UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________________ to_________________________

 

Commission File Number: 001-38036

 

TAKUNG ART CO., LTD

(Exact name of registrant as specified in its charter)

 

Delaware   26-4731758
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)

 

Room 709 Tower 2, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong

(Address of principal executive offices) (Zip Code)

 

+852 3158 0977

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which
registered
 Common Stock  TKAT  NYSE American

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes    ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes    ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes    x  No

 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes    ¨ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

The number of shares of common stock issued and outstanding as of May 13, 2021 is 11,662,379.

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO., LTD

INDEX

 

        Page  
PART I.   Financial Information     3  
             
    Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited)     3  
             
    Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.     18  
             
    Item 3.  Quantitative and Qualitative Disclosures About Market Risk.     25  
             
    Item 4.  Controls and Procedures.     25  
             
PART II.   Other Information     26  
             
    Item 6.  Exhibits.     26  
             
    Signatures     27  

 

2

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in U.S. Dollars except Number of Shares)

 

    March 31,     December 31,  
    2021     2020  
      (Unaudited)          
ASSETS                
Current assets                
Cash and cash equivalents   $ 4,383,648     $ 4,698,135  
Restricted cash     11,478,520       9,144,610  
Account receivables, net     154,349       154,771  
Prepayment and other current assets, net     572,029       279,387  
Amount due from related parties     6,199,670       6,225,134  
Loan receivables     2,136,817       2,609,748  
Total current assets     24,925,033       23,111,785  
                 
Non-current assets                
Property and equipment, net     341,758       437,996  
Intangible assets     22,443       22,504  
Deferred tax assets, net     661,907       638,860  
Operating lease right-of-use assets     165,335       183,409  
Other non-current assets     26,816       18,594  
Total non-current assets     1,218,259       1,301,363  
Total assets   $ 26,143,292     $ 24,413,148  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
LIABILITIES                
Current liabilities                
Accrued expenses and other payables   $ 784,397     $ 728,088  
Customer deposits     11,478,520       9,144,610  
Advance from customers     8,390       17,412  
Short-term borrowings from a third party     1,971,718       1,977,109  
Amount due to a related party     6,431,199       6,448,784  
Operating lease liabilities – current     73,607       72,367  
Tax payables     99,137       106,354  
Total current liabilities     20,846,968       18,494,724  
                 
Non-current liabilities                
   Operating lease liabilities, non-current     87,913       103,379  
Total non-current liabilities     87,913       103,379  
Total liabilities     20,934,881       18,598,103  
                 
COMMITMENTS AND CONTINGENCIES                
                 
SHAREHOLDERS’ EQUITY                
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,271,379 shares issued and outstanding as of March 31, 2021; 11,271,379 shares issued and outstanding as of December 31, 2020)     11,271       11,271  
Additional paid-in capital     6,361,832       6,358,115  
Accumulated deficit     (798,899 )     (226,311 )
Accumulated other comprehensive loss     (365,793 )     (328,030 )
Total shareholders’ equity     5,208,411       5,815,045  
Total liabilities and shareholders’ equity   $ 26,143,292     $ 24,413,148  

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements. 

 

3

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Stated in U.S. Dollars except Number of Shares)

(UNAUDITED)

 

    Three Months Ended  
    March 31,     March 31,  
    2021     2020  
Revenue            
Listing fee   $ 273,792     $ 176,943  
Commission     358,086       900,823  
Management fee     147,230       103,520  
Total revenue     779,108       1,181,286  
                 
Cost of revenue     (252,237 )     (656,514 )
Gross profit     526,871       524,772  
                 
Operating expenses                
General and administrative expenses     (1,013,158 )     (1,110,447 )
Selling expenses     (104,911 )     (42,989 )
Total operating expenses     (1,118,069 )     (1,153,436 )
                 
Loss from operations     (591,198 )     (628,664 )
                 
Other income and expenses:                
Other income (expenses)     22,813       38,305  
Loan interest expense     -       (38,913 )
Exchange loss     (8,976 )     (236,695 )
Total other income (expenses)     13,837       (237,303 )
                 
Loss before income tax expense     (577,361 )     (865,967 )
                 
Income tax benefit (expense)     4,773       (87,395 )
                 
Net loss     (572,588 )     (953,362 )
                 
Foreign currency translation adjustment     (37,763 )     (8,768 )
                 
Comprehensive loss   $ (610,351 )   $ (962,130 )
                 
Loss per common share – basic   $ (0.05 )   $ (0.08 )
Loss per common share – diluted   $ (0.05 )   $ (0.08 )
Weighted average number of common shares outstanding –basic     11,271,379       11,255,129  
Weighted average number of common shares outstanding –diluted     11,271,379       11,255,129  

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

4

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Stated in U.S. Dollars except Number of Shares)

(UNAUDITED)

 

