Art appreciation

TAKUNG ART CO., LTD Management’s discussion and analysis of financial condition and results of operations. (Form 10-K)

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes.


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           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 Note Regarding Forward-Looking Statements", our
actual results and the timing of events may differ materially from those
anticipated in these forward-looking statements.



Overview



We, through our wholly owned subsidiary, Hong Kong Takung, operate an electronic
online platform located at https://www.nftoeo.com/for artists, art dealers and
art investors to offer and trade valuable artwork. We offer online 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 related to the offering and trading of artworks on our system, consisting mainly of registration fees, trading commissions, management fees and consulting service on NFT projects.

In July 2021Takung appointed Mr. Kwok Leung Li as CEO to lead the new direction with three initiatives to grow our blockchain and NFT businesses.



The company's NFT business outlook can be described in several aspects below.







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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. Provide advisory services such as appraisal/appreciation potential of works of art




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.



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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 709, Tower
2, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong.



Competitive Advantages


Takung’s advantages in the NFT and blockchain transaction market are as follows:



Innate industry advantages



In recent years, NFT digital artworks based on blockchain technology have become popular assets. The NFT online platform the company has built can effectively solve the current situation, such as uncertain ownership of property, difficulty in distinguishing authenticity, and low efficiency of artwork circulation. Transform offline business development into online operation, so the value of digital works can flow freely online.

Core Management Team Benefits

Takung core team members have experience in developing blockchain technology and operating the NFT trading platform, which can ensure smoother development and business operation at a later 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
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 launched is built by
a professional technical team. Each technician has rich industry experience, can
work under a short development cycle or high pressure, and has a number of
relevant industry benchmarking projects experience. The capability of the
technical team ensures the strong technical support in the later system
optimization and iterative update.



Marketing advantages



The Company has a professional marketing team. After the platform goes online,
it can be promoted online and offline simultaneously, so as to quickly increase
the popularity of the platform, and use professional marketing solutions to
attract more creators and demanders to join in the platform.



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Recent Developments



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 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 unanticipated
consequence of the pandemic on our future business performance and liquidity due
to the severity of global situation of COVID-19. To minimize the impact of the
uncertainties from the ongoing coronavirus outbreak and suspension of the
operation of Tianjin Takung, we modified our business model by investing in a
cultural and NFT projects as discussed aforementioned.



Results of Takung’s operation



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 fee,
trading commission, management fee and consultancy service fee.



For the years ended December 31, 2021 and 2020



The following tables set forth our consolidated statements of operations data:



                                                          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 )




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Revenue



Revenue by category


The following table presents our revenues 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 revenues by type of client:


                                               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 $-



  (i) Listing fee revenue



Listing fee revenue is calculated based on a percentage of the listing value and the transaction value of the 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, 2021, a total of 310 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.



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During the year ended December 31, 2021, there were 15 new paint sets listed on the platform. The total value of the listing was $3,859,663 (HK$30,000,000) for painting, of which 22% (for painting) of the stated value was charged as registration fee.



As of December 31, 2020, a total of 295 sets of artwork were listed for trade on
our platform -comprising 70 sets of paintings and calligraphies from famous
Chinese, Russian and Mongolian artists ranging in listing value from $128,934
(HK$1,000,000) to $1,547,209 (HK$12,000,000), 35 pieces of jewelry ranging in
listing value from $25,787 (HK$200,000) to $1,289,341 (HK$10,000,000), 134
pieces of precious stones ranging in listing value from $12,893 (HK$100,000) to
$773,605 (HK$6,000,000), 29 pieces of amber ranging in listing value from
$64,467 (HK$500,000) to $1,031,473 (HK$8,000,000), 4 pieces of antique mammoth
ivory carving ranging in listing value from $128,934 (HK$1,000,000) to $257,868
(HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value
from $103,147 (HK$800,000) to $232,081 (HK$1,800,000), 7 pieces of porcelain in
listing value from $38,680 (HK$300,000) to $386,802 (HK$3,000,000), 6 sets of
Unit+ product with listing values from $128,934 (HK$1,000,000) to $395,312
(HK$3,066,000), 1 piece of Yixing Purple Clay with a listing value of $128,934
(HK$1,000,000) and 7 pieces of sports culture with listing values from $128,934
(HK$1,000,000) to $257,868 (HK$2,000,000).



