NFT (MI) - 2019 Q4 - Annual Report

PART I This section details the company's business operations, associated risks, property holdings, and ongoing legal matters Business Takung Art operates an online platform for trading fractional ownership of artwork, generating revenue from listing, trading, and management fees - The company operates an online platform for artists, art dealers, and investors to offer and trade ownership units in valuable artwork, making high-end art investment more accessible[17][18] - Primary revenue streams consist of listing fees, trading commissions, and management fees, with minor additional revenue from premium services and agent subscriptions[19][57] - The company's corporate structure includes the Delaware-based parent, Takung Art Co., Ltd, with operating subsidiaries in Hong Kong and the PRC to manage the platform, handle payments, and conduct marketing[15][44] - As of December 31, 2019, 285 sets of artwork were listed on the platform, including paintings, jewelry, precious stones, and other collectibles[59][71] Overview and Corporate Structure Takung Art, a Delaware holding company, operates its art trading platform via Hong Kong and PRC subsidiaries, currently streamlining its corporate structure - The company was originally incorporated as Cardigant Medical Inc. in 2009 and shifted to the art trading business after a reverse merger with Hong Kong Takung in 2014[19][23][26] - The company is in the process of dissolving Takung Art Holdings and merging the operations of Shanghai Takung into Tianjin Takung to streamline operations and save costs[18][26][56] - In 2019, the company acquired Hong Kong MQ Group Limited and established Tianjin MQ, its PRC subsidiary, to explore new business opportunities[17][29][30] Trading Platform and Operations The company's electronic platform facilitates trading of artwork ownership units, involving owners, agents, and traders, with processes for listing, transactions, and settlement - The trading platform consists of a matching system, transaction monitoring, account management, and a settlement system, with hardware hosted by Amazon Web Services in Singapore and Hong Kong[45][46][55] - Key participants on the platform are Original Owners, Offering Agents, and Traders[50][51][52] - The offering process requires an application, an investment value research report, and an appraisal, with a one-time listing fee, typically 22.5% to 48.5% of the total offering price, charged upon successful listing[65][68] - The company charges trading commissions, typically 0.3% of the transaction value (currently promoted at 0.2%), and a daily management fee of $0.0013 (HK$0.01) per 100 artwork units to cover insurance and storage[84][85] Regulation The company's operations are subject to diverse regulations across the U.S., Hong Kong, and the PRC, covering taxation, securities, and foreign investment - In the U.S., the company is subject to a 21% flat corporate income tax rate as per the Tax Cuts and Jobs Act of 2017[105][106] - Under Hong Kong's Securities & Futures Ordinance (SFO), the company's business model of trading artwork units is not classified as dealing in securities, thus not requiring a license from the SFC[111][113] - In the PRC, the company's subsidiaries are subject to a 25% enterprise income tax, and dividend payments to foreign investors may be subject to a 10% withholding tax and are restricted to accumulated profits after setting aside statutory reserves[135][145] - The company's PRC subsidiaries are required to contribute to social insurance plans and housing funds for their employees, in compliance with PRC labor laws[139][142] Risk Factors The company faces significant business, operational, and investment risks, including economic downturns, COVID-19 impacts, and regulatory uncertainties in Hong Kong and the PRC - The business is materially and adversely affected by the COVID-19 outbreak, which has created economic uncertainty, impeded recruitment, and negatively impacted authorized agents' operations[162][164] - The company's business is sensitive to global economic conditions and discretionary consumer spending, where a decline in trading volumes would directly decrease revenues; new listings were suspended in August 2018 due to bearish market sentiment[159][161][166] - Operating in the PRC exposes the company to risks from changes in political and economic policies, uncertainties in legal interpretation and enforcement, and restrictions on currency exchange that may limit fund transfers out of China[226][230][255] - The company may be treated as a PRC resident enterprise for tax