    Number     Common     Additional
Paid-in
    Retained     Accumulated
other
comprehensive
       
    of shares     stock     capital     earnings     loss     Total  
Balance, December 31, 2020     11,271,379     $ 11,271     $ 6,358,115     $ (226,311 )   $ (328,030 )   $ 5,815,045  
Shared-based compensation     -       -       3,717       -       -       3,717  
Net loss     -       -       -       (572,588 )     -       (572,588 )
Foreign currency translation adjustment     -       -       -       -       (37,763 )     (37,763 )
Balance, March 31, 2021     11,271,379     $ 11,271     $ 6,361,832     $ (798,899 )   $ (365,793 )   $ 5,208,411  

 

    Number     Common     Additional
Paid-in
    Retained
earnings (accumulated
    Accumulated
other
comprehensive
       
    of shares     stock     capital     deficit)     loss     Total  
Balance, December 31, 2019     11,255,129     $ 11,255     $ 6,320,604     $ 386,327     $ (273,029 )   $ 6,445,157  
Shared-based compensation     -       -       5,986       -       -       5,986  
Net loss     -       -       -       (953,362 )     -       (953,362 )
Foreign currency translation adjustment     -       -       -       -       (8,768 )     (8,768 )
Balance, March 31, 2020     11,255,129     $ 11,255     $ 6,326,590     $ (567,035 )   $ (281,797 )   $ 5,489,013  

 

5

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

 

    Three Months Ended  
    March 31,     March 31,  
    2021     2020  
Cash flows from operating activities:                
Net cash provided by (used in) operating activities     1,651,695       (1,214,913 )
                 
Cash flows from investing activities:                
Purchase of property and equipment     (1,229 )     -  
Repayment of loan from a third party     390,400       -  
Net cash provided by investing activities     389,171       -  
                 
Effect of exchange rate change on cash, cash equivalents and restricted cash     (21,443 )     (85,550 )
                 
Net increase (decrease) in cash, cash equivalents and restricted cash     2,019,423       (1,300,463 )
                 
Cash, cash equivalents and restricted cash, beginning balance     13,842,745       21,829,154  
                 
Cash, cash equivalents and restricted cash, ending balance   $ 15,862,168     $ 20,528,691  
                 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets                
Cash and cash equivalents as of March 31, 2021 and 2020, respectively     4,383,648       5,062,253  
Restricted cash as of March 31, 2021 and 2020, respectively     11,478,520       15,466,438  
Total cash, cash equivalents, and restricted cash as of March 31, 2021 and 2020, respectively   $ 15,862,168     $ 20,528,691  
                 
Supplemental cash flows information:                
                 
Cash paid for interest   $ -     $ -  
Cash paid for income tax   $ -     $ -  

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

6

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd and Subsidiaries (“Takung”), 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.

 

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 currently has no operations. 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.

 

7

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures, which are normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC.

 

Beginning in the first quarter of 2020, a strain of coronavirus (COVID-19) has spread globally and at this point, the extent to which the COVID-19 may impact operations of the Company is uncertain. The extent of the impact of the coronavirus on the Company's business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the three months ended March 31, 2021 may not be indicative of the future operating results for the fiscal year ending December 31, 2021 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.

 

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.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of March 31, 2021, its interim condensed consolidated results of operations and cash flows for the three months ended March 31, 2021 and 2020, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods. 

 

Recent Accounting Pronouncements

 

Except for the ASUs issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial statements upon adoption.

  

8

 

 

3. PREPAYMENT AND OTHER CURRENT ASSETS, NET

 

Prepayment and other current assets mainly consist of prepaid tax, prepaid services for maintenance of online trading system, prepaid advertising and promotional services, prepaid financial advisory and banking services, prepaid rent to a related party, rent deposit and as well as other current assets.

 

    March 31,     December 31,  
    2021     2020  
      (Unaudited)          
Prepaid tax   $ 12,139     $ 32,262  
Prepaid service fees     183,811       202,647  
Prepaid rent     359,839       -  
Staff advance     763       2,299  
Deposit     15,477       35,879  
Other current assets     -       6,300  
Less: allowance for doubtful accounts     -       -  
Prepayment and other current assets, net   $ 572,029     $ 279,387  

 

No provision for doubtful accounts was recognized for the three months ended March 31, 2021 and 2020.

  

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

    March 31,
2021
    December 31,
2020
 
      (Unaudited)          
Listing fee   $ 154,349     $ 154,771  
Less: allowance for doubtful accounts     -       -  
Account receivables, net   $ 154,349     $ 154,771  

  

No provision for doubtful accounts was recognized for the three months ended March 31, 2021 and 2020.

  

9

 

 

5. LOAN RECEIVABLES

 

The following table sets forth a summary of the loan agreements in loan receivables balance:

 

Date     Borrower   Lender   Original
Amount
(RMB)
    Outstanding
Balance
(RMB)
    Amount in
Reporting
Currency
(USD)
    Annual 
Interest
Rate
    Repayment 
Due Date
7/18/2019     Chongqing Aoge Import and Export Co.   Tianjin Takung     5,000,000       5,000,000     $ 763,149       0 %   7/30/2021
8/29/2019      Chongqing Aoge Import and Export Co.   Tianjin Takung     5,000,000       5,000,000       763,149       0 %   7/30/2021
9/20/2019      Chongqing Aoge Import and Export Co.   Tianjin Takung     4,000,000       4,000,000       610,519       0 %   7/30/2021
                Total             $ 2,136,817              

 

All the transactions entered with Chongqing Aoge Import and Export co. were aimed to meet the Company’s working capital needs in U.S. Dollars, which are freely convertible to Hong Kong Dollar.

