UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2020

 

  ¨ 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)

 

Registrant’s telephone number, including area code +852 3158-0977

 

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, par value $0.001 per share  TKAT NYSE American 

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨  Yes          x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨  Yes          x No

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨  Yes          x  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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s second fiscal quarter, was approximately $6,296,651.

 

The number of shares of common share, par value $0.001 outstanding as of March 29, 2021 is 11,271,379.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

Table of Contents

 

    Page
  PART I 4
Item 1. Business. 4
Item 1A. Risk Factors. 24
Item 1B. Unresolved Staff Comments. 41
Item 2. Properties. 41
Item 3. Legal Proceedings. 42
Item 4. Mine Safety Disclosures. 42
     
  PART II 43
     
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. 43
Item 6. Selected Financial Data. 45
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 58
Item 8. Financial Statements and Supplementary Data. 58
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 90
Item 9A. Controls and Procedures. 90
Item 9B. Other Information. 91
     
  PART III 92
     
Item 10. Directors, Executive Officers and Corporate Governance. 92
Item 11. Executive Compensation. 99
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. 105
Item 13. Certain Relationships and Related Transactions, and Director Independence. 107
Item 14. Principal Accountant Fees and Services. 110
     
  PART IV 112
     
Item 15. Exhibits, Financial Statement Schedules. 112

 

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Cautionary Statement Regarding Forward Looking Statements

 

The discussion contained in this Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Annual Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report or the date of documents incorporated by reference herein that include forward-looking statements.

 

Currency, exchange rate, and “China” and other references

 

Unless otherwise noted, all currency figures in this filing are in U.S. dollars.

 

References to “US$,” “$”, “dollars” and “U.S. dollars” are to the legal currency of the United States.

 

References to "yuan" or "RMB" are to the Chinese yuan, the lawful currency of China, which is also known as the “Renminbi”.

 

References to “HK$” are to the Hong Kong dollars, the legal currency of Hong Kong.

 

Our reporting currency is U.S. Dollars. This Annual Report also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of HK$ into U.S. dollars were made at HK$7.7534 and HK$7.7894 to US$1.00 and translations of Renminbi into U.S. dollars were made at RMB6.525 and RMB6.9618 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020 and December 31, 2019, respectively. We make no representation that the HK$, Renminbi or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars, HK$ or Renminbi, as the case may be, at any particular rate or at all. As of March 31, 2021, the translations of HK$ and Renminbi into U.S. dollars were made at HK$7.7744 and RMB6.5696 to US$1.00, respectively.

 

References to “PRC” or “China” are to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Taiwan and the special administrative regions of Hong Kong and Macau.

 

References to “Hong Kong” are to “Hong Kong, Special Administrative Region of the People’s Republic of China”.

 

Unless otherwise specified or required by context, references to “we,” “the Company”, “Takung”, “our” and “us” refer collectively to (i) Takung Art Co., Ltd, (ii) the subsidiaries of Takung Art Co., Ltd, Hong Kong Takung Art Company Limited (“Hong Kong Takung”), Hong Kong MQ Group Limited (“Hong Kong MQ”), a Hong Kong limited liability company and its wholly-owned PRC subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a wholly-owned subsidiary of Hong Kong Takung incorporated in the Tianjin Pilot Free-Trade Zone (TJFTZ) in Tianjin, China respectively.

 

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References to Tianjin Takung’s “registered capital” is to the equity of Tianjin Takung, which under PRC law is measured not in terms of shares owned but in terms of the amount of capital that has been contributed to a company by a particular shareholder or all shareholders. The portion of a limited liability company’s total capital contributed by a particular shareholder represents that shareholder’s ownership of the company, and the total amount of capital contributed by all shareholders is the company’s total equity. Capital contributions are made to a company by deposits into a dedicated account in the company’s name, which the company may access in order to meet its financial needs. When a company’s accountant certifies to PRC authorities that a capital contribution has been made and the company has received the necessary government permission to increase its contributed capital, the capital contribution is registered with regulatory authorities and becomes a part of the company’s “registered capital.”

 

PART I

 

Item 1.   Business

 

Overview

 

Takung Art Co., Ltd is a holding company that, through Hong Kong Takung Art Company Limited (“Hong Kong Takung”) and Takung Cultural Development (Tianjin) Co. Ltd., Hong Kong Takung’s wholly-owned subsidiary in China (“Tianjin Takung”), operates an electronic online platform located at http://en.takungae.com/ for artists, art dealers and art investors to offer and trade in ownership units over valuable artwork. On June 19, 2019, Takung Art Co., Ltd purchased from Ms. Ma Hiu Ngai, the Company’s shareholder, one (1) ordinary share of Hong Kong MQ Group Limited (“Hong Kong MQ”), constituting 100% of its issued and outstanding shares, for a cash consideration of HK$1.00 and therefore made Hong Kong MQ its wholly-owned subsidiary.

 

Through Hong Kong Takung and Tianjin Takung, we offer on-line listing and trading services that allow artists/art dealers/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 have deregistered Takung Art Holdings and Shanghai Takung in an effort to streamline our business operations.

 

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.

 

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

 

Corporate History and Structure

 

We were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was focused on the development of novel biologic and peptide-based compounds and enhanced methods for local delivery of treatments for vascular diseases including peripheral artery disease and ischemic stroke.

 

Pursuant to the Stock Purchase Agreement dated as of July 31, 2014, Yong Li, an individual purchased a total of 22,185,230 (pre- Reverse Stock Split) restricted shares of common stock of the Company from a group of three former shareholders of the Company. In consideration for the shares, Mr. Li paid the sellers $399,344 in cash which came from his own capital. The sellers were Jerett A. Creed, the Company’s former Chief Executive Officer, Chief Financial Officer, director and formerly a controlling shareholder of the Company, the Creed Family Limited Partnership and Ralph Sinibaldi. The shares represented approximately 95% of the Company’s then issued and outstanding common stock. The sale was consummated on August 28, 2014. As a result of the transaction, there was a change in control of the Company.

 

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On August 27, 2014, we entered into a Contribution Agreement with Cardigant Neurovascular. Pursuant to the Contribution Agreement, we assigned all our assets, properties, rights, title and interest used or held for use by our business, (except for certain excluded assets set forth therein) which was the treatment of atherosclerosis and plaque stabilization in both the coronary and peripheral vasculature using systemic and local delivery of large molecule therapeutics and peptide mimetics based on high density lipoprotein targets (“Cardigant Business”). In consideration for such contribution of capital, Cardigant Neurovascular agreed to assume all our liabilities raising from the Cardigant Business prior to the date of the Contribution Agreement and thereafter with regard to certain contributed contacts. We granted Cardigant Neurovascular an exclusive option for a period of 6 months to purchase the excluded assets for $1. Cardigant Neurovascular exercised this option October 20, 2014 and the excluded assets were assigned to Cardigant Neurovascular on October 20, 2014.

 

Also on October 20, 2014, we acquired the business of Hong Kong Takung through the acquisition of all the share capital of Hong Kong Takung under a Share Exchange Agreement dated September 23, 2014 in exchange for 209,976,000 (pre-Reverse Stock Split) newly-issued restricted shares of our common stock to the shareholders of Hong Kong Takung.

 

Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.

 

As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we ceased the Cardigant Business and have now assumed Hong Kong Takung’s business operations.

 

On November 5, 2014, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of the State of Delaware to change our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd.”

 

On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s operations by receiving deposits from and making payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. On January 27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China. Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s and deregistered Shanghai Takung in order to save costs on May 8, 2020.

 

On August 10, 2015, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of our issued and outstanding shares of common stock at a ratio of 1-for-25 (the “Reverse Stock Split”). Upon filing of the Certificate of Amendment, every twenty-five shares of the Company’s issued and outstanding common stock were automatically converted into one issued and outstanding share of common stock, without any change in par value per share. No fractional shares will be issued as a result of the Reverse Stock Split. Shareholders who would otherwise be entitled to receive a fractional share will be entitled to rounding up their fractional shares to the nearest whole number.

 

Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was incorporated in Hong Kong on July 20, 2018 and operates as a holding company to operate an e-commerce platform for offering, selling and trading whole pieces of artwork instead of units of artwork. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.

 

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 will focus on exploring business opportunities. Tianjin MQ was deregistered on August 10, 2020 due to the Company streamlining its operation.

 

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Business History of Hong Kong Takung

 

Hong Kong Takung is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Its authorized capital is 20,000,000 shares. Prior to the Reverse Merger, all its 20,000,000 issued and outstanding shares, par value $0.13 (HK$1) per share, were owned by Kirin Linkage Limited (4,000,000 shares) and Loyal Heaven Limited (16,000,000 shares), both Cayman Islands companies.

 

Although Hong Kong Takung was incorporated in late 2012, it did not commence business operations until late 2013.

 

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Corporate Structure

 

The diagram below illustrates our current corporate structure:

 

 

 

Our Trading Platform

 

Our proprietary platform is an all-electronic trading system, consisting of host computers, client-side terminals and an interconnected communication system. Our trading system supports the trading and payment/settlement of artwork ownership units. It is an electronic platform developed by a third-party software development company and customized for us, primarily consisting of a matching system, a transaction monitoring system, an account managing system and a settlement system.

 

Matching is a core function of our trading platform. Our system concludes transactions by matching all the transactions submitted by the Traders (as defined below). Transaction monitoring system is responsible for monitoring the daily transactions in real-time to ensure fairness and accuracy in our trading platform. The settlement system verifies and reconciles daily statistical data with the banks’ transaction system, and completes the registration and settlement (or payment) of artwork units once the transaction data is verified.

 

Our website http://en.takungae.com/ is an essential part of our trading platform.

 

The website is important as it is the gateway to our trading platform. It publishes our membership and trading rules, trading information disclosure, and artwork introduction, and provides services to Traders, such as account management. Traders may open, close and manage their accounts with us on our website. Client-end terminal may be downloaded from our website. Through the terminal, Traders may access their account with us and conduct transactions in artwork units, such as purchasing and selling and submitting inquiries. Data transmission between the Traders and our trading system is encrypted to prevent data leaks.

 

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The transaction on our trading platform are wholly settled in HKD. For RMB deposits and withdrawal in China, our trading platform through Enterprise Resources Planning (ERP) system, can directly connect trader bank accounts to our bank accounts under Bank of China, Ping An Bank, Minsheng Bank, China Citic Bank and Shanghai Pudong Development Bank (“SPD Bank”) to facilitate account and transaction enquiries. The transaction instructions will be submitted to our trading platform on a real-time basis for their deposit. Our trading platform subscribed the payment function from each of those banks which provides real-time payment and settlement service to make deposits quick and easy. If they would like to withdraw money from their trading account, the Traders will put in a request on our trading platform. After confirming the Traders’ accounts have sufficient money for withdrawal, we will transfer the money from the client-money bank account to the Traders’ individual bank account.

 

In order to execute a trade, a Trader logs into his online bank account and must first transfer funds from his bank account to his trading account with us. This ensures that he has sufficient funds to consummate a trade.

 

Offering and trading of artwork on our platform involves a number of parties, namely, Original Owner, Offering Agent, and Traders.

 

  · An Original Owner is the original owner of the artwork to be offered and traded on our platform. Customarily, the Original Owner is also the artist or creator of the artwork although this is not always the case. The Original Owner must have good and marketable title to the artwork and have the right to dispose of the artwork.

 

  · An Offering Agent is an entity that is experienced with artwork or artwork investment and has a good reputation. The Offering Agent is engaged by the Original Owner to assist him or her with the offering and trading of artwork, such as preparation of listing application and assigning an investment value, research, organizing promotions and marketing activities, communicating with potential investors, etc.

 

  · A Trader is anyone who is 18 years or older or any entity that maintains a trading account with us through our electronic trading platform and participates in the trading of artwork units. Once a Trader acquires one or more units of an artwork, the Trader becomes a Co-Owner of that artwork. Presently, only residents of the People’s Republic of China, Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are eligible to become a Trader.

 

Additional parties such as insurer, appraisal firm, trader service organizations and custodian for artworks will be retained in connection with the offering and trading of artwork on our system. A trader service organization is an independent legal entity pre-approved by us to provide business consulting services to our Traders.

 

Our trading system hardware platform is hosted by a rendered service from Amazon web and their server is in Singapore. Our clearing system hardware platform is hosted in Hong Kong and our disaster recovery system is set up in the CITIC Telecom IDC room, located in Hong Kong. The real-time data synchronization ensures the safety of transaction data.

 

Through our subsidiary, Shanghai Takung, we are able to receive deposits from and make payments to online artwork Traders in mainland China on behalf of Hong Kong Takung. We disbanded the whole software development team in Hangzhou and will outsource the research and development work of our trading platform to a third-party contractor when the need arises. Tianjin Takung is presently a back office for Hong Kong Takung and Shanghai Takung, which provides technology support and also carries out marketing and promotion activities in mainland China. On September 30, 2019, the operations of Shanghai Takung merged with Tianjin Takung’s operations, and the management deregistered Shanghai Takung in order to save costs on May 8, 2020.

 

Revenue

 

We generate revenue from our services in connection with the offering and trading of artwork on our system. Our revenue mainly falls into three broad categories: (i) listing fees, (ii) trading commissions, and (iii) management fees. To a much smaller extent, we have two additional sources of revenue, which we began earning start in 2015. We charge an annual fee for providing Traders and Offering Agents with premium services, including more in-depth information and tools, on the trading platform. This revenue is recognized ratably over the service agreement period. We also began earning authorized agent subscription revenue which is an annual service fee paid by authorized agents to grant them the right to bring their network of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period.

 

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Offering

 

Artwork that is eligible for offering and trading on our platform includes calligraphy, paintings, sculptures, crafts, jade, jewelry, metal ware, ceramics, and antique furniture. The common denominator of our listed paintings is that they are from renowned living artists and are valuable.

 

As of December 31, 2020, a total of 295 sets of artwork were listed for trade on our platform —comprising 70 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $29,538,802 (HK$229,100,000); 35 pieces of jewelry with a total listing value of $9,368,352 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,024,459 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,248,740 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,457 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,229 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,096,940 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,329,826 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,934 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,097,152 (HK$8,509,400), of which 22.5%-48% (for 70 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.

