NFT (MI) - 2021 Q4 - Annual Report

PART I Business Takung Art Co., Ltd. is a holding company transitioning its business focus to non-fungible tokens (NFTs), operating an online trading platform and providing related consulting services, following the suspension of its PRC artwork unit trading platform Overview and Corporate History The company operates an online NFT artwork trading platform and provides consulting services, having evolved its corporate structure to support its new focus on the NFT market - The company operates an electronic online platform for artists, art dealers, and investors to offer and trade ownership of valuable artwork in the form of non-fungible tokens (NFTs)[14] - The company is expanding its business model to include NFT consulting, NFT gaming, sales of in-game character NFTs, and membership packs[14] - In late 2021 and early 2022, the company established new subsidiaries in the U.S. and Hong Kong, including NFT Digital Technology Limited, NFT Exchange Limited, and Metaverse Digital Payment Co., Limited, to support its NFT and digital payment business initiatives[28][29] Recent Regulatory Developments and Risks The company faces significant legal and operational risks from its China operations, including the suspension of its Tianjin Takung platform and uncertainties regarding PRC laws and overseas listing approvals - The artwork unit trading platform operated by the PRC subsidiary, Tianjin Takung, was suspended by local authorities around November 8, 2021, to facilitate an investigation, the purpose of which has not been announced[31] - The company believes it is not currently required to obtain permission from the CSRC or CAC for its overseas listing but acknowledges uncertainty regarding future regulations, which could hinder its ability to offer securities[30] - The company's auditor, WWC, P.C., is a U.S.-based firm inspected by the PCAOB and is not subject to the HFCAA determination that prevents inspection of firms in mainland China and Hong Kong, though the report acknowledges the risk if this changes, trading could be prohibited[32][33] Business Operations and Revenue Model The company's business revolves around its nftoeo.com platform for artwork unit trading, generating revenue primarily from listing fees, trading commissions, and management fees - The company's main revenue sources are listing fees, trading commissions, and management fees, also earning fees from premium services and authorized agent subscriptions[52] - Listing fees generally range from 22.5% to 48.5% of the total offering price for the major types of artwork listed[64] - Trading commissions are typically 0.2% of the transaction value for both the buyer and seller, totaling 0.4%, while management fees are charged at $0.0013 (HK$0.01) per 100 artwork units per day[80][81] Artwork Listed as of December 31, 2021 | Artwork Category | Number of Sets/Pieces | Total Listing Value (USD) | | :--- | :--- | :--- | | Paintings and Calligraphies | 85 | $33,334,620 | | Jewelry | 35 | $9,384,103 | | Precious Stones | 134 | $16,987,662 | | Amber | 29 | $12,222,265 | | Other (Ivory, Porcelain, etc.) | 27 | $4,647,270 | Regulation and Compliance The company navigates complex regulatory frameworks in the U.S., Hong Kong, and the PRC, covering tax, securities, data protection, and foreign investment, despite the suspension of its PRC operations - In the U.S., the company is subject to tax laws such as the Tax Cuts and Jobs Act (21% corporate rate) and the CARES Act[103][104][107] - In Hong Kong, the business is not currently classified as dealing in securities under the SFO, but is subject to regulations on Sale of Goods, Supply of Services, Fair Trading, and Personal Data Protection[111][112][114][119][124] - PRC subsidiaries are subject to a 25% enterprise income tax rate, with dividends paid to foreign investors subject to a 10% withholding tax, and subsidiaries must set aside at least 10% of after-tax profits into a statutory reserve until it reaches 50% of registered capital[141][152] - China's central bank has suspended all transactions of digital currencies in the mainland, but this does not apply to Hong Kong under the 'One Country, Two Systems' policy, and Hong Kong is planning to make licensing for crypto exchanges mandatory[136][137] Risk Factors The company faces substantial risks from its early-stage NFT business transition, the deconsolidation of its PRC subsidiary, evolving NFT regulations, cybersecurity threats, and geopolitical uncertainties in Hong Kong and the PRC Risks Related to Business and Financial Condition Primary business risks include the early-stage NFT transition, financial impact from Tianjin Takung's deconsolidation, and inherent legal, regulatory, and cybersecurity challenges in the nascent NFT market - The company is in an early stage of transitioning its business to focus on NFT and blockchain technologies, and may not achieve profitability[162][163][164] - The deconsolidation of Tianjin Takung has materially impacted the consolidated financial statements, with restricted cash of $52.2 million (as of Dec 31, 2021) removed from the balance sheet and a $16.3 million asset impairment recorded in 2021[165] - The recently launched NFT platform is subject to significant and evolving risks, including uncertain regulations regarding intellectual property, cybersecurity, anti-money laundering (AML), and whether NFTs will be classified as securities or commodities[179][180][182] - The company's success is dependent on its ability to attract and retain key personnel, including its CEO, CFO, and directors, as well as a trained workforce[197][199] Risks Related to Doing Business in Hong Kong and the PRC Operating in Hong Kong and the PRC exposes the company to significant geopolitical and regulatory risks, including uncertain legal autonomy, unpredictable government oversight, data security laws, HFCAA delisting threats, and currency controls - The Hong Kong legal system's autonomy under the 'one country, two systems' policy faces uncertainty, which could limit legal protections and contract enforcement[225][226][228] - The PRC government may intervene in or influence operations at any time, and there is significant uncertainty regarding the need for approvals from authorities like the CSRC and CAC for overseas listings, which could hinder the ability to offer securities[236][239][240] - The company is subject to evolving PRC laws on cybersecurity and data protection, such as the Cybersecurity Review Measures and the Personal Information Protection Law (PIPL), which could impose significant compliance costs and penalties[241][243][248] - If the PCAOB is unable to inspect the company's auditor for two consecutive years, trading of its securities may be prohibited under the HFCAA, potentially leading to delisting from the NYSE American[250][254] - PRC regulations on currency exchange may limit the ability to transfer revenue generated in Renminbi to fund offshore business activities or pay dividends to shareholders[284] Unresolved Staff Comments The company reports that it has no unresolved staff comments - Not applicable[294] Properties The company leases several properties for office and storage space, including locations in Admiralty, Hong Kong, Tsuen Wan, Hong Kong, and Tianjin, China, with an additional office lease in Tianjin expiring in February 2022 Leased Properties | Location | Type | Size (sq. ft.) | Lease Expiry | | :--- | :--- | :--- | :--- | | Admiralty, Hong Kong | Office | ~885 | Dec 14, 2022 | | Tsuen Wan, Hong Kong | Storage | ~236 | Jan 31, 2022 (auto-renewable) | | Tianjin, China | Storage | ~2,153 | Jul 14, 2025 | | Beijing, China | Storage | ~538 | Feb 14, 2022 (auto-renewable) | | Tianjin, China | Office | ~22,503 | Feb 2, 2022 | Legal Proceedings The company reports two main legal matters: a settled contract breach claim against Hong Kong Takung and the ongoing suspension of Tianjin Takung's artwork unit trading platform by local authorities - A claim filed against Hong Kong Takung in July 2020 for alleged breach of contract has been settled and closed in the company's favor as of June 9, 2021[300] - The trading platform of the PRC subsidiary, Tianjin Takung, was suspended by local authorities around November 8, 2021, for an investigation, with no further developments as of the report date[301] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[302] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE American under 'TKAT', with 198 shareholders as of April 2022, and no dividends planned, while recent unregistered sales include a $5 million private placement - The company's common stock began trading on the NYSE American on March 22, 2017, under the symbol 'TKAT'[305] - As of April 13, 2022, there were 198 registered shareholders of common stock[306] - The company has not paid dividends and does not anticipate paying them in the foreseeable future, citing reliance on funds from its Hong Kong and China entities, which are subject to distribution limitations[307] - On July 12, 2021, the company sold 571,429 shares of common stock to an institutional investor for gross proceeds of $5,000,000[311] - On September 9, 2021, the company issued 1,558,480 restricted shares as part of an equity investment in a BVI entity, valued at $10,630,120[310] Management's Discussion and Analysis of Financial Condition and Results of Operations The MD&A details the company's strategic shift to NFT businesses, reporting a $30.1 million net loss in 2021 due to discontinued operations and share-based compensation, with going concern