The accompanying notes are an integral part of
these consolidated financial statements
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars except Number of Shares)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art
Co., Ltd and Subsidiaries (“Takung”, “Company”), a Delaware corporation (formerly Cardigant Medical Inc.) through
Hong Kong Takung Art Company Limited (“Hong Kong Takung”), a Hong Kong company and its wholly owned subsidiary, operates an
electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong
Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading
artwork. The Company generates revenue from its services in connection with the offering and trading of artwork on its system, primarily
consisting of listing fees, trading commissions, and management fees. The Company conducts business primarily in Hong Kong, People’s
Republic of China.
Takung (Shanghai)
Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the
Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent
company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung.
Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Takung Cultural Development
(Tianjin) Co., Ltd.
Takung Cultural
Development (Tianjin) Co., Ltd (“Tianjin Takung”) provides technology development services to Hong Kong Takung and also carries
out marketing and promotion activities in mainland China. It is engaged in providing services to its parent company Hong Kong Takung by
receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung when Shanghai Takung was deregistered.
On November 8, 2021, the Management became aware of the suspension of the operation of Tianjin Takung by the local authority.
Hong Kong
Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding
company to control an online platform for offering, selling and trading whole piece of artwork. Takung Art Holdings was deregistered on
April 29, 2020 due to deregistration of its wholly-owned subsidiary, Art Era Internet Technology (Tianjin) Co., Ltd., on June 18, 2019.
Hong Kong
MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018, and is engaged in blockchain and non-fungible
tokens (“NFT”) businesses, including consultancy service for NFT launch projects, developing its own NFT marketplace to facilitate
users to buy and sell NFTs, as well as development of block chain-based online games. On June 19, 2019, as a result of a private transaction, one (1)
share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as
of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share
capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin)
Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is
a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located
in the Pilot Free Trade Zone in Tianjin. Tianjin MQ focused on exploring business opportunities and promoting its artwork trading business.
Tianjin MQ was deregistered on August 10, 2020 due to the Company streamlining its operation.
NFT
Digitial Technology Limited (“NFT Digital”) was incorporated
in Albany, New York on December 13, 2021 and is a wholly-owned subsidiary of Takung. This entity primarily provides administrative and
technical supports for the development of NFT projects.
NFT
Exchange Limited (“NFT Exchange”) was incorporated in Wyoming on January 7, 2022 and is wholly owned by Takung. This entity
facilitates the business and operation of the new NFT exchange market.
Metaverse
Digital Payment Co., Limited (“Metaverse Digital Payment”) was formed in Hong Kong on January 27, 2022, and is wholly owned
by NFT Exchange. This entity is engaged in digital payment service.
Cultural Objects Provenance Holdings Limited
Cultural
Objects Provenance Holdings Limited is an investment holding company. Its wholly-owned subsidiary is headquartered in Hong Kong, with
global outposts in China (Shenzhen), Europe (Germany), and USA (NY/LA). It is an artwork authentication platform powered by blockchain.
According to company home page, the subsidiary is the official technology partner for NANZUKA Gallery in Tokyo, Japan. It authenticated
some sought-after editions and limited edition works from some of the world’s most prolific artists, including Hajime Sorayama,
Javier Calleja, Daniel Arsham, James Jarvis, and more.
On May
28, 2021, Takung entered into a Securities Purchase Agreement (the “SPA”) with Cultural Objects Provenance Holdings Limited
(“Cultural Objects”), a British Virgin Islands company with a wholly-owned subsidiary in Hong Kong engaging in an operation
of an artwork authentication platform powered by blockchain with global presence in China, Germany and the United States. Takung shall
invest in Cultural Objects through paying certain purchase consideration that consists of cash consideration, $500,000 and issuance
of 282,000 shares of common stock of Takung in exchange for 54,100 shares of common stock of Cultural Objects and 290,000 unvested
restricted shares of common stock of Takung to Cultural Objects in exchange for 32,460 unvested shares of common stock of Cultural
Objects.
On
August 21, 2021, Takung and Cultural Objects entered to an amendment to the SPA. The amendment provides that the original purchase
price was amended to be $500,000 in cash and the issuance of 771,040 restricted shares of common stock of Takung to Cultural
Objects in exchange for 54,100 shares of common stock of Cultural Objects, and, subject to the satisfaction of the conditions
stipulated in the SPA, the issuance of 787,440 unvested restricted shares of common stock of Takung to Cultural Objects in exchange
for 32,460 unvested shares of common stock of Cultural Objects. The cash consideration of $500,000 was paid to Cultural
Objects by the end of August 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted shares of common stock
of Takung issued to Cultural Objects in an exchange for an aggregate 86,560 shares of common stock of Cultural Objects. Together
with the cash consideration paid $500,000 and the total value of the restricted shares issued to Cultural Objects, $10,130,120, the
total value of the investment in Cultural Objects was $10,630,120. As of December 31, 2022 the initial cost of this investment was
adjusted to $0 after a further impairment charge, $9,296,614 was recorded (see Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been
prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”).
This basis of accounting involves the application
of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.
The Company’s financial statements are expressed in U.S. dollars.
Use of estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and
expenses during the reporting periods. Actual results could differ materially from those results.
Basis of consolidation
The consolidated financial statements include
the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Hong Kong MQ and Tianjin MQ, NFT exchange, NFT Digital,
and Metaverse Digital Payment. All intercompany transactions and balances have been eliminated on consolidation.
Discontinued operations
The Company has adopted ASC Topic 205 “Presentation
of Financial Statements” Subtopic 20-45, in determining whether any of its business component(s) classified as held for sale, disposed
of by sale or other than by sale is required to be reported in discontinued operations. In accordance with ASC Topic 205-20-45-1, a discontinued
operation may include a component of an entity or a group of components of an entity, or a business or non-profit activity. A disposal
of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of
the following occurs: (1) the component of an entity or group of components of an entity meets the criteria to be classified as held for
sale; (2) the component of an entity or group of components of an entity is disposed of by sale; (3) the component of an entity or group
of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).
For the component disposed of other than by sale
in accordance with paragraph 360-10-45-15, the Company adopted ASC Topic 205-20-45-3 and reported the results of operations of the discontinued
operations, less applicable income tax expenses or benefits as a separate component in in the statement where net income (loss) is reported
for current and all prior periods presented. Due to the suspension of the operation of Tianjin Takung by the local authority in the fourth
quarter of 2021, Hong Kong Takung lost its control over Tianjin Takung. The Company plans to dispose Hong Kong Takung, and is actively
locating buyers for Hong Kong Takung and related operations in order to focus on its blockchain and NFT business operation.
As of December 31 2022, only the operation
of Hong Kong Takung was classified as a discontinued operation the same as of December 31, 2021.
Deconsolidation
Under the ASC Subtopic 810-10-40, “Consolidation-Overall-Derecognition”,
a reporting entity will deconsolidate a subsidiary in the period when the loss of control over such subsidiary incurred as a result of
one or more of the following events: (i) a parent sells all or part of its ownership interest in its subsidiary; (ii) the expiration of
a contractual agreement that gave control of the subsidiary to the parent; (iii) the subsidiary issues shares which reduces the parent’s
ownership interest in the subsidiary to an extent that the parent no longer has a controlling financial interest in such subsidiary; (iv)
the subsidiary becomes subject to the control of a government, court, administrator, or regulator. Upon deconsolidation, the reporting
entity would no longer include the subsidiary’s assets, liabilities and results of operations in its consolidated financial statements.