 

·   The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company.

 

·   Hong Kong Takung entered into loan agreements (the “Hong Kong Dollar Loans”) with Friend Sourcing Ltd., a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum (See Note 8). Friend Sourcing is a non-related party to the Company.

 

The transactions with Friend Sourcing were aimed to meet the Company’s working capital needs in Hong Kong Dollars.

 

Through an understanding between Chongqing Aoge Import and Export Co. and Friend Sourcing, the Hong Kong Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that the Hong Kong Dollar Loans and the RMB Loans will be repaid simultaneously.

 

On November 30, 2020, Tianjin offered a short-term financing in an amount of $992,094 (RMB6,500,000) with an annual interest rate at 6% to a non-related third party, Tianjin Zhiyuan Enterprise Management Co., Ltd. The loan was matured on February 2, 2021. $534,204 (RMB 3,500,000) was paid off on December 31, 2020 and $462,255 (RMB3,028,603), inclusive of the outstanding principal balance, $457,889 (RMB3,000,000) and interest receivable, $4,366 (RMB28,603). This loan receivable was fully repaid on January 27, 2021.

  

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

    March 31,     December 31,  
    2021     2020  
      (Unaudited)          
Furniture, fixtures and equipment   $ 217,623     $ 218,430  
Leasehold improvements     23,152       23,216  
Computer trading and clearing system     3,458,697       3,468,346  
Transport equipment     109,796       110,245  
Sub-total     3,809,268       3,820,237  
Less: accumulated depreciation     (3,467,510 )     (3,382,241 )
 Property and equipment, net   $ 341,758     $ 437,996  

 

Depreciation expense was $96,613 and $127,930 for the three months ended March 31, 2021 and 2020, respectively.

 

10

 

 

7. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of March 31, 2021 and December 31, 2020 consisted of the following:

 

    March 31,     December 31,  
    2021     2020  
      (Unaudited)          
Accruals for professional fees   $ 471,002     $ 267,427  
Accruals for consulting fees     266,697       365,634  
Payroll payables     29,696       80,026  
Trading and clearing system     3,089       -  
Other payables     13,913       15,001  
Total accrued expenses and other payables   $ 784,397     $ 728,088  

 

8. SHORT-TERM BORROWINGS FROM A THIRD PARTY

 

In July 2019, Hong Kong Takung entered into HKD Loans with 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.

 

In the meantime, Tianjin Takung entered interest-free RMB Loans with another third party as a guarantee for the HKD Loans. The loan amount was $2,136,817 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loans are “secured” by the RMB Loans. It is an understanding between the parties that when the HKD Loans are repaid, the RMB Loans will be repaid at the same time.

 

Date     Borrower   Lender   March 31, 
2021
(USD)
    December 31,
2020
(USD)
    Annual
Interest
Rate
    Repayment 
Due Date
7/18/2019     Hong Kong Takung   Friend Sourcing Ltd.   $ 716,169     $ 718,127       8 %   7/30/2021
8/29/2019     Hong Kong Takung   Friend Sourcing Ltd.   $ 697,527     $ 699,434       8 %   7/30/2021
9/20/2019     Hong Kong Takung   Friend Sourcing Ltd.   $ 558,022     $ 559,548       8 %   7/30/2021
           Less: Discount loan payable   $ -     $ -              
          Total   $ 1,971,718     $ 1,977,109              

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of March 31, 2020. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings were $1,971,718 and $1,247,691 for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively. The interest expenses for the short-term borrowings were $nil and $38,913 for the three months ended March 31, 2021 and 2020, respectively.

  

9. RELATED PARTY BALANCES AND TRANSACTIONS

 

The following is a list of director and related parties to which the Company has transactions with:

 

(a) Jianping Mao (“Mao”), the Human Resources Management Director of Hong Kong Takung

  

(b) Jing Wang (“Wang”), the Chief Financial Officer of the Company since June 1, 2020 and the former legal representative of Tianjin Takung during period from May 28, 2020 to September 24, 2020

 

Amount due from related parties

 

Amount due from related parties consisted of the following as of the periods indicated:

 

    March 31,
2021
    December 31,
2020
 
      (Unaudited)          
Wang (b)(i)   $ 6,199,670     $ 6,225,134  
Mao(a)(ii)     -       111,099  
Less: allowance for doubtful accounts (ii)     -       (111,099 )
Total current amount due from a related party   $ 6,199,670     $ 6,225,134  

  

11

 

 

Amount due to a related party

 

Amount due to a related party consisted of the following as of the periods indicated:

 

    March 31,
2021
    December 31,
2020
 
      (Unaudited)          
Wang (b)(i)   $ 6,431,199     $ 6,448,784  
Total current amount due to a related party   $ 6,431,199     $ 6,448,784  

  

(i) Amount due to and due from Wang

  

On May 29, 2020, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with Wang for the loan of $6,431,199 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan as May 15, 2021. Hong Kong Takung is currently negotiating an extension of the loan with Wang.