We listed a total of 10 pieces of artwork in 2020. The listing fees ranged from
22.83% to 25% of the listing value of the paintings and calligraphies. The total
listing value of artwork during 2020 was $3,481,221 (HK$27,000,000).



The increase in the number of listings of artwork for the year ended
December 31, 2021, compared to the same period in 2020, resulted in a higher
listing fee revenue in 2021 as our listing fee was charged based on the listing
value of the 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 traders 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 have defined a Selected Trader as an “inactive trader” who meets the following criteria;

? The merchant has defaulted on three monthly commission payments

month;

? The merchant has not made any transactions during the revaluation month;

? The service agent has confirmed with the merchant concerned that he has been

    inactive.



Once an inactive Trader 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 a commission to service agents. We offer a total of 40% to 75% of the commission earned on trades with new traders to service agents when they bring an agreed number of traders to the trading platform.

Commission paid to service agents and rebates are recognized as cost of revenue in the same period in which the corresponding revenue is recognised.


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Commission revenue for the year ended December 31, 2021 reduced by $1,199,157,
from $3,288,077 for the year ended December 31, 2020 to $2,088,920 for the same
period in 2021. Although we incurred a higher trading transaction volume in
2021, majority of the trading transactions were mainly initiated by selected
traders during 2021. We earned a fixed fee from those selected traders
regardless of the volume of the trading transactions initiated by 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 is
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 ownership shares when there is a purchase and sale
transaction.



During the year ended December 31, 2021, management fee revenue increased by
$1,019,213, from $463,397 for the year ended December 31, 2020 to $1,482,610 for
the same period in 2021 due to a higher trading volume in 2021.



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 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, 2021 and 2020 were $1,359,425
and $2,287,404 respectively. The decrease in the cost of revenue for the year
ended December 31, 2021 compared to the 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.



                                       48





Gross Profit


Gross profit for our continuing operations was $120,000 for the year ended
December 31, 2021, compared to nil for the year ended December 31, 2020. The
gross profit for our continuing operations in 2021 was generated from 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, 2021, compared to $780,697 for the
year ended December 31, 2020. The spike in general and administrative expense by
$12,784,851 or 1638% was primarily attributed to a 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, 2021 compared to $6,917,060 for the
same period in 2020, with a decline by $3,926,832. During 2021, Hong Kong Takung
lost its control over the operation of Tianjin Takung and the assets,
liabilities and results of operations of Tianjin Takung was 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, 2021 and 2020. Amounts for the year
ended December 31, 2020 had been reclassified due to the deconsolidation of
Tianjin Takung.



                                                For the year ended                For the year ended
                                                   December 31,                      December 31,
                                                       2021                              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 continuing operation also incurred a total of $nil and $7,041 in selling
expenses from its continuing operations for the years ended December 31, 2021
and 2020, respectively. The decrease in selling expense by $7,041 was due to the
deconsolidation of Tianjin Takung during 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.



Continuing operations recorded a gain on extinguishment of debt,
$1,331,191, which concerned the amount to be paid to Tianjin Takung related to Tianjin Takung’s operational support. This amount has not been included in the year ended December 31, 2020 as the loss of control suffered in the fourth quarter of 2021.


                                       49





Other (expenses) income



Other expenses from the continuing operations for the year ended December 31,
2021 was $93 compared to other income $17,665 for the same period in 2020. The
significant decrease was predominantly due to a significant decrease in foreign
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 a loss before income taxes $13,447,956 and
$770,073 for the years ended December 31, 2021 and 2020, respectively. The loss before income taxes from our continuing operations was significantly higher in 2021 as we incurred higher stock-based compensation in 2021.

