NFT (MI) - 2022 Q4 - Annual Report

Part I Business Takung Art Co., Ltd. is a holding company that has transitioned its business to operate an online platform for trading artwork ownership as Non-Fungible Tokens (NFTs). The company generates revenue primarily from listing fees, trading commissions, and NFT consulting services. It is undergoing a significant strategic shift, including the disposition of its legacy art trading subsidiaries (Hong Kong Takung and Hong Kong MQ) to focus on the NFT market, NFT gaming, and digital payment services through its newer US and Hong Kong-based subsidiaries. The company's operations are primarily in Hong Kong and the United States, and it asserts that PRC laws do not currently have a material impact on its business, though it acknowledges potential future risks - The company operates an electronic online platform (https://www.nftoeo.com/) for trading artwork ownership in the form of NFTs and provides NFT consulting services. It is also exploring the NFT gaming business[12] - On November 1, 2022, the company entered into a Share Purchase Agreement to sell its subsidiaries Hong Kong Takung and Hong Kong MQ for a cash consideration of $1,500,000, signaling a strategic disposition of its legacy business[19] - The company has established new subsidiaries to support its NFT business: NFT Digital (New York) for administrative and technical support, NFT Exchange (Wyoming) to operate the NFT exchange market, and Metaverse HK (Hong Kong) for digital payment services[17][18] - The company states that as its operations are in Hong Kong and the U.S., it is not currently subject to PRC regulations requiring approval from authorities like the CSRC or CAC for its business operations or U.S. listing. However, it acknowledges the risk of future PRC government intervention in Hong Kong[32][33][84] - As of December 31, 2022, the company had 22 full-time employees across management, administration, finance, technical, operations, and marketing departments[54] Risk Factors The company faces significant risks related to its business transition to the nascent and volatile NFT market, which is subject to legal, regulatory, and cybersecurity uncertainties. Financially, the deconsolidation of its PRC subsidiary (Tianjin Takung) materially impacts its statements, and it has insufficient insurance coverage. Operational risks include dependence on its new NFT platform's success, system failures, and the need for effective marketing. The company also highlights substantial risks associated with its Hong Kong operations, including potential PRC government intervention, the impact of the Hong Kong National Security Law, and uncertainties regarding the application of PRC regulations to Hong Kong entities. Investment risks include potential delisting under the HFCA Act, although its current auditor is inspectable by the PCAOB - The company is in the early stages of transitioning its business to focus on NFT-related technologies, and there is a risk that this new business strategy may not achieve profitability[92][93] - The deconsolidation of the Tianjin Takung subsidiary means that restricted cash balances of $58.2 million (as of Dec 31, 2022) are not included in the company's consolidated financial statements, materially affecting their presentation[94] - The recently launched NFT platform is exposed to significant risks, including evolving regulations (anti-money laundering, securities law), intellectual property disputes, cybersecurity attacks, and uncertain market acceptance[104][105][106] - Although the company's operations are in Hong Kong and the U.S., it acknowledges risks from potential PRC government intervention in Hong Kong, which could hinder operations and cause the stock value to decline[150][152] - The company's auditor, Assentsure PAC, is based in Singapore and currently subject to PCAOB inspection. However, the report notes the risk that if the PCAOB is unable to inspect auditors in the future (e.g., due to work papers in China/HK), the company's securities could be delisted under the HFCA Act[162][168][171] Properties The company leases a small office in Sha Tin, New Territories, Hong Kong. The one-year lease commenced on October 10, 2022, with an annual rent of $10,000 and does not include a renewal option - The Company leases an office at Office Q, 11th Floor, Kings Wing Plaza 2, No. 1 Kwan Street, Sha Tin, New Territories, Hong Kong[189] - The lease term is for one year starting from October 10, 2022, with an annual rent of US$10,000[189] Legal Proceedings The company reports that the artwork unit trading platform operated by its PRC subsidiary, Tianjin Takung, was suspended by local authorities on November 8, 2021, to facilitate an investigation. As of the report date, there have been no further developments regarding this matter - The artwork unit trading platform of the PRC subsidiary, Tianjin Takung, was suspended by local authorities on or around November 8, 2021, to facilitate an investigation[190] - As of the date of the report, there has been no development regarding the investigation[190] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE American under the symbol 'TKAT'. As of April 2023, there were 120 registered shareholders. The company has never paid dividends and does not plan to in the foreseeable future. The section also details several sales of unregistered securities in 2021 and 2022, through which the company raised significant capital by issuing units consisting of common stock and warrants - The company's common stock began trading on the NYSE American on March 22, 2017, under the symbol 'TKAT'[193] - No dividends have ever been paid on common stock, and none are anticipated in the foreseeable future[195] - In March 2022, the company agreed to issue 10,238,910 units at $2.93 per unit, with each unit comprising one share and a warrant to purchase three shares. The transaction