 

Traditionally, artwork is sold and transacted by the creator/owner of it through galleries, stores and agents.

 

Similarly, an artwork is presented to us for listing by the owner/artist (Original Owner) together with an agent (Offering Agent). Both the Original Owner and the Offering Agent would have discussed and proposed a price for the artwork in their listing application to us. An Offering Agent assists the Original Owner with the listing process, such as getting the artwork appraised by a third party professional, assigning an initial value for each trading unit at listing, performing research and preparing the marketing material and promotional activities to attract Traders’ interest. There may be circumstances in the future that the Original Owner will approach us for the listing, in which case, we will recommend an Offering Agent to assist the Original Owner with the listing process. However, we consider this to be a rare case. For the 295 pieces of artwork that we have listed through December 31, 2020, the listing processes were all initiated by Offering Agents.

 

On receipt of the application, we will assess and consider the merits of listing the artwork on our platform. Some of the factors we will consider are the appeal of the proposed artwork, the artist, the marketability of the artwork and the likelihood of its appreciation in the future.

 

Assuming that an artwork is accepted for listing, it will be divided into equal ownership units based on its appraised value. For example, a painting with a listing value of $1,531,569 (HK$12,000,000) may be divided into 12,000,000 units with each unit sold at $0.13 (HK$1). Traders would then be able to bid for and trade these units on our platform.

 

Qualification for Offering

 

We have quantified standards for artwork that is eligible for offering and trading in A-Tier on our platform. Except for the A-Tier standards, we do not have quantified standards for artwork that is eligible for offering and trading on our platform. However, we will generally require the artwork to meet the following qualifications:

 

  · Clearly-established ownership

 

  · Having certain economic and artistic value

 

  · Having an appraisal report from professional appraisers

 

We do not evaluate or appraise artwork but we rely on expert opinions from third parties on the value of the artwork.

 

Offering Process

 

To list an eligible artwork on our platform, the Original Owner and/or his/her Offering Agent must submit a listing application to us together with an investment value research report on the artwork and an offering statement. The investment value research report analyses all the factors that would affect the investment value of the artwork. The artwork should be appraised by a qualified appraisal firm appointed by the Original Owner and/or the Offering Agent.

 

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Generally, an offering statement includes the following information:

 

  · Introduction of the artwork, including name, author, date of creation
  · Material facts on the offering, including type of artwork, total offering price, offering method, identity of Offering Agent, the number of artwork units offered, offering number, unit offering price, term of the offering, subscription period, minimum subscription amount, etc.
  · Offering details including subscription procedure, registration, etc.
  · Parties involved in the offering, including Offering Agent, appraisal firm, insurer, custodian
  · Appendices generally include related material documents such as appraisal report

 

Prior to the sale to the public, the Original Owner may reserve a certain percentage of the artwork units and the Offering Agent may subscribe for a certain percentage of artwork units, generally 0-20%. These artwork units held by the Original Owner and the Offering Agent may not be traded until 180 days after the date when the artwork is listed.

 

The offering of ownership units in artwork will be considered successful if the units subscribed reach a prescribed percentage (“Offering Percentage”) of the total units offered. The Offering Percentage is determined by the Original Owner, the Offering Agent, if one is engaged, and us and is set forth in our Offering Agreement with them. The Offering Percentage for our existing listed artwork is 80%. If an Offering Agent is engaged, the total number of subscribed units by Traders and reserved units by the Original Owner should equal or exceed the Offering Percentage; otherwise, the offering is unsuccessful. If no Offering Agent is involved, the total subscribed units should exceed the Offering Percentage; otherwise, the offering is unsuccessful. In the event of an unsuccessful offering, the offer for subscriptions of the artwork units by Traders is voided.

 

If the total subscribed units exceed the Offering Percentage but are less than the total offered amount, then the Offering Agent is obliged to purchase the remaining units on the same offering terms or if no Offering Agent is engaged, the Original Owner shall retain the remaining units. In the former, the Offering Agent is required to link its bank accounts in PRC with its trading account with us to ensure that it has sufficient funds to purchase any remaining unsold units. The Original Owner and/or the Offering Agent shall pay us a one-time offering fee and a listing deposit. The offering fee is determined based on many factors, such as the type of artwork and the offering size. We generally charge approximately 22.5-48.5% of the total offering price for calligraphies, paintings, jewelry, ambers, precious stones, antique mammoth ivory carving, porcelain pastel paintings and porcelain, which are the major types of artwork listed and traded on our system as of December 31, 2020. The listing fee is earned when the units for the artwork are successfully subscribed for and trades on our platform.

 

The offering deposit is generally 22% of the total offering price and may vary based on the type of artwork, offering price and other factors. The offering deposit is paid by the Offering Agent through the linked accounts as described above and will be refunded if all offered artwork units are sold. In the event that the total number of units sold exceeds the Offering Percentage but does not reach all of the units offered, the offering deposit will be used to purchase the remaining artwork units that have not been subscribed by Traders.

 

Upon receipt of all required offering documents, we will review the offering application and decide on a case by case basis, if the artwork should be listed and traded on our platform. Our management team, with the assistance of art consultants (who are appointed by the Offering Agent), conducts a procedural review of the offering application and related documents. We will approve the artwork for offering and trading as long as all listing requirements are met.

 

As of December 31, 2020, there were a total of 295 pieces of artworks, including 70 sets of paintings and calligraphies, 35 pieces of jewelry, 134 pieces of precious stones, 29 pieces of amber, 4 pieces of antique mammoth ivory carving, 2 pieces of porcelain pastel paintings, 7 pieces of porcelain, 6 sets of Unit+ products, 1 piece of Yixing collectable and 7 pieces of sports memorabilia successfully listed and trading on our system.

 

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The Original Owner and the Offering Agent are required to disclose timely all material information regarding the artwork. The disclosure must be true, accurate, complete and not misleading. The Original Owner and the Offering Agent are responsible for their conduct in connection with the offering of the artwork. We also monitor and regulate their conduct. For more information, please refer to our disclosure under “Regulation of Market Participants.”

 

Subscription Process

 

Once the offering is approved, the Offering Agent will fund its trading account with the listing deposit and we then register the artwork units in our system. The Traders may log into their trading account to bid for the artwork units. If the artwork units are over-subscribed, we will conduct a lottery to determine which subscriptions will be accepted.

 

A Trader may receive a lower allocation than the number of units that he or she has applied for. Traders may also be allotted with more or fewer units than others who have applied for the same number of units. It is also possible that Traders are not allotted any units at all. The more units that a Trader applies for, the more likely a Trader is allotted with units. In order to subscribe for units, Traders need to set aside money in their brokerage accounts with us, which is “frozen” during the subscription period. After the announcement of the allotment, the money “frozen” will be released to us in a successful offering or back to the Traders’ accounts in an unsuccessful one. The funds from successful subscriptions will be disbursed to the Original Owner in accordance with the payment schedule provided in our Offering Agreement with him or her.

 

Pre-Listing Premium Pricing

 

In addition to charging a percentage of the total listing amount as listing fee, additional listing revenue may be generated by the Pre-Listing Premium processed by the Offering Agent.

 

In certain circumstances, if the Offering Agent believes that there are Traders who are willing to pay a premium to be able to purchase the units without entering the balloting process so they can be certain about purchasing the units, the Offering Agent can negotiate with the Original Owner and us to “lock-in” and purchase the units outright on the listing date at a premium. These units will not be entered into the balloting process. The Listing Agreement (between the Owner, Agent and us) would specify the maximum number of units that can be locked in by the Offering Agent. The premium, which is in addition to the total listing amount, is recognized as listing income.

 

Insurance and Storage of Artwork

 

We require insurance coverage for artwork offered and traded on our platform. The insurance policy has an insured value equal to the total offering price of the artwork and covers the entire trading period.

 

The listed artwork is also required to be stored at qualified facilities. The storage companies we select are experienced with artwork storage and transportation. Specifically, the storage facility should meet the following requirements:

 

  · Has warehouses with constant temperature and humidity in different locations;

 

  · Has 24-hour video surveillance and infrared burglar alarm system;

 

  · Has professional artwork transportation equipment; and

 

  · Has security personnel.

 

Once a Trader purchases certain artwork units, he will become a Co-Owner of this artwork and must abide by a Co-Owner Agreement, which, among other things, authorizes us to select and change, on behalf of the Co-Owners, the storage company and insurer for the artwork.

 

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We pay the fees for the insurance and the storage out of the management fees paid to us by the Traders. Our management fee is calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is accounted for as revenue, and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.

 

In the event of a loss, we will receive the insurance monies from the insurer as beneficiary under the relevant insurance policy and then disburse them to all Co-Owners in accordance with the Co-Owner Agreement.

 

Trading

 

Our market is open for trading from Monday through Friday. Traders may only purchase or sell artwork units during trading hours. They may nevertheless log into their account and view the account information, such as the balance of funds, type and number of artwork units held during non-business hours.

 

Traders purchase and sell artwork units listed on our system through a client-end terminal – trading software. The software is available for download from our website http://en.takungae.com/ and every Trader may commence trading in artwork units once he opens a trading account with us and has funded this account as described above. Each Trader is required to sign a Trading Agreement and abide by a Co-Owner Agreement. The aggregate number of units allowed to be traded per day by a Trader shall not exceed 5% of the total offered artwork units.

 

On April 1, 2016, we began to charge a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traders are selected by authorized agents and subject to our review. After review, we negotiate individually with each Trader to determine a fixed monthly fee. Pursuant to negotiations, different Traders may have different rates and once agreed upon, the monthly fee is fixed.

 

We charge trading commissions for purchase and sale of artwork units. The commission is typically 0.3% of the total amount of each transaction but as a promotion, we currently charge a reduced fee of 0.2% of the transaction value on both the purchase and sale sides resulting in an aggregate commission rate of 0.4%.

 

We also charge Traders management fees covering the insurance, storage, and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is deducted from proceeds from the sale of artwork units.

 

Currently, most of our Traders are from Mainland China and some portion from other countries such as Australia, Malaysia, Mongolia, New Zealand, Russia, Singapore and Taiwan are also eligible to register as Traders.

 

Trading Halt

 

We may halt the trading of a listed artwork upon occurrence of the following conditions:

 

  · Occurrence of irregular trading activities;
  · 10% or more of a listed artwork is involved in legal proceeding and has been frozen by relevant authorities;
  · Release of information in public media that may materially affect or have affected the trading price of the artwork;
  · The artwork is the subject of a legal proceeding regarding ownership;
  · Upon application by all the Co-Owners to change the terms of Co-Owner Agreement or arrangements regarding transportation, storage, insurance or exhibition of the artwork;
  · The artwork is involved in illegal transactions; and
  · Other circumstances that would make the listing unfit in our discretion.

 

Delisting

 

Each offering statement will stipulate the term in which an artwork trades on our platform. An artwork may be delisted from our platform through voluntary withdrawal or successful sale of the artwork via auction at the end of the term.

 

Upon application of all the Co-Owners, an artwork may also be delisted from our system. The Co-Owners should submit a delisting application, upon receipt of which we will suspend the trading of the artwork units. If the application is approved, the artwork will be delisted from our platform; otherwise, it will resume trading. Once delisted, the artwork will be returned to the designee of all Co-Owners or the sole owner.

 

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Upon expiration of the trading term as set forth in the offering statement, the trading of the artwork units will be suspended and the artwork will enter into an auction process. The offering price shall be the reserve price for the artwork. Once it is successfully sold through auction, the artwork will be delisted from our system. If the auction is not successful, the artwork units will resume trading for a term to be determined at the time its trading is resumed.

 

An artwork may also be delisted due to the following reasons:

 

  · The artwork was lost in a theft or robbery;
  · The artwork was irreparably damaged;
  · The artwork was adjudicated to be owned by a person other than the Original Owner; and
  · Other circumstances which we deem would render the listing unfit.

 

A delisting report will be issued by us upon delisting of an artwork, which report will state the name of the delisted artwork, the delisting date, the delisting decision, related matters following the delisting, etc.

 

Registration and Settlement

 

Our trading platform’s settlement system reconciles all trades and payments on a daily basis.

 

The registration and settlement of the trading of artwork units is currently supervised and managed by our registration and settlement department. This department is responsible for trading account setup and management, registration of artwork units, including initial registration, transfer registration and delisting registration and providing information, consultation or training relating to the registration and settlement of artwork units.

 

Regulation of Market Participants

 

The Original Owner and the Offering Agent are required to comply with our rules in connection with the offering of artwork. If we discover any violation, we will request them to take corrective actions. If the Offering Agent engages in fraudulent activities, such as putting out false or misleading advertisement or disclosure on the artwork, it may be barred from participating in any offering for up to two years, in addition to any legal liabilities.

 

We monitor and regulate the conduct of Traders on a daily basis through our real time monitoring system. If there are irregular trading activities that may affect the trading price and volume of artwork units, we will seek clarification from the Trader(s) by sending inquiries and notices, and conducting interviews, etc. If there is any violation of our trading rules, we may take the following actions:

 

  · issue oral or written warnings;
  · request the Trader to submit written commitment;
  · issue a reprimand;
  · impose a fine;
  · suspend or limit trading activities; and
  · revoke the qualifications of the Trader.

 

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Sales and Marketing

 

We are currently marketing our electronic trading platform through participation in culture and art exhibitions and internet advertising. Additionally, we encourage existing Traders to introduce new Traders. We used to pay referral fees but have ceased that practice in fiscal year 2019.

 

We have also instituted a trader service organization service program. Trader service organizations are separate, independent entities that provide business consultation services to some of our Traders such as providing training on the trading rules of our platform. Under the trader service organization service program, we will pay the relevant trader service organization up to 75% of all trading commissions generated from new Traders referred to us from Traders serviced by such trader service organization (“Service Fee”). The exact terms with each trader service organization which participates in this program vary on a case by case basis although in every case, the Service Fee is contingent on the ongoing business consultation relationship between the trader service organization and the Trader. In other words, if the business consultation relationship is terminated between a Trader and its trader service organization, that trader service organization will no longer earn a Service Fee from trading commissions generated from new Traders introduced by that Trader.

