NFT LIMITED The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
37
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that may be deemed "forward-looking statements" within the meaning ofUnited States of America securities laws. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to
be appropriate. These statements include, without limitation, statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues, our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with theSecurities and Exchange Commission . The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under "Special Note Regarding Forward-Looking Statements", our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements. Overview We, through our wholly owned subsidiary, Hong Kong Takung, operate an electronic online platform located at https://www.nftoeo.com/for artists, art dealers and art investors to offer and trade valuable artwork. We offer online listing and trading services that allow artists, art dealers and owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fee, trading commissions, management fee and consultancy service fee on NFT projects.
The company's NFT business outlook can be described in several aspects below.
38
NFT Market Insights
Digital artwork based on NFT technology is becoming a hot asset. The earliest
NFT projects can be traced back to the 2017 bull market CryptoKitties (the
encrypted cats), which had the properties of scarcity and value anchoring of
ownership. At its peak, a virtual cat could sell for more than $100,000 . In
terms of NFT artwork, in March 2021 , artist Beeple's NFT work "Every Day: The
First 5,000 Days" sold for $69.346 million , making it the third-highest price
for a living artist. According to a report by Invezz, the NFT market was worth
$338 million in 2020, and it has grown by 800% to reach $490 million in 2021.
With the help of the bull market wave, NFT has grown rapidly. As of the first
quarter of 2021, the total transaction volume of the NFT market has exceeded 1.5
billion US dollars , an increase of more than 2627% from the previous quarter. In
April 2021 , the total market value of NFTs exceeded $30 billion for the first
time, setting a new all-time high. Currently, NFTs can be used in the fields
including games, artworks, domain names, insurance, collectibles, virtual
assets, real assets, identities, etc. With the vigorous development of the
digital world, many businesses will appear in digital form, and the application
space and technological imagination of NFT are expected to become more and more
attractive in the new digital economy world.
New business model
TKAT's business model revolves around the theme of "free circulation of value
and creation of a unique digital work exchange platform", allowing each user to
create, buy and sell various irreplaceable digital works to realize the value of
works.
New business types
A. Providing consulting services such as artwork valuation/appreciation
potential
Avoiding poor offline communication and incomplete information, tapping into the
needs of users and providing comprehensive consulting services on topics such as
labor cost, artist influence, artistic value of works, and channels for
obtaining works, which not only serves customers but also creates value forthe company. B. NFT trading service
TKAT is building a fully functional NFT trading platform, which has been in operation and generating revenue sinceJune 2022 . The platform is designed to include the categories of digital works such as artwork, music videos, collectibles, game props, sports, metaverse, virtual world, social tokens, and meet the needs of various users as much as possible. It is able to realize the whole business process of user registration-certification-work uploading-work casting-work trading. In the transaction process, the Company extracts a portion of the processing fee (including token minting, first sale, and second sale) to create value. C. Advertising service
After the TKAT platform has reached a certain user base, it will be able to
provide advertising and publicity services for users or the company itself. The
business model is not limited to categories and industries, such as investment
promotion, work promotion, and industry promotion.
39
New Strategic Direction
TKAT is committed to creating an original digital platform that integrates games, artworks, domain names, insurance, collectibles, virtual assets, real assets, identity and other fields, and changes the market status of traditional industries through its own efforts. Strategic goals: basic platform building-targeted population entry-providing services (consulting services, transaction services, advertising services)-optimizing the platform and expanding the scope of services-full service. Competitor analysis
Opensea is an NFT market exchange. It has more than 20,000 users. Compared with
projects in the popular decentralized finance ("DeFi") field, it is second only
to Uniswap, kyber and Compound, and higher than maker, 0x, etc. As a trading
platform with a relatively high status in the NFT field, OpenSea has a complete
range of collections, equivalent to Taobao in the NFT world. At present, the
trading market of OpenSea has nearly 40,000 users, and the monthly transaction
volume exceeds 5 million US dollars . Coinbase's new NFT platform hits 1.4
million signups. The Coinbase platform has an active population of 50,000 users.