 

In a meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Wang for the loan of $6,199,670 (RMB40,619,000) with the maturity date of the loan as May 15, 2021. Tianjin Takung is currently negotiating an extension of the loan with Wang.

 

Through an understanding between Wang and the Company, the HK Dollar Working Capital Loan is "secured" by the RMB Working Capital Loan. It is the understanding between the parties that the HK Dollar Working Capital Loan and the RMB Working Capital Loan will be repaid simultaneously.

 

(ii) Amount due from Mao

  

The amount due from Mao is primarily related to the lease deposit from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will expire on May 12, 2021. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $209,994 (RMB1,449,838) every six months and a deposit of $111,099 (RMB724,919). On May 12, 2020, the Company terminated the lease and recognized bad debt expense of $111,099 related to the deposit paid to Mao due to the remote likelihood of collecting the rent deposit. No related lease liability was recognized as of December 31, 2020.

 

 

(iii) Rent prepayment to Mao

 

On March 1, 2021, Tianjin Takung entered into two lease agreements with a related party, Mao for its office location in Tianjin, PRC and employee accommodation in Hong Kong. The leases will expire on February 28, 2022. Monthly rental payments for the office location and employee accommodation are $25,070 (RMB 162,500) and $7,135 (RMB46,250), respectively. The agreements require lump sum payments of $300,847 (RMB1,950,000) and $85,626 (RMB555,000), respectively. As of March 31, 2021, total rent amount paid to Mao with respect to these agreements included in prepayment was $349,777 (RMB2,291,667).

 

10. 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. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.

 

12

 

 

United States of America

  

The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on March 27, 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 March 31, 2021 due to the recent enactment.

 

As of March 31, 2021 and December 31, 2020, the Company in the United States had $1,809,680 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

 

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 $257,808) 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.

 

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 were subject to income tax at a rate of 25%.

 

The income tax provision consists of the following components:

 

    Three Months Ended
March 31,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
Current:                
Federal   $ -     $ -  
State     -       -  
Foreign     20,208       101,561  
Total Current   $ 20,208     $ 101,561  
                 
Deferred:                
Federal   $ -     $ -  
State     -       -  
Foreign     (24,981 )     (14,166 )
Total Deferred   $ (24,981 )   $ (14,166 )
                 
Total income tax expense   $ (4,773 )   $ 87,395  

 

 

13

 

 

A reconciliation between the Company’s actual provision for income taxes and the provision at the Hong Kong statutory rate is as follows:

 

    Three Months Ended
March 31,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
Loss before income tax expense   $ (577,361 )   $ (865,967 )
                 
Computed tax expense with statutory tax rate     (121,245 )     (142,884 )
Impact of different tax rates in other jurisdictions     3,719       (5,019 )
Impact of preferred tax rate     46,150       57,184  
                 
Non-deductible items:                
Tax effect of non-deductible expenses     (7,078 )     13,328  
Changes in valuation allowance     74,827       28,600  
Others     (1,146 )     136,186  
Total income tax expense   $ (4,773 )   $ 87,395  

 

The effective tax rate was 0.8% and (10.1)% for the three months ended March 31, 2021 and 2020, respectively.

 

Uncertain tax positions

 

The reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:

 

    March 31,
2021
    December 31,
2020
 
      (Unaudited)          
Uncertain tax liabilities, beginning of period   $ 101,789     $ -  
Settlements with tax authority during current year     (28,562 )     101,789  
Uncertain tax liabilities, end of period   $ 73,227     $ 101,789  

 

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 interim condensed consolidated financial statements as of March 31, 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 March 31, 2021 and December 31, 2020, respectively.

 

Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended 31 December 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of March 31, 2021 and December 31, 2020, the Company had $73,227 and $101,789, respectively, of uncertain tax liabilities related to the different methodology of certain tax non-deductible expenses applied by the IRD. The examination is currently in progress. Due to the uncertain tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in an adverse finding and we would be subject to additional liability which could be materially different from these estimates. In such circumstances, we will record additional tax expense or tax benefit in the period in which such the resolution occurs. The Company does not expect the position of uncertain tax liabilities will significantly fluctuate within the next twelve months.

 

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 income 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.

 

14

 

 

11. 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 six 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 Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.