Due to the suspension of the operation of Tianjin Takung by the local authority, the loss of control over Tianjin Takung was resulted.
The financial information of Tianjin Takung was deconsolidated for the year ended December 31, 2021.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation in order to reflect the deconsolidation of Tianjin
Takung. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.
Fair value measurements
The Company applies the provisions of ASC Subtopic
820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and
for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. ASC
820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair
value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC
820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
● |
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
● |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
|
|
|
|
● |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
There
were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December
31, 2022 and 2021.
Comprehensive loss
The
Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose financial statements. For the years ended December 31,
2022 and 2021, the Company’s comprehensive loss includes net loss and foreign currency translation adjustment.
Foreign currency translation and transaction
The functional
currency of Metaverse Digital Payment, Hong Kong Takung, Hong Kong MQ and Tianjin Takung are in Hong Kong Dollar (“HKD”);
NFT Digital and NFT Exchange are in United States Dollar (“USD”)
The reporting
currency of the Company is USD.
Transactions
in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction.
At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end
of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at
period-end are included in income statement of the period.
For
the purpose of presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed
in USD at the exchange rate on the balance sheet’s dates, which is 7.8015 and 7.7996 as of December 31, 2022
and December 31, 2021, respectively;
The resulting
translation adjustments are reported under accumulated other comprehensive loss in the stockholders’ equity section of the balance
sheets.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand,
cash in bank with no restrictions, as well as highly liquid investments which are unrestricted as to withdrawal or use, and which have
original maturities of three months or less when initially purchased.
A significant portion of the Company’s cash
and cash equivalents is denominated in RMB, and deposited in the financial institutions of China. Chinese governmental policies were introduced
in 1996 to allow the convertibility of RMB denominated cash into foreign currencies for current account items, but conversion of RMB denominated
cash into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval
of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currencies
to fund the business activities outside China, or to repay non-RMB denominated obligations.
Restricted cash
Restricted cash represents the cash deposited
by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”)
in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred to the broker’s
account before the trading take place. Upon the delivery of the shares, the seller will send instructions to the bank, requesting the
amount to be transferred to their personal account. After deducting the commission as per Takung, the bank will transfer the remainder
to the seller’s personal account. Except for instructing the bank to deduct the commission fee, Takung has no right to use any funds
in the broker’s account except for instructing the bank to deduct the commission and management fee. Our restricted cash is denominated
in USD and is deposited in the financial institutions of USA.
Due
to the deconsolidation of Tianjin Takung, the ending balance of our restricted cash totaling $58,254,521 and $52,215,458 as of December
31, 2022 and 2021, respectively, was not included in our consolidated financial statements and reclassified to current assets –
a deconsolidated entity.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable are recorded and carried at
the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates for the allowance
for doubtful accounts based upon the assessment of various factors, including historical, experience, the age of the accounts receivable
balances, credit quality of the customers, current economic conditions, and other factors that may affect customers’ ability to
pay.
Loan receivable
Loan to third parties
is presented under current asset of the balance sheets based on the nature and loan period of time.
Prepayment and other current assets, net
Prepayment and other current assets mainly consist
of the prepayment for income taxes, maintenance of online trading system, advertising and promotional services, insurances, financial
advisory, professional services, rental deposits, as well as other current assets.
Other non-current assets
A portion of the deposits, are presented under
the non-current section of the balance sheets based on the expected collection date.
Property and equipment, net
Property and equipment are stated at cost less
accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income
or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred. Depreciation
and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are
placed in service.
The Company developed systems and solutions for
internal use. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. Unamortized capitalized
costs are included in computer trading and clearing system, within property and equipment, net in the Consolidated Balance Sheets. Capitalized
software costs are amortized on a straight-line basis over the estimated useful lives of the software of 5 years. Amortization of these
costs is included in depreciation and amortization expense in the Consolidated Statements of Operations.
Estimated useful lives are as follows, taking
into account the assets’ estimated residual value:
Classification | |
Estimated useful life |
Furniture, fixtures and equipment | |
5 years |
Leasehold improvements | |
Shorter of the remaining lease terms and the estimated 3 years |
Computer trading and clearing system | |
5 years |
Long-lived assets
The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these
events occur, the Company assesses the recoverability of these long-lived assets by comparing the carrying amount of the assets to the
future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted
cash flow is less than the carrying amount of the assets, the Company recognizes an impairment equal to the difference between the carrying
amount and fair value of these assets.
During 2022, we did not record any asset impairments
due to the deconsolidation of Tianjin Takung as a result of the loss of control in this entity.
Intangible assets
Intangible assets represent the licensing cost
for the trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at
least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. For
intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company
has not recorded impairment of intangible assets as of December 31, 2022 and 2021.
Customer deposits
Customer deposits represent the cash deposited
by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”)
in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s
account before the trading take place.
Advance from customers
Advance from customers represent the cash deposited
by the traders into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading
ownership units of the NFT. The traders are required to have their funds transferred to the broker’s account before the trading
take place.
Revenue Recognition
The Company generates revenue from its services
in connection with the offering and trading of artworks on the Company’s system, primarily consisting of listing fee, trading commission,
and management fee.
Effective January 1, 2018, the Company adopted
Topic 606 using modified retrospective approach applied to its contracts which were not completed as of January 1, 2018. Results for reporting
periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with Topic 605.
Under ASC 606, an entity recognizes revenue as
the Company satisfies a performance obligation when its customer obtains control of promised goods or services, in an amount that reflects
the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with
a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable
consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it
is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers
to the customer.
The Company recognizes revenue when control of
the promised services is transferred to the traders and service agents. Revenue is measured at the transaction price, which is based on
the amount of consideration that the Company expects to receive in exchange for transferring the promised services to the traders and
service agents. The revenue mainly falls into the following broad categories: (i) listing fee, (ii) commission, and (iii) management
fee.
Listing fee
The Company recognizes the listing fee revenue
at a point in time when the ownership units of the artwork are listed and available for trading on the Company’s system, at an amount
of an agreed percentage of the total offering price. The amount is collected from the money raised from the issuance of such units.
Commission
The Company generates commission fee from non-VIP
traders and selected traders.
For non-VIP traders, the commission is calculated
based on a percentage of transaction value of artworks when there is purchase and sale of the ownership shares of the artworks. The
commission revenue is recognized at a point in time when each purchase and sale transaction is completed.
For selected traders, starting from April 1,
2016, the Company charged a predetermined monthly commission fee which allows the selected traders to conduct unlimited trades for specific
artworks. The commission revenue is recognized on a monthly basis as the Company continuously satisfied its performance obligation.
Management fee
The Company provides third-party merchants the
access to Takung’s online platform for sales of artworks, and charges commission fee to third-party merchants, at an amount of an
agreed percentage of the total transaction price. The revenue is recognized at a point in time when the artwork sales transaction is completed.