closed in April 2022[199] - In June 2022, the company agreed to sell 10,380,623 units at $2.89 per unit, with each unit comprising one share and a warrant to purchase two shares, raising gross proceeds of approximately $30 million. The transaction closed in September 2022[200] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategic shift to an NFT-focused business model, which began generating significant commission revenue in 2022. For FY2022, continuing operations revenue was $3.4 million, a substantial increase from $120,000 in 2021. Despite this, the company recorded a net loss from continuing operations of $10.6 million, largely due to a $9.3 million impairment on a non-marketable investment. The company's liquidity position improved dramatically, with cash from continuing operations increasing to $67.5 million, primarily due to raising approximately $60 million from private placements. Management believes these funds are sufficient to meet liquidity needs for the next twelve months Consolidated Statements of Operations Highlights (Continuing Operations) | Metric | For the year ended Dec 31, 2022 | For the year ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenue | $3,403,536 | $120,000 | | Gross Profit | $2,620,746 | $120,000 | | Non-marketable investment impairment | ($9,296,754) | ($1,333,506) | | General and administrative expenses | ($3,677,967) | ($13,565,548) | | Net loss from continuing operations | ($10,608,594) | ($13,447,956) | - Revenue from continuing operations surged to $3.4 million in 2022, almost entirely from commission fees generated by the new NFT trading platform, which began operations in June 2022[223][211] - General and administrative expenses for continuing operations decreased to $3.7 million in 2022 from $13.6 million in 2021, primarily because the 2021 figure included $10.9 million in share-based compensation[236][237] - The company's cash and cash equivalents from continuing operations increased from $1.5 million at the end of 2021 to $67.5 million at the end of 2022, mainly due to approximately $60 million raised from private placements[248][249][250] - As of December 31, 2022, the company's continuing operations had a working capital of $60.9 million, a significant improvement from $1.6 million in the prior year[255][256] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the years ended December 31, 2022, and 2021. The auditor's report for 2022 from Assentsure PAC highlights the litigation involving the deconsolidated entity Tianjin Takung. The 2021 report from the prior auditor, WWC, P.C., included a going concern paragraph. Key notes to the financial statements detail the company's shift to an NFT business, the deconsolidation of Tianjin Takung, a full impairment of a $10.6 million investment, and subsequent events including agreements for a major disposition and a corporate redomiciling Consolidated Balance Sheet Highlights | Metric | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $64,794,688 | $1,503,153 | | Total current assets | $67,689,687 | $2,166,540 | | Non-marketable investment, net | $0 | $9,296,614 | | Total assets | $67,751,063 | $11,653,736 | | Total current liabilities | $15,344,281 | $8,877,053 | | Total shareholders' equity | $52,406,782 | $2,776,683 | - The company's auditor for FY2022, Assentsure PAC, issued an opinion with an emphasis of matter regarding litigation involving the deconsolidated entity, Tianjin Takung. The prior auditor's FY2021 report included a going concern paragraph related to the suspension of the PRC subsidiary's operations[269][279] - Note 3 (Going Concern): Management's plan to mitigate going concern risk includes raising capital through PIPE transactions, which yielded approximately $60 million in 2022, and developing its new blockchain and NFT business model[362][363][364] - Note 4 (Investments): The company recorded a $9,296,614 impairment charge in 2022, writing down its non-marketable investment in Cultural Objects Provenance Holdings Limited to $0[369][372] - Note 17 (Subsequent Event): On November 1, 2022, the company entered into an agreement to dispose of its legacy subsidiaries, Hong Kong Takung and Hong Kong MQ. It also entered into a merger agreement to redomicile the parent company from Delaware to the Cayman Islands[430][433] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On May 4, 2022, Takung Art Co., Ltd. dismissed its independent registered public accounting firm, WWC, P.C., and appointed Assentsure PAC as its new auditor. The company reported that there were no disagreements with WWC on any matter of accounting principles or practices. WWC's audit report for the fiscal year 2021 had included an emphasis of matter for going concern - On May 4, 2022, the company dismissed WWC, P.C. and appointed Assentsure PAC as its new independent registered public accounting firm[439][441] - There were no disagreements with the former auditor, WWC, on accounting principles, financial statement disclosure, or auditing scope[440] - WWC's audit report for the fiscal year ended December 31, 2021, contained an emphasis of a matter for going concern[439] Controls and Procedures As of December 31, 2022, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective. However, an assessment of internal control over financial reporting identified a weakness in the Information Technology environment, specifically a lack of clear segregation of duties where one employee is responsible for both operating system and database maintenance - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[444] - A weakness in internal control over financial reporting was identified related to IT: a lack of segregation of duties, as one employee manages both the operating system and database maintenance[445] - The annual report does not include an attestation report from the independent public accounting firm regarding internal control over financial