 

We utilize Google and Baidu Listing Search and Key Word Search services for search engine optimization in order to promote our website and platform.

 

In April 2016, we introduced a discount program to our VIP Traders with a contractually determined flat rate of trading commission is applied to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate will be waived. The discounted rate varies between the selected artworks. If VIP traders become delinquent on payment, we will cancel the discount program for those individuals and revert to charging them commission per transaction.

 

Besides this, we also instituted separate discount programs to VIP Traders by waiving their trading management fees during certain promotion periods.

 

Customers

 

Our customers are the Traders, Original Owners and Offering Agents. We are constantly marketing and increasing our customer base, it is difficult to ascertain if the loss of a single customer, or a few customers would have a material adverse effect on us. Suffice it to say, no one customer constitutes in the aggregate 10% or more of our consolidated revenue.

 

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Seasonality

 

In view of our operating history, other than the Chinese New Year which could impact the number of listings and trading around that period, we believe the nature of our business is not cyclical.

 

Employees

 

As of March 31, 2021, we had 24 full-time employees, comprising 18 employees who are based in the People’s Republic of China, and 6 employees who are based in Hong Kong. Ms. Zhihua Yang is our Chief Executive Officer. Ms. Jing Wang is our Chief Financial Officer. As for the other 22 employees, 2 are from the Business Development department, 1 are from the Big Data Analytics department, 4 are from the IT department, 1 is from the Transaction Management department, 5 are from Human Resources and Administration department, 1 is from Customer Service department, 2 are from the Clearing and Settlement department, 1 is from the Legal department, 5 are from the Accounting and Finance Team.

 

There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

 

Regulation

 

U.S. Regulations

 

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31, 2017.

 

The Act establishes a flat corporate income tax rate of 21% which supersedes the current tax rate ranging from 15% through 35% and repeals the corporate alternative minimum tax (AMT) effective in 2018.

 

Under the Act, U.S. federal net operating losses (NOLs) carryforwards will be carried forward indefinitely while the two-year NOL carrybacks for NOLs arising in taxable years ending after December 31, 2017 was repealed. Furthermore, the Act imposes an annual limit of 80% on the amount of the taxable income that such NOLs can offset for the NOLs arising in taxable years ending December 31, 2019 and thereafter.

 

The Act has significantly modified the U.S. international business tax regime, essentially transforming the framework by which U.S. and non-U.S. headquartered businesses are taxed. The significant changes consist of:

 

  · A partial participation exemption system for profits derived by US-based multinationals from foreign subsidiaries, eliminating the friction of a US tax upon repatriation of overseas profits

 

  · A minimum tax on foreign earnings of US-based multinationals with foreign subsidiaries

 

  · A base erosion tax on transactions between US and non-US affiliated corporations, in structures involving US and non-US headquartered groups

 

  · A one-time tax on the estimated US$2-3 trillion of overseas earnings accumulated by US-based multinationals, payable over eight years, and thus allowing those profits to be repatriated without further US tax

 

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  · Several other changes across the US international tax regime addressing the source of income, FTCs, deductibility of payments, and other issues, including ownership and transfers of intangible property (Global Intangible Low-Taxed Income or GILTI).

 

The Coronavirus Aid, Relief and Economy Security Act (“the CARES Act”) 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 net operation loss (“NOL”) deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 2020 due to the recent enactment.

 

Hong Kong Regulations

 

As a business operating in Hong Kong, we are subject to various regulations and rules promulgated by the Hong Kong government. The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.

 

Securities & Futures

 

The securities and futures markets in Hong Kong are currently governed by the Securities & Futures Ordinance (“SFO”). The SFO consolidates and authorized the 10 previous ordinances regulating the securities and futures markets. The primary legislation and the subsidiary legislation commenced operation on April 1, 2003. By law, any person carrying on, among others, a business of dealing in securities in Hong Kong, has to be licensed by the Securities and Futures Commission (“SFC”) unless falling within one of the licensing exemptions.

 

The term “securities” under the SFO is defined as:

 

(a) shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, or which it is reasonably foreseeable will be issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority;

 

(b) rights, options or interests (whether described as units or otherwise) in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes;

 

(c) certificates of interest or participation in, temporary or interim certificates for, receipts for, or warrants to subscribe for or purchase, such shares, stocks, debentures, loan stocks, funds, bonds or notes;

 

(d) interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities;

 

(e) interests, rights or property, whether in the form of an instrument or otherwise, prescribed by notice under section 392 as being regarded as securities in accordance with the terms of the notice.

 

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Our business model does not qualify as dealing in securities, as such term is defined in the SFO and as such, we are not required to obtain the requisite license from the SFC.

 

Sale of Goods

 

In the event an artwork is “delisted” from our platform, we would arrange to sell the artwork on behalf of all owners of the artwork and then distribute the proceeds of sale to them. We will be considered a “Commercial Agent” under the Hong Kong Factors Ordinance and a “Seller” under the Hong Kong Sales of Goods Ordinance.

 

The Sale of Goods Ordinance (“SGO”) provides that goods for sale must be:

 

  · Of merchantable (satisfactory) quality. Goods must meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price and all other relevant circumstances. The quality of goods includes their appearance and finish, their safety and their durability. Goods must be free from defects, even minor ones, except where these defects have been brought to your attention by the seller (section 16 of SGO);
  · Fit for their purposes (section 16 of SGO);
  · As described on the package or a display sign, or by the seller (section 15 of SGO); and
  · Correspond with the sample (section 17 of SGO).

 

If sellers fail to meet any one of the above conditions, they are in breach of contract. Under these circumstances, consumers are entitled to reject the goods and demand a full refund. We are accordingly bound by these implied warranties of sale in the event that we sell any artwork previously listed on our platform.

 

Supply of Services

 

We provide a platform to trade in artwork units for which we are compensated by receiving listing fees, management fees and trading commissions. The Hong Kong Supply of Services (Implied Terms) Ordinance (“SSO”), provides that in the absence of provisions in the contract for services, services should be carried out with reasonable care and skill (which generally means the services must meet the standard that a reasonable person would regard as satisfactory) ( section 5 of the SSO), the services should be performed within a reasonable time if the time of performance has not been fixed by the contract (section 6 of the SSO); and a reasonable charge should be paid if the charge has not been fixed by the contract (section 7 of the SSO).

 

If service suppliers fail to meet any one of the above conditions, they would be “in breach of contract”. Under these circumstances, consumers are entitled to sue defaulting suppliers for compensation.

 

Section 8(1) of the SSO provides that as against a party to a contract for the supply of a service who deals as a consumer, the other party (the service supplier) cannot, by reference to any contract term, exclude or restrict any liability of his arising under the contract by virtue of this Ordinance. In other words, we cannot impose a contract term that excludes or restricts our liability on breach of contract.

 

In addition, the Hong Kong Control of Exemption Clauses Ordinance subject any attempt by us to exclude our liability for financial loss or damage to property during the course of the provision of our services to the test of “reasonableness”. Our exemption clauses are also controlled by the rules of common law. For example, an exemption clause must be incorporated into the contract, and the person who is seeking to rely on the exemption clause must show that reasonable steps have been taken to bring the clause to the attention of the other party.

 

The Hong Kong Unconscionable Contracts Ordinance only applies to a contract for the sale of goods or supply of services in which one of the contracting parties is dealing as a consumer. If the Court finds out that the contract or any part thereof was unconscionable (unfair/not sensible) in circumstances relating to the contract at the time when it was made, the Court would have the jurisdiction under section 5 of the Unconscionable Contracts Ordinance to refuse to enforce the contract, or to enforce the remainder of the contract without the unconscionable part, or to limit the application of, or to revise or alter, any unconscionable part so as to avoid any unconscionable result.

 

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Fair Trading

 

The Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance 2012 (“Amendment Ordinance”) came into effect on July 19, 2013 and amended the Trade Descriptions Ordinance by prohibiting specified unfair trade practices that may be deployed against customers and strengthen the enforcement mechanism. The Customs and Excise Department is the principal enforcement agency under the Trade Descriptions Ordinance. Concurrent jurisdiction is conferred on the Office of the Communications Authority (“HKCA”) to enforce the new fair trading sections. The key amendments include:

 

  · the expansion of the definition of trade descriptions in relation to goods, as well as the extension of the scope to cover services;

 

  · the creation of new criminal offences on unfair trade practices, namely misleading omissions, aggressive commercial practices, bait advertising, bait-and-switch and wrongly accepting payment;

 

  · the introduction of a compliance-based mechanism under which civil enforcement options, namely the acceptance of undertaking from Traders and the seeking of injunction from the court where necessary, can be drawn on to promote compliance with the new fair trading sections introduced by the Amendment Ordinance; and

 

  · the creation of a new private right of action for damages to facilitate consumer redress.

 

On July 15, 2013, the Customs and Excise Department and the HKCA published the Enforcement Guidelines for the Amendment Ordinance to state the manner in which they will exercise their enforcement powers and provide guidance on the operation of the new legislative provisions.

 

Intellectual Property

 

Our business is dependent on a combination of trademarks, trademark application, trade secrets and industry know-how, and copyright, in order to protect our intellectual property rights. We have submitted trademark applications for “Takung” in Hong Kong, Mainland China, Macau and the United States.

 

In China, the Trademark Law and the Unfair Competition Law governs our marks. The Hong Kong SAR’s trade mark registration system is separate from the system operating in other parts of China. Trade mark registrations obtained in Chinese Trade Marks Office, or elsewhere in the world, do not automatically get protection in the Hong Kong SAR. Trade marks must be registered in the Hong Kong SAR before they can be protected in the Hong Kong SAR under the Trade Marks Ordinance.

 

Protection of Personal Data

 

We have access to certain of our Traders’, Original Owners’ and Offering Agents’ personal information as well as information of Qianrong’s network of art traders. The Hong Kong Personal Data (Privacy) (Amendment) Ordinance 2012 (“Amendment Ordinance”) which changes the Personal Data (Privacy) Ordinance (“PDPO”) governs our use of such personal information in direct marketing activities and in acquiring and transferring such personal data to third parties for direct marketing purposes.

 

The Amendment Ordinance creates a new direct marketing regime (Part VI A of the PDPO) to establish the rights and obligations of parties using personal information for direct marketing purposes or transferring personal information to a third party for marketing purposes. Under the new regime, an organization can only use or transfer personal information for direct marketing purposes if that organization has provided the required information and consent mechanism to the individual concerned, and obtained his or her consent. Under the Amendment Ordinance it is a criminal offense, punishable by fines and imprisonment, for an organization to fail to comply with any of these new requirements.

 

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We are also now required to have in place procedures to ensure that any personal information transferred to any service provider is not retained for longer than necessary, and is protected against any unauthorized or accidental access, processing, erasure, loss, or use.

 

Employment

 

Some of our employees are employed in Hong Kong and we are subject to the Hong Kong Employment Ordinance (“EO”). The EO is the main employment legislation in Hong Kong. It guarantees certain minimum benefits, including:

 

  · Paid annual leave.
  · Paid sick leave.
  · Paid maternity leave.

 

Subject to limited exceptions, the EO applies to all employees working in Hong Kong, regardless of their nationality. Observing the terms of the EO is generally considered to be mandatory, although it is not specifically expressed to be an overriding statute.

 

Other mandatory laws that are likely to apply to the employment relationship with our employees include:

 

  · Personal Data (Privacy) Ordinance (PDPO). This ordinance regulates an employer's collection or surveillance, use and disclosure of an employee's personal data (including personal data contained in e-mails and phone calls).

  · Mandatory Provident Fund Schemes Ordinance (MPFSO). Subject to very limited exceptions, this ordinance requires employers in Hong Kong to enroll employees in a Mandatory Provident Fund (MPF) Scheme (that is, a retirement scheme), to which the employer and employee must make certain contributions. Foreign nationals are exempt if they are posted in Hong Kong to work for a period not exceeding 13 months or belong to a retirement scheme outside of Hong Kong. In certain cases, a Hong Kong national working outside of Hong Kong may still be subject to this ordinance if the employment has sufficient connection with Hong Kong.
  · Occupational Safety and Health Ordinance (OSHO). This ordinance imposes a duty on all employers, as far as is reasonably practical, to ensure the safety and health in the workplace of its employees. The OSHO covers most industrial and non-industrial workplaces in Hong Kong.
  · Employees' Compensation Ordinance (ECO). If an employee suffers injury arising out of and in the course of employment in Hong Kong (or overseas, if the travel is authorized by the employer), the employer is usually liable to compensate the employee under the ECO. Eligible family members of an employee killed in an accident at work can also be entitled to compensation. If an employer carries on business in Hong Kong, its employees are protected under the ordinance. (An employee can work outside Hong Kong but his employment contract must have been entered into in Hong Kong.) All employers must maintain valid employees’' compensation insurance policies to cover their liabilities under the ordinance and at common law.
  · Companies Ordinance. Protects employees of a Hong Kong company (including a Hong Kong subsidiary of a foreign company) in relation to wages and other entitlements if the company is wound up. The employees become preferential creditors in the winding-up.
  · Sex Discrimination Ordinance (SDO), Disability Discrimination Ordinance (DDO), Family Status Discrimination Ordinance (FSDO) and Race Discrimination Ordinance (RDO). All legislate against various forms of discrimination.
  · Basic Law and the Hong Kong Bill of Rights Ordinance. These safeguard certain rights of individuals, although they have limited application in the context of employment law.
  · Labour Tribunal Ordinance. This ordinance empowers the Labour Tribunal to hear and resolve disputes relating to employment contracts as well as alleged breaches of the EO. It potentially covers disputes involving foreign nationals or Hong Kong residents working abroad.
  · Prevention of Bribery Ordinance (POBO). The POBO applies to employees, particularly to those who receive or solicit bribes from third parties (for example, an employee who receives bribes from a supplier of goods in return for placing orders with that supplier). In some cases, employees may also be subject to anti-corruption legislation in other jurisdictions.

 

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PRC Regulations

 

Regulations on Foreign Investment

 

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth "permitted" category. Establishment of wholly foreign-owned enterprises is generally allowed in the encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations. We conduct business operations that are restricted to foreign investment through our PRC consolidated affiliated entities.