The service rates for each service are as follows: 1. Rarible's minting fees are
borne by the creators themselves, and the royalties are also set by the creators
themselves, with default amounts of 10%, 20% and 30%. 2. VIV3's NFT minting
costs and profits come from the 12.5% service fee it collects on the first and
second sales. 3. OpenSea does not need gas fee to mint NFT. 4. Rarible charges a
2.5% service fee on the first sale. On the SuperRare platform, a 15% commission
is charged on the first sale and a 3% fee (paid by the buyer) is charged onthe second sale. Our headquarters are located inHong Kong ,Special Administrative Region ,People's Republic of China and we conduct our business primarily inthe United States andHong Kong through a global online platform. Our principal executive offices are located at Office Q, 11thFloor,Kings Wing Plaza 2, No. 1,Kwan Street , Shatin, New Territory,Hong Kong . Competitive Advantages
The advantages of Takung in the NFT transaction and blockchain market are as follows:
Innate industry advantages
In recent years, digital artworks of NFT technology based on blockchain technology are becoming popular assets. The NFT online platform the Company built can effectively solve the current situation such as unclear ownership of property, difficulty in distinguishing authenticity and low efficiency of artwork circulation. Convert business development from offline to online operation, so that the value of digital works can be freely circulated online.
Advantages of the core management team
The core team members of Takung have experience in blockchain technology development and NFT trading platform operation, which can ensure a smoother development and business operation in the later stage.
Takung's platform advantages
The currently developed and launched NFT online trading platform supports
multi-category product uploads, including: Digital art, Digital oil painting,
Produced by Gallery, Personal products, Artist signature, Oil on canvas, Print,
Paper ink, Device, Comprehensive media, Derivative, and It will be continuously
enriched and improved according to customer interests. The NFT trading platform
has stable performance, high security and easy to maintain. At the front end of
the system, the Company will continuously improve the operability and user
experience of the system focusing on improving the user experience.
Technical advantages
The Company's digital works exchange platform that has been launched is built by
a professional technical team. Each technician has rich industry experience, can
work under a short development cycle or high pressure, and has a number of
relevant industry benchmarking projects experience. The capability of the
technical team ensures the strong technical support in the later system
optimization and iterative update.
Marketing advantages
The Company has a professional marketing team. After the platform goes online,
it can be promoted online and offline simultaneously, so as to quickly increase
the popularity of the platform, and use professional marketing solutions to
attract more creators and demanders to join in the platform.
40
Results of Operations
For the years ended
The following tables set forth our consolidated statements of operations data:
For the year ended
December 31
2022 2021 Variance
Revenue
Listing fee $ - $ - -
Commission 3,403,536 - 3,403,536
Management fee - - -
Consultancy fee - 120,000 (120,000 )
Revenue 3,403,536 120,000 3,283,536
Cost of revenue (782,790 ) - (782,790 )
Gross profit 2,620,746 120,000 2,500,746
Selling expenses - - -General and administrative expenses (3,677,967 ) (13,565,548 )
9,887,581
Non-marketable investment impairment (9,296,754 ) (1,333,506 )
(7,963,248 )
Gain on extinguishment of debt - 1,331,191 (1,331,191 )
Gain on disposal of subsidiaries - - -
Total operating expenses (12,974,721 ) (13,567,863 ) 593,142
Loss from continuing operations (10,353,975 ) (13,447,863 )
(3,093,888 ) Total other (expense) income 1,186 (93 ) 1,279 Loss before income taxes (10,352,789 ) (13,447,956 ) (3,095,167 ) Income tax expense 255,805 - 255,805
Net loss from continuing operations (10,608,594 ) (13,447,956 )
2,839,362
Net loss from discontinued operations (322,075 ) (16,625,555 )
(16,303,480 ) Net loss$ (10,930,669 ) $ (30,073,511 ) 19,142,842 41 Revenue Revenue by category
The following table presents our revenue by category:
For the year ended
December 31,
2022 2021Listing fee-Continuing operations $ - $ - Listing fee-Discontinued operations
- 876,658
Commission-Continuing operations 3,403,536 -
Commission-Discontinued operations - 2,088,920
Management fee-Continuing operations - -
Management fee-Discontinued operations - 1,482,610
Consultancy fee-Continuing operations - 120,000
Consultancy fee-Discontinued operations - -
Subtotal 3,403,536 4,568,188
Less: Revenue - discontinued operations - (4,448,188 )
Total revenue - continuing operations
Revenue by customer type
The following table presents our revenue by customer type:
For the year ended
December 31,
2022 2021
Artwork owners $ - $ -
Non - VIP traders 3,403,536 -
VIP traders - -
Corporate advisee - 120,000
Subtotal 3,403,356 4,568,188
Less: Revenue - discontinued operations - (4,448,188 )
Total revenue - continuing operations
(i) Listing fee revenue
Listing fee revenue is calculated based on a percentage of the listing value and transaction value of artworks.