 

The following table provides a summary of leases by balance sheet location as of March 31, 2021:

 

Assets/liabilities   Classification   As of March 31,
2021
 
Assets            
Operating lease right-of-use assets   Operating lease assets   $ 165,335  
             
Liabilities            
Current            
Operating lease liability - current   Current operating lease liabilities   $ 73,607  
             
Long-term            
Operating lease liability - non-current   Long-term operating lease liabilities     87,913  
             
Total lease liabilities       $ 161,520  

 

The operating lease expenses for the three months ended March 31, 2021 and 2020 were as follows:

 

        Three Months Ended March 31,  
Lease Cost   Classification   2021     2020  
Operating lease cost   Cost of revenue, general and administrative expenses   $ 57,275     $ 200,362  
Total lease cost       $ 57,275     $ 200,362  

 

Maturities of operating lease liabilities on March 31, 2021 were as follows:

 

Maturity of Lease Liabilities     Operating Leases  
2021 (remaining)     $ 66,528  
2022       80,493  
2023       15,263  
2024       15,263  
2025       -  
Thereafter       -  
Total lease payments     $ 177,547  
Less: interest       (16,027 )
Present value of lease payments     $ 161,520  

 

15

 

 

   

Three Months Ended

March 31,

 
Lease Term and Discount Rate   2021     2020  
Weighted-average remaining lease term (years)                
Operating leases     2.57       1.51  
                 
Weighted-average discount rate (%)                
Operating leases     8 %     8 %

 

   

 Three Months Ended

March 31,

 
Other Information   2021     2020  
Cash paid for amounts included in the measurement of lease liabilities                
Operating cash flows from operating leases   $ 17,126     $ 28,478  
Leased assets obtained in exchange for new operating lease liabilities     -       -  

 

12. LOSS PER SHARE

 

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.

 

    Three Months Ended
March 31,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
Numerator:                
Net loss   $ (572,588 )   $ (953,362 )
                 
Denominator:                
Weighted-average shares outstanding – Basic     11,271,379       11,255,129  
Stock options and restricted shares     -       -  
Weighted-average shares outstanding – Diluted     11,271,379       11,255,129  
                 
Loss per share                
-Basic   $ (0.05 )   $ (0.08 )
-Diluted   $ (0.05 )   $ (0.08 )

 

16

 

 

Due to the loss for the three months ended March 31, 2020, approximately 100,890 options and 6,250 restricted shares, respectively, were excluded from the calculation of diluted net loss per share. 

 

Due to the loss for the three months ended March 31, 2021, approximately 100,890 options and no restricted shares, respectively, were excluded from the calculation of diluted net loss per share. 

 

13. CONTINGENCIES

 

Around May and June 2020, the Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, Tianjin Takung and Hong Kong Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by a certain service agent. The claims amounted to approximately $0.23 million. Subsequently, one of the plaintiffs with a claim amount of $0.15 million withdrew his claim against Tianjin Takung on July 1, 2020. The withdrawal was approved by the Shanghai Pudong People’s Court on July 20, 2020. Meanwhile, the other litigation proceeding with a claim amount of approximately $0.08 million has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020. On November 24, 2020, the Tianjin City Beicheng District People’s Court ruled that the claim was without merit and dismissed the case.

 

On or around July 2020, a third claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung on the basis of alleged breaches of contract. The claim amount has yet to be determined. A court hearing will be held on July 20, 2021.

 

Except for the above, as of March 31, 2021 and through the issuance date of the condensed consolidated financial statements included in this Form 10-Q, the Company does not have any other significant indemnification claims.

 

14. SUBSEQUENT EVENTS

 

On April 1, 2021, Hong Kong Takung entered into a loan extension agreement for its HK Dollar Working Capital Loan with Friend Sourcing Ltd, with an extended maturity date to July 30, 2021. On the same day, Tianjin Takung also entered into a loan extension agreement for its RMB Working Capital Loan with Chongqing Aoge Import and Export Co. with an extended maturity date to July 30, 2021.

 

On April 21, 2021, our board of directors approved an award of the Company’s common stock to its directors, employees and consultants at a par value of $0.001 under the 2015 Incentive Stock Plan. The aggregate number of shares of the Company’s common stock granted was 335,000.

 

Other than the events aforementioned, the Company has evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements. 

 

17

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the report the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results unless required by applicable securities regulations or rules. The following discussion should be read in conjunction with our financial statements and the related notes filed herein.

  

Overview

 

We, through our wholly owned subsidiary, Hong Kong Takung, operate an electronic online platform located at http://en.takungae.com for artists, art dealers and art investors to offer and trade valuable artwork. We offer on-line 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 fees, trading commissions and management fees.

 

Our headquarter is located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong and Tianjin. Our new principal executive office is located at Room 709, Tower 2, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong.

 

Recent Developments

  

While the ongoing coronavirus pandemic is spreading throughout the world, our operations have fully resumed in March 2020. Overall, we had additional pieces of artwork listed and a larger trading transaction amounts during the first quarter in 2021 as discussed underneath. Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of global situation of COVID-19. To minimize the impact of such uncertainties, we reduced our workforces during the first quarter in 2021.

    

Results of Operation of Takung

 

Hong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees. 

