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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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.   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).   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

Smaller reporting company

 

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            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 November 19, 2021 is 13,957,353.

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.

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

31

Item 4. Controls and Procedures.

31

PART II.

Other Information

31

Item 6. Exhibits.

32

Signatures

33

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)

    

September 30, 

    

December 31, 

    

2021

    

2020

 

(Unaudited)

 

  

ASSETS

Current assets

 

  

 

  

Cash and cash equivalents

$

8,859,865

$

4,698,135

Restricted cash

 

53,241,711

 

9,144,610

Account receivables, net

 

234,143

 

154,771

Prepayment and other current assets, net

 

512,664

 

279,387

Amount due from related parties

 

6,303,970

 

6,225,134

Loan receivables

 

2,172,766

 

2,609,748

Total current assets

 

71,325,119

 

23,111,785

 

 

Non-current assets

 

 

Property and equipment, net

 

216,130

 

437,996

Intangible assets

 

22,414

 

22,504

Non-marketable investment

10,630,120

Deferred tax assets, net

 

548,156

 

638,860

Operating lease right-of-use assets

130,073

183,409

Other non-current assets

 

18,430

 

18,594

Total non-current assets

 

11,565,323

 

1,301,363

Total assets

$

82,890,442

$

24,413,148

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

LIABILITIES

 

 

Current liabilities

 

 

Accrued expenses and other payables

$

1,073,795

$

728,088

Customer deposits

 

53,241,711

 

9,144,610

Advance from customers

 

21,895

 

17,412

Short-term borrowings from a third party

 

1,969,084

 

1,977,109

Amount due to a related party

 

6,422,608

 

6,448,784

Operating lease liabilities - current

76,719

72,367

Tax payables

 

11,009

 

106,354

Total current liabilities

 

62,816,821

 

18,494,724

Non-current liabilities

 

 

Operating lease liabilities, non-current

41,714

103,379

Total non-current liabilities

41,714

103,379

Total liabilities

 

62,858,535

 

18,598,103

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

Common stock (1,000,000,000 shares authorized; $0.001 par value; 13,957,353 shares issued and outstanding as of September 30, 2021; 11,271,379 shares issued and outstanding as of December 31, 2020)

 

13,957

 

11,271

Additional paid-in capital

 

30,431,500

 

6,358,115

Accumulated deficit

 

(10,017,410)

 

(226,311)

Accumulated other comprehensive loss

 

(396,140)

 

(328,030)

Total shareholders’ equity

 

20,031,907

 

5,815,045

Total liabilities and shareholders’ equity

$

82,890,442

$

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) INCOME

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

    

For the Three Months Ended

    

For the Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Revenue

 

  

 

  

 

  

 

  

Listing fee

$

320,173

$

$

877,267

$

557,789

Commission

 

1,083,976

 

568,853

 

2,090,372

 

2,657,989

Management fee

 

1,124,528

 

116,612

 

1,483,641

 

330,138

Consultancy service fee

80,000

80,000

Total revenue

 

2,608,677

 

685,465

 

4,531,280

 

3,545,916

 

 

 

 

Cost of revenue

 

(719,826)

 

(393,990)

 

(1,424,528)

 

(1,804,566)

Gross profit

 

1,888,851

 

291,475

 

3,106,752

 

1,741,350

 

 

 

 

Operating expenses:

 

 

 

 

General and administrative expenses

 

(3,817,635)

 

(617,228)

 

(12,783,107)

 

(2,657,403)

Selling expense

 

(48,511)

 

(174,379)

 

(284,980)

 

(278,953)

Total operating expenses

 

(3,866,146)

 

(791,607)

 

(13,068,087)

 

(2,936,356)

 

 

 

 

Loss from operations

 

(1,977,295)

 

(500,132)

 

(9,961,335)

 

(1,195,006)

 

 

 

 

Other income and expenses:

 

 

 

 

Other income

 

59,673

 

55,497

 

81,754

 

158,941

Loan interest expense

 

(86,823)

 

(21,678)

 

(86,823)

 

(100,038)

Exchange gain

 

95,657

 

547,760

 

265,790

 

344,275

Total other income

 

68,507

 

581,579

 

260,721

 

403,178

 

 

 

 

(Loss) income before provision for income taxes

 

(1,908,788)

 

81,447

 

(9,700,614)

 

(791,828)

 

 

 

 