Consultancy service fee revenue
In the year of 2021, we recorded a consultancy
service fee revenue, $120,000, which was pertinent to providing consultancy services with respect to the strategic utilization of blockchain
technology and NFT launch to a third party.
Revenue by customer type
The following table presents the revenue by customer
type for the years ended December 31, 2022 and 2021:
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | |
Artwork owners | |
$ | - | | |
$ | 876,658 | |
Non - VIP traders | |
| 3,403,536 | | |
| 2,110,492 | |
VIP traders | |
| - | | |
| 1,461,038 | |
Corporate advise | |
| - | | |
| 120,000 | |
Subtotal | |
| 3,403,536 | | |
| 4,568,188 | |
Less: Revenue - discontinued operations | |
| - | | |
| (4,448,188 | ) |
Total | |
$ | 3,403,536 | | |
$ | 120,000 | |
Cost of revenue
The Company’s cost of revenue primarily
consists of expenses associated with the delivery of its service. These include expenses related to the operation of the data centers,
such as facility and lease of the server equipment, development and maintenance of the platform system, as well as the cost of insurance,
storage and transportation of the artworks. Cost of revenue also includes commission paid to service agent.
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | |
Commission paid to service agents | |
$ | - | | |
$ | 1,099,540 | |
Depreciation | |
| - | | |
| 114,215 | |
Internet service charge | |
| 782,790 | | |
| 47,696 | |
Artwork insurance | |
| - | | |
| 50,878 | |
Artwork storage | |
| - | | |
| 47,096 | |
Subtotal | |
| 782,790 | | |
| 1,359,425 | |
Less: Cost of revenue – discontinued operations | |
| - | | |
| (1,359,425 | ) |
Total | |
$ | 782,790 | | |
$ | - | |
The Company has elected to apply the practical
expedient in ASC 606-10 and does not disclose information about remaining performance obligations that have original expected durations
of one year or less.
The Company does not have amounts of contract
assets that it has right to consideration in exchange for services that the Company has transferred to customers when that right is conditioned
on something other than the passage of time. The contract liabilities are the Company’s obligation to transfer services to traders
for which the Company has received consideration from the traders. All contract liabilities are expected to be recognized as revenue within
one month and are presented in Advance from Customers in the Consolidated Balance Sheet.
Leases
In February 2016, the FASB issued ASU 2016-12,
Leases (ASC Topic 842), which amends the leases requirements in ASC Topic 840, Leases. Under the new lease accounting standard, a lessee
will be required to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The new standard also modifies
the classification criteria and accounting for sales-type and direct financing leases, and enhances the disclosure requirements. Leases
will continue to be classified as either finance or operating leases.
The Company determines if an arrangement is a
lease at inception. The lease payments under the lease arrangements are fixed. Non-lease components include payments for building management,
utilities and property tax. It separates the non-lease components from the lease components to which they relate.
Lease assets and liabilities are recognized at
the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of
the future lease payments is the Company’s incremental borrowing rate, because the interest rate implicit in the leases is not readily
determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms
and payments, and in economic environments where the leased asset is located. The lease terms include periods under options to extend
or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally uses the base,
non-cancelable, lease term when determining the lease assets and liabilities.
Income taxes
The Company accounts for income taxes using an
asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization
of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire
before the Company is able to realize their benefits, or that future deductibility is uncertain.
Under ASC 740, a tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not
that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical
merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount
of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense
in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosures and transition.
On December 22, 2017, the Tax Cuts and Jobs
Act (the “Tax Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including
the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31,
2017. Certain activities conducted in foreign jurisdictions may result in the imposition of U.S. corporate income taxes on Takung when
its subsidiaries, controlled foreign corporations (“CFCs”), generate income that is subject to Subpart F or GILTI under the
U.S. Internal Revenue Code beginning after December 31, 2017.
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 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified
improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively
as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements
as of December 31, 2020 due to the recent enactment.
The Company accounts for an unrecognized tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax
authorities. The Company considers and estimates interest and penalties related to the gross unrecognized tax benefits and includes as
part of its income tax provision based on the applicable income tax regulations.
The
Company’s Hong Kong subsidiary of Metaverse Digital Payment Co., Limited accrued US$255,805 corporate income tax for the year ended
December 31,2022.
The Company did not accrue any liability, interest
or penalties related to uncertain tax positions in the provision for income taxes line of the consolidated statements of operations for
the year ended December 31, 2021.
Earnings (loss) per share
Basic
net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted-average number of shares of common stock
outstanding during the year. Diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders
by the weighted-average number of shares of common stock outstanding during the period adjusted to include the effect of potentially
dilutive securities. Potentially dilutive securities are excluded from the computation of dilutive EPS in periods in which the effect
would be antidilutive (Note 15).
Concentration of risks
Concentration of credit risk
Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, account receivables. The
carrying values of the financial instruments approximate their fair values due to their short-term maturities. The Company places its
cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Account receivables primarily
comprise of amounts receivable from the trader customers. With respect to the prepayment to service suppliers, the Company performs on-going
credit evaluations of the financial condition of these suppliers. The Company establishes an allowance for doubtful accounts based upon
estimates, factors surrounding the credit risk of specific service providers and other information.
Concentration of customers
There were no revenues from customers that individually
represent greater than 10% of the total revenues during the years ended December 31, 2022 and 2021.
Concentration of customer deposits
As of December 31, 2022 and 2021, there were
no traders that individually accounted for greater than 10% of the Company’s total customer deposits.
Accounting pronouncements issued but not yet adopted
Financial Instruments - Credit Losses:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.
The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured
either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected
credit loss, which will be more decision useful to users of the financial statements. In November 2019, FASB issued ASU 2019-10, “Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the
effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard
in the first quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13
on its consolidated financial statements, particularly its recognition of allowances for accounts receivable.
The Company does not believe other recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position,
statements of operations and cash flows.
3. GOING CONCERN
Due
to the recent regulatory scrutiny by PRC governments on digital asset related business, the artwork unit trading platform operated by
the PRC subsidiary Tianjin Takung was suspended by the local authority. The Management became aware of the suspension on or around November
8, 2021. The local authority indicated the suspension was to facilitate certain investigation although it did not announce the purpose
of the investigation. The Company intends to fully cooperate with the local authority’s investigation.
The Company has accrued a compensation amount
of RMB 408,411 for the year ended December 31, 2022 arising from three settled cases and nine pending cases; none of the pending cases
have received any outcome as at April 17, 2023.
In the event that the suspension carries on for
a substantial period of time or the investigation results in unfavourable outcome, the Company is subject to various risks, including,
but not limited to, permanent discontinuation of the artwork unit trading platform business, material loss of Tianjin Takung’s
carrying assets, material impact to the Company’s financial performance and liquidity, and being involved in litigation.
The carrying value of the assets and liabilities
of Tianjin Takung whose operation was suspended as disclosed above which were deconsolidated from the accompanying consolidated financial
statements, is both $68,502,804 and $69,455,570 and as of December 31, 2021 and 2022.