Listing value is the total offering price of an artwork when the ownership units
are initially listed on our trading platform. We utilize an appraised value as a
basis to determine the appropriate listing value for each artwork, or portfolio
of artworks.
(ii) Commission fee revenue
For non-VIP Traders, the commission revenue was calculated based on a percentage
of transaction value of artworks, which we charge trading commissions for the
purchase and sale of the ownership shares of the artworks. The commission is
typically 5% of the total amount of each transaction. The commission is
accounted for as revenue and immediately deducted from the proceeds from the
sales of artwork units when a transaction is completed.
42
(iii) Management fee revenue
Our legacy online trading platform from discontinued operations charges Traders
a management fee to cover the costs of insurance, storage, and transportation
for an artwork and trading management of artwork units. The management fee is
recognized when the artwork is sold and is deducted from proceeds from the sale
of artwork ownership shares when there is a purchase and sale transaction.
Cost of Revenue
Cost of revenue primarily includes the following: commission paid to service
agents, depreciation, internet service charges, artwork insurance and artwork
storage costs.
For the year ended
December 31,
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
Others - -
Subtotal 782,790 1,359,425
Less: Cost of revenue - discontinued operations - (1,359,425 )
Total $ 782,790 $ -
Cost of revenue - continuing operations for the years ended
Cost of revenue - discontinued operations for the years ended
Gross Profit Gross profit for our continuing operations was$2,620,746 for the year endedDecember 31, 2022 , compared to$120,000 for the year endedDecember 31, 2021 . The gross profit for our continuing operations in 2021 was generated from the provision of consultancy service related to NFT business. Due to the suspension ofTianjin's operation, we reclassified listing revenue, commission revenue and management revenue as well as the corresponding cost of revenue to net income or loss from discontinued operations. 43 Operating Expenses
General and administrative expenses for the continuing operations were
General and administrative expenses from the discontinued operations were$323,772 for the year endedDecember 31, 2022 compared to$0 for the same period in 2021, with an increase by$323,772 . During 2021, Hong Kong Takung lost its control over the operation of Tianjin Takung and the assets, liabilities and results of operations of Tianjin Takung was deconsolidated. The following table sets forth the main components of our general and administrative expenses of our continuing operations and for discontinued operations for the years endedDecember 31, 2022 and 2021. Amounts for the year endedDecember 31, 2021 had been reclassified due to the deconsolidation of Tianjin Takung. For the year ended For the year ended December 31, December 31, 2022 2021 Amount($) % of Total Amount($) % of Total
Salary and welfare 1,592,911 12.0 % 97,234 0.6 % Office, insurance and rental expenses 34,309 0.3 % 304,890 1.8 % Legal and professional fees 1,204,669 9.1 %
1,028,884 6.2 %
Consultancy fee 658,082 4.9 % 216,141 1.3 %
Depreciation expenses 1,395 0.0 % 117 0.0 %Traveling and accommodation expenses - %
28 0.0 %
Share-based compensation - % 10,881,967 65.7 %
Others 9,483,355 71.3 % 1,036,287 6.3 %
Total general & administrative
expenses-continuing operations 12,974,721 97.6 % 13,565,548 81.9 %
Total general & administrative
expenses-a discontinued operations 323,772 2.4 %
2,990,228 18.1 %
Total $ 13,298,493 100.0 % $ 16,555,776 100.0 %
The continuing operation also incurred a total of $nil in selling expenses from
its continuing operations for the years ended
Other (expenses) income
Other expenses from the continuing operations for the year ended
Loss before income taxes
Our continuing operations incurred loss before income taxes$10,352,789 and$13,447,956 for the years endedDecember 31, 2022 and 2021, respectively. Loss before income taxes of our continuing operations was significantly higher in 2021 as we incurred a higher share-based compensation in 2021. To disclose loss before tax from discontinued operations for FY2021,$322,075 for the year endedDecember 31, 2022 while generated loss before income taxes,$16,113,160 in the same period in 2021 44 Income tax expense The Company's effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to aU.S. income tax rate of 21%,Hong Kong profits tax rate at 8.25% for the firstHK$ 2 million (approximately$257,311 ) assessable profits and at 16.5% for assessable profits aboveHK$ 2 million (approximately$257,311 ) (16.5% prior toJanuary 1, 2018 ) and PRC enterprise income tax rate at 25%. The Global Intangible Low-taxed Income (GILTI) is a new provision introduced by the Tax Act.U.S. shareholders, who are domestic corporations, of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective for tax years of foreign corporations beginning afterDecember 31, 2017 . The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has made an accounting policy choice of treating taxes due on futureU.S. inclusions in taxable amount related to GILTI as a current period expense when incurred. As ofDecember 31, 2022 and 2021, the Company does not have any aggregated positive tested income; and as such, does not have additional provision amount recorded for GILTI tax. The Coronavirus Aid, Relief and Economy Security (CARES) Act ("the CARES Act, H.R. 748") was signed into law on27 March 2020 . The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The company does not anticipate a material impact on its financial statements as ofDecember 31, 2022 due to the recent enactment. The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 ("the Ordinance") ofHong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the firstHK$ 2 million (approximately$257,868 ) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of "connected entities" is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Hong Kong MQ still apply the original tax rate of 16.5% for its provision for current income and deferred taxes. 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 endedDecember 31, 2022 and 2021. 45
The income tax expense from the continuing operations for the years ended
The income tax expense from the discontinued operations for the years ended
Net Loss As a result of our operations aforementioned, our net losses after income taxes for continuing operations for the years endedDecember 31, 2022 and 2021 were$10,352,789 and$13,447,956 , respectively.
Our discontinued operations generated net loss
Foreign currency translation profit and loss
We had a foreign currency translation profit and loss for the years ended
Comprehensive loss
As a result of the above, we posted a comprehensive loss of
Liquidity and Capital Resources
The following tables set forth our consolidated statements of cash flow:
For the years ended
December 31
2022 2021
Net cash used in operating activities-continuing operations
$ (3,188,435 ) Net cash used in operating activities- discontinued operations (887,469 ) (12,923,713 ) 3,515,567 (16,112,148 )
Net cash used in investing activities- continuing operations 1,401
(507,024 )
Net cash used in investing activities- discontinued
operations 127,805 (457 )
129,206 (507,481 )
Proceeds from a short-term borrowing from a third party 1,550,000 Net cash provided by financing activities-continuing operations 60,000,007
5,180,485
Net cash provided by financing activities-discontinued
operations -
61,550,007 5,180,485
Effect of exchange rate change on cash and cash equivalents, and restricted cash from continuing operations
42,840 (13,061 ) Effect of exchange rate change on cash and cash equivalents, and restricted cash from discontinued operations
517,919 (548,845 )
560,759 (561,906 )
Net (decrease) increase in cash and cash equivalents - continuing operations
65,997,284 1,471,965
Net (decrease) increase in cash and cash equivalents and restricted cash - discontinued operations
(241,745 ) (13,473,015 )
65,755,540 (12,001,050 )
Cash and cash equivalents, beginning balance - continuing operations 1,503,153 31,188
Cash and cash equivalents and restricted cash, beginning balance- discontinued operations
338,542 13,811,557
1,841,695 13,842,745
Cash and cash equivalents and restricted cash, ending balance - discontinued operations
$ 67,500,438
96,797 338,542
67,597,235 1,841,695
46
Sources of Liquidity
The cash and cash equivalent balance from the continuing operations as of
During the year endedDecember 31, 2022 , net cash used in operating activities from operating activities was$4,403,036 which predominantly related to the net loss from the continuing operations,$10,608,594 . The investing cash outflow from the continuing operations totaled$1,401 . The financing cash inflows from continuing operations totaled$61,550,007 .
The cash and cash equivalent balance from the discontinued operations as of
During the year endedDecember 31, 2022 , net cash used in operating activities from discontinued operations was$(887,469) . Net cash provided by investing activities from discontinued operations was$127,805 . There was no cash inflow or outflow from financing activities from our discontinued operations in 2022.
The cash and cash equivalent balance from the continuing operations as of
During the year endedDecember 31, 2021 , net cash used in operating activities from operating activities was$3,188,435 which predominantly related to the net loss from the continuing operations,$13,447,956 and a non-cash gain on extinguishment of debts,$1,331,191 , was primarily offset by non-cash item share-based compensation,$10,881,967 and non-marketable investment impairment,$1,333,506 . The investing cash outflow from the continuing operations totaled$507,024 which included the purchase of equipment,$7,024 and investment in cultural projects,$500,000 . The financing cash inflows from continuing operations totaled$5,180,485 , which included cash receipts from the stock option exercised by our employees,$180,485 , and cash receipts from a private investment,$5,000,000 .