Income tax expense (benefit)

 

83,892

 

(631)

 

90,485

 

94,225

 

 

 

 

Net (loss) income

$

(1,992,680)

$

82,078

$

(9,791,099)

$

(886,053)

 

 

 

 

Foreign currency translation adjustment

 

(34,280)

 

(38,371)

 

(68,110)

 

(48,747)

 

 

 

 

Comprehensive (loss) income

$

(2,026,960)

$

43,707

$

(9,859,209)

$

(934,800)

 

 

 

 

(Loss) income per common share - basic

$

(0.16)

$

0.01

$

(0.82)

$

(0.08)

(Loss) income per common share - diluted

$

(0.16)

$

0.01

$

(0.82)

$

(0.08)

Weighted average number of common shares outstanding-basic

 

12,689,317

 

11,271,379

 

11,897,019

 

11,261,694

Weighted average number of common shares outstanding-diluted

 

12,689,317

 

11,271,379

 

11,897,019

 

11,261,694

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)

    

    

    

    

    

Accumulated

    

Additional

other

Number

Common

Paid-in

Accumulated

comprehensive

    

of shares

    

Stock

    

capital

    

deficit

    

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

Issuance of ordinary shares for restricted stock award

335,000

335

6,863,814

6,864,149

Exercise of stock options

61,065

61

180,424

180,485

Net loss

(7,225,831)

(7,225,831)

Foreign currency translation adjustment

3,933

3,933

Balance, June 30, 2021

11,667,444

$

11,667

$

13,406,070

$

(8,024,730)

$

(361,860)

$

5,031,147

Issuance of ordinary shares for professional services

160,000

160

1,897,440

1,897,600

Issuance of ordinary shares related to a private placement

571,429

571

4,999,429

5,000,000

Issuance of ordinary shares related to a non-marketable investment

1,558,480

1,559

10,128,561

10,130,120

Net loss

(1,992,680)

(1,992,680)

Foreign currency translation adjustment

(34,280)

(34,280)

Balance, September 30, 2021

13,957,353

$

13,957

$

30,431,500

$

(10,017,410)

$

(396,140)

$

20,031,907

    

    

    

Retained

Accumulated

    

    

Additional 

earnings

 other 

Number

Common

Paid-in

(accumulated

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

Issuance of ordinary shares for restricted stock award

6,250

6

(6)

Issuance of ordinary shares for professional services

10,000

10

13,240

13,250

Shared-based compensation

6,053

6,053

Net loss

(14,769)

(14,769)

Foreign currency translation adjustment

(1,608)

(1,608)

Balance, June 30, 2020

 

11,271,379

11,271

6,345,877

(581,804)

(283,405)

5,491,939

Share-based compensation

6,119

6,119

Net income

82,078

82,078

Foreign currency translation adjustment

(38,371)

(38,371)

Balance, September 30, 2020

 

11,271,379

$

11,271

$

6,351,996

$

(499,726)

$

(321,776)

$

5,541,765

5

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED Consolidated Statements of Cash Flows

(Stated in U.S. Dollars)

(UNAUDITED)

    

    

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net cash provided by (used in) operating activities

$

43,471,227

$

(6,680,813)

 

 

Cash flows from investing activities:

 

 

Purchase of property and equipment

 

(1,688)

 

(19,961)

Purchase of a non-marketable investment

(500,000)

Loan repayment from a third party

 

389,917

 

Net cash used in investing activities

 

(111,771)

 

(19,961)

 

 

Cash flows from financing activities:

 

 

Proceeds from stock option exercised

 

180,485

 

Proceeds from a private placement

5,000,000

Net cash provided by financing activities

 

5,180,485

 

Effect of exchange rate change on cash, cash equivalents and restricted cash

(281,110)

122,268

Net increase (decrease) in cash, cash equivalents and restricted cash

48,258,831

(6,578,506)

Cash, cash equivalents and restricted cash, beginning balance

 

13,842,745

 

21,829,154

Cash, cash equivalents and restricted cash, ending balance

$

62,101,576

$

15,250,648

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets

 

 

Cash and cash equivalents as of September 30, 2021 and 2020, respectively

 

8,859,865

 

4,934,049

Restricted cash as of September 30, 2021 and 2020, respectively

 

53,241,711

 

10,316,599

Total cash, cash equivalents, and restricted cash as of September 30, 2021 and 2020, respectively

$

62,101,576

$

15,250,648

Supplemental cash flows information:

 

 

Cash paid for interest

$

86,823

$

Cash paid for income tax

$

112,429

$

58,452

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 is engaged  in blockchain and non-fungible tokens (“NFT”) businesses, including consultancy service for NFT launch projects, developing its own NFT marketplace to facilitate users to buy and sell NFTs, as well as development of block chain-based online games. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.

MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ focused on exploring business opportunities and promoting its artwork trading business. Tianjin MQ was deregistered on August 10, 2020 due to the Company streamlining its operation.

7

Cultural Objects Provenance Holdings Limited

Cultural Objects Provenance Holdings Limited is an investment holding company. Its wholly-owned subsidiary is headquartered in Hong Kong, with global outposts in China (Shenzhen), Europe (Germany), and USA (NY/LA). It is an artwork authentication platform powered by blockchain. According to company home page, the subsidiary is the official technology parrter for NANZUKA Gallery in Tokyo, Japan. It authenticated some sought-after editions and limited edition works from some of the world’s most prolific artists, including Hajime Sorayama, Javier Calleja, Daniel Arsham, James Jarvis, and more.

On May 28, 2021, Takung entered into a Securities Purchase Agreement (the “SPA”) with Cultural Objects Provenance Holdings Limited (“Cultural Objects”), a British Virgin Islands company with a wholly-owned subsidiary in Hong Kong engaging in an operation of an artwork authentication platform powered by blockchain with global presence in China, Germany and the United States.  Takung shall invest in Cultural Objects through paying certain purchase that consists of cash consideration, $500,000 and issuance of 282,000 shares of common stock of Takung in exchange for 54,100 common shares of Cultural Objects and 290,000 unvested restricted shares of common stock of Takung to Cultural Objects in exchange for 32,460 unvested common shares of Cultural Objects.

On August 21, 2021, Takung and Cultural Objects entered to an amendment to the SPA.  The amendment provides that the original purchase price was amended to be $500,000 in cash and the issuance of 771,040 restricted shares of common stock of Takung to Cultural Objects in exchange for 54,100 common shares of Cultural Objects, and, subject to the satisfaction of the conditions stipulated in the SPA, the issuance of 787,440 unvested restricted shares of common stock of Takung to Cultural Objects in exchange for 32,460 unvested common shares of Cultural Objects. The cash consideration of $500,000 was paid to Cultural Objects by the end of August 2021.  On September 9, 2021, an aggregate amount of 1,558,480 restricted shares of common stock of Takung issued to Cultural Objects in an exchange for an aggregate 86,560 common shares of Cultural Objects. Together with the cash consideration paid $500,000 and the total value of the restricted shares issued to Cultural Objects, $10,130,120, the total value of the investment in Cultural Objects was $10,630,120 (see Note 3).

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 September 30, 2021 and for the three and nine months ended September 30, 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 2021, a strain of coronavirus (COVID-19) has spread globally. Although the Company’s operations have fully resumed in March 2021 and maintained an increasing trend of new trader accounts opening, the extent of the impact of the coronavirus on the Company's business and operations is highly uncertain and cannot be predicted with confidence. The Company’s business and operation 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 nine months ended September 30, 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, revenue 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 September 30, 2021, its interim condensed consolidated results of operations and cash flows for the three and nine months ended September 30, 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.

8

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.

3. GOING CONCERN

Due to the recent regulatory scrutiny by PRC governments on digital asset related business, the artwork unit trading platform operated by the PRC subsidiary Tianjin Takung was suspended by the local authority. The Management became aware of the suspension on or around November 8, 2021. The local authority indicated the suspension was to facilitate certain investigation although it did not announce the purpose of the investigation. The Company intends to fully cooperate with the local authority's investigation.

In the event that the suspension carries on for a substantial period of time or the investigation results in unfavourable outcome, the Company is subject to various risks, including, but not limited to, permanent discontinuation of the artwork unit trading platform business, material loss of Tianjin Takung’s carrying assets, material impact to the Company’s financial performance and liquidity, and being involved in litigation.