Management has assessed the Company’s ability
to continue as a going concern in accordance with the requirements of ASC 205-40 and, based on the above factors, the management has concluded
that there is substantial doubt about its ability to continue as a going concern within one year from the issuance date of the Company’s
consolidated financial statements. Management’s plan to alleviate the going concern risk includes, but not limited to, (1) equity
or debt financing, (2) increasing cash generated from new business model operations, and (3) financing from domestic banks and other financial
institutions. The management of the Company has made the following plans to mitigate these adverse conditions and to increase the liquidity
of the Company.
Management’s Plan
Private Investment in Public Equity (“PIPE”)
Transaction
The Company entered into certain securities purchase
agreement on February 23, 2022 (the “SPA”) with certain non-affiliated and accredited “non-U.S. Persons”, (the
“Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”), pursuant
to which the Company agreed to sell 11,952,190 units, each consisting of one share of Common Stock (the “Shares”) and a warrant
(the “Warrant”) to purchase three Shares.
On March 9, 2022, the Company and the Purchasers
agreed to amend and restate the SPA (the “A&R SPA”) to amend the number of units sold, per unit purchase price, and the
terms of the warrants underlying the units. Pursuant to the terms of the A&R SPA, the Company agreed to sell 10,238,910 units (the
“Units”), each Unit consisting of one Share and a Warrant to purchase three Shares with a purchase price per Unit of $2.93.
On April 14, 2022, the transaction contemplated
by the A&R SPA closed. The gross proceeds to the Company from this offering were approximately $30 million.
On June
27, 2022, Takung Art Co., Ltd., a Delaware corporation (the “Company”) entered into certain securities purchase
agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined
in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to which the Company agreed
to sell 15,789,474 units, each consisting of one share of the common stock of the Company, par value $0.001 per share (the “Common
Stock”) and a warrant to purchase two shares of Common Stock. The purchase price of each Unit is $1.9. The gross proceeds to
the Company from this offering will be approximately $30 million.
New Business Model Operations
The Company plans to further develop its operations
of blockchain and NFT related businesses, including consultancy services, development of NFT marketplace and “Play-to-Earn”
style blockchain-based online games. “Play to Earn” is essentially a business model powered by blockchain technology, where
players can acquire in-game assets or token ownership by recharging and playing games.
Meanwhile, the Company is actively seeking other
strategic partners with resources that can expand its blockchain and NFT businesses.
The Company has recruited a global management
team and technology research and development team to develop new products and new business directions that combine education and technology
to provide online service in Metaverse. In order to diversify the political and legal risks result from the scrutiny from the PRC regulations
in regard with the digital assets, the Company has also decided to expand its business outside China, such as United States and Canada.
The Company has set up the new corporate structure
for its new business stream as follows:
4. INVESTMENTS
We adopted ASU 2016-01 on January 1, 2018. This
guidance requires us to measure all equity investments that are not accounted for under the equity method or result in consolidation at
fair value and recognize any changes in net income. For equity investments with readily determinable and observable fair values,
we use quoted market prices to determine the fair value of equity securities. For equity investments without readily determinable
fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same
issuer.
Equity investments with readily determinable fair
values that are not accounted for under the equity method classified as trading are not assessed for impairment, since they are carried
at fair value with the change in fair value included in net income. Similarly, prior to the adoption of ASU 2016-01, equity investment
classified as trading was not tested for impairment.
Equity investments without readily determinable
fair values are reviewed each reporting period to determine whether a significant event or change in circumstances has occurred that may
have an adverse effect on the fair value of each investment. When such events or changes occur, we assess the fair value compared to our
cost basis in the investment. We also perform this assessment every reporting period for each investment for which our cost basis has
exceeded the fair value.
For investments in privately-held companies, management’s
assessment of fair value is based on valuation methodologies such as discounted cash flows, estimates of revenue and appraisals, as applicable.
We consider and apply the assumptions that we believe market participants would use in evaluating estimated future cash flows when utilizing
the discounted cash flow or estimates of revenue valuation methodologies. In the event the fair value of an investment declines
below our cost basis, management determines if the decline in fair value is other than temporary and records an impairment accordingly.
As of December 31, 2022, our investment merely
includes a non-marketable investment in a privately held company incorporated in British Virgin Islands without readily determinable market
values. We elected the measurement alternative under which we measured the investment at cost minus impairment with an adjustment to the
changes from observable price changes in orderly transactions for the similar investments of the same issuer.
Management determined that the future undiscounted
cash flow was less than the carrying cost of our non-marketable investment and recognized an impairment charge, $9,296,614, against our
non-marketable investment.
The carrying value is measured as the total initial
cost minus impairment. The carrying value for our non-marketable investment is nil and summarized below:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Total initial cost | |
$ | 10,630,120 | | |
$ | 10,630,120 | |
Cumulative net gain (loss) | |
| | | |
| — | |
Provision for impairment | |
| (10,630,120 | ) | |
| (1,333,506 | ) |
Total carrying value | |
$ | - | | |
$ | 9,296,614 | |
For the year ended December 31, 2022, we incurred
provision for impairment for $10,630,120. For the year ended December 31, 2021, we did not incur any unrealized gain or loss in connection
with the non-marketable investment and we incur provision for impairment for $1,333,506.
5. PREPAYMENT AND OTHER CURRENT ASSETS,
NET
Prepayment and other
current assets mainly consist of the prepaid tax, the prepaid services for maintenance of online trading system, the advertising and promotional
services, prepaid financial advisory and banking services, as well as other current assets.
|
|
December 31,
2022 |
|
|
December 31,
2021 |
|
Prepaid service fees |
|
$ |
- |
|
|
$ |
196,497 |
|
Deposit |
|
|
5,557 |
|
|
|
5,557 |
|
Other current assets |
|
|
- |
|
|
|
2,791 |
|
Less: allowance for doubtful accounts |
|
|
- |
|
|
|
- |
|
Subtotal |
|
|
5,557 |
|
|
|
204,845 |
|
Less: Prepayment and other current assets, net – discontinued operations |
|
|
- |
|
|
|
(34,937 |
) |
Prepayment and other current assets, net |
|
$ |
5,557 |
|
|
$ |
169,908 |
|
For
the years ended December 31, 2022 and 2021, the Company did not incur provision for doubtful accounts.