 

Under the PRC laws, the establishment of a wholly foreign owned enterprise is subject to the approval of the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry and commerce authority. We have duly obtained the approvals from the competent commerce authority for our interest in Tianjin Takung and completed the registration of Tianjin Takung with the competent industry and commerce authority.

 

Regulations Relating to Taxation

 

In January 2008, the PRC Enterprise Income Tax Law took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Our PRC subsidiary is subject to PRC enterprise income tax at the statutory rate of 25% on its PRC taxable income.

 

Under the PRC Enterprise Income Tax Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.

 

Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.

 

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Please see “Risk Factors—We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”

 

Regulations Relating to Labor

 

We are subject to laws and regulations governing our relationship with our PRC employees, including wage and hour requirements, working and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.

 

Pursuant to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008 and amended in 2012, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.

 

An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, an employee who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated at three times their normal salaries for each waived vacation day.

 

Pursuant to the Regulations on Occupational Injury Insurance effective in 2004, as amended in 2010, and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. The aforesaid measures are reiterated in the Social Insurance Law of China effective in July 2011, which stipulates the system of social insurance of China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity insurance. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.

 

Regulation on PRC Business Tax and Value-Added Tax

 

Prior to January 1, 2012, pursuant to Provisional Regulation of China on Business Tax and its implementing rules, any entity or individual rendering services in the territory of PRC is generally subject to a business tax at the rate of 5% on the revenues generated from provision of such services.

 

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On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (“VAT”) reform program, or Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Industries in Shanghai included industries involving the leasing of tangible movable property, transportation services, research and development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural and creative services,” are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax In lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was implemented throughout China. Tianjin Takung is currently subject to a VAT of 6% on its gross revenue. This Pilot Program was officially launched and announced on November 19, 2017 subject to a VAT of 6% on its gross revenue.

 

Regulations on Dividend Distribution

 

The principal regulations governing dividend distributions of wholly foreign-owned enterprises include the Company Law (2013 Amendment); the Wholly Foreign-Owned Enterprise Law (2000 Amendment) and the Wholly Foreign-Owned Enterprise Law Implementing Rules (2001 Amendment).

 

Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations.  In addition, these wholly foreign-owned enterprises are required to set aside at least 10% of their respective accumulated after-tax profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital.

 

Approvals, Licenses and Certificates

 

We require a number of approvals, licenses and certificates in order to operate our business. Our principal approvals, licenses and certificates are set forth below.

 

Hong Kong Takung

 

  · Certificate of Incorporation (No. 18013848) issued by Hong Kong Special Administrative Region, Registrar of Companies on September 17, 2012.

 

  · Business Registration Certificate for the year commencing September 17, 2020 to September 16, 2021.

 

Tianjin Takung

 

  · Business License (Registration No. 91120118MA07H4322R) issued by Tianjin Pilot Free Trade Zone Market and Quality Supervisory Administration valid from January 27, 2016 through January 26, 2046.

 

Hong Kong MQ

 

  · Certificate of Incorporation (No. 2770404) issued by Hong Kong Special Administrative Region, Registrar of Companies on November 27, 2018.

 

  · Business Registration Certificate for the year commencing November 27, 2019 to November 26, 2020.

 

Competition

 

Traditionally art galleries and auction houses provide a platform for owners of artworks to sell their collections. However, their trading model is substantially different from ours. We believe we do not have any direct competition due to our unique business model of trading artwork ownership units instead of the artworks. We are not aware of any other companies engaging in a similar business.

 

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Research and Development

 

Currently, we do not have any research and development activity. We are still connecting third parties to explore research and development projects that will help us expand our business.

 

Intellectual Property

 

Our business is dependent on a combination of trademarks, copyrights, trade secrets and industry know-how. In order to protect our intellectual property rights, we have registered trademarks in Hong Kong, Mainland China, Macau and the United States.

 

Set forth below is a detailed description of our trademarks registered by our subsidiary Hong Kong Takung as of March 31, 2021:

 

        Trademark          
Country/Area   Trademark   number     Classes   Status
        303101679     14, 16,   Registered on August 14, 2014.
Hong Kong             35, 36, 42   Effective until August 13, 2024.
                   
                   
Macau        N/090131     14    
        N/090132     16   Registered on February 26, 2015.
        N/090133     35   Effective until February 26, 2022.
        N/090134     36    
        N/090135     42      
                   
United States        86372887     14  

Registered on July 11, 2017

Effective until July 10, 2027

        4983954     16    
        4983955     35   Registered on June 21, 2016
        4983956     36   Effective until June 20, 2026
        4983957     41    
                   
Mainland China                   
        15247645     36   Registered on December 14, 2015.
        15247714     42   Effective until December 13, 2025.

 

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Set forth below is a detailed description of our registered domain names.

 

Domain name   Registrant    Registration date   Expiry date
takungae.com.hk   Hong Kong Takung   June 28, 2013   June 28, 2021
takungae.com   Tianjin Takung   June 19, 2013   June 19, 2021
takungae.net   Hong Kong Takung   June 19, 2013   June 19, 2021
takungonline.com.hk   Hong Kong Takung   August 4, 2015   August 4, 2022
takungunit.com.hk   Hong Kong Takung   August 4, 2015   August 4, 2022
takungonline.com   Tianjin Takung   August 4, 2015   August 4, 2022
takungunit.com   Hong Kong Takung   August 4, 2015   August 4, 2022
takung-tj.com   Tianjin Takung   March 21, 2018   March 21, 2023
taking-sh.com   Tianjin Takung   October 9, 2016   October 9, 2021
takungsports.com   Hong Kong Takung   November 27, 2017   November 27, 2022
takungcalssic.com   Hong Kong Takung   January 25, 2018   January 25, 2023
takungcc.com   Hong Kong Takung   January 25, 2018   January 25, 2023

 

We own our trading system and related software.

 

The Impacts of COVID-19

 

While the ongoing coronavirus pandemic is spreading throughout the world, our operations have fully resumed in March 2020. During the year ended December 31, 2020, we had additional 10 pieces artwork listing compared to 6 pieces of artwork listing in the same period in 2019. Moreover, a higher number of active traders, 199,145, involved in the year ended December 31, 2020 compared to the same period in 2019, 153,400. As a result, we experienced a higher trading transaction amounts, $9,707,549,492 (HK$75,290,783,102) for the year ended December 31, 2020 compared to $ 4,169,858,232 (HK$32,480,693,712) in the same period in 2019.

 

Although we do not expect that the pandemic 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 streamlined our operations by merging one of our subsidiaries in the PRC, Takung (Shanghai) Co., Ltd to Tianjin Takung on May 8, 2020 and reorganized its workforces.

 

Item 1A. Risk Factors.

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this report before deciding to invest in our common stock.

 

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RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION

 

The global economy and the financial markets may negatively affect our business and clients, as well as the supply of and demand for works of art.

 

Our business is affected by global, national and local economic conditions since the services we provide are discretionary and we depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in Hong Kong and Mainland China. These factors include economic conditions and perceptions of such conditions by Traders, employment rates, the level of Traders’ disposable income, business conditions, interest rates, availability of credit and levels of taxation in regional and local markets. There can be no assurance that our services will not be adversely affected by changes in general economic conditions in Hong Kong and globally.

 

The art market is influenced over time by the overall strength and stability of the global economy and the financial markets, although this correlation may not be immediately evident. In addition, political conditions and world events may affect our business through their effect on the economies, as well as on the willingness of potential buyers and sellers to invest and sell art in the wake of economic uncertainty. On August 13, 2018, we announced the suspension of new listings of artwork on our trading platform. We attribute the decline in appetite for artwork investments to the overall bearish sentiments in China as a result of the declines in both of the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We resumed new listings in the first quarter of 2019 and 2020. There is no guarantee that we will never suspend them again.

 

Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19).

 

An outbreak of respiratory illness caused by COVID-19 emerged in late 2019 and has spread within the PRC and globally. The coronavirus is considered to be highly contagious and poses a serious public health threat. The World Health Organization labeled the coronavirus a pandemic on March 11, 2020, given its threat beyond a public health emergency of international concern the organization had declared on January 30, 2020.

 

Our revenues and workforce are concentrated in China (including Hong Kong). The epidemic has resulted in lockdown of cities, travel restrictions, and the temporary closure of stores and facilities in China for the past few months. The negative impacts of the COVID-19 outbreak on our business have included:

 

  · the uncertain economic conditions may refrain the traders from their investment activities on our trading platform;
  · quarantines impeded our ability to recruit new service agents and traders. Travel restrictions limited other parties’ ability to visit and meet us in person. Although most communication could be achieved via video calls, this form of remote communication may be less effective in building trust and engaging new agents and traders.
  · the operations of our existing authorized agents and service agents have been and could continue to be negatively impacted by the epidemic, which may in turn adversely impact the listing and trading transactions on our platform or result in loss of customers or disruption to our operations.

 

The above adverse impacts might be mitigated as quarantines across China have been largely lifted as of late March and the Chinese government has rolled out an array of favorable fiscal measures. While we do not expect that the pandemic will have a material adverse effect on our business or financial results at this time, we are unable to accurately predict the impact that the coronavirus will have due to various uncertainties, including the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and effectiveness of the actions that may be taken by governmental authorities.

 

Additionally, the pandemic has affected our overall ability to react timely to mitigate the impact of this event and has substantially hampered our efforts to provide our investors with timely information and comply with our filing obligations with the Securities and Exchange Commission.

 

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A decline in trading volumes will decrease our trading revenues.

 

Trading volumes are directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of artworks and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated depending on market conditions and other factors beyond our control. Because a significant percentage of our revenues are tied directly to the trading volumes on our markets, a general decline in trading volumes would lower revenues and may adversely affect our operating results. Declines in trading volumes have also impacted our market share or pricing structures and adversely affected our business and financial condition.

 

System limitations or failures could harm our business.

 

Our businesses depend on the integrity and performance of the technology, computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new services. These consequences could result financial losses and decreased customer service and satisfaction. If trading volumes increase unexpectedly or other unanticipated events occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

 

A variety of uncontrollable events may reduce our ability to provide our trading services, impair our ability to provide our services or increase the cost of providing our services.

 

Our headquarters are in Hong Kong SAR and our servers are in Hong Kong SAR, Macau and mainland China, which are historically susceptible to adverse weather conditions such as typhoons, excessive heat or rain, earthquakes and floods. Those natural disasters may result in significant and extensive damage to our network equipment. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past several years, in 2009, the outbreak of influenza A (H1N1) and more recently, the coronavirus outbreak. In 2010, an earthquake registering 7.1 on the Richter scale struck Qinghai Province. In April 2013, another major earthquake registering 7.0 on the Richter scale struck Ya’an region of Sichuan Province. In 2013, certain areas of China suffered from severe floods. We are unable to predict the effect, if any, that any other future natural disasters and health hazards may have on our business. Any future natural disasters and health hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, natural disasters and health hazards may severely restrict the level of economic activities in affected areas, which may in turn materially adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations. These events and others, such as fluctuations in energy costs and computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide our services or to obtain insurance coverage with respect to these events.

 

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We have insufficient insurance coverage

 

We presently do not have any insurance to cover certain events such as physical damage to our office premises and resulting business interruption, certain injuries occurring on our property and liability for breach of legal responsibilities as we believe, based on our organization, business model and the remote possibility of the incurrence of substantial damages from such events, that the costs of such insurance greatly exceeds the benefits of having it. However, in the possible event of a significant loss from such an event, this may severely impact our performance or continue as a going concern.

 

The success of our business depends on our ability to market and advertise the services we provide effectively.

 

Our ability to establish effective marketing campaigns is the key to our success. Our advertisements promote our corporate image and our services. If we are unable to increase awareness of our brand, the benefits of using our trading platform to invest in artwork and that such investment is secure, we may not be able to attract new Traders. Our marketing activities may not be successful in promoting our services or in retaining and increasing our Trader base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.

 

Our success is dependent on the receptiveness of Traders of artwork to our platform.

 

We believe the demand for artwork listings will be generated by our Traders. We hope to educate our Traders on the merits of using our platform to invest in artwork. Not only in the subject artwork secure and insured, it requires less capital for our Traders to invest as they need only invest in artwork units and not purchase the entire piece of artwork. We hope that they will see their investment as less risky as they are presented with the opportunity to diversify their investments through various pieces of artwork. Our success would accordingly depend on the receptiveness of Traders to the merits of investments on our platform.

 

If we are unable to renew the lease of our property, our operations may be adversely affected.

 

We do not directly own the land over the property we lease. We may lose our leases or may not be able to renew it when it is due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting our operations or increasing our cost of operations.

 

The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.

 

Any significant growth in the market for our services or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of the date of this Annual Report, we have 38 full time employees. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.

 

Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of supplies, development of new products and services, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.

 

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If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

 

If adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plan and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.

 

In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

 

If we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.

 

Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

 

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

 

Our success is, to a certain extent, attributable to the management and operational and technical expertise of certain key personnel. In addition, we will require an increasing number of experienced and competent executives and other members of senior management to implement our growth plans. If we lose the services of any member of our senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.

 

We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations.

 

We must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.

 

Our financial results may fluctuate because of many factors and, as a result, investors should not rely on our historical financial data as indicative of future results.

 

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:

 

  · vulnerability of our business to a general economic downturn in Hong Kong and mainland China;

 

  · fluctuation and unpredictability of the prices of the products we sell;

 

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  · changes in the laws and regulations of Hong Kong and mainland China that affect our operations; and

 

  · our ability to obtain necessary government certifications and/or licenses to conduct our business.

 

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results in accordance with U.S. GAAP could be materially and adversely affected. In addition, investor confidence in us and the market price of our equities could decline significantly if we conclude that our internal control over financial reporting is not effective.