The following table sets forth the carrying value of the assets and liabilities of Tianjin Takung whose operation was suspended as disclosed above, which were included in the accompanying unaudited condensed consolidated financial statements:

    

September 30,

    

December 31,

2021

2020

ASSETS

 

  

 

  

CURRENT ASSETS

 

  

 

  

Cash and cash equivalents

$

5,897,115

$

3,922,665

Restricted cash

 

53,241,711

 

9,144,610

Prepayment and other current assets, net

 

212,868

 

71,876

Intercompany receivables

 

1,439,513

 

1,379,393

Amount due from related parties

 

6,303,970

 

6,225,134

Loan receivables

 

2,172,766

 

2,609,748

Total current assets

 

69,267,943

 

23,353,426

NON-CURRENT ASSETS

 

  

 

  

Property and equipment, net

 

113,481

 

231,939

Deferred tax assets, net

 

138,501

 

125,190

Operating lease right-of-use assets

 

51,953

 

59,790

Total non-current assets

 

303,935

 

416,919

TOTAL ASSETS

$

69,571,878

$

23,770,345

CURRENT LIABILITIES

 

  

 

  

Accrued expenses and other payables

$

614,128

$

436,674

Customer deposits

 

53,241,711

 

9,144,610

Intercompany payables

 

16,328,379

 

14,829,608

Operating lease liabilities - current

 

12,381

 

11,517

Tax payable

 

11,009

 

20,003

Total current liabilities

 

70,207,608

 

24,442,412

NON-CURRENT LIABILITIES

 

  

 

  

Operating lease liability - non-current

 

27,932

 

40,610

TOTAL LIABILITIES

$

70,235,540

$

24,483,022

The Company has considered whether there is substantial doubt about its ability to continue as a going concern based on above factor. In evaluating if there is substantial doubt about its ability to continue as a going concern, the Company is trying to alleviate the

9

going concern risk through further developing its operations in blockchain and NFT related businesses including consultancy services, development of NFT marketplace and “Play to Earn” style block chain-based online games.

Meanwhile, the Company is actively seeking other strategic partners with resources that can expand its blockchain and NFT businesses.

4. INVESTMENTS

We adopted ASU 2016-01 on January 1, 2018.  This guidance requires us to measure all equity investments that are not accounted for under the equity method or result in consolidation at fair value and recognize any changes in net income.  For equity investments with readily determinable and observable fair values, we use quoted market prices to determine the fair value of equity securities.  For equity investments without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Equity investments with readily determinable fair values that are not accounted for under the equity method classified as trading are not assessed for impairment, since they are carried at fair value with the change in fair value included in net income. Similarly, prior to the adoption of ASU 2016-01, equity investment classified as trading was not tested for impairment.

Equity investments without readily determinable fair values are reviewed each reporting period to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. When such events or changes occur, we assess the fair value compared to our cost basis in the investment. We also perform this assessment every reporting period for each investment for which our cost basis has exceeded the fair value.

For investments in privately-held companies, management's assessment of fair value is based on valuation methodologies such as discounted cash flows, estimates of revenue and appraisals, as applicable. We consider and apply the assumptions that we believe market participants would use in evaluating estimated future cash flows when utilizing the discounted cash flow or estimates of revenue valuation methodologies.  In the event the fair value of an investment declines below our cost basis, management determines if the decline in fair value is other than temporary and records an impairment accordingly.

As of September 30, 2021, our investment merely includes a non-marketable investment in a privately held company incorporated in British Virgin Islands without readily determinable market values. We elected the measurement alternative under which we measured the investment at cost minus impairment with an adjustment to the changes from observable price changes in orderly transactions for the similar investments of the same issuer.

The carrying value is measured as the total initial cost minus impairment.  The carrying value for our non-marketable investment is summarized below:

September 30,

December 31,

    

2021

    

2020

(Unaudited)

Total initial cost

$

10,630,120

$

Cumulative net gain (loss)

 

 

Total carrying value

$

10,630,120

$

For the three months and nine months ended September 30, 2021, we did not incur any unrealized gain or loss in connection with the non-marketable investment.  Since the investment was acquired in August 2021, there was no unrealized gain or loss incurred for the three months and nine months ended September 30, 2020.

10

5. PREPAYMENT AND OTHER CURRENT ASSETS, NET

Prepayment and other current assets mainly consist of the prepaid tax, prepaid service fees, as well as staff advance.