purposes, which would subject it to PRC income tax on its global income and could result in PRC taxation on dividends paid to foreign investors[246][247] Properties The company and its subsidiaries operate entirely from leased properties, including offices and storage facilities in Hong Kong and mainland China - The company's principal executive office is a leased space of approximately 1,821 square feet in Tsim Sha Tsui, Hong Kong, with a lease expiring on December 31, 2020[268] - Subsidiaries lease multiple office and storage spaces in Hong Kong and mainland China (Tianjin, Shanghai, Beijing) to support operations[269][270][277] Legal Proceedings Shanghai Takung faced seven individual claims totaling approximately $0.11 million between November 2019 and March 2020, all of which have been settled - From November 2019 to March 2020, Shanghai Takung was subject to seven individual claims totaling approximately $0.11 million due to disputes involving service agents[281] - All legal claims have been settled and dismissed by the claimants as of the date of this report[281] PART II This section covers the company's common stock market, financial performance, and internal controls Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE American, with historical price data, shareholder count, and details on its dividend policy and equity compensation plan - The company's common stock is traded on the NYSE American under the symbol 'TKAT'[285] Common Stock Trading Prices | Quarter | 2019 High ($) | 2019 Low ($) | 2018 High ($) | 2018 Low ($) | | :--- | :--- | :--- | :--- | :--- | | Q1 | 0.854 | 0.561 | 2.95 | 2.01 | | Q2 | 0.939 | 0.550 | 2.37 | 1.26 | | Q3 | 0.739 | 0.352 | 1.68 | 0.75 | | Q4 | 0.670 | 0.427 | 0.94 | 0.57 | - The company has not paid dividends and does not plan to in the foreseeable future, as it intends to retain earnings for growth[288] - As of December 31, 2019, there were 100,890 outstanding share options, with no new options granted in 2019 and 153,348 options forfeited by employees[290] Management's Discussion and Analysis of Financial Condition and Results of Operations Takung Art experienced a significant revenue decline in FY2019 due to lower listing and commission fees, but narrowed its net loss by reducing expenses, while cash and restricted cash increased due to customer deposits Financial Performance Summary | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $3,173,014 | $8,495,423 | -62.7% | | Listing Fee | $284,210 | $3,907,301 | -92.7% | | Commission | $2,438,756 | $3,818,852 | -36.1% | | Gross Profit | $1,311,437 | $5,916,659 | -77.8% | | Total Expenses | $4,963,773 | $12,575,144 | -60.5% | | General & Admin | $4,662,313 | $11,324,469 | -58.8% | | Net Loss | ($4,092,806) | ($7,631,963) | 46.4% | - The significant decrease in revenue was mainly due to a 92.7% drop in listing fees, as the company listed only 6 artworks in 2019 compared to 38 in 2018, citing a focus on promoting existing listings amid unfavorable market conditions[330][333][334] - Net loss improved from $7.6 million in 2018 to $4.1 million in 2019, primarily because of a $6.7 million reduction in general and administrative expenses, driven by lower salaries, consultancy fees, and other operational costs[354][370] - Cash and restricted cash increased from $12.5 million at the end of 2018 to $21.8 million at the end of 2019, largely due to a $11.9 million increase in customer deposits held by the company[373][374] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2019 and FY2018, including balance sheets, statements of operations, changes in equity, and cash flows Consolidated Balance Sheet Highlights | Balance Sheet Highlights | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $32,441,503 | $24,569,225 | | Cash and cash equivalents | $5,424,213 | $7,974,884 | | Restricted cash | $16,404,941 | $4,549,202 | | Total Liabilities | $25,996,346 | $14,099,778 | | Customer deposits | $16,404,941 | $4,549,202 | | Total Shareholders' Equity | $6,445,157 | $10,469,447 | Consolidated Statement of Operations Highlights | Statement of Operations Highlights | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Total Revenue | $3,173,014 | $8,495,423 | | Gross Profit | $1,311,437 | $5,916,659 | | Loss from Operations | ($3,652,336) | ($6,658,485) | | Net Loss | ($4,092,806) | ($7,631,963) | | Loss Per Share (basic & diluted) | ($0.36) | ($0.68) | Consolidated Cash Flow Highlights | Cash Flow Highlights | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $9,841,840 | ($23,035,965) | | Net cash from investing activities | $224,608 | ($1,846,325) | | Net cash from financing activities | ($699,526) | $928,293 | | Net change in cash | $9,305,068 | ($24,616,496) | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes - As of December 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[548] - Management determined that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[549] - No changes were made in the company's internal controls over financial reporting during the year ended December 31, 2019[551] PART III This section details the company's governance structure, executive and director compensation, and related party transactions Directors, Executive Officers and Corporate Governance This section outlines the company's executive officers and directors, board committee structure, director independence, and adopted Code of Business Conduct and Ethics - As of May 8, 2020, the key executive officers are Fang Mu (CEO) and Jehn Ming Lim (CFO)[557] - The Board of Directors has three independent directors: Xiaoyu Zhang, Jiangping (Gary) Xiao, and Li Lv[657] - The Board has established an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee, with charters available on the company's website[587][588][589] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, including principal officers[594] Executive Compensation This section details the compensation of named executive officers for FY2019 and FY2018, including base salaries, bonuses, and director compensation Named Executive Officer Compensation | Name and Principal Position | Year | Total Annual Compensation ($) | | :--- | :--- | :--- | | Fang Mu, CEO | 2019 | 44,671 | | Jehn Ming Lim, CFO | 2019 | 97,972 | | Chun Hin Leslie Chow, Former CEO | 2019 | 121,561 | | Chun Hin Leslie Chow, Former CEO/CFO | 2018 | 319,801 | | Di Xiao, Former CEO | 2018 | 235,081 | - Fang Mu was appointed CEO on August 6, 2019, with a monthly salary of HK$30,000 from the parent company and a separate consulting fee of RMB 30,000 per month from a subsidiary[604][606] - Jehn Ming Lim was appointed CFO on February 18, 2019, with a monthly salary of HK$65,000[607][608] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section discloses beneficial ownership of common stock as of May 8, 2020, identifying major shareholders and detailing holdings of executive officers and directors Beneficial Ownership of Common Stock | Name of Beneficial Owner | Number of Shares | Percentage Ownership | | :--- | :--- | :--- | | Xiao Jian | 3,000,000 | 26.655% | | Hiu Ngai Ma | 2,216,907 | 19.697% | | CEDE & CO | 1,356,972 | 12.056% | - As of May 8, 2020, the company's executive officers and directors individually own less than 1% of the common stock, with the exception of CFO Jehn Ming Lim who owns 5,000 shares[647] Certain Relationships and Related Transactions, and Director Independence This section details related party transactions, including inter-company loan agreements and office lease arrangements, alongside the board's determination of director independence - The company has a secured loan arrangement involving its Hong Kong and Tianjin subsidiaries with related party Shuhai Li, where Hong Kong Takung received a ~$6.4M loan, secured by a ~$5.8M loan extended by Tianjin Takung[658][660][661] - PRC subsidiaries Tianjin Takung and Tianjin MQ lease their office facilities from Jianping Mao, the Human Resources Management Director of Hong Kong Takung[662][663][664] - The Board of Directors has determined that directors Xiaoyu Zhang, Jiangping (Gary) Xiao, and Li Lv are independent under NYSE listing standards[657] Principal Accountant Fees and Services This section discloses fees paid to the independent auditor, Marcum Bernstein & Pinchuk LLP, for audit and other services in fiscal years 2019 and 2018 Fees Paid to Independent Registered Public Accounting Firm | Fee Category | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Audit Fees | $231,000 | $339,000 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | - The company's independent registered public accounting firm is Marcum Bernstein & Pinchuk LLP[667] PART IV This section lists all exhibits and financial statement schedules included in the Form 10-K report Exhibits, Financial Statement Schedules This section provides a comprehensive list of exhibits filed with the Form 10-K, including corporate documents, material contracts, and required certifications - Lists corporate governance documents, including the Certificate of Incorporation (3.1) and Bylaws (3.2)[674] - Includes material contracts such as the 2015 Incentive Share Plan (4.1) and various loan and service agreements (10.1-10.33)[674][675] - Contains required certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[677]