 

Since 2016, we enhanced our internal controls over financial reporting by making the following changes: (i) we established a desired level of corporate governance with regard to identifying and measuring the risk of material misstatement, (ii) we set up a key monitoring mechanism including independent directors and audit committee to oversee and monitor our risk management, business strategies and financial reporting procedure, (iii) we have a Chief Financial Officer with SEC and US GAAP expertise and (iv) we have strengthened our financial team by employing more qualified accountant(s) to enhance the quality of our financial reporting function. We conducted out an evaluation using the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission with the participation of our management, including Zhihua Yang, the Company’s Chief Executive Officer and Jing Wang, the Company’s Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2020. Based upon that evaluation, we concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit 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 CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. However, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Accordingly, if in spite of such changes and improvements, our internal controls are still ineffective in our ability to accurately and timely report our financial results in accordance with U.S. GAAP, this could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. This, in turn, could result in a material adverse impact on us and undermine investor confidence in us and the market price of our equities could decline significantly.

 

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Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.

 

Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.

 

If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our Traders or other participants, the communication infrastructure, or the e-platform on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.

 

Future inflation may inhibit our ability to conduct business profitably.

 

In recent years, the economy in China including Hong Kong has experienced periods of rapid expansion and high rates of inflation. High inflation may in the future cause the Chinese and Hong Kong governments to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and Hong Kong, and thereby harm the market for our services.

 

Currency fluctuations may adversely affect our business, including reducing our revenues and profits in U.S. dollar terms if RMB were to decline in value.

 

Our reporting currency is the U.S. dollar. Our operations of Takung uses U.S. dollar while Hong Kong Takung and Hong Kong MQ use Hong Kong dollar and Tianjin Takung uses Renminbi (RMB) as their functional currencies. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies.  It is possible that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against the U.S. dollar.

 

The income statements of our China and Hong Kong operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of RMB and Hong Kong dollar -denominated transactions results in increased revenues, operating expenses and net income for our non-U.S. operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our non-U.S. subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the non-U.S. subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.

 

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Restrictions on currency exchange may limit our ability to convert RMB into foreign currencies to fund our business activities outside China, or to repay non-RMB denominated obligations.

 

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenues may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

 

The Company’s requirements could exceed the amount of time or level of experience that our officer and directors may have.

 

Our success largely depends on the continuing services of our chief executive officer, Zhihua Yang, our chief financial officer, Jing Wang and our directors, Xiaoyu Zhang, Jiangping (Gary) Xiao and Lv Li. Our continued success, also, depends on our ability to attract and retain qualified personnel. We believe that Messrs. Yang, Wang, Zhang, Xiao and Li possess valuable business development and marketing knowledge, experience and leadership abilities that would be difficult in the short term to replicate. The loss of their services could have an adverse effect on our business, results of operations and financial condition as our potential future revenues.

 

There can be no assurance that we will be able to attract and hire officers or directors with similar experience to operate our business, in the event that any one of them is otherwise unsuccessful in doing so.

 

Because our funds are held in banks which may not be covered by sufficient insurance, the failure of any bank in which we deposit our funds could affect our ability to continue our business.

 

Banks and other financial institutions in Hong Kong and China may not be covered by sufficient insurance for funds held on deposit. The Hong Kong Deposit Protection Board manages and supervises the operation of the Deposit Protection Scheme, which protects deposit amounts up to only $64,487 (HK$500,000). On May 1, 2015, the State Council of People’s Republic of China, released the Regulations on Deposit Insurance, with a scheme that would insure up to $76,628 (RMB500,000) in deposits made by businesses and individuals per bank. The scheme is backed by a fund run by the People’s Bank of China.

 

As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue in business.

 

Our annual effective income tax rate can change significantly as a result of a combination of changes in our U.S. and foreign earnings and other factors, including changes in tax laws or changes made by regulatory authorities.

 

Our consolidated effective income tax rate is equal to our total income tax expense (benefit) as a percentage of total book income (loss) before tax. However, income tax expense and benefits are recognized on a jurisdictional or legal entity basis instead of worldwide or consolidated level basis. Losses in one jurisdiction may not be used to offset profits in other jurisdictions and may cause an increase in our tax rate. Changes in statutory income tax rates and laws, as well as initiation of tax audits by local and foreign authorities, could impact the amount of income tax liability and income taxes we are required to pay. In addition, any fluctuation in the earnings (or losses) of the jurisdictions and assumptions used in the calculation of income taxes could have a significant effect on our consolidated effective income tax rate. Furthermore, our effective tax rate could increase if we are unable to generate sufficient future taxable income in certain jurisdictions, or if we are otherwise required to increase our valuation allowances against our deferred tax assets.

 

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We are subject to taxation in multiple jurisdictions. As a result, any adverse development in the tax laws of any of these jurisdictions or any disagreement with our tax positions could have a material adverse effect on our business, consolidated financial condition or results of operations.

 

We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions particularly in the United States, People’s Republic of China and Hong Kong SAR. In addition, tax authorities in any applicable jurisdiction, including the United States, may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. In the event any applicable tax authorities effectively sustained their positions which are different from our tax treatment of any of our transactions, it could have a significant adverse impact on our business, consolidated results of our operations as well as consolidated financial condition.

 

Our financial position and results of operations may be significantly impacted by any unfavorable tax consequences due to the changes to the fiscal policies or tax regulations.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") which includes significant changes to the U.S. corporate income tax system and U.S. international tax regime. The effect of the international provisions of the Tax Act resulted in a one-time deemed repatriation tax on unremitted foreign earnings and profits (a "transition tax"), a minimum tax on foreign earnings of U.S.-based multinationals with foreign subsidiaries, a base erosion tax on transactions between U.S. and non-U.S. affiliated corporations, in structures involving U.S. and non-US headquartered groups, a partial participation exemption for dividends from foreign subsidiaries and several other changes across the U.S. international tax provisions addressing the source of income, FTCs, deductibility of payments and other issues, including ownership and transfers of intangible property (Global Intangible Low-Taxed Income or GILTI).

 

The remaining international tax provisions will be effective for taxable years beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. See our discussion and analysis of income tax in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The growth of aging receivables and a deterioration in the collectability of these accounts could adversely affect our results of operations.

 

We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts, and the general condition of the industry. In the year ended December 31, 2020 and 2018, no provision for doubtful accounts related to the receivable from our traders was recorded. Due to the difficulty in assessing future trends, we could be required to further increase our provisions for doubtful accounts. As our accounts receivable age and become uncollectible our cash flow and results of operations are negatively impacted.

 

While the management exercised its caution in the entry into agreements with authorized agents, who in turn select Traders and the Company reviewed the Traders, certain Traders could pay arrears the monthly fee and owe debts to the Company for a long period. In the event the Company has to write off the amount of uncollectible receivables of the authorized agent subscription fee and commission fee from the selected Traders, and if such write-off is material, it may have adverse impact on our financial results.

 

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RISKS RELATED TO DOING BUSINESS IN HONG KONG

 

The Hong Kong legal system embodies uncertainties which could limit the legal protections available to you and us.

 

As one of the conditions for the handover of the sovereignty of Hong Kong to China, China had to accept some conditions such as Hong Kong's Basic Law before its return. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people's rights and freedom for fifty years from 1997. This agreement had given Hong Kong the freedom to function in a high degree of autonomy. The Special Administrative Region (“SAR”) of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.

 

Some international observers and human rights organizations have expressed doubts about the future of the relative political freedoms enjoyed in Hong Kong, and about the PRC's pledge to allow a high degree of autonomy in Hong Kong. They considered, for example, that the proposals in Article 23 of the Basic Law in 2003 (which was withdrawn due to mass opposition) might have undermined autonomy. On June 10, 2014, Beijing released a new report asserting its authority over the territory. This ignited criticism from many people in Hong Kong, who said that the Communist leadership was reneging on its pledges to abide by the "one country, two systems" policy that allows for a democratic, autonomous Hong Kong under Beijing's rule.

 

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If the PRC were to, in fact, renege on its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of our contractual rights. This could, in turn, materially and adversely affect our business and operation. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our customers.

 

It will be difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in Hong Kong.

 

Substantially all of our assets will be located in Hong Kong and mainland China and our officers and our present directors reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws.

 

We may have difficulty establishing adequate management, legal and financial controls in Hong Kong, which could impair our planning processes and make it difficult to provide accurate reports of our operating results.

 

Although we will be required to implement internal controls, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in Hong Kong and mainland China in these areas. As a result of these factors, we may experience difficulty in establishing the required controls, making it difficult for management to forecast its needs and to present the results of our operations accurately at all times. If we are unable to establish the required controls, market makers may be reluctant to make a market in our stock and investors may be reluctant to purchase our stock, which would make it difficult for you to sell any shares of common stock that you may own or acquire.

 

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RISKS RELATED TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA

 

Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.

 

Some of our operations are conducted in the People’s Republic of China (“PRC”) and part of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.

 

The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China's economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

 

While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.

 

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.

 

As some of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries, Shanghai Takung, Tianjin Takung, and Tianjin MQ are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.

 

Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.

 

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PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.

 

Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where the parties' revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.

 

If we grow to a certain threshold level, any proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. As a result of, many of the transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM's practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions in the future in a timely manner or at all.

 

We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements.

 

We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our operating subsidiaries in the PRC, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our operating subsidiaries incur additional debt, the instruments governing the debt may restrict its ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.

 

Under PRC laws, rules and regulations, our subsidiaries incorporated in China are required to set aside a portion of their net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as 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.

 

Limitations on the ability to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including making investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.

 

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The services conducted by our wholly-foreign owned enterprises might be regarded as a form of online advertising or as part of services requiring an Internet content provider license or other licenses and subjecting us to other laws, rules and regulations as well as increased taxes.

 

Our online platform to list artwork for sale at fixed prices and other related services are currently not classified as a form of online advertising in China or as part of services requiring an ICP license or other licenses. We conduct our fixed price sale of artwork and other related business through our wholly-foreign owned enterprises in the PRC, which are not qualified to operate an online advertising business and do not hold an ICP license. However, we cannot assure you that the PRC government will not classify our business and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. If new regulations characterize our business and other related services as a form of online advertising or as part of ICP services requiring an ICP license or other licenses, we may have to conduct our business through other entities, which are qualified to operate online advertising business and hold ICP or other licenses.

 

If we conducted our business through other entities, we may face increased scrutiny from the tax authorities and may incur additional taxes on any services fees paid by such entities to our wholly-foreign owned enterprise. In addition, advertising services are subject to a cultural construction fee under PRC law, which is a 3% surcharge in addition to the applicable value-added tax. If our business and other related services were to be considered a form of online advertising, our revenue from those services would be subject to the 3% surcharge. If that were to occur, our margins would decline and our net income could be reduced. In addition, the substantial revenue streams attributable to our business would then be collected from such other entities and subject to the risks associated with these entities. If the change in classification of our business and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and late payment interest.

 

Moreover, PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator's license for operating an advertising business.

 

In addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertising distributors must confirm that the advertisers have obtained requisite government approvals, including the advertiser's operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities. If we become subject to PRC advertising laws, we would need to take steps to monitor, and to ensure that our third-party marketing affiliates monitor, the content of any advertisements displayed on our platforms. This could require considerable resources and time, and could significantly affect the operation of our business, while also subjecting us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with such laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations. Any change in the classification of our business and other related services by the PRC government may also significantly disrupt our operations and materially and adversely affect our business and prospects.

 

We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.

 

Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with "de facto management bodies" located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. "De facto management body" refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation's general position on how the "de facto management body" test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate only a small portion of our revenues offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body."

 

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Dividends payable to our foreign investors and gains on the sale of our common stock by our foreign investors may become subject to PRC taxation.

 

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable by a resident enterprise to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of common stock by such investors is also subject to PRC tax at a current rate of 5%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our common stock, and any gain realized by the investors from the transfer of our common stock, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of our common stock by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, holders of our common stock would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas and to claim foreign tax credit if applicable. If dividends payable to our non-PRC investors, or gains from the transfer of our common stock by such investors are subject to PRC tax, the value of your investment in our common stock may decline significantly.

 

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.

 

On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax and Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.

 

According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable commercial purpose" of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.

 

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There are uncertainties as to the application of Bulletin 7. As Bulletin 7 was promulgated recently, it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiary may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC subsidiary may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our financial condition and results of operations.

 

Restrictions on currency exchange may limit our ability to utilize our revenue effectively.

 

A significant portion of our revenue is denominated in Renminbi. The Renminbi is 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 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. Since a significant amount of our future revenue is denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.

 

Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt or otherwise do not have the liquidity to pay us during our deposit period.

 

On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency. Under this regulation, depositors will be fully indemnified for their deposits and interests in an aggregate amount up to a limit of RMB500,000. Deposits or interests over such limit will only be covered by the bank’s liquidation assets. Therefore, although this requirement to purchase deposit insurance may help, to a certain extent, prevent Chinese banks from going bankrupt, it would not be effective in providing effective protection for our accounts, as our aggregate deposits are much higher than the compensation limit.

 

RISKS RELATING TO INVESTMENT IN OUR SECURITIES

 

An active public market for our common stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the public market.

 

We cannot predict the extent to which an active public market for our common stock will develop or be sustained.

 

Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.

 

Holders of a significant number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate shareholder (or shareholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

 

If we fail to maintain effective internal controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial condition, results of operations and reputation could be materially and adversely affected.

 

We are a public company and our internal controls are essential to the integrity of our business and financial results. Our public reporting obligations place a strain on our management, operational and financial resources and systems. Although we have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal controls, if we encounter difficulties in improving our internal controls and management information systems, we may incur additional costs and management time in meeting our improvement goals. We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective internal controls in the future, our business, financial condition, results of operations and reputation may be materially and adversely affected.

 

39

 

 

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

 

We do not foresee paying cash dividends in the near future.

 

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.

 

40

 

 

Item 1B.  Unresolved Staff Comments.

 

Not applicable.

 

Item 2.  Properties.

 

We signed a new Hong Kong office lease on December 15, 2020 for approximately 885 square feet of office space at Room 709 on the 7th floor of Tower II of Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong. The lease expires on December 14, 2022 and provides for a monthly rent of $5,135 (HK$39,825) and a monthly building management fee of $575 (HK$4,460).

 

Hong Kong Takung leased approximately 236 square feet of storage space at Private Storage Area 23, Unit 2 on the 23rd Floor of Global Gateway, Tsuen Wan, Hong Kong. This lease expired on January 21, 2021 and provided for a monthly rent of $2,694(HK$20,900). The lease is renewable after one year.