Our discontinued operations incurred loss before income taxes, $16,113,160 for
the year ended December 31, 2021 while generated income before income taxes,
$169,985 in the same period in 2020. Due to the loss of 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
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 $257,311) assessable profits and at 16.5% for assessable
profits above HK$ 2 million (approximately $257,311) (16.5% prior to January 1,
2018) and PRC enterprise income tax rate at 25%.



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, 2021 and 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 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.



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 $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.



                                       50





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, 2021 and 2020.



The income tax expense from the continuing operations for the years ended
December 31, 2021 and 2020 were nil as a full valuation allowance was recognized
against the net operating loss carryforwards generated by the Company and 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.



Income tax expense from discontinued operations for the years ended
December 31, 2021 and 2020 have been $512,395 and $12,550respectively.



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, 2021 and 2020 were
$13,447,956 and $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 loss

We had a currency translation loss for the years ended December 31, 2021
and 2020 from ($13,059) and ($55,001)respectively.


Comprehensive loss


As a result of the above, we recorded an overall loss of $30,086,570 and
$667,639 for the years ended December 31, 2021 and 2020, respectively.

Cash and capital resources

The following tables present our consolidated statements of cash flows:


                                                                    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 change in exchange rate on cash and cash equivalents and on restricted cash from continuing operations

                       (13,061 )              -

Effect of change in exchange rate on cash and cash equivalents and on restricted cash from discontinued operations

(548,845) 311,127

(561,906) 311,127

(Decrease) net increase in cash and cash equivalents – continuing operations

1,471,965 (977,294 ) Net increase (decrease) 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, opening balance – continuing operations

31,188 1,028,482 Cash and cash equivalents and restricted cash, opening balance – discontinued operations

13,811,557 20,800,672

13,842,745 21,829,154

Cash and cash equivalents and restricted cash, closing balance – discontinued operations

                               $   

1,503,153 $31,188
Cash and cash equivalents and restricted cash, closing balance – discontinued operations

338,542       13,811,557
                                                                   1,841,695       13,842,745




                                       51





Sources of Liquidity


The balance of cash and cash equivalents from continuing operations as at
December 31, 2021 been $1,503,153. Of this amount, we had $273,151
worded in WE dollars deposited in financial institutions in United States, $1,230,002denominated in HK$ in hong kong financial institutions.



During the year ended December 31, 2021, net cash used 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
$507,024 which included the purchase of equipment, $7,024 and investment in
cultural projects, $500,000. The financing cash inflows from continuing
operations totaled $5,180,485, which included cash receipts from the stock
option exercised by our employees, $180,485, and cash receipts from a private
investment, $5,000,000.


The cash and cash equivalent balance from the discontinued operations as of
December 31, 2021 was $338,542. Out of this amount, we had $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 balance of cash and cash equivalents from continuing operations as at
December 31, 2020 been $31,188. Of this amount, we had $25,879 worded in
WE dollars deposited in financial institutions in United States,
$5,309 denominated in HK$ in hong kong financial institutions



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 $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 the PRC, $316,195, denominated in HK$ in Hong Kong financial institutions
and $12,916,993, denominated in renminbi in the PRC financial institutions.

                                       52





During the year ended December 31, 2020, net cash used in operating activities
by our discontinued operations totaled $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 from 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 from the discontinued
operations.



As of December 31, 2021, total current liabilities from the continuing
operations, $143,429, which was 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, $6,410,585 in amount due to related
parties, $21,854 in advance from customers, $1,965,398 in short-term borrowings
from a third party and $62,397 in lease liabilities.



As of December 31, 2021, the Company's continuing operation had cash and cash
equivalents of $1,503,153, a working capital of $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.



                                       53




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 account," which includes dividends, trade and
service-related foreign exchange transactions, but not under the "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 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'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'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 recent accounting pronouncements contained in Note 2 to our Consolidated Financial Statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.

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