reporting, as the company is not required to provide one[446] Part III Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's executive officers, Kuangtao Wang (CEO and Chairman) and Jianguang Qian (CFO), and its three independent directors: Doug Buerger, Guisuo Lu, and Ronggang (Jonathan) Zhang. It outlines the structure and composition of the Board's three committees (Audit, Compensation, and Governance and Nominating), all of which consist of the independent directors. The Board's role in risk oversight is also described, and a Code of Business Conduct and Ethics has been adopted - The company's executive officers are Kuangtao Wang (age 45, CEO and Chairman) and Jianguang Qian (age 39, CFO)[452] - The Board of Directors has three committees: Audit, Compensation, and Governance and Nominating. All three committees are composed of the independent directors: Guisuo Lu, Ronggang (Jonathan) Zhang, and Doug Buerger[472] - The Board has determined that Guisuo Lu qualifies as an audit committee financial expert[473] - The company has adopted a Code of Business Conduct and Ethics applicable to its officers and employees[480] Executive Compensation This section details the compensation for the company's named executive officers and directors for fiscal years 2022 and 2021. Compensation primarily consists of base salaries. In 2022, CEO Kuangtao Wang received a salary of $180,000, and CFO Jianguang Qian received $60,000. No new share options were granted in 2022 or 2021, and there were no outstanding equity awards at the end of fiscal year 2022 2022 Executive Compensation Summary | Name & Principal Position | Fiscal Year | Base Compensation | Total Annual | | :--- | :--- | :--- | :--- | | Kuangtao Wang, CEO | 2022 | $180,000 | $180,000 | | Jianguang Qian, CFO | 2022 | $60,000 | $60,000 | - The company did not grant any new share options in fiscal years 2022 and 2021[497] - There were no outstanding equity awards for employees, directors, or officers at the end of fiscal year 2022[498] - The company does not offer pension or retirement plans, other than legally mandated contributions for certain employees[501] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section outlines the company's 2015 Incentive Stock Plan and provides a snapshot of its beneficial ownership as of April 12, 2023. Under the equity plan, 41,832 shares remained available for future issuance. The ownership table indicates two major shareholders: CEDE & CO with 31.2% and Jian Xiao with 8.6%. All executive officers and directors as a group beneficially own less than 1% of the outstanding common stock - As of the report date, 41,832 shares of common stock remained available for future issuance under the company's 2015 Incentive Stock Plan[511][512] Security Ownership of Certain Beneficial Owners (as of April 12, 2023) | Owner Name | Number of Shares Beneficially Owned | Percentage of Ownership | | :--- | :--- | :--- | | CEDE & CO | 10,930,162 | 31.2% | | Jian Xiao | 3,000,000 | 8.6% | | All Officers and Directors (as a group) | - | < 1% | - The total number of common stock shares outstanding as of March 31, 2023, was 34,991,886[5] Certain Relationships and Related Transactions, and Director Independence The company confirms that three of its directors—Doug Buerger, Guisuo Lu, and Ronggang (Jonathan) Zhang—are independent according to NYSE listing standards. The section discloses historical related party transactions, including working capital loans from 2019 with a former legal representative of a subsidiary, which were later transferred to a former CFO. It also notes consulting agreements with former executives that expired in 2022 and were not renewed - The Board of Directors has determined that Doug Buerger, Guisuo Lu, and Ronggang (Jonathan) Zhang are 'independent directors' under NYSE and SEC rules[523] - In 2019, Hong Kong Takung and Tianjin Takung entered into working capital loan agreements with Mr. Shuhai Li, a former legal representative of Tianjin Takung. These loans were subsequently transferred to Ms. Jing Wang, a former CFO, in May 2020[524][525] - Consulting agreements with former CEOs Chun Hin Leslie Chow and Fang Mu expired in 2022 and were not renewed[528] Principal Accounting Fees and Services This section details the fees paid to the company's auditors. For the fiscal year 2022, the company incurred approximately $251,750 in audit fees to its current auditor, Assentsure PAC. For fiscal year 2021, it incurred approximately $230,000 in audit fees to its former auditor, WWC, P.C. No audit-related, tax, or other fees were incurred in either year. All services were pre-approved by the Board of Directors Audit Fees | Fiscal Year | Auditor | Fees Incurred | | :--- | :--- | :--- | | 2022 | Assentsure PAC | ~$251,750 | | 2021 | WWC, P.C. | ~$230,000 | - The company did not incur any audit-related fees, tax fees, or other fees from its independent public accounting firm in fiscal years 2022 and 2021[531][532] - On May 4, 2022, Assentsure PAC was appointed as the new auditor, replacing the dismissed WWC, P.C.[529] Part IV Exhibits, Financial Statement Schedules This section provides a comprehensive list of all exhibits filed with the Form 10-K. Notable exhibits include the company's articles of incorporation and bylaws, the 2015 Incentive Share Plan, various securities purchase agreements from recent capital raises, the Share Purchase Agreement for the disposition of its legacy subsidiaries, and the Agreement and Plan of Merger for its planned redomiciling - Exhibit 10.28 details the Share Purchase Agreement dated November 1, 2022, for the sale of Hong Kong Takung Art Company Limited and Hong Kong MQ Group Limited[535] - Exhibit 10.30 contains the Agreement and Plan of Merger dated November 1, 2022, between Takung Art Co., Ltd. and NFT Limited for the company's redomicile to the Cayman Islands[535] - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[536]