 

18

 

 

  THREE-MONTH PERIOD ENDED MARCH 31, 2021 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2020

 

The following tables set forth our interim condensed consolidated statements of income data with a percentage:

  

    Three Months Ended March 31,  
    2021     % of
Revenue
    2020     % of
Revenue
 
    (Unaudited)           (Unaudited)        
Revenue   $ 779,108       100     $ 1,181,286       100  
Cost of revenue     (252,237 )     (32 )     (656,514 )     (56 )
Selling expense     (104,911 )     (14 )     (42,989 )     (4 )
General and administrative expenses     (1,013,158 )     (130 )     (1,110,447 )     (94 )
Total costs and expenses     (1,370,306 )     (176 )     (1,809,950 )     (154 )
Loss from operations     (591,198 )     (76 )     (628,664 )     (54 )
Interest and other income (expenses), net     13,837       2       (237,303 )     (20  
Loss before income tax expense     (577,361 )     (74 )     (865,967 )     (74 )
Income tax benefit (expense)     4,773       1       (87,395 )     (7 )
Net loss   $ (572,588 )     (73 )   $ (953,362 )     (81 )

 

Revenue

   

The following table sets forth our interim condensed consolidated revenue by revenue source:

 

   

Three Months Ended

March 31,

 
    2021     2020  
    (Unaudited)     (Unaudited)  
Listing fee revenue   $ 273,792     $ 176,943  
Commission revenue     358,086       900,823  
Management fee revenue     147,230       103,520  
Total   $ 779,108     $ 1,181,286  

 

19

 

 

  (i) Listing fee revenue

 

As of March 31, 2021, a total of 298 sets of artwork were listed for trade on our platform —comprising 73 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $30,627,634 (HK$237,600,000); 35 pieces of jewelry with a total listing value of $9,366,178 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,020,509 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,245,898 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,302 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,151 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,095,686 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,329,518 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,904 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,096,897 (HK$8,509,400), of which 22.5%-48% (for 73 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.

 

During the three months ended March 31, 2021, there were 3 sets of paintings listed on our platform. Their total listing values were $1,095,686 (HK$8,500,000) for the paintings, of which 24.9%-25% (for the paintings) of the listed values were charged as listing fees.

  

As of March 31, 2020, a total of 287 sets of artwork were listed for trade on our platform —comprising 62 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $26,779,740 (HK$208,100,000); 35 pieces of jewelry with a total listing value of $9,350,389 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,991,816 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,225,254 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $669,172 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $334,586 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,093,838 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,327,276 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,687 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,095,048 (HK$8,509,400), of which 22.5%-48% (for 62 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.

 

During the three months ended March 31, 2020, there were 2 sets of paintings listed on our platform. Their total listing values were $772,121 (HK$6,000,000) for the paintings, of which 22.83%-23% (for the paintings) of the listed values were charged as listing fees.

 

The listing fees charged increased to $273,792 during the three months ended March 31, 2021 compared to $176,943 for the same period ended March 31, 2020. Compared to those for the three months ended March 31, 2020, the number of new listing of paintings and the value of the artworks were slightly higher during the same period in 2021. There were three sets of paintings listed during the three months ended March 31, 2021 while there were two sets of paintings during the same period in 2020 listed on our platform. The total listing value of the new artworks for the three months ended March 31, 2021 was $1,095,686 compared to $772,121 for the three months ended March 31, 2020.

  

  (ii) Commission fee revenue

 

We generate commission fee from non-VIP traders and selected traders as follows:

 

For non-VIP traders, the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.0013 (HK$0.01).

  

For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.

 

We define traders as “inactive” if they meet the following criteria;

 

  · The trader defaults in payment over three months;

 

  · The trader did not incur any transactions in the month of reassessment;

 

  · The service agent has confirmed with the relevant trader that he/she was inactive.

  

20

 

 

Once an inactive trader has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant change in fact and circumstances and pursuant to ASC 606-10-25-1(e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.

 

We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.

 

We used to offer commissions to Traders and service agents. Effective January 1, 2019, we no longer offered commission to our Traders. For service agents, we offer a total of 40% to 75% of the commission earned from transactions with new Traders to the service agents when they bring in an agreed number of Traders to the trading platform.

 

The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.

 

Total commission revenue decreased by $542,737 or 60.2% for the three months ended March 31, 2021 to $358,086 compared to $900,823 for the three months ended March 31, 2020. For the three months ended March 31, 2021, the trading amount was approximately $3,625,533,613 (HKD28,125,802,109) compared to $1,669,248,138 (HK$12,971,393,429) in the same period in 2020. Although we incurred a higher amount of trading amount in the first quarter 2021 compared to that in the same period in 2020, majority of the transactions were initiated by our VIP traders that would not incur commission revenue. Therefore, our commission revenue for the first quarter in 2021 was significantly lower than that in the same period in 2020.

 

  (iii) Management fee revenue

 

We charge Traders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which is calculated at $0.0013 (HK$0.01) per 100 artwork units per day. 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.

 

During the three months period ended March 31, 2021, management fee revenue increased by $43,710, from $103,520 for the three months ended March 31, 2020 to $147,230 in the same period in 2021, due to an increase in trading transaction volume in the first quarter in 2021 compared to that in the same period in 2020 as discussed above.