 

Hong Kong Takung also leased approximately 2,153 square feet of storage space at Lingtong Gongyuan, Southeast of Hebin Park, Tanggu, Binhai New Area, Tianjin City, China. The lease expires on July 14, 2025 and provides for a monthly rent and monthly service fee of $1,074 (RMB 8,333).

 

Tianjin Takung lease approximately 538.2 square feet of storage space at the Linji Building A, No. 8 Street 8, Shunyi District, Beijing, China 101300. The lease expires on February 14, 2021 and provides for a monthly rent of $1,375 (RMB 9,500) and a monthly service fee of $83 (RMB 570).

 

On August 12, 2020, Tianjin Takung leased an office space at 14-1-302, Intercity Meijing Garden, Beichen Economic Development Zone, Beichen District, Tianjin, China. The lease provides a monthly rent payment is $227(RMB1,568) and expires on August 11, 2021.

 

41

 

 

Item 3.   Legal Proceedings.

 

From November 2019 to March 2020, there were a total of seven individual claims filed against Shanghai Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by certain service agents. These claims amounted to approximately $0.11 million. These claims have all been settled as of present date with the voluntary dismissal by the claimants.

 

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 4.   Mine Safety Disclosures.

 

Not applicable.

 

42

 

 

PART II

 

Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common share was originally quoted on the OTCBB from October 2013 under the designation “CARD”. On November 5, 2014, we amended our name from “Cardigant Medical Inc.” to “Takung Art Co., Ltd” and on November 12, 2014, our symbol was changed to “TKAT”. Our common share began trading on the NYSE American from March 22, 2017.

 

Holders of Our Common Share

 

As of March 29, 2021, we had 128 registered shareholders of our common share, which does not include the shares held in street name by brokerage firms. The holders of common share are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the common share have no preemptive rights and no right to convert their common share into any other securities. There is no redemption or sinking fund provisions applicable to the common share.

 

Dividends

 

We have not paid dividends on our common share and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our Hong Kong and China operation entities for our funds and Hong Kong and Chinese regulations may limit the amount of funds distributed to us from our Hong Kong and Chinese operation entities, which will affect our ability to declare any dividends.

 

43

 

 

 

 

Registration Rights

 

We have no other obligation to register under the Securities Act any of our shares of common stock.

 

Equity Compensation Plans

 

On August 26, 2015, we approved our 2015 Incentive Stock Plan, allowing for the issuance of up to 1,037,000 shares of our common stock. On August 27, 2015, we registered the shares of common stock reserved for issuance under our 2015 Incentive Stock Plan with the SEC on a registration statement on Form S-8 under the Securities Act. On August 28, 2015, we issued 300,000 shares of our common stock as partial compensation to third party consultants. We have since increased the Share Plan by an additional 500,000 shares. On November 20, 2015, we issued 487,000 restricted shares of our common stock as partial compensation to third party consultants. On November 30, 2016, we issued 50,000 shares of our common stock to a third-party consultant for general financial advisory and banking service. On October 2, 2017, we issued 20,000 shares of our common stock to a third-party consultant. These issuance of shares were under the 2015 Incentive Stock Plan.

 

On March 22, 2017, we issued an aggregate of 19,606 restricted shares of our common stock to three of our former non-executive directors, namely, Messrs. Joseph Levinson, John Levy and Kwok Keung William Tsui under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.

 

On May 16, 2018, we issued an aggregate of 17,143 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.

 

On April 24, 2019, we issued an aggregate of 29,104 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Sun UP LLC (of which Joseph Levinson is the LLC member) under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.

 

On May 27, 2020, 10,000 shares of common stock were granted to the Company’s SEC legal counsel as a compensation for legal advisory services rendered.

 

On June 8, 2020, we issued an aggregate of 6,250 restricted shares of our common stock to three of our former non-executive directors, namely, John Levy, Kwok Keung William Tsui and Joseph Levinson under our 2015 Incentive Stock Plan (which was registered on a registration statement on Form S-8 under the Securities Act and filed with the SEC on August 27, 2015) as partial consideration for their services as directors pursuant to their respective director appointment letters.

 

Equity Compensation Plan Information

 

Plan category  

Number of

securities to be

issued upon

exercise of

outstanding

options, warrants

and rights

   

Weighted-average

exercise price of

outstanding

options, warrants

and rights

   

Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected

in column (a))

 
    (a)     (b)     (c)  
Equity compensation plans not approved by security holders     -       -       -  
Equity compensation plans approved by security holders     261,952     $ 3.08       335,945  
Totals     261,952     $ 3.08       335,945  

 

The Company granted 431,525 stock options during 2016. The exercise price of share options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years.

 

During 2020, we did not grant any share options. 10,178 share options have been vested and no share options were forfeited by the employees. The outstanding share options as of December 31, 2020 were 100,890.  

 

Stock Transfer Agent

 

Our stock transfer agent is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, New York 11598.

 

Repurchase of Equity Securities by Takung Art Co., Ltd and Affiliated Purchasers

 

None.

 

Recent Sales of Unregistered Securities

 

None.

 

44

 

 

Item 6.   Selected Financial Data.

 

Not applicable.

 

Item 7.   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 report contains certain statements that may be deemed “forward-looking statements” within the meaning of United States of America securities laws.  All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

 

These statements include, without limitation, statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues, our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission.

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, particularly those set forth under "Special Note Regarding Forward-Looking Statements", our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.

 

45

 

 

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.

 

46

 

 

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 headquarters are 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 offices are located at Room 709, Tower 2, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong.

 

47

 

 

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, involved a higher number of active traders and larger trading transaction amounts during the year ended December 31, 2020 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 streamlined our operations by merging one of our subsidiaries in the PRC, Takung (Shanghai) Co., Ltd to Tianjin Takung on May 8, 2020 and reorganized its workforces.

 

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 fee, trading commission, and management fee.

 

For the years ended December 31, 2020 and 2019

 

The following tables set forth our consolidated statements of operations data:

 

    For the Year Ended December 31  
    2020     % of revenue     2019     % of revenue  
Revenue                                
Listing fee   $ 815,748       17.9     $ 284,210       8.9  
Commission     3,288,077       72.0       2,438,756       76.9  
Management fee     463,397       10.1       450,048       14.2  
Total revenue     4,567,222       100.0       3,173,014       100.0  
Cost of revenue     2,287,404       50.1       1,861,577       58.7  
Gross profit     2,279,818       49.9       1,311,437       41.3  
Selling expense     390,112       8.5       301,460       9.5  
General and administrative expenses     3,455,249       75.7       4,662,313       146.9  
Total expenses     3,845,361       84.2       4,963,773       156.4  
Loss from operations     (1,565,543 )     (34.3 )     (3,652,336 )     (115.1 )
Total other income (expenses)     965,455       21.1       (367,201 )     (11.6 )
Loss before income taxes     (600,088 )     (13.2 )     (4,019,537 )     (126.7 )
Income tax expense     (12,550 )     (0.3 )     (73,269 )     (2.3 )
Net loss   $ (612,638 )     (13.5 )   $ (4,092,806 )     (129.0 )

 

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Revenue

 

(i) Listing fee revenue

 

Listing fee revenue is calculated based on a percentage of the listing value and transaction value of artworks.

 

Listing value is the total offering price of an artwork when the ownership units are initially listed on our trading platform. We utilize an appraised value as a basis to determine the appropriate listing value for each artwork, or portfolio of artworks.

 

As of December 31, 2020, a total of 295 sets of artwork were listed for trade on our platform —comprising 70 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists ranging in listing value from $128,934 (HK$1,000,000) to $1,547,209 (HK$12,000,000), 35 pieces of jewelry ranging in listing value from $25,787 (HK$200,000) to $1,289,341 (HK$10,000,000), 134 pieces of precious stones ranging in listing value from $12,893 (HK$100,000) to $773,605 (HK$6,000,000), 29 pieces of amber ranging in listing value from $64,467 (HK$500,000) to $1,031,473 (HK$8,000,000), 4 pieces of antique mammoth ivory carving ranging in listing value from $128,934 (HK$1,000,000) to $257,868 (HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value from $103,147 (HK$800,000) to $232,081 (HK$1,800,000), 7 pieces of porcelain in listing value from $38,680 (HK$300,000) to $386,802 (HK$3,000,000), 6 sets of Unit+ product with listing values from $128,934 (HK$1,000,000) to $395,312 (HK$3,066,000), 1 piece of Yixing Purple Clay with a listing value of $128,934 (HK$1,000,000) and 7 pieces of sports culture with listing values from $128,934 (HK$1,000,000) to $257,868 (HK$2,000,000). 

 

We listed a total of 10 pieces of artwork in 2020. The listing fees ranged from 22.83% to 25% of the listing value of the paintings and calligraphies. The total listing value of artwork during 2020 was $3,481,221 (HK$27,000,000).

 

As of December 31, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists ranging in listing value from $127,630 (HK$1,000,000) to $1,531,569 (HK$12,000,000), 35 pieces of jewelry ranging in listing value from $25,526 (HK$200,000) to $1,276,307 (HK$10,000,000), 134 pieces of precious stones ranging in listing value from $12,763 (HK$100,000) to $765,785 (HK$6,000,000), 29 pieces of amber ranging in listing value from $63,815 (HK$500,000) to $1,021,046 (HK$8,000,000), 4 pieces of antique mammoth ivory carving ranging in listing value from $127,630 (HK$1,000,000) to $255,262 (HK$2,000,000), 2 pieces of porcelain pastel paintings ranging in listing value from $102,105 (HK$800,000) to $229,735 (HK$1,800,000), 7 pieces of porcelain in listing value from $38,289 (HK$300,000) to $382,892 (HK$3,000,000), 6 sets of Unit+ product with listing values from $127,630 (HK$1,000,000) to $391,316 (HK$3,066,000), 1 piece of Yixing Purple Clay with a listing value of $127,630 (HK$1,000,000) and 7 pieces of sports culture with listing values from $127,630 (HK$1,000,000) to $255,262 (HK$2,000,000).

 

We listed a total of 6 pieces of artwork in 2019. The listing fees ranged from 22.9% to 28 % of the listing value of the paintings and calligraphies. The total listing value of artwork during 2019 was $1,148,677 (HK$9,000,000).

 

49

 

 

The increase in the number of listings of artwork for the year ended December 31, 2020, compared to the same period in 2019, resulted in a higher listing fee revenue in 2020 as our listing fee was charged based on the listing value of the artwork.

 

(ii) Commission fee revenue

 

For non-VIP Traders, the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, 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 $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. On November 7, 2018 we lowered the minimum charge to $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 defined a selected Trader as “inactive trader” who meets the following criteria;

 

The Trader has been defaulted in making monthly commission payments over three months;
The Trader did not incur any transactions in the month of reassessment;
The service agent confirmed with the relevant Trader that he/she has been inactive.

 

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.

 

The Company offered commission to 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.

 

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Commission revenue for the year ended December 31, 2020 grew by $849,321, from $2,438,756 for the year ended December 31, 2019 to $3,288,077 for the same period in 2020 mainly due to higher trading transaction amount incurred and more traders involved in 2020. Total transaction amounts for the years ended December 31, 2020 and 2019 were $9,707,549,492 (HK$75,290,783,102) and $4,169,858,232 (HK$32,480,693,712), respectively. Total active traders for the years ended December 31, 2020 and 2019 were 199,145 and 153,400, respectively.

 

(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 year ended December 31, 2020, management fee revenue increased by $13,349, from $450,048 for the year ended December 31, 2019 to $463,397 for the same period in 2020.

 

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Revenue by customer type

 

The following table presents our revenue by customer type:

 

   

For the years ended December 31,

 
    2020     2019  
Artwork owners   $ 815,748     $ 284,210  
Non - VIP traders     2,674,125       2,256,192  
VIP traders     1,077,349       632,612  
Total   $ 4,567,222     $ 3,173,014  

 

Cost of Revenue

 

Cost of revenue primarily includes the following: commission paid to service agents, depreciation, internet service charges, artwork insurance and artwork storage costs.

 

    For the years ended December 31,  
    2020     2019  
Commission paid to service agents   $ 1,691,411     $ 1,053,789  
Depreciation     340,001       460,749  
Internet service charge     141,059       208,941  
Artwork insurance     49,956       48,322  
Artwork storage     63,716       89,320  
Others     1,261       456  
Total   $ 2,287,404     $ 1,861,577  

 

Cost of revenue for the years ended December 31, 2020 and 2019 were $2,287,404 and $1,861,577, respectively. The rise in the cost of revenue for the year ended December 31, 2020 compared to the same period in 2019 was mainly due to an increase in the commissions paid to service agents by $637,622. This increase was driven by a higher trading transaction amounts during the year ended December 31, 2020 as discussed above. Such increase was offset by a decrease in depreciation by $120,748 due to some of our computer equipment and trading systems having been fully depreciated, a decline in internet service charges by $67,882 due to a downsizing of our office locations and a decrease of artwork storage costs by $25,604 as we negotiated the storage fee with the service provider.

 

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Gross Profit

 

Gross profit was $2,279,818 for the year ended December 31, 2020, compared to $1,311,437 for the year ended December 31, 2019. The increase by $968,381 was primarily due to an increase in commission revenue as discussed above.

 

Gross profit margin grew by 8.6% to 49.9% for the year ended December 31, 2020 from 41.3% for the year ended December 31, 2019, primarily due to the significant increase in commission revenue.

 

Operating Expenses

 

General and administrative expenses were $3,455,249 for the year ended December 31, 2020, compared to $4,662,313 for the year ended December 31, 2019. The significant plunge in general and administrative expense by $1,207,064 or 25.9% was attributed to a significant decrease in salary and welfare by $415,200 due to lower employee headcount and salary reduction of our executives, a decrease in consultancy fees by $155,470 due to lower consulting fees charged by our consultants of Tianjin Takung, a decrease in legal and professional fees by $287,992 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in travel and accommodation fees by $60,926 due to fewer overseas travel and accommodation, a fall in share-based compensation by $1,316 as there were no additional stock options granted, a decrease in office, insurance and rental expenses by $343,156 due to early lease terminations by Tianjin Takung and Tianjin MQ in July 2020, a decrease in depreciation by $17,392 as some of our furniture and fixtures and computer equipment had been fully depreciated, a decrease in research and development expense by $28,111 and a fall in others by $52,824. The overall decline in general and administrative expenses was offset by an increase in non-deductible input VAT expense by $103,931 as a result of an increase in service fees paid to Tianjin Takung and an increase in bad debt expense by $51,392 due to a write-off of rental deposit recorded by Tianjin MQ.