6. ACCOUNT RECEIVABLES, NET
Account receivables consisted of the following:
| |
December 31, 2022 | | |
December 31, 2021 | |
Listing fee | |
$ | - | | |
$ | 154,771 | |
Consultancy service | |
| 94,918 | | |
| 120,000 | |
Less: allowance for doubtful accounts | |
| (8,484 | ) | |
| (154,771 | ) |
Subtotal | |
| 86,434 | | |
| 120,000 | |
Less: Accounts receivables, net- discontinued operations | |
| - | | |
| - | |
Account receivables, net | |
$ | 86,434 | | |
$ | 120,000 | |
For
the year ended December 31, 2022 and 2021, we recognized $8,484 and $154,771, respectively, in provision for doubtful accounts.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| |
December 31, 2022 | | |
December 31, 2021 | |
Furniture, fixtures and equipment | |
$ | 63,376 | | |
$ | 63,392 | |
Leasehold improvements | |
| 23,072 | | |
| 23,078 | |
Computer trading and clearing system | |
| 2,430,445 | | |
| 2,429,883 | |
Sub-total | |
| 2,516,893 | | |
| 2,516,353 | |
Less: accumulated depreciation | |
| (2,496,135 | ) | |
| (2,428,936 | ) |
Subtotal | |
| 20,758 | | |
| 87,417 | |
Less: Property and equipment, net – discontinued operations | |
| (15,276 | ) | |
| (80,534 | ) |
Property and equipment, net | |
$ | 5,482 | | |
$ | 6,883 | |
8. INTANGIBLE ASSETS
| |
December 31, 2022 | | |
December 31, 2021 | |
Intangible assets | |
$ | 22,226 | | |
$ | 22,372 | |
Less: accumulated amortization | |
| - | | |
| - | |
Subtotal | |
| 22,226 | | |
| 22,372 | |
Less: Intangible assets – discontinued operations | |
| (22,226 | ) | |
| (22,232 | ) |
Total Intangible assets | |
$ | - | | |
$ | 140 | |
9. OTHER NON-CURRENT ASSETS
Other
non-current assets as of December 31, 2022 and 2021 consisted of:
| |
December 31, 2022 | | |
December 31, 2021 | |
Deposit – non-current | |
$ | 18,391 | | |
$ | 18,396 | |
Prepayment – non-current | |
| - | | |
| - | |
Subtotal | |
| 18,391 | | |
| 18,396 | |
Less: Other non-current assets – discontinued operations | |
| (18,391 | ) | |
| (18,396 | ) |
Total other non-current assets | |
$ | - | | |
$ | - | |
10. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables as of December 31, 2022 and 2021 consisted
of:
|
|
December 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accruals for consulting fees |
|
$ |
406,152 |
|
|
$ |
266,304 |
|
Accruals for professional fees |
|
|
- |
|
|
|
90,642 |
|
Payroll payables |
|
|
451,800 |
|
|
|
55,964 |
|
Trading and clearing system |
|
|
- |
|
|
|
2,364 |
|
Other payables |
|
|
1,273,939 |
|
|
|
1,546 |
|
Subtotal |
|
|
2,131,891 |
|
|
|
416,820 |
|
Less: Accrued expenses and other payables- discontinued operations |
|
|
- |
|
|
|
(273,391 |
) |
Total accrued expenses and other payables |
|
$ |
2,131,891 |
|
|
$ |
143,429 |
|
11. SHORT-TERM
BORROWINGS FROM A THIRD PARTY
In
July 2019, Hong Kong Takung entered into HKD Loans with Friend Sourcing Ltd (“Friend Sourcing”) with
interest accruing at a rate of 8% per annum. The HKD Loans are to provide Hong Kong Takung with sufficient HKD currency to meet
its working capital requirements. Friend Sourcing is a non-related party to the Company. On April 1, 2021, Hong Kong Takung extended
the due date of the HKD Loans with Friend Sourcing to July 30, 2021. On August 1, 2021, Hong Kong Takung further extended the
financing with Friend Souring to April 1, 2022. An interest payment, $86,795, was made on October 22, 2021.
Date | |
Borrower | |
Lender | |
December 31, 2022 (RMB) | | |
December 31, 2022 (HKD) | | |
Annual Interest Rate | | |
Repayment Due Date | |
7/18/2019 | |
Hong Kong Takung | |
Friend Sourcing Ltd. | |
$ | 5,000,000 | | |
$ | 5,567,929 | | |
| 8 | % | |
| 4/1/2021 | |
8/29/2019 | |
Hong Kong Takung | |
Friend Sourcing Ltd. | |
$ | 5,000,000 | | |
$ | 5,422,993 | | |
| 8 | % | |
| 4/1/2021 | |
9/20/2019 | |
Hong Kong Takung | |
Friend Sourcing Ltd. | |
$ | 4,000,000 | | |
$ | 4,338,395 | | |
| 8 | % | |
| 4/1/2021 | |
| |
| |
Less: Discount loan payable | |
$ | - | | |
$ | - | | |
| | | |
| | |
| |
| |
| |
| 14,000,000 | | |
| 15,329,317 | | |
| | | |
| | |
| |
| |
Less: Short-term borrowings from third party- discontinued operations: | |
| (14,000,000 | ) | |
| (15,329,317 | ) | |
| | | |
| | |
| |
| |
| |
| | | |
| | | |
| | | |
| | |
| |
| |
Total | |
$ | - | | |
$ | - | | |
| | | |
| | |
The weighted
average interest rate of outstanding short-term borrowings was 8% per annum as of December 31, 2022 and 2021. The fair value
of the short-term borrowings approximates their carrying amounts.
Borrower | |
Account Name | |
Lender | |
Total | | |
Effective Day | |
Due Day |
NFT Exchange Limited | |
Loan payable | |
Guohui Li | |
| 250,000.00 | | |
2022/4/11 | |
2023/4/10 |
NFT Exchange Limited | |
Loan payable | |
Guohui Li | |
| 500,000.00 | | |
2022/4/27 | |
2023/4/26 |
NFT Exchange Limited | |
Loan payable | |
Guohui Li | |
| 500,000.00 | | |
2022/8/29 | |
2023/8/28 |
NFT Exchange Limited | |
Loan payable | |
Guohui Li | |
| 300,000.00 | | |
2022/2/16 | |
2023/2/15 |
Total | |
| |
| |
| 1,550,000.00 | | |
| |
|
The
third party by the name of Guohui Li has lent NFT Exchange Limited for the amount of $1,550,000.00.
12. INCOME TAXES
Takung was incorporated in the State of Delaware and is therefore subject
to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s
Republic of China and are subject to Hong Kong profits tax.
United States of America
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 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified
improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively
as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements
as of December 31, 2020 due to the recent enactment.
As of December 31, 2022 and 2021, the Company in the United States
had $11,935,256 and $1,454,286 in net operating loss carry forwards available to offset future taxable income, respectively. For net operating
losses arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable
income and carryforward the NOL indefinitely. NOLs generated prior to January 1, 2018 will not be subject to the taxable income limitation
and will begin to expire in 2033 if not utilized.
Hong Kong
Two-tier Profits Tax Rates
The two-tier profits tax rates system was introduced
under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment
year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,311)
of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject
to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for
the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both
of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity
being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship
business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities
are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier
profits tax rates on its profits tax return. The election is irrevocable. The Company elected Hong Kong Takung to be subject to the two-tier
profits tax rates.
The provision for current income and deferred
taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Takung Art Holdings and Hong Kong MQ still apply
the original tax rate of 16.5% for its provision for current income and deferred taxes.
As of December 31, 2022 and 2021, the Company’s subsidiaries
in Hong Kong had nil and $6,194,177 in net operating loss carry forwards available to offset future taxable income, respectively. These
net operating losses will be carryforward indefinitely under Hong Kong Profits Tax regulation.
PRC
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, 2022 and 2021.
According to PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the
year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted.