 

Revenue by customer type

 

The following table presents our revenue by customer type:

 

   

Three Months Ended

March 31,

 
    2021     2020  
    (Unaudited)     (Unaudited)  
Artwork owners   $ 273,792     $ 176,943  
Non – VIP Traders     312,640       856,132  
VIP Traders     192,676       148,211  
Total   $ 779,108     $ 1,181,286  

 

21

 

 

Cost of Revenue

 

    Three Months Ended
March 31,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
Commissions paid to service agents   $ 135,174     $ 497,601  
Depreciation     69,062       96,191  
Internet service charge     19,169       34,332  
Artwork insurance     12,744       12,120  
Artwork storage     16,088       16,270  
Total   $ 252,237     $ 656,514  

 

Cost of revenue for the three months ended March 31, 2021 and March 31, 2020 was $252,237 and $656,514, respectively. The decrease in cost of revenue by $404,277, for the three months ended March 31, 2021 compared to March 31, 2020, was mainly due to a decrease in commissions paid to service agents by $362,427 because of a decrease in trading transactions initiated by non-VIP traders in the first quarter in 2021, a decrease in depreciation by $27,129 due to having fully depreciated of some of our computer equipment and trading systems, a decline in internet service charges by $15,163 and artwork storage costs by $182.

 

Gross Profit

 

Gross profit was $526,871 or 67.6% for the three months ended March 31, 2021, compared to $524,772 or 44.4% for the three months ended March 31, 2020.

 

Although our total revenue for the three months ended March 31, 2021 decreased by $402,178 or 34% compared to that for the same period in 2020, our gross profit margin was higher for the three months ended March 31, 2021 compared to that for the same period in 2020 by 23.2%. The higher gross profit margin in current period was primarily driven by the plummet in the cost of revenue by 61.6% as discussed aforementioned.

 

Operating Expenses

 

General and administrative expenses for the three months ended March 31, 2021 were $1,013,158 compared to $1,110,447 for the three months ended March 31, 2020. The decrease in general and administrative expenses by $97,289 was predominantly attributable to a decrease in office, insurance and rental expenses by $198,521 due to an early termination of a lease agreement by Tianjin Takung in May 2020, a reduction in salary and welfare expense by $98,490 due to fewer employees in the first quarter 2021, a lower travel and accommodation fees by $28,274 and a decrease in non-deductible input VAT expense by $35,951 as a result of a fall in service fees paid to Tianjin Takung in the first quarter 2021 compared to that in the same period in 2020. The overall decrease was offset by a rise in consultancy fee by $199,815 as we engaged third-party computer technicians for system upgrades and an increase in legal and professional fees by $71,760 due to an increase in auditor’s fee.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended March 31, 2021 and March 31, 2020.

 

    Three Months Ended     Three Months Ended  
    March 31, 2021     March 31, 2020  
    (Unaudited)     (Unaudited)  
    Amount ($)     % of Total     Amount ($)     % of Total  
Salary and welfare     226,242       22.3       324,732       29.2  
Office, insurance and rental expenses     126,258       12.5       324,779       29.2  
Legal and professional fees     260,978       25.8       189,218       17.1  
Non-deductible input VAT expense     36,142       3.6       72,093       6.5  
Travel and accommodation fees     8,567       0.8       36,841       3.3  
Consultancy fee     234,932       23.2       35,117       3.2  
Depreciation     27,551       2.7       31,739       2.9  
Share based compensation expense     3,717       0.4       5,986       0.5  
Others     88,771       8.7       89,942       8.1  
Total general and administrative expense   $ 1,013,158       100.0     $ 1,110,447       100.0  

  

22

 

 

Other income (expenses)

 

We incurred other income for the three months ended March 31, 2021, $13,837, compared to other expenses of $237,303 for the same period in 2020. There was a significant decrease in exchange loss by $227,719, arising from the appreciation of the Renminbi against the US dollar in the first quarter 2021.

 

Income tax expenses

 

The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,808) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,808) and PRC enterprise income tax rate of 25%.

 

The effective tax rates for the three months ended March 31, 2021 and 2020 were 0.8% and (10.1)%, respectively.  

 

Income tax benefit (expense) for the three months ended March 31, 2021 and 2020 were $4,773 and $(87,395), respectively. Our income tax expense was higher in the three months ended March 31, 2020 as during the three months ended March 31, 2020, we recognized an uncertain tax position driven by the income tax examination preliminary result from the tax authority of Hong Kong on the profits tax returns filed for the tax years December 31, 2016 through 2018 by Takung Hong Kong. The tax examination hasn’t been closed as of the filing of this quarterly report.

 

Net Loss

 

We recorded a net loss of $572,588 and $953,362 for the three months ended March 31, 2021 and 2020, respectively.

 

The reduction in the net loss by $380,774 during this current period was predominately due to a decrease in foreign exchange loss by $227,719 and a fall in income tax expense by $92,168.