 

The following table sets forth the main components of our general and administrative expenses for the years ended December 31, 2020 and 2019.

 

    For the year ended December 31,
2020
    For the year ended December 31,
2019
 
    Amount($)     % of Total     Amount($)     % of Total  
Salary and welfare     1,284,986       37.2 %     1,700,186       36.5 %
Office, insurance and rental expenses     733,008       21.2 %     1,076,164       23.1 %
Legal and professional fees     562,982       16.3 %     850,974       18.3 %
Consultancy fee     120,464       3.5 %     275,934       5.9 %
Non-deductible input VAT expense     281,175       8.1 %     177,244       3.8 %
Depreciation expenses     119,513       3.5 %     136,905       3.0 %
Traveling and accommodation expenses     48,318       1.4 %     109,244       2.3 %
Bad debt expense     104,997       3.0 %     53,605       1.2 %
Share-based compensation     37,527       1.1 %     38,843       0.8 %
Research & development expenses     -       - %     28,111       0.5 %
Others     162,279       4.7 %     215,103       4.6 %
Total general & administrative expenses   $ 3,455,249       100.0 %   $ 4,662,313       100.0 %

 

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The Company also incurred a total of $390,112 and $301,460 in selling expenses for the years ended December 31, 2020 and 2019, respectively. The increase in selling expense by $88,652 was due to more promotion and advertising events incurred by Tianjin Takung during 2020.

 

Total operating expenses for the year ended December 31, 2020 was $3,845,361, a decline of $1,118,412 compared to $4,963,773 for the same period in 2019. The significant decrease was driven by the reduction in general and administrative expenses as discussed above.

 

Other income and (expenses)

 

Other income for the year ended December 31, 2020 was $965,455, compared to other expenses $367,201 for the same period in 2019. The significant increase was predominantly due to a significant increase in foreign currency exchange gain by $1,135,574, arising from the appreciation of the Renminbi against the US dollar.

 

Income tax expense

 

The Company’s effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate at 8.25% for the first HK$ 2 million (approximately $257,868) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,868) (16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%.

 

The Global Intangible Low-taxed Income (GILTI) is a new provision introduced by the Tax Act. U.S. shareholders, who are domestic corporations, of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current period expense when incurred. As of December 31, 2020 and 2019, the Company does not have any aggregated positive tested income; and as such, does not have additional provision amount recorded for GILTI tax.

 

The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The company does not anticipate a material impact on its financial statements as of December 31, 2020 due to the recent enactment.

 

54

 

 

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 HK$ 2 million (approximately $257,868) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. 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. We 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.

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the year ended December 31, 2020 and 2019.

 

The income tax expense for the years ended December 31, 2020 and 2019 decreased by $60,719, from $73,269 for the year ended December 31, 2019 to $12,550 for the same period in 2020. During the year ended December 31, 2019, we derecognized the deferred tax assets incurred by our subsidiaries in PRC as they continued to incur tax loss. On the other hand, for the same period in 2020, we recognized an uncertain tax position driven by the income tax examination for the tax years December 31, 2016 through 2018 of Takung Hong Kong. The tax examination has not been concluded as of our report date. Besides, Takung Hong Kong and Tianjin Takung incurred taxable income due to higher foreign currency exchange gain and higher service income earned, respectively, during 2020. The taxable income of Takung Hong Kong and Tianjin Takung was offset by the utilization of their respective net operating loss carryforwards.

 

Our effective tax rates for the years ended December 31, 2020 and 2019 were (2.1)% and (1.8)%, respectively.

 

Net Loss

 

As a result of our operations aforementioned, our net losses after income taxes for the years ended December 31, 2020 and 2019 were $612,638 and $4,092,806, respectively.

 

Foreign currency translation loss (gain)

 

We had a foreign currency translation (loss) gain for the years ended December 31, 2020 and 2019 of $(55,001) and $29,673, respectively.

 

Comprehensive loss

 

As a result of the above, we posted a comprehensive loss of $667,639 and $4,063,133 for the years ended December 31, 2020 and 2019, respectively.

 

55

 

 

Liquidity and Capital Resources

 

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

 

   

For the years ended December 31

 
    2020     2019  
Net cash (used in) provided by operating activities   $ (7,842,800 )   $ 9,841,840  
Net cash (used in) provided by investing activities     (454,736 )     224,608  
Net cash used in financing activities     -       (699,526 )
Effect of exchange rate change on cash and cash equivalents and restricted cash     311,127       (61,854 )
Net (decrease) increase in cash and cash equivalents and restricted cash     (7,986,409 )     9,305,068  
Cash and cash equivalents and restricted cash, beginning balance     21,829,154       12,524,086  
Cash and cash equivalents and restricted cash, ending balance   $ 13,842,745     $ 21,829,154  

 

Sources of Liquidity

 

The cash and restricted cash balance as of December 31, 2020 was $13,842,745. Out of this amount, we had $604,248 denominated in U.S. dollars deposited in the financial institutions in the United States, Hong Kong and the PRC, $321,504 denominated in HK$ in Hong Kong financial institutions and $12,916,994 denominated in RMB in the financial institutions in the PRC. During the year ended December 31, 2020, net cash used by operating activities totaled $7,842,800 which primarily included the cash outflows from the following: an increase in accounts receivable by $154,771 to be collected from the artwork owners for listing fee, a decrease in customer deposits by $7,260,331 due to refund of deposits, a decrease in current portion of lease liabilities by $94,620 and a decrease in amount due to related parties by $453,932 as we made lease payments to our related party for the early lease termination. The overall operating cash outflows were mainly offset by operating cash inflows: an increase in prepayments, deposits and other assets by $206,594. The cash outflows from investing activities included the purchase of property and equipment, $20,218, by Tianjin Takung and a loan made to a third party, $434,518. There were no cash inflows or outflows from our financing activities. The resulting change in cash for the period was a decrease of $7,986,409. The cash balance at the beginning of the period was $21,829,154 and the cash balance as of December 31, 2020 was $13,842,745.

 

The cash and restricted cash balance as of December 31, 2019 was $21,829,154. Out of this amount, we had $825,886 denominated in U.S. dollars deposited in the financial institutions in the United States, Hong Kong and the PRC, $1,163,168 denominated in HK$ in Hong Kong financial institutions, and $19,834,157 denominated in RMB in the financial institutions in the PRC. During the year ended December 31, 2019, net cash generated from operating activities totaled $9,841,840 which included the cash inflows from the following: an increase in client deposits by $11,855,739 placed by the customers for upcoming transactions, non-cash item such as depreciation, $597,654, decrease in prepayment and other current assets, $386,557, collection from accounts receivable, $568,757, an increase in lease liabilities, current, $166,987, an increase in lease liabilities, noncurrent, $48,856, and repayments from related party, $340,044. The cash inflows were offset by the net loss, $4,092,806. Net cash generated from investing activities totaled $224,608. The cash inflows from investing activities included the repayment of loans from third party, $2,380,065, offset by the outflow of loans made to third parties, $2,080,211 and purchase of property and equipment, $75,246. Net cash used in financing activities totaled $699,526 was resulted from the repayment of loans to third parties, $2,499,500, offset by proceeds from short-term borrowings, $1,799,974. The resulting change in cash for the period was an increase of $9,305,068. The cash balance at the beginning of the period was $12,524,086. The cash balance as of December 31, 2019 was $21,829,154.

 

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 tax payables.

 

As of December 31, 2019, the Company had $25,947,490 in total current liabilities, which included $629,666 in accrued expenses and other payables, $16,404,941 in customer deposits, $1,868,345 in short-term borrowings from a third party, $6,862,713 in amount due to related parties, $8,788 in advance from customers, $166,987 in lease liabilities and $6,050 in tax payables.

 

The Company’s total liabilities as of December 31, 2020 and 2019 amounted to $18,598,103 and $25,996,346, respectively.

 

The Company’s net assets amounted to $5,815,045 and $6,445,157 as of December 31, 2020 and 2019, respectively.

 

As of December 31, 2020, the Company had cash and cash equivalents of $4,698,135 and a working capital of $4,617,061. This can assure the Company with sufficient liquidity and adequate capital to fund the operations and reasonably meet the anticipated liquidity requirements for at least the next twelve months.

 

56

 

 

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 shareholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.

 

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.

 

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

 

We may sell our common stock in order to fund our business growth. Issuances of additional shares will result in dilution to existing shareholders. There is no assurance that we will achieve sales of the equity securities or arrange for debt or other financing to fund our growth in case it is necessary, or if we are able to do so, there is no guarantee that existing shareholders will not be substantially diluted.

 

Critical Accounting 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. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.

 

Recent Accounting Pronouncements

 

The discussion of the recent accounting pronouncements contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.

 

57

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
Report of Independent Registered Public Accounting Firm 59
   
Consolidated Balance Sheets at December 31, 2020 and 2019 60
   
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019 61
   
Consolidated Statements of Changes in Shareholder’s Equity for the years ended December 31, 2020 and 2019 62
   
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 63
   
Notes to Consolidated Financial Statements 64

 

58

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To: The Board of Directors and Stockholders of

Takung Art Co., Ltd.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Takung Art Co., Ltd. (the “Company”) as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue Recognition – commission

 

The Company operates an artwork trading platform which processes significant volumes of trading transactions. As described in Note 2, the Company generates commission fee revenues from these transactions. The revenue recognition of these commissions relies on the Information Technology (“IT”) systems processing those transactions and data. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, obtaining an understanding of the IT systems and environment, performing walkthroughs procedures, and recalculating commission fees recognized.

 

/s/ WWC, P.C.

WWC, P.C.

Certified Public Accountants

 

We have served as the Company’s auditor since 2021.

 

San Mateo, California

March 31, 2021

 

 

59

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of Takung Art Co., Ltd.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Takung Art Co., Ltd. (the “Company”) as of December 31, 2019, the related consolidated statement of operations, comprehensive loss, changes in shareholders’ equity and cash flows for the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum Bernstein & Pinchuk LLP

 

We have served as the Company’s auditor since 2016 to 2021.

 

Beijing, China

May 8, 2020

 

 

BEIJING OFFICE • Unit 2419-2422 • Kerry Center South Tower • 1 Guang Hua Road • Chaoyang District, Beijing • 100020

Phone 8610.8518.7992 • Fax 8610.8518.7993 • www.marcumbp.com

 

60

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

    December 31,     December 31,  
    2020     2019  
ASSETS                
Current assets                
Cash and cash equivalents   $ 4,698,135     $ 5,424,213  
Restricted cash     9,144,610       16,404,941  
Account receivables, net     154,771       -  
Prepayment and other current assets, net     279,387       451,248  
Amount due from related parties     6,225,134       5,834,554  
Loan receivables     2,609,748       2,010,974  
Total current assets     23,111,785       30,125,930  
                 
Non-current assets                
Property and equipment, net     437,996       859,826  
Intangible assets     22,504       22,401  
Deferred tax assets, net     638,860       540,279  
Operating lease right-of-use assets     183,409       731,469  
Amount due from a related party     -       104,128  
Other non-current assets     18,594       57,470  
Total non-current assets     1,301,363       2,315,573  
Total assets   $ 24,413,148     $ 32,441,503  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
LIABILITIES                
Current liabilities                
Accrued expenses and other payables   $ 728,088     $ 629,666  
Customer deposits     9,144,610       16,404,941  
Advance from customers     17,412       8,788  
Short-term borrowings from a third party     1,977,109       1,868,345  
Amount due to related parties     6,448,784       6,862,713  
Operating lease liabilities, current     72,367       166,987  
Tax payables     106,354       6,050  
Total current liabilities     18,494,724       25,947,490  
                 
Operating lease liabilities, non-current     103,379       48,856  
Total noncurrent liabilities     103,379       48,856  
                 
Total liabilities     18,598,103       25,996,346  
                 
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 December 31, 2020; 11,255,129 shares issued and outstanding as of December 31, 2019)     11,271       11,255  
Additional paid-in capital     6,358,115       6,320,604  
(Accumulated deficits) retained earnings     (226,311 )     386,327  
Accumulated other comprehensive loss     (328,030 )     (273,029 )
Total shareholders’ equity     5,815,045       6,445,157  
Total liabilities and shareholders’ equity   $ 24,413,148     $ 32,441,503  

 

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

 

61

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

 

    For the Year
Ended December 31,
    For the Year
Ended December 31,
 
    2020     2019  
Revenue                
Listing fee   $ 815,748     $ 284,210  
Commission     3,288,077       2,438,756  
Management fee     463,397       450,048  
Total revenue     4,567,222       3,173,014  
                 
Cost of revenue     (2,287,404 )     (1,861,577 )
Gross profit     2,279,818       1,311,437  
                 
Operating expenses                
General and administrative expenses     (3,455,249 )     (4,662,313 )
Selling expense     (390,112 )     (301,460 )
Total operating expenses     (3,845,361 )     (4,963,773 )
                 
Loss from operations     (1,565,543 )     (3,652,336 )
                 
Other income and expenses:                
Other income (expenses)     239,788       (63,221 )
Loan interest expense     (163,401 )     (57,474 )
Exchange gain (loss)     889,068       (246,506 )
Total other income (loss)     965,455       (367,201 )
                 
Loss before income taxes     (600,088 )     (4,019,537 )
                 
Income tax expense     (12,550 )     (73,269 )
                 
Net loss     (612,638 )     (4,092,806 )
                 
Foreign currency translation adjustment     (55,001 )     29,673  
                 
Comprehensive Loss   $ (667,639 )   $ (4,063,133 )
                 
Loss per share of common stock– basic   $ (0.05 )   $ (0.36 )
Loss per share of common stock– diluted   $ (0.05 )   $ (0.36 )
                 
Weighted average number of common shares outstanding –basic     11,264,128       11,246,119  
Weighted average number of common shares outstanding –diluted     11,264,128       11,246,119  