The income tax expense was $255,805 and $512,395
for the years ended December 31, 2022 and 2021, respectively, related primarily to the Company’s subsidiaries located outside
of the U.S. The loss before provision for income taxes for the years ended December 31, 2022 and 2021 was as follows:
The income tax provision consists of the following
components:
| |
For the year ended December 31, 2022 | | |
For the year ended December 31, 2021 | |
Current: | |
| | |
| |
Federal | |
$ | - | | |
$ | - | |
State | |
| - | | |
| - | |
Foreign | |
| 255,805 | | |
| - | |
Total current income tax expenses, continuing operations | |
| 255,805 | | |
| - | |
Current income tax expenses, discontinued operations | |
| - | | |
| - | |
Total current | |
$ | 255,805 | | |
$ | - | |
| |
| | | |
| | |
Deferred: | |
| | | |
| | |
Federal | |
$ | - | | |
$ | - | |
State | |
| - | | |
| - | |
Foreign | |
| - | | |
| - | |
Total deferred income tax expenses, continuing operations | |
| - | | |
| - | |
Deferred income tax expenses, discontinued operations | |
| - | | |
| 512,395 | |
Total deferred | |
$ | - | | |
$ | 512,395 | |
Total income tax expense | |
$ | 255,805 | | |
$ | 512,395 | |
A reconciliation between the Company’s actual
provision for income taxes is as follow:
Continuing operations
The effective tax rate for the continuing
operations was (2.6)% and 0.0%for the years ended December 31, 2022 and 2021, respectively.
| |
For the year ended December 31,
2022 | | |
For the year ended December 31,
2021 | |
Loss before income tax expense | |
$ | (9,775,632 | ) | |
$ | (13,447,956 | ) |
Computed tax benefit with statutory tax rate | |
| (483,828 | ) | |
| (2,824,071 | ) |
Impact of different tax rates in other jurisdictions | |
| (96,669 | ) | |
| (1,384 | ) |
Tax effect of non-deductible expenses | |
| - | | |
| 775 | |
Changes in valuation allowance | |
| 836,302 | | |
| 2,920,437 | |
Previous years unrecognized tax effects | |
| - | | |
| (95,757 | ) |
Total income tax expense | |
$ | 255,805 | | |
$ | - | |
Discontinued operations
The effective tax rate for the discontinued operations was 0.0% and
(3.2)% for the years ended December 31, 2022 and 2021, respectively.
| |
For the year ended December 31,
2022 | | |
For the year ended December 31,
2021 | |
Loss before
income tax expense | |
$ | (322,075 | ) | |
$ | (16,113,160 | ) |
Computed tax benefit with statutory tax rate | |
| (67,636 | ) | |
| (3,383,764 | ) |
Impact of different tax rates in other jurisdictions | |
| (14,493 | ) | |
| (81,864 | ) |
Effect of preferred tax rate | |
| 53,142 | | |
| 2,136,292 | |
Tax effect of non-deductible expenses | |
| - | | |
| 1,370,731 | |
Changes in valuation allowance | |
| 28,987 | | |
| 474,442 | |
Previous years unrecognized tax effects | |
| - | | |
| (3,442 | ) |
Total income tax expense | |
$ | - | | |
$ | 512,395 | |
The approximate tax effects of temporary differences,
which give rise to the deferred tax assets and liabilities are as follows:
Continuing operations
| |
As of December 31, | | |
As of December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets | |
| | |
| |
Tax loss carried forward | |
$ | - | | |
$ | 2,506,404 | |
Provision for impairment loss | |
| 1,533,964 | | |
| 280,036 | |
Unvested restricted shares | |
| - | | |
| 444,465 | |
Total deferred tax assets | |
| 1,533,964 | | |
| 3,230,905 | |
Less: valuation allowance | |
| (1,533,964 | ) | |
| (3,230,905 | ) |
Total Deferred tax assets, net of valuation allowance | |
| - | | |
| - | |
| |
| | | |
| | |
Deferred tax liabilities | |
| | | |
| | |
Total Deferred tax liabilities | |
$ | - | | |
$ | - | |
Deferred tax assets, net of valuation allowance and deferred tax liabilities | |
$ | - | | |
$ | - | |
Discontinued operations
| |
As of December 31, | | |
As of December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets | |
| | |
| |
Tax loss carried forward | |
$ | - | | |
$ | 510,890 | |
Provision for doubtful accounts | |
| - | | |
| 153,854 | |
PPE, due to difference in depreciation | |
| 10,914 | | |
| 2,010 | |
Total deferred tax assets | |
| 10,914 | | |
| 666,754 | |
Less: valuation allowance | |
| (10,914 | ) | |
| (666,754 | ) |
Total Deferred tax assets, net of valuation allowance | |
| - | | |
| - | |
| |
| | | |
| | |
Deferred tax liabilities | |
| | | |
| | |
Total Deferred tax liabilities | |
$ | - | | |
$ | - | |
Deferred tax assets, net of valuation allowance and deferred tax liabilities | |
$ | - | | |
$ | - | |
Uncertain tax positions
The reconciliation of the beginning and ending
amount of liabilities associated with uncertain tax positions is as follows:
|
|
December 31,
2022 |
|
|
December 31,
2021 |
|
Uncertain tax liabilities, beginning
of period, discontinued operations |
|
$ |
- |
|
|
$ |
101,789 |
|
Additions for tax position of current period |
|
|
- |
|
|
|
- |
|
Settlements with tax
authority during current year |
|
|
- |
|
|
|
(101,789 |
) |
Uncertain tax liabilities,
end of period, discontinued operations |
|
$ |
- |
|
|
$ |
- |
|
The Company files tax returns as prescribed by
the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the
respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The amounts of uncertain tax liabilities listed
above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the
consolidated financial statements as of December 31, 2022 and 2021. The Company anticipated that the settlements with the taxing authority
are remitted within one year.
Our policy is to include interest and penalty
charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest
of $nil as of December 31, 2022 and 2021, respectively.
Our subsidiary, Hong Kong Takung, has been
recently selected for routine examination for its tax years ended December 31, 2016 through 2018 by Hong Kong Inland Revenue Department
(“IRD”). The examination had been concluded in May 2021 and the ultimate resolution of the tax examination concurred
with the uncertain tax liabilities previously accrued. Hong Kong Takung settled the entire tax liabilities in June 2021. Metaverse Digital
Payment Co., Limited incurred corporate income tax payable of $255,805 during the year of 2022. The Company does not expect the position
of uncertain tax liabilities will significantly fluctuate within the next twelve months. This expectation is still valid till the reporting
day of April 14, 2023.
The statute of limitations for the Internal Revenue
Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on
which it was filed, whichever is later.
In accordance with the Hong Kong profits tax regulations,
a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the
case of potential willful underpayment or evasion.
In accordance with PRC Tax Administration Law
on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties
and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation
on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the
above.
13. LEASES
The Company has operating leases for its office
facilities and artwork storages. The Company’s leases have remaining terms of less than one year to approximately nine years. Leases
with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases
on a straight-line basis over the lease term.