doubts mitigated by a recent $30 million PIPE financing Results of Operations For 2021, the company reported a $30.1 million net loss, driven by a $16.6 million loss from discontinued operations (including a $16.4 million impairment) and a $13.4 million loss from continuing NFT consultancy services Consolidated Statement of Operations Summary (2021 vs 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue (Continuing Ops) | $120,000 | $0 | | Net Loss from Continuing Operations | $(13,447,956) | $(770,073) | | Net (Loss)/Income from Discontinued Operations | $(16,625,555) | $157,435 | | Total Net Loss | $(30,073,511) | $(612,638) | - General and administrative expenses for continuing operations surged to $13.6 million in 2021 from $0.8 million in 2020, primarily due to a $10.8 million increase in share-based compensation[360] - Discontinued operations in 2021 included impairment charges of $16.4 million against receivables from and investment in Tianjin Takung following its deconsolidation[368][506] - Revenue from continuing operations in 2021 was entirely from a new consultancy service related to NFT projects[339][359] Liquidity and Capital Resources As of December 31, 2021, continuing operations had $1.5 million cash and $1.6 million working capital, while discontinued operations had an $8.4 million working deficit, with a $30 million PIPE financing secured post-year-end to address going concern doubts Cash and Working Capital as of Dec 31, 2021 | Category | Continuing Operations | Discontinued Operations | | :--- | :--- | :--- | | Cash and Cash Equivalents | $1,503,153 | $338,542 | | Working Capital/(Deficit) | $1,649,632 | $(8,360,145) | - Net cash used in operating activities was $16.1 million in 2021, a significant increase from $7.8 million in 2020[415] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern[490] - Subsequent to year-end, the company closed a private investment in public equity (PIPE) transaction in April 2022, raising gross proceeds of approximately $30 million to fund operations[491][492][493] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021 and 2020, with auditor notes highlighting going concern doubts due to the deconsolidation of the PRC subsidiary and reclassification of legacy operations Report of Independent Registered Public Accounting Firm The auditor's report expresses substantial doubt about the company's going concern ability due to PRC subsidiary suspension and identifies 'Investments' as a Critical Audit Matter - The auditor's report contains a 'Going Concern' paragraph, indicating substantial doubt about the company's ability to continue operations due to the suspension of its PRC subsidiary[402] - The Critical Audit Matter identified was 'Investments', specifically the valuation of a non-marketable investment in a privately held company, which required significant management judgment and extended audit procedures[406][407] Consolidated Financial Statements Consolidated financial statements show a significant deterioration in 2021, with total assets decreasing to $11.7 million and a net loss of $30.1 million, largely due to Tianjin subsidiary deconsolidation Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $11,653,736 | $24,413,148 | | Total Liabilities | $8,877,053 | $18,598,103 | | Total Stockholders' Equity | $2,776,683 | $5,815,045 | Consolidated Operations Highlights (Year Ended Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue (Continuing Ops) | $120,000 | $0 | | Net Loss | $(30,073,511) | $(612,638) | | Comprehensive Loss | $(30,086,570) | $(667,639) | | Loss Per Share (Continuing Ops) | $(1.09) | $(0.07) | Notes to Consolidated Financial Statements Notes detail accounting policies, the NFT business transition, deconsolidation of Tianjin Takung, going concern doubts, asset impairments, related party transactions, and significant share issuances in 2021 - Note 3 (Going Concern): Management acknowledges substantial doubt about the company's ability to continue as a going concern due to the suspension of the Tianjin Takung platform, with mitigation plans including a PIPE transaction and developing the new NFT business model[487][490][491] - Note 5 (Asset Impairments): The company recorded asset impairment charges of $16,538,781 in 2021, primarily from writing off receivables from and its investment in the deconsolidated Tianjin Takung[506][509] - Note 19 (Stockholders' Equity): In 2021, the company issued 3,039,909 restricted shares, including awards for services and 1,558,480 shares for an investment in Cultural Objects Provenance Holdings Limited, with share-based compensation expense of $10.9 million in 2021[413][574][575][583] - Note 2 (Discontinued Operations & Deconsolidation): Due to the suspension of Tianjin Takung's operation and loss of control, its financial