 

23

 

 

Liquidity and Capital Resources

 

The following tables set forth our interim condensed consolidated statements of cash flow:

 

    Three Months Ended  
    March 31,  
    2021     2020  
    (Unaudited)     (Unaudited)  
Net cash provided by (used in) operating activities   $ 1,651,695     $ (1,214,913 )
Net cash provided by investing activities     389,171       -  
Effect of exchange rate change on cash and cash equivalents     (21,443 )     (85,550 )
Net increase (decrease) in cash, cash equivalents and restricted cash     2,019,423       (1,300,463 )
Cash, cash equivalents and restricted cash, beginning balance     13,842,745       21,829,154  
Cash, cash equivalents and restricted cash, ending balance   $ 15,862,168     $ 20,528,691  

 

Sources of Liquidity

 

During the three months ended March 31, 2021, net cash provided by operating activities totaled $1,651,695, which chiefly driven by a net increase in operating assets and liabilities, $2,139,959, non-cash adjustments to net loss, $84,324 offset by net loss, $572,588. Net cash provided by investing activities, $389,171, included loan repayment from a third party, $390,400 offset by a purchase of computer equipment by Tianjin Takung, $1,229. There was no net cash provided by or used in financing activities during the three months ended March 31, 2021. The resulting change in cash for the period was an increase of $2,019,423. The cash balance at the beginning of the period was $13,842,745. The cash balance as of March 31, 2021 was $15,862,168.

 

During the three months ended March 31, 2020, net cash used in operating activities totaled $1,214,913, which predominately resulted from the net loss of $953,362 and a decline in net change in operating assets and liabilities of $654,218 and offset by non-cash adjustments to net loss of $392,667. There was no net cash provided by or used in investing or financing activities during the three months ended March 31, 2020. The resulting change in cash for the period was a decrease of $1,300,463. The cash balance at the beginning of the period was $21,829,154. The cash balance as of March 31, 2020 was $20,528,691.

   

As of March 31, 2021, the Company had $20,846,968 in total current liabilities, which included $784,397 in accrued expenses and other payables, $11,478,520 in customers’ deposits, $1,971,718 in short-term borrowings from a third party, $6,431,199 in amount due to a related party, $8,390 in advance from customers, $73,607 in lease liabilities and $99,137 in VAT payables.

 

As of December 31, 2020, the Company had $18,494,724 in total current liabilities, which consisted of $728,088 in accrued expenses and other payables, $9,144,610 in customer deposits, $1,977,109 in short-term borrowings from a third party, $6,448,784 in amount due to related parties, $17,412 in advance from customers, $72,367 in lease liabilities and $106,354 in VAT payables.

  

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 the State 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 stockholders, 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.

 

Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China 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 of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.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.

 

24

 

 

Off-Balance Sheet Arrangements 

 

We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.

 

Future Financings

 

Although our trading volume increased in the first quarter 2021, our commission revenue was lower in the three months ended March 31, 2021 compared to that in the same period in 2020 as discussed aforementioned. We continue to explore company restructuring and business opportunities, including re-evaluation of the company’s unit business and a downsize of the workforce to further streamline our costs of operation. Our management forecasts that we have sufficient cash from our operations to fund our business organically. However, we may conduct equity sales of our common shares in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, and if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.

 

Critical Accounting Policies

 

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.

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC. 

 

Recent Accounting Pronouncements

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Ms. Zhihua Yang and our Chief Financial Officer, Mrs. Jing Wang. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of March 31, 2021 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

25

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Around May and June 2020, the Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, Tianjin Takung and Hong Kong Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by a certain service agent. The claims amounted to approximately $0.23 million. Subsequently, one of the plaintiffs with a claim amount of $0.15 million withdrew his claim against Tianjin Takung on July 1, 2020. The withdrawal was approved by the Shanghai Pudong People’s Court on July 20, 2020. Meanwhile, the other litigation proceeding with a claim amount of approximately $0.08 million has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020. On November 24, 2020, the Tianjin City Beicheng District People’s Court ruled that the claim was without merit and dismissed the case.

 

On or around July 2020, a third claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung on the basis of alleged breaches of contract. The claim amount has yet to be determined. A court hearing will be held on July 20, 2021.

 

Item 6. Exhibits.

 

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

 

Exhibit
No.
  Description
     
3.1   Certificate of Incorporation (1)
3.2   By-laws of the Company (1)
3.3   Certificate of Amendment of the Certificate of Incorporation (1)
3.4   Certificate of Amendment of the Certificate of Incorporation (1)
3.5   Certificate of Amendment (2)
3.6   Certificate of Amendment of the Certificate of Incorporation (4)
3.7   Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
3.8   Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
10.1   Memorandum regarding loan extension, dated April 1, 2021, signed by Hong Kong Takung Art Co., Ltd., Friend Sourcing Ltd, Takung Cultural Development (Tianjin) Co., Ltd. and Chongqing Aoge Import and Export Co., Ltd.*
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
     
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Label Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*

  

(1)       Incorporated by reference to the exhibit to our registration statement on Form S-1 filed with the SEC on August 16, 2011.

(2)       Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013.

(3)       Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014.

(4)       Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014.

 

*Filed herewith.

**Furnished herewith.

 

26

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  TAKUNG ART CO., LTD
     
Date: May 17, 2021 By: /s/ Zhihua Yang
    Zhihua Yang
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: May 17, 2021 By: /s/ Jing Wang
    Jing Wang
    Chief Financial Officer
    (Principal Financial Officer)

 

27

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