The cash and cash equivalent balance from the discontinued operations as ofDecember 31, 2021 was$338,542 . Out of this amount, we had$112,397 denominated inU.S. dollars deposited in the financial institutions inHong Kong ,$226,145 , denominated in HK$ inHong Kong financial institutions. During the year endedDecember 31, 2021 , net cash used in operating activities from discontinued operations was$12,923,713 , which included net loss from Hong Kong Takung,$16,625,555 and a decrease in customer deposits,$9,144,610 , offset by deferred tax expense,$639,025 , deconsolidation of Tianjin Takung,$11,021,710 and change in foreign currency exchange rate,$1,259,010 . Net cash used in investing activities from discontinued operations was$457 which was related to the purchase of office equipment by Hong Kong Takung. There was no cash inflow or outflow from financing activities from our discontinued operations in 2021. As ofDecember 31, 2022 , total current liabilities from the continuing operations,$6,643,446 , which was related to accrued expenses and other payables 2,131,891, advance from customers 2,705,750,short term borrowings 1,550,000 and tax payable 255,805 of US Takung, NFT exchange and Metaverse HK. Total current liabilities from the discontinued operation, Hong Kong Takung, totaled$8,700,835 which consisted of$2,291,811 in reclass Hong Kong Takung liabilities,$6,409,024 in amount due to related parties. 47 As ofDecember 31, 2022 , the Company's continuing operation had cash and cash equivalents of$64,794,688 , a working capital of$60,948,983 and the net assets amounted to$60,954,465 . As ofDecember 31, 2021 , total current liabilities from the continuing operations,$143,429 , which was related to accrued expenses and other payables of US Takung and Hong Kong MQ. Total current liabilities from the discontinued operation, Hong Kong Takung, totaled$8,733,624 which consisted of$273,390 in accrued expenses and other payables,$6,410,585 in amount due to related parties,$1,964,919 in short-term borrowings from a third party and$62,397
in lease liabilities. As ofDecember 31, 2021 , the Company's continuing operation had cash and cash equivalents of$1,503,153 , a working capital of$1,649,632 and the net assets amounted to$10,953,269 . The Company's discontinued operations, which primarily related to Hong Kong Takung, had cash and cash equivalents of$338,542 , a working deficit of$8,360,145 and net liabilities of$8,176,586 . In order to continue to maintain the liquidity requirements, the Company introduced NFT business in the fourth quarter of 2021 and developed consultancy service fee on NFT projects. The Company also seeks to negotiate and extend financing arrangements with the related party and the third party. InFebruary 2022 , the Company entered into certain securities purchase agreement with certain "non-U.S. persons" and expected to raise approximately$30 million from this offering. Management believed that these measures provided sufficient liquidity and adequate capital to fund the operations and reasonably meet the anticipated liquidity requirements for at least the next twelve months. Total liabilities of the Company's continuing operations as ofDecember 31, 2022 and 2021 amounted to$6,643,446 and$143,429 , respectively. Total liabilities of the Company's discontinued operations as ofDecember 31, 2022 and 2021 were$8,700,835 and$8,733,624 , respectively. Net assets of the Company's continuing operations amounted to$60,954,465 and$10,953,269 as ofDecember 31, 2022 and 2021, respectively. During the 2021, we invested in a cultural project,$10,630,120 , which was partially funded by a capital raised through a private investment in public equity,$5,000,000 , during 2021.
The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RMB is only currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of theState Administration of Foreign Exchange ("SAFE") by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries. 48 Applicable PRC law permits payment of dividends to us by our operating subsidiaries inChina only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries inChina are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out ofHong Kong . Hence, ourHong Kong operating subsidiary is able to transfer cash without any limitation to theU.S. under normal circumstances. If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors. Future Financings We may sell our common stock in order to fund our business growth. Issuances of additional shares will result in dilution to existing shareholders. There is no assurance that we will achieve sales of the equity securities or arrange for debt or other financing to fund our growth in case it is necessary, or if we are able to do so, there is no guarantee that existing shareholders will not be
substantially diluted. Critical Accounting Estimates
We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies", is incorporated herein by reference.
Recent Accounting Pronouncements
The discussion of the recent accounting pronouncements contained in Note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies", is incorporated herein by reference.
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