information was deconsolidated in Q4 2021, and the operations of Hong Kong Takung have been classified as discontinued[433][434][435] Controls and Procedures As of December 31, 2020, management concluded that disclosure controls and internal control over financial reporting were effective, with no auditor attestation report required - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[601] - Based on an assessment using the COSO 2013 framework, management determined that internal control over financial reporting was effective as of December 31, 2020[602] PART III Directors, Executive Officers and Corporate Governance This section provides biographical information for executive officers and directors, detailing the Board's structure, its three independent committees, and the company's Code of Business Conduct and Ethics Executive Officers and Directors (as of March 31, 2022) | Name | Age | Position | | :--- | :--- | :--- | | Kwok Leung Paul Li | 36 | Chief Executive Officer | | Kuangtao Wang | 44 | Co-Chief Executive Officer | | Jianguang Qian | 38 | Chief Financial Officer | | Tak Ching (Anthony) Poon | 40 | Director | | Ronggang (Jonathan) Zhang | 61 | Director | - The Board of Directors has three committees: Audit, Compensation, and Governance and Nominating, all composed of independent directors Tak Ching (Anthony) Poon, Ronggang (Jonathan) Zhang, and Doug Buerger[635] - The Board has determined that Tak Ching (Anthony) Poon qualifies as an audit committee financial expert[636] Executive Compensation This section details executive and director compensation for 2021 and 2020, including CEO Kwok Leung Paul Li's $820,452 total compensation, with no new share options granted or pension plans offered Summary Compensation Table for Named Executive Officers (2021) | Name & Principal Position | Salary ($) | Share Award ($) | Total Annual ($) | | :--- | :--- | :--- | :--- | | Kwok Leung Paul Li (CEO) | 55,452 | 765,000 | 820,452 | | Zhihua Yang (Former CEO) | 43,947 | — | 43,947 | | Jing Wang (Former CFO) | 21,915 | — | 21,915 | - In 2021, 61,065 stock options were exercised, and the remaining 39,825 unexercised options expired, with no new options granted[573][671] - The company does not offer pension or retirement benefits, other than legally required contributions to the PRC's social security fund for its employees there[672] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section outlines equity compensation plans, including the 2015 Incentive Stock Plan with 41,832 shares available, and beneficial ownership, with Jian Xiao and CEDE & CO as major holders - The company's 2015 Incentive Stock Plan was amended to authorize 2,703,745 shares, and as of the report date, 41,832 shares were available for future issuance[684] Security Ownership of Major Beneficial Owners (as of March 29, 2022) | Beneficial Owner | Number of Shares Beneficially Owned | Percentage Ownership | | :--- | :--- | :--- | | Jian Xiao | 3,000,000 | 20.873% | | CEDE & CO | 9,088,682 | 63.237% | | Kwok leung (Paul) Li (CEO) | 150,000 | 1.044% | | All Officers and Directors (as a group) | <1% | * | Certain Relationships and Related Transactions, and Director Independence The company discloses several related party transactions, including reciprocal interest-free loans, with the Board of Directors, comprising three independent directors, responsible for their review and approval - The Board of Directors has determined that Doug Buerger, Tak Ching (Anthony) Poon, and Ronggang (Jonathan) Zhang are independent directors under NYSE and SEC rules[696] - Hong Kong Takung had an interest-free loan payable of ~$6.4 million, while Tianjin Takung had an interest-free loan receivable of ~$6.2 million with the same related party (Jing Wang, former CFO), structured to be repaid simultaneously[697][698][699] Principal Accountant Fees and Services The company changed its independent auditor to WWC, P.C. on March 1, 2021, with audit fees detailed for both 2020 and 2021, and all services pre-approved by the Board Audit Fees | Fiscal Year | Auditor | Fees Incurred | | :--- | :--- | :--- | | 2021 | WWC, P.C. | ~$230,000 | | 2020 | WWC, P.C. | ~$150,000 | | 2020 | Marcum BP (Former) | ~$99,000 | - The company appointed WWC, P.C. as its new independent auditor on March 1, 2021, replacing Marcum Bernstein & Pinchuk LLP[704] PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, the 2015 Incentive Share Plan, and CEO/CFO certifications - Key exhibits filed include the Certificate of Incorporation (3.1), Bylaws (3.2), 2015 Incentive Share Plan (4.1), various Securities Purchase Agreements related to recent financing and investments (10.19, 10.20, 10.24, 10.25), a list of subsidiaries (21.1), consent of the auditor (23.1), and CEO/CFO certifications (31.1, 31.2, 32.1)[711][712]