2020, the Company engaged Fang Mu as an external consultant after her resignation as the Company’s Chief Executive Officer and accrued a monthly service fee of $5,157 (HK$40,000) with an expiration date on September 15, 2021. The service agreement is renewable annually. The agreement was renewed on September 16, 2021 with a monthly service fee of $10,290 (HK$80,000).
Item 14. Principal Accounting Fees and Services.
On April 26, 2016, Marcum Bernstein & Pinchuk LLP (“Marcum”Marcum BP”) was appointed as our independent registered public accounting firm. On March 1, 2021, WWC, P.C. (“WWC”) was appointed as the new independent registered public accounting firm. Simultaneously with the appointment of WWC, on March 1, 2021, Marcum BP was terminated as the independent registered public accounting firm for the Company.
Audit Fees
We incurred approximately $339,000$99,000 for professional services rendered by our former registered independent public accounting firm, Marcum BP for the review of the Company in the fiscal year 2020.
We incurred approximately $150,000 for professional services rendered by our current registered independent public accounting firm, Marcum Bernstein & Pinchuk LLPWWC, for the audit and review of the Company in the fiscal year 2018.2020.
We incurred approximately $231,000$230,000 for professional services rendered by our current registered independent public accounting firm, Marcum Bernstein & Pinchuk LLPWWC, for the audit and review of the Company in the fiscal year 2019.2021.
Audit-Related Fees
We did not incur any audit-related fees in the fiscal years ended December 31, 20192021 and 2018.2020.
Tax Fees
We did not incur any tax fees in the fiscal years ended December 31, 20192021 and 2018.2020.
All Other Fees
We did not incur any fees from our registered independent public accounting firm for services other than the services covered in “Audit Fees” in the fiscal years ended December 31, 20192021 and 2018.2020.
Pre-Approval Policies and Procedures
The Board of Directors pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
Item 15. Exhibits, Financial Statement Schedules.
| 21.1 | List of Subsidiaries * | |
| Consent of WWC, P.C. * | ||
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (1) | Incorporated herein by reference to the exhibits to our registration statement on Form S-1 filed with the SEC on August 16, 2011. |
| (2) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013. |
| (3) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014. |
| (4) | Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014. |
| (5) | Incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K filed with the SEC on August 12, 2015. |
| (6) | Incorporated herein by reference to Exhibit 4.1 to our registration statement on Form S-8 filed with the SEC on August 27, 2015. |
| (7) | Incorporated herein by reference to the exhibits to our annual report on Form 10-K filed with the SEC on March 31, 2015. |
| (8) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on November 17, 2015. |
| (9) |
| Incorporated herein by reference to the exhibits to our registration statement on Form S-1 filed with the SEC on November 25, 2015. |
| (10) |
| Incorporated herein by reference to the exhibit to our current report on Form 8-K filed with the SEC on February 19, 2019. |
| (11) | Incorporated herein by reference to the exhibits to our annual report on Form 10-K filed with the SEC on April 16, 2019. |
| (12) | Incorporated herein by reference to the exhibits to our annual report on Form 10-K filed with the SEC on May 8, 2020. |
| (13) | Incorporated herein by reference to the exhibits to our annual report on Form 10-K filed with the SEC on March 31, 2021. |
| (14) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on June 1, 2021. |
| (15) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on July 13, 2021. |
| (16) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on September 15, 2021. |
| (17) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on February 23, 2022. |
| (18) | Incorporated herein by reference to the exhibits to our current report on Form 8-K filed with the SEC on March 25, 2022. |
| * | Filed herewith |
| ** | Furnish herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TAKUNG ART CO., LTD | ||
| By: | /s/ | |
| (Principal Executive Officer) | ||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ | Chief Executive Officer | |||
| (Principal Executive Officer) | ||||
| /s/ | ||||
| /s/ | ||||
| (Principal Financial and Accounting Officer) | ||||
| /s/ Doug Buerger | Director | April 15, 2022 | ||
| Doug Buerger | ||||
| /s/ | Director | |||
| /s/ Ronggang (Jonathan) Zhang | Director | April 15, 2022 | ||
| Ronggang (Jonathan) Zhang |
71