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Prepaid tax

$

26,341

$

32,262

Prepaid service fees

 

335,200

 

202,647

Prepaid rent

 

150,347

 

Staff advance

 

 

2,299

Deposit

 

 

35,879

Other current assets

776

6,300

Less: allowance for doubtful accounts

Prepayment and other current assets, net

$

512,664

$

279,387

No provision for doubtful accounts was recognized for the three and nine months ended September 30, 2021 and 2020, respectively.

6. ACCOUNT RECEIVABLES, NET

Account receivables consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Listing fee

$

154,143

$

154,771

Consultancy service

80,000

Less: allowance for doubtful accounts

 

 

Account receivables, net

$

234,143

$

154,771

No provision for doubtful accounts was recognized for the three and nine months ended September 30, 2021 and 2020, respectively.

7. LOAN RECEIVABLES

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

Amount in

    

    

    

Original

    

Outstanding

    

Reporting

    

Annual

    

Amount

Balance

Currency

Interest

Repayment

Date

    

Borrower

    

Lender

    

(RMB)

    

(RMB)

    

(USD)

    

Rate

    

Due Date

7/18/2019

 

Chongqing Aoge Import and Export Co.

 

Tianjin Takung

 

5,000,000

 

5,000,000

$

775,988

 

0

%  

4/1/2022

8/29/2019

 

Chongqing Aoge Import and Export Co.

 

Tianjin Takung

 

5,000,000

 

5,000,000

$

775,988

 

0

%  

4/1/2022

9/20/2019

 

Chongqing Aoge Import and Export Co.

 

Tianjin Takung

 

4,000,000

 

4,000,000

$

620,790

 

0

%  

4/1/2022

 

  

 

  

 

Total

 

  

$

2,172,766

 

  

 

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.

11

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. The loans were extended on August 1, 2020 with a new repayment due date on April 1, 2022.

On November 30, 2020, Tianjin offered a short-term financing in an amount of $1,008,784 (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. Portion of the loan amount, $543,191 (RMB 3,500,000) was paid off on December 31, 2020 . The remaining balance, $470,032 (RMB3,028,603), inclusive of the outstanding principal balance, $465,593 (RMB3,000,000) and interest receivable, $4,439 (RMB28,603) was fully repaid on January 27, 2021.

8. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Furniture, fixtures and equipment

$

220,130

$

218,430

Leasehold improvements

 

23,121

 

23,216

Computer trading and clearing system

 

3,473,208

 

3,468,346

Transport equipment

 

111,644

 

110,245

Sub-total

 

3,828,103

 

3,820,237

Less: accumulated depreciation

 

(3,611,973)

 

(3,382,241)

 Property and equipment, net

$

216,130

$

437,996

Depreciation expense was $57,747 and $109,766 for the three months ended September 30, 2021 and 2020, respectively, and $225,389 and $356,756 for the nine months ended September 30, 2021 and 2020, respectively.

9. ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of September 30, 2021 and December 31, 2020 consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Accruals for professional fees

$

611,309

$

267,427

Accruals for consulting fees

302,308

365,634

Payroll payables

 

30,247

 

80,026

Trading and clearing system

 

5,509

 

Accrued interest

86,625

Other payables

 

37,797

 

15,001

Total accrued expenses and other payables

$

1,073,795

$

728,088

10. 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. On August 1, 2021, Hong Kong Takung further extended the financing with Friend Souring to April 1, 2022. An interest payable, $86,823, was accrued upon extension and was paid on October 22, 2021.

12

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 $2,172,766 (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. On August 1, 2021, Tianjin Takung further extended the financing with the third party to April 1, 2022.

September 30, 

December 31, 

Annual

2021

2020

Interest

Repayment

Date

    

Borrower

    

Lender

    

(USD)

    

(USD)

    

Rate

    

Due Date

7/18/2019

 

Hong Kong Takung

 

Friend Sourcing Ltd.

$

715,213

$

718,127

 

6~8

%  

4/1/2022

8/29/2019

 

Hong Kong Takung

 

Friend Sourcing Ltd.

$

696,595

$

699,434

 

6~8

%  

4/1/2022

9/20/2019

 

Hong Kong Takung

 

Friend Sourcing Ltd.

$

557,276

$

559,548

 

6~8

%  

4/1/2022

 

 

Less: Discount loan payable

$

$

 

  

 

  

 

  

 

Total

$

1,969,084

$

1,977,109

 

  

 

  

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2021. The fair value of the short-term borrowings approximates their carrying amounts.