The following table provides a summary of leases
by balance sheet location as of December 31, 2022 and 2021:
Assets/liabilities | |
Classification | |
As of December 31, 2022 | | |
As of December 31, 2021 | |
Assets | |
| |
| | | |
| | |
Operating lease right-of-use assets, continuing operations | |
Operating lease assets | |
$ | - | | |
$ | - | |
Operating lease right-of-use assets, discontinued operations | |
Operating lease assets | |
| - | | |
| 62,397 | |
Total operating lease right-of-use assets | |
| |
$ | - | | |
$ | 62,397 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current | |
| |
| | | |
| | |
Operating lease liability – current, continuing operations | |
Current operating lease liabilities | |
$ | - | | |
$ | - | |
Operating lease liability – current, discontinued operations | |
Current operating lease liabilities | |
| - | | |
| 62,397 | |
Total operating lease liability – current | |
| |
$ | - | | |
$ | 62,397 | |
| |
| |
| | | |
| | |
Long-term | |
| |
| | | |
| | |
Operating lease liability – non-current, continuing operations | |
Long-term operating lease liabilities | |
$ | - | | |
$ | - | |
Operating lease liability – non-current, discontinued operations | |
Long-term operating lease liabilities | |
| - | | |
| - | |
Total operating lease liability – non-current | |
| |
$ | - | | |
$ | - | |
| |
| |
| | | |
| | |
Total lease liabilities – continuing operations | |
| |
$ | - | | |
$ | - | |
Total lease liabilities – discontinued operations | |
| |
$ | - | | |
$ | 62,397 | |
The operating lease expense, including two lease
arrangements from a related party, for the year ended December 31, 2022 and 2021 was as follows:
| |
| |
For the year ended | | |
For the year ended | |
Lease Cost | |
Classification | |
December 31, 2022 | | |
December 31, 2021 | |
Operating lease cost | |
Cost of revenue, general and administrative expenses | |
$ | 62,364 | | |
$ | 108,580 | |
| |
| |
| | | |
| | |
Total lease cost | |
| |
$ | 62,364 | | |
$ | 108,580 | |
Operating lease cost-discontinued operations | |
Cost of revenue, general and administrative expenses | |
| (62,364 | ) | |
| (108,580 | ) |
Total lease cost | |
| |
$ | | | |
$ | - | |
Maturities of operating lease liabilities as of
December 31, 2022 were as follow:
Maturity of Lease Liabilities | |
Operating Leases | |
2022 | |
$ | - | |
2023 | |
| - | |
2024 | |
| - | |
2025 | |
| - | |
2026 | |
| - | |
Thereafter | |
| - | |
Total undiscounted lease payments | |
$ | - | |
Less: interest | |
| - | |
Present value of lease payments | |
$ | - | |
Supplemental information related to operating
leases was as follows:
| |
For the year ended December 31, 2022 | | |
For the year ended December 31, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities – continuing operations | |
$ | - | | |
$ | - | |
Cash paid for amounts included in the measurement of lease liabilities – discontinued operations | |
$ | 61,031 | | |
$ | 66,793 | |
| |
| | | |
| | |
Weighted average remaining lease term – continuing operations | |
| - | | |
| - | |
Weighted average remaining lease term – discontinued operations | |
| 0.0 year | | |
| 1.0 year | |
Weighted average discount rate – continuing operations | |
| - | | |
| - | |
Weighted average discount rate – discontinued operations | |
| 8 | % | |
| 8 | % |
14. COMMITMENTS AND CONTINGENCIES
Capital Commitments
As of December 31, 2022 and 2021, the Company
had no capital commitments.
Contingencies
During
the year ended December 31, 2022, the deconsolidated entity of the Company, Tianjin Takung has been named as a defendant for litigations
filed against the entity and compensation claims amounting to USD 60,694
have been recorded in the statement of operations. As at the filing date of this report, there are pending litigations that have yet to
be concluded and the compensation claims are not determinable until the outcome are finalized. The Company is in the process of finalizing
the disposal of Hong Kong Takung, and upon the completion of the disposition of Hong Kong Takung, the purchaser will assume all the assets
and liabilities of the entity, including those associated with the Tianjin Takung.
Except for the above, as of December 31, 2022
and through the issuance date of the consolidated financial statements included in this Form 10-K, the Company does not have any other
significant indemnification claims.
Due to the deconsolidation of Tianjin Takung,
the ending balance of our restricted cash totaling $58,254,521 and $52,215,458 as of December 31, 2022 and 2021, respectively, was not
included in our consolidated financial statements and was reclassified to current assets – a deconsolidated entity. The Company
could be exposed to claims made by the PRC customers for the return of their deposits at the Tianjin Takung’s restricted cash accounts.
Any claims against Hong Kong Takung, though it is a limited company, that are ultimately successful, could have a material adverse effect
on the Company’s financial position, operating results and cash holdings unless Hong Kong Takung is disposed or wound down.
15. NET LOSS PER SHARE
The computation of the Company’s basic and
diluted net loss per share is as follows:
| |
For the year ended December 31,
2022 | | |
For the year ended December 31,
2021 | |
Numerator: | |
| | |
| |
Net loss-continuing operations | |
$ | (10,031,437 | ) | |
$ | (13,447,956 | ) |
Net loss – discontinued operations | |
| (322,075 | ) | |
| (16,625,555 | ) |
Total net loss | |
| (10,353,512 | ) | |
| (30,073,511 | ) |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Weighted-average shares outstanding-Basic | |
| 24,793,842 | | |
| 12,383,741 | |
Stock options and restricted shares | |
| - | | |
| - | |
Weighted-average shares outstanding-Diluted | |
| 24,793,842 | | |
| 12,383,741 | |
Loss per share-continuing operations | |
| | | |
| | |
-Basic | |
$ | (0.40 | ) | |
$ | (1.09 | ) |
-Diluted | |
$ | (0.40 | ) | |
$ | (1.09 | ) |
| |
| | | |
| | |
Loss per share-discontinued operations | |
| | | |
| | |
-Basic | |
$ | (0.01 | ) | |
$ | (1.34 | ) |
-Diluted | |
$ | (0.01 | ) | |
$ | (1.34 | ) |
Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
As
of December 31, 2022, there were no outstanding stock options and no other securities that
would potentially be converted to additional shares of common stock that would have been
outstanding if the dilutive potential shares of common stock had been issued were excluded
from the calculation of diluted net loss per share.
As
disclosed on Takung Art Co., Ltd.’s (the “Company”) Current Report on Form 8-K (the “Form 8-K”)
filed on March 25, 2022, the Company entered into certain securities purchase agreement, dated February 23, 2022, as amended on March
9, 2022 (the “SPA”), with certain “non-U.S. Persons” (the “Purchasers”) as defined in
Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the SPA, the Company agreed
to issue 10,238,910 units for a per unit price of $2.93. Each unit consists of one share of the common stock of the Company, par value
$0.001 per share (the “Common Stock”) and a warrant to purchase three shares of Common Stock.
The
Purchasers have transferred the purchase price to the Company on April 6, 2022. On April 14, 2022, the Company has issued 10,238,910 units
to the Purchasers. The issuance and sale of the units is exempted from the registration requirement of the Securities Act pursuant to
Regulation S promulgated thereunder.
16. SHAREHOLDERS’ EQUITY
Share Options:
The exercise price of share options ranged from
$2.91 to $3.65 and the requisite service period ranged from two to five years.
