The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes.
41 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 Americasecurities 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.
The company's NFT business outlook can be described in several aspects below. 42 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 millionin 2020, and it ahs grown by 800% to reach $490 millionin 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 billionfor 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. 43 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'snew NFT platform hits 1.4 million signups. The Coinbaseplatform 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 Chinaand we conduct our business primarily in Hong Kongand 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. 44 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, 2021as 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
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 ) 45 Revenue Revenue by category
The following table presents our revenues by category:
For the year ended December 31, 2021 2020 Listing fee
$ 876,658 $ 815,748Commission 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
Revenue by customer type
The following table presents our revenues by type of client:
For the year ended December 31, 2021 2020 Artwork owners $ -
$ 815,748Non - 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
(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. 46
During the year ended
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 Claywith 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, 2018we 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
? The merchant has not made any transactions during the revaluation month;
? The service agent has confirmed with the merchant concerned that he has been
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.
47 Commission revenue for the year ended
December 31, 2021reduced by $1,199,157, from $3,288,077for the year ended December 31, 2020to $2,088,920for 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 $463,397for the year ended December 31, 2020to $1,482,610for 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 $ 1,691,411Depreciation 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, 2021and 2020 were $1,359,425and $2,287,404respectively. The decrease in the cost of revenue for the year ended December 31, 2021compared 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, 2021as 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 $93,363as we downsized of our office locations. 48 Gross Profit
Gross profit for our continuing operations was
$120,000for 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'soperation, 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 $13,565,548for the year ended December 31, 2021, compared to $780,697for the year ended December 31, 2020. The spike in general and administrative expense by $12,784,851or 1638% was primarily attributed to a significant increase in share-based compensation by $10,844,440as we granted 910,000 restricted shares to our consultants, independent directors and employees, an increase in consultancy fee by $216,141due to an engagement of consultants for NFT business, an increase in legal and professional fees by $718,956as 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, $944,723which chiefly a payment to an exhibition company which assisted us in locating the potential investors. General and administrative expenses from the discontinued operations were $2,990,228for the year ended December 31, 2021compared to $6,917,060for the same period in 2020, with a decline by $3,926,832. During 2021, Hong Kong Takung lost its control over the operation of Tianjin Takung and the assets, liabilities and results of operations of Tianjin Takung was deconsolidated. The following table sets forth the main components of our general and administrative expenses of our continuing operations and for discontinued operations for the years ended December 31, 2021and 2020. Amounts for the year ended December 31, 2020had been reclassified due to the deconsolidation of Tianjin Takung. For the year ended For the year ended December 31, December 31, 2021 2020 Amount($) % 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
$ 16,555,776100.0 % $ 7,697,757100.0 % Elimination of intercompany transaction related to service expenses to TianjinTakung - - (4,242,507 ) - Total general & administrative expenses as previously reported $ - 100.0 % $ 3,455,249100.0 % The continuing operation also incurred a total of $nil and $7,041in selling expenses from its continuing operations for the years ended December 31, 2021and 2020, respectively. The decrease in selling expense by $7,041was 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,
49 Other (expenses) income Other expenses from the continuing operations for the year ended
December 31, 2021was $93compared to other income $17,665for 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 Kongdollar against the US dollar during 2021.
Loss (income) before income taxes
Our continuing operations incurred a loss before income taxes
Our discontinued operations incurred loss before income taxes,
$16,113,160for the year ended December 31, 2021while generated income before income taxes, $169,985in 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, $16,388,254and investment in Tianjin Takung, $150,527in 2021. The entire asset impairment charges resulted in a higher loss before income taxes in 2021 compared to the same period in 2020. Income tax expense The Company's effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to a U.S.income tax rate of 21%, Hong Kongprofits tax rate at 8.25% for the first HK$ 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, 2021and 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, 2020due 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 Kongbecame 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 Holdingsand 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 Holdingsand 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, 2021and 2020. The income tax expense from the continuing operations for the years ended December 31, 2021and 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
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, 2021and 2020 were $13,447,956and $770,073, respectively. Our discontinued operations generated net loss after income tax $16,625,555for the year ended December 31, 2021while net income after income tax $157,435for the year ended December 31, 2020.
Foreign currency translation loss
We had a currency translation loss for the years ended
and 2020 from
As a result of the above, we recorded an overall loss of
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
(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
Cash and cash equivalents, opening balance – continuing operations
31,188 1,028,482 Cash and cash equivalents and restricted cash, opening balance – discontinued operations
Cash and cash equivalents and restricted cash, closing balance – discontinued operations
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
During the year ended
December 31, 2021, net cash used in operating activities from operating activities was $3,188,435which predominantly related to the net loss from the continuing operations, $13,447,956and a non-cash gain on extinguishment of debts, $1,331,191, was primarily offset by non-cash item share-based compensation, $10,881,967and non-marketable investment impairment, $1,333,506. The investing cash outflow from the continuing operations totaled $507,024which included the purchase of equipment, $7,024and 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, 2021was $338,542. Out of this amount, we had $112,397denominated in U.S.dollars deposited in the financial institutions in Hong Kong, $226,145, denominated in HK$ in Hong Kongfinancial 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, $16,625,555and a decrease in customer deposits, $9,144,610, offset by deferred tax expense, $639,025, deconsolidation of Tianjin Takung, $11,021,710and change in foreign currency exchange rate, $1,259,010. Net cash used in investing activities from discontinued operations was $457which 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
During the year ended
December 31, 2020, net cash used in operating activities by the continuing operations totaled $997,294which 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, 2020was $13,811,557. Out of this amount, we had $578,369denominated in U.S.dollars deposited in the financial institutions in Hong Kongand the PRC, $316,195, denominated in HK$ in Hong Kongfinancial 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 $7,260,331and deferred tax benefit, $112,365, offset by the net income, $157,435and depreciation, $455,070. Net cash used in investing activities from discontinued operations, $454,736, included purchase of equipment, $20,218and a loan to a third party, $434,518during 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 $8,733,624which consisted of $273,390in accrued expenses and other payables, $6,410,585in amount due to related parties, $21,854in advance from customers, $1,965,398in short-term borrowings from a third party and $62,397in 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 $1,649,632and 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 $8,360,145and 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 millionfrom 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 $8,011in 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 $720,078in accrued expenses and other payables, $1,977,109in short-term borrowings from a third party, $6,448,784in amount due to related parties, $17,412in advance from customers, $72,367in lease liabilities, $9,144,610in customer deposits, and $106,353in tax payables. Total liabilities of the Company's continuing operations as of December 31, 2021and 2020 amounted to $143,430and $8,011, respectively. Total liabilities of the Company's discontinued operations as of December 31, 2021and 2020 were $8,733,624and $18,590,092, respectively. Net assets of the Company's continuing operations amounted to $10,953,269and $165,567as of December 31, 2021and 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 Chinaonly out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in Chinaare 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 Kongoperating 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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