11. 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”), Human Resources Management Director of Hong Kong Takung;
(b) Jing Wang (“Wang”), former Chief Financial Officer of the Company from June 1, 2020  through June 1, 2021 and former legal representative of Tianjin Takung during period from May 28, 2020 to September 24, 2020. On June 1, 2021, the term of the employment of Wang expired;
(c) Sze Chan (“Chan”), Vice President of Hong Kong Takung since November 17, 2020.

Amount due from related parties, net

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

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Chan (c)(i)

 

$

6,303,970

 

$

Wang(b)(i)

6,225,134

Mao(a)(ii)

111,099

Less: allowance for doubtful accounts (ii)

(111,099)

Total current amount due from a related party

$

6,303,970

$

6,225,134

Amount due to related parties

Amount due to related parties consisted of the following as of the years indicated:

    

September 30, 

    

December 31, 

    

2021

    

2020

(Unaudited)

Chan (c)(i)

$

6,422,608

$

Wang (b)(i)

6,448,784

Total current amount due to a related party

$

6,422,608

$

6,448,784

13

(i)    Amount due to and due from Wang and Chan

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 $6,422,608 (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 extended the loan with Wang with the maturity date on May 15, 2022. On May 29, 2021, the loan agreement was transferred to Chan with the identical maturity date.

In a meantime, Tianjin Takung entered into an interest-free loan agreement (the “RMB Working Capital Loan”) with Wang for the loan of $6,303,970 (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. Tianjin Takung extended the loan arrangement with Wang with the maturity date on May 15, 2022.   On May 29, 2021, the loan agreement was transferred to Chan with the identical maturity date.

Through an understanding between Chan 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 to and 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 was set to 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 $224,083 (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 and September 30,2021.

(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 $25,115 (RMB 162,500) and $7,148 (RMB46,250), respectively. The agreements require lump sum payments of $302,635 (RMB1,950,000) and $86,135 (RMB555,000), respectively. As of September 30, 2021, total rent amount paid to Mao with respect to these agreements included in prepayment was $161,987 (RMB1,043,750).

12. INCOME TAXES

Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.

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 September 30, 2021 due to the recent enactment.

14

As of September 30, 2021 and December 31, 2020, the Company in the United States had $11,326,891 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 $257,490) 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

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

(Unaudited)

    

(Unaudited)

    

(Unaudited)

    

(Unaudited)

Current:

 

  

 

  

 

  

 

  

Federal

$

$

$

$

State

 

 

 

 

Foreign

 

(10,947)

 

 

 

101,738

Total Current

$

(10,947)

$

$

$

101,738

 

 

 

 

Deferred:

 

 

 

 

Federal

$

$

$

$

State

 

 

 

 

Foreign

 

94,839

 

(631)

 

90,485

 

(7,513)

Total Deferred

$

94,839

$

(631)

$

90,485

$

(7,513)

Total income tax (benefit) expense

$

83,892

$

(631)

$

90,485

$

94,225

15

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

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

(Unaudited)

    

(Unaudited)

    

(Unaudited)

    

(Unaudited)

(Loss) income before income tax expense  

$

(1,908,788)

$

81,447

$

(9,700,614)

$

(791,828)

Computed tax benefit with statutory tax rate

 

(400,844)

 

13,440

 

(2,037,129)

 

(130,651)

Impact of different tax rates in other jurisdictions

 

766

 

16,109

 

1,864

 

14,432

Impact of preferred tax rate

(158,079)

7,729

(152,689)

62,248

U.S. tax on foreign entities

213,238

213,238

Tax effect of non-deductible expenses

 

31,084

 

153,619

 

95,459

 

337,519

Changes in valuation allowance

 

524,905

 

(204,420)

 

2,098,066

 

(338,577)

Others

(127,178)

12,892

(128,324)

149,254

Total income tax expense (benefit)

$

83,892

$

(631)

$

90,485

$

94,225

The effective tax rate was (4.4)% and (0.8)% for the three months ended September 30, 2021 and 2020, respectively, and (0.9)% and (11.9)% for the nine months ended September 30, 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:

    

September 30, 

    

December 31, 

2021

2020

Uncertain tax liabilities, beginning of period

$

101,789

$

101,789

Settlements with tax authority during current year

 

(101,789)

 

Uncertain tax liabilities, end of period

$

$

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 September 30, 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 September 30, 2021 and December 31, 2020, respectively.