There was no share options granted during the
year of 2022 and no share options were forfeited nor exercised in the year ended December 31, 2021.
The Company did not issue any share options during
the year of 2022. The number of share options as of December 31, 2022 is as follows:
| |
Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Terms | | |
Aggregate Intrinsic Value | |
Outstanding, beginning of year | |
| - | | |
$ | - | | |
| - | | |
| - | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited or expired | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding, end of year | |
| - | | |
| - | | |
| - | | |
| - | |
Exercisable, end of year | |
| - | | |
| - | | |
| - | | |
| - | |
Expected to vest | |
| - | | |
$ | - | | |
| - | | |
| - | |
Award of restricted shares:
On May 27, 2020, 10,000 shares of common
stock were granted to the Company’s SEC legal counsel as a compensation for legal advisory services rendered.
On April 21, 2021, the board of directors of the
Company approved an issuance of 335,000 shares of common stock as share-based awards to its independent directors, employees and consultants
under the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $6,863,815 in connection with this issuance
in April 2021.
On May 28, 2021, the Company entered into a Securities
Purchase Agreement with a company incorporated in British Virgin Islands (“BVI entity”). In exchange for an aggregate
amount of 86,560 shares of common stock of the BVI entity, the Company shall remit $500,000 in cash and issue 572,000 restricted shares
of the Company to the BVI entity. On August 21, 2021, both parties entered into an Amendment to Securities Purchase Agreement and
the number of restricted shares of the Company to be issued to the BVI entity was increased to 1,558,480. The Company remitted the
cash payment of $500,000 to the BVI entity on August 20, 2021. On September 9, 2021, an aggregate amount of 1,558,480 restricted
shares at a price of $6.5 was issued to the BVI entity. The Company recognized the net carrying amount of this equity investment,
$9,296,614, an initial cost of $10,630,120 with an impairment charge, $1,333,506, in noncurrent asset.
On July 12, 2021, pursuant to the terms of that
certain Securities Purchase Agreement dated July 8, 2021, the Company sold 571,429 shares (the “Shares”) of its common stock,
par value $0.001 per share (the “Common Stock”), to an institutional investor (the “Investor”) at a price of $8.75
per share, for gross proceeds of $5,000,000 before deducting the placement agent fee and offering expenses (the “Private Placement”).
On July 9, 2021, the Company entered into an Advisory
Agreement with an independent institutional contractor for exploring potential investors and projects to advance new business development.
Upon signing the agreement, an aggregate of 160,000 shares of common stock at a price of $11.86 was awarded to the contractor under
the 2015 Incentive Stock Plan. The Company recognized a share-based compensation expense of $1,897,600 in connection with this issuance
in July 2021.
On November 30, 2021, the board of directors of
the Company approved an issuance of 415,000 shares of common stock as restricted share-based awards to its independent consultants and
employees under the Rule 144 of the Securities Act of 1933. The restricted shares were issued on November 30, 2021. The Company recognized
a share-based compensation of $2,116,500 in relation to this issuance in November 2021.
The Company did not award any share option during the year of 2022.
The
following table sets forth changes in compensation-related restricted share awards during year ended December 31, 2022. The Company
uses fair market value of its common stock publicly traded on the date of the grant to determine the fair value of restricted shares.
The Company did not award any restricted common stocks to anyone during the year of 2022.
| |
| Number of | | |
| Weighted Average Grant Date | | |
Weighted Average Remaining Contractual |
| |
| Shares | | |
| Fair Value | | |
Term |
Unvested at December 31, 2021 | |
| 415,000 | | |
$ | 5.10 | | |
0.41 year |
Granted | |
| - | | |
| - | | |
0.00 year |
Forfeited | |
| - | | |
| - | | |
- |
Vested | |
| - | | |
| - | | |
0.00 year |
Unvested at December 31, 2022 | |
| 415,000 | | |
$ | 5.10 | | |
0.41 year |
The share-based compensation expenses recognized, including the offering
of restricted shares, were nil and $10,881,967 during the years ended December 31, 2022 and 2021, respectively.
17. SUBSEQUENT EVENT
Disposition Agreement
On November 1, 2022,
Takung Art Co., Ltd. (the “Company”), Hong Kong Takung Art Company Limited (“Hong Kong Takung”) and Hong Kong
MQ Group Limited (“Hong Kong MQ”, together with Hong Kong Takung, the “Targets”), the Company’s wholly
owned subsidiaries, and Fecundity Capital Investment Co., Ltd. (the “Purchaser”), entered into a certain share purchase agreement
(the “Disposition SPA”). Pursuant to the Disposition SPA, the Purchaser agreed to purchase the Targets in exchange for cash
consideration of $1,500,000 (the “Purchase Price”). Upon the closing of the transaction (the “Disposition”) contemplated
by the Disposition SPA, the Purchaser will become the sole shareholder of the Targets and as a result, assume all assets and liabilities
of all the subsidiaries and VIE entities owned or controlled by the Targets. The Company believes that the Disposition will not have
a significant, material impact on the Company’s consolidated financial statements.
The closing of the Disposition
is subject to certain closing conditions including the payment of the Purchase Price, the receipt of a fairness opinion from Access Partner
Consultancy & Appraisals and the approval of the Company’s shareholders.
The Disposition was approved
by the board of directors (the “Board”) of the Company.
Below is the Company’s structure chart
before the completion of the Disposition.
Below will be the Company’s structure
chart after the completion of the Disposition.
Merger Agreement
On November 1, 2022,
the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NFT Limited (“NFT”), a
Cayman Islands exempt company and a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, among other things,
the Company will merge with and into NFT, with NFT continuing as the surviving entity (the “Redomicile”). The Redomicile
will become effective at such time on the closing date as the certificate of merger is duly filed with the Secretary of State of the
State of Delaware or at such other time specified in the Certificate of Merger (the “Effective Time”).
From and after the Effective
Time, each share of the Company’s stock, either common stock or preferred stock issued and outstanding prior to the Effective Time
(excluding certain excluding shares and dissenting shares, if any) will be automatically converted into Class A Ordinary Shares of NFT
on pro rata basis. Each share of NFT stock held immediately prior to the Effective Time by the Company will be automatically cancelled
and no payment will be made with respect thereto.
The closing of the Redomicile
is subject to the satisfaction or waiver of customary conditions by the respective parties, including the approval of the Merger Agreement
and the contemplated transactions by the Company’s shareholders.
The Redomicile was approved
by the Board of the Company.
As
disclosed on Takung Art Co., Ltd.’s (the “Company”) Current Report on Form 8-K (the “Form 8-K”) filed
on August 24, 2022, the Company entered into certain securities purchase agreement, dated June 27, 2022, as amended on July 27, 2022
(the “SPA”), with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the
Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the SPA, the Company agreed to issue 10,380,623 units
for a per unit price of $2.89 (the “Units”). Each Unit consists of one share of the common stock of the Company, par value
$0.001 per share (the “Common Stock”) and a warrant to purchase two shares of Common Stock.
The
issuance and sale of the Units is exempted from the registration requirement of the Securities Act pursuant to Regulation S promulgated
thereunder.
The
transaction contemplated by the SPA was closed on September 13, 2022, as all the closing conditions have been satisfied.