 

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

 

62

 

  

TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

      Number of 
shares
      Common
Stock
      Additional
Paid-in
capital
      Retained
earnings
      Accumulated
other
comprehensive(loss)
income
       Total   
Balance, December 31, 2018     11,226,025     $ 11,226     $ 6,281,790     $ 4,479,133     $ (302,702 )   $ 10,469,447  
                                                 

Issuance of common stock for restricted share award

    29,104       29       -       -       -       29  
                                                 
Share-based compensation     -       -       38,814       -       -       38,814  
                                                 
Net loss for the year     -       -       -       (4,092,806 )     -       (4,092,806 )
                                                 

Foreign currency translation adjustment

    -       -       -       -       29,673       29,673  
                                                 
Balance, December 31, 2019     11,255,129       11,255       6,320,604       386,327       (273,029 )     6,445,157  
                                                 

Issuance of common stock for restricted share award

    16,250               -       -       -       -  
                                                 
Share-based compensation     -       16       37,511       -       -       37,527  
                                                 
Net loss for the year     -       -       -       (612,638 )     -       (612,638 )
                                                 

Foreign currency translation adjustment

    -       -       -       -       (55,001 )     (55,001 )
                                                 
Balance, December 31, 2020     11,271,379     $ 11,271     $ 6,358,115     $ (226,311 )   $ (328,030 )   $ 5,815,045  

 

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

 

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TAKUNG ART CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

 

    For the Year     For the Year  
    Ended     Ended  
    December 31,     December 31,  
    2020     2019  
Cash flows from operating activities:                
Net loss   $ (612,638 )   $ (4,092,806 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation     459,515       597,654  
Interest expense     163,401       57,474  
Bad debt expense     104,997       53,605  
Changes in exchange rate     (889,068 )     246,506  
Share-based compensation     37,527       38,843  
Loss on fixed asset disposals     785       57,180  
Deferred taxes     (89,206 )     71,459  
Changes in operating assets and liabilities (decrease) increase in:                
Prepayment and deposits     171,861       386,557  
Other non-current assets     34,733       84,823  
Account receivables     (154,771 )     568,757  
Operating lease right-of-use assets     548,060       (731,469 )
Amount due to related parties     (453,932 )     340,044  
Customer deposits     (7,260,331 )     11,855,739  
Tax payables     100,304       108,393  
Advance from customers     8,624       (207 )
Accrued expenses and other payables     27,436       (16,555 )
Operating lease liabilities, current     (94,620 )     166,987  
Operating lease liabilities, non-current     54,523       48,856  
                 
Net cash (used in) provided by operating activities     (7,842,800 )     9,841,840  
                 
Cash flows from investing activities:                
Purchase of property and equipment     (20,218 )     (75,246 )
Purchase of available-for-sale investments     -       (22,975,927 )
Maturity and redemption of available-for-sale investments     -       22,975,927  
Repayment of loans by third party     -       2,380,065  
Loans to third parties     (434,518 )     (2,080,211 )
Net cash (used in) provided by investing activities     (454,736 )     224,608  
                 
Cash flows from financing activities:                
Proceeds from short-term borrowings     -       1,799,974  
Loan repayments to third parties     -       (2,499,500 )
Net cash used in financing activities     -       (699,526 )
                 
Effect of exchange rate change on cash and cash equivalents, and restricted cash     311,127       (61,854 )
                 
Net (decrease) increase in cash and cash equivalents, and restricted cash     (7,986,409 )     9,305,068  
                 
Cash and cash equivalents, and restricted cash beginning balance     21,829,154       12,524,086  
                 
Cash and cash equivalents, and restricted cash ending balance   $ 13,842,745     $ 21,829,154  
                 
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets                
Cash and cash equivalents     4,698,135       5,424,213  
Restricted cash     9,144,610       16,404,941  
Total cash, cash equivalents, and restricted cash   $ 13,842,745     $ 21,829,154  
                 
Supplemental cash flows information:                
Cash paid for interest   $ -     $ 156,519  
Cash paid for income taxes   $ 58,843     $ -  

 

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

 

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TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd and Subsidiaries (“Takung”), 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 Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focused on developing its e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.

 

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.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States ("U.S. GAAP").

 

This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. dollars.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Actual results could differ materially from those results.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung, Tianjin Takung, Takung Art Holdings, Art Era, Hong Kong MQ and Tianjin MQ. All intercompany transactions and balances have been eliminated on consolidation.

 

Fair value measurements

 

The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements.  ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

  · Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  · Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
  · Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 31, 2020 and 2019.

 

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Comprehensive loss

 

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. For the years ended December 31, 2020 and 2019, the Company’s comprehensive loss includes net loss and foreign currency translation adjustment.

 

Foreign currency translation and transaction

 

The functional currency of Hong Kong Takung, Takung Art Holdings, Hong Kong MQ, Tianjin Takung and Shanghai Takung are the Hong Kong Dollar (“HKD”).

 

The functional currency of Art Era and Tianjin MQ are the Renminbi (“RMB”).

 

The reporting currency of the Company is the United States Dollar (“USD”).

 

Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary items at period-end are included in income statement of the period.

 

For the purpose of presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed in USD at the exchange rate on the balance sheet’s dates, which is 7.7534 and 7.7894 as of December 31, 2020 and December 31, 2019, respectively; shareholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 7.7559 and 7.8351 for the years ended December 31, 2020 and 2019, respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the exchange rate on the balance sheet date, which is 6.525 and 6.9618 as of December 31, 2020 and December 31, 2019 respectively. Shareholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rates during the year, which is 6.9042 and 6.9081 for the years ended December 31, 2020 and December 31, 2019.

 

The resulting translation adjustments are reported under accumulated other comprehensive loss in the shareholders’ equity section of the balance sheets.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand, cash in bank with no restrictions, as well as highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when initially purchased.

 

A significant portion of the Company’s cash and cash equivalents is denominated in RMB, and deposited in the financial institutions of China. Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB denominated cash into foreign currencies for current account items, but conversion of RMB denominated cash into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currencies to fund the business activities outside China, or to repay non-RMB denominated obligations.

 

Restricted cash

 

Restricted cash represents the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place. Upon the delivery of the shares, the seller will send instructions to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management fee as per Takung, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank to deduct the commission and management fee, Takung has no right to use any funds in the broker’s account except for instructing the bank to deduct the commission and management fee.

 

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Short term investments

 

Short term investments consist of held-to-maturity investments and available-for-sale investments.

 

The Company’s held-to-maturity investments consist of financial products purchased from banks, which are not allowed for the early withdrawal. The Company’s short term held-to-maturity investments are classified as short-term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.

 

Investments classified as available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized.

 

The Company reviews its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.

 

As of December 31, 2020 and 2019 there were no short-term investments.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates for the allowance for doubtful accounts based upon the assessment of various factors, including historical, experience, the age of the accounts receivable balances, credit quality of the customers, current economic conditions, and other factors that may affect customers' ability to pay.

 

Loan receivable

 

Loan to third parties is presented under current asset of the balance sheets based on the nature and loan period of time.

 

Prepayment and other current assets, net

 

Prepayment and other current assets mainly consist of the prepayment for income taxes, maintenance of online trading system, advertising and promotional services, insurances, financial advisory, professional services, rental deposits, as well as other current assets.

 

Other non-current assets

 

A portion of the deposits, are presented under the non-current section of the balance sheets based on the expected collection date.

 

Property and equipment, net

 

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment are included in operating income or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

 

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Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service.

 

The Company developed systems and solutions for solely internal use. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. Unamortized capitalized costs are included in computer trading and clearing system, within property and equipment, net in the Consolidated Balance Sheets. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software of 5 years. Amortization of these costs is included in depreciation and amortization expense in the Consolidated Statements of Operations.

 

Estimated useful lives are as follows, taking into account the assets' estimated residual value:

 

Classification   Estimated
useful life
Furniture, fixtures and equipment   5 years
Leasehold improvements   Shorter of the remaining lease terms and the estimated 3 years
Computer trading and clearing system   5 years

 

Long-lived assets

 

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Company assesses the recoverability of these long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the future undiscounted cash flow is less than the carrying amount of the assets, the Company recognizes an impairment equal to the difference between the carrying amount and fair value of these assets.

 

Intangible assets

 

Intangible assets represent the licensing cost for the trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 2020 and 2019.

 

Customer deposits

 

Customer deposits represent the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds transferred to the broker’s account before the trading take place.

 

Advance from customers

 

Advance from customers represent trading commissions one month in advance charged to the VIP traders. Starting from April 1, 2016, the Company charges a monthly commission to VIP traders, instead of charging per transaction.

 

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Revenue Recognition

 

The Company generates revenue from its services in connection with the offering and trading of artworks on the Company’s system, primarily consisting of listing fee, trading commission, and management fee.

 

Effective January 1, 2018, the Company adopted Topic 606 using modified retrospective approach applied to its contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605.

 

Under ASC 606, an entity recognizes revenue as the Company satisfies a performance obligation when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.

 

The Company recognizes revenue when control of the promised services is transferred to the traders and service agents. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to the traders and service agents. The revenue mainly falls into the following broad categories: (i) listing fee, (ii) commission, and (iii) management fee.

 

Listing fee

 

The Company recognizes the listing fee revenue at a point in time when the ownership units of the artwork are listed and available for trading on the Company’s system, at an amount of an agreed percentage of the total offering price. The amount is collected from the money raised from the issuance of such units.

 

Commission

 

The Company generates commission fee from non-VIP traders and selected traders.

 

For non-VIP traders, the commission is calculated based on a percentage of transaction value of artworks when there is purchase and sale of the ownership shares of the artworks. The commission revenue is recognized at a point in time when each purchase and sale transaction is completed.

 

For selected traders, starting from April 1, 2016, the Company charged a predetermined monthly commission fee which allows the selected traders to conduct unlimited trades for specific artworks. The commission revenue is recognized on a monthly basis as the Company continuously satisfied its performance obligation.

 

Management fee

 

The Company provides custody and insurance service for artworks listed and traded on the Company’s platform. Management fee is calculated at a rate of $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is recognized and is deducted from proceeds from the sale of artwork ownership shares when there is a purchase and sale transaction. A discount program is offered to waive the management fee during certain promotion periods. Such discounts are recognized as a reduction of the revenue.

 

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The Company provides third-party merchants the access to Takung’s online platform for sales of artworks, and charges commission fee to third-party merchants, at an amount of an agreed percentage of the total transaction price. The revenue is recognized at a point in time when the artwork sales transaction is completed.

 

Revenue by customer type

 

The following table presents the revenue by customer type for the years ended December 31, 2020 and 2019:

 

    For the years ended
December 31,
 
    2020     2019  
Artwork owners   $ 815,748     $ 284,210  
Non - VIP traders     2,674,125       2,256,192  
VIP traders     1,077,349       632,612  
Total   $ 4,567,222     $ 3,173,014  

 

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Cost of revenue

 

The Company’s cost of revenue primarily consists of expenses associated with the delivery of its service. These include expenses related to the operation of the data centers, such as facility and lease of the server equipment, development and maintenance of the platform system, as well as the cost of insurance, storage and transportation of the artworks. Cost of revenue also includes commission paid to service agent.

 

    For the years ended December 31,  
    2020     2019  
Commission paid to service agents   $ 1,691,411     $ 1,053,789  
Depreciation     340,001       460,749  
Internet service charge     141,059       208,941  
Artwork insurance     49,956       48,322  
Artwork storage     63,716       89,320  
Others     1,261       456  
Total   $ 2,287,404     $ 1,861,577  

 

The Company has elected to apply the practical expedient in ASC 606-10 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

The Company does not have amounts of contract assets that it has right to consideration in exchange for services that the Company has transferred to customers when that right is conditioned on something other than the passage of time. The contract liabilities are the Company’s obligation to transfer services to traders for which the Company has received consideration from the traders. All contract liabilities are expected to be recognized as revenue within one month and are presented in Advance from Customers in the Consolidated Balance Sheet.

 

Leases

 

In February 2016, the FASB issued ASU 2016-12, Leases (ASC Topic 842), which amends the leases requirements in ASC Topic 840, Leases. Under the new lease accounting standard, a lessee will be required to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The new standard also modifies the classification criteria and accounting for sales-type and direct financing leases, and enhances the disclosure requirements. Leases will continue to be classified as either finance or operating leases.

 

The Company adopted ASC Topic 842 using the modified retrospective transition method effective January 1, 2019. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. As a result of the adoption, the Company recognized a lease liability and right-of-use asset for each of the existing lease arrangement. The adoption of the new lease standard does not have a material impact on the consolidated income statements or the consolidated statements of cash flows.

 

 

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The Company determines if an arrangement is a lease at inception. The lease payments under the lease arrangements are fixed. Non-lease components include payments for building management, utilities and property tax. It separates the non-lease components from the lease components to which they relate.

 

Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because the interest rate implicit in the leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the lease assets and liabilities.

 

Income taxes

 

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government which included a wide range of tax reform affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of the tax provision effective after December 31, 2017. Certain activities conducted in foreign jurisdictions may result in the imposition of U.S. corporate income taxes on Takung when its subsidiaries, controlled foreign corporations (“CFCs”), generate income that is subject to Subpart F or GILTI under the U.S. Internal Revenue Code beginning after December 31, 2017.

 

The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 2020 due to the recent enactment.

 

The Company accounts for an unrecognized tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities. The Company considers and estimates interest and penalties related to the gross unrecognized tax benefits and includes as part of its income tax provision based on the applicable income tax regulations.

 

The Company did not accrue any liability, interest or penalties related to uncertain tax positions in the provision for income taxes line of the consolidated statements of operations for the year ended December 31, 2019. During the year ended December 31, 2020, the Company recorded an unrecognized tax benefit from an uncertain tax position based on the income tax examination as discussed in Note 12.

 

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Earnings (loss) per share

 

Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive (Note 15).

 

Concentration of risks

 

Concentration of credit risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, account receivables. The carrying values of the financial instruments approximate their fair values due to their short-term maturities. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings and quality. Account receivables primarily comprise of amounts receivable from the trader customers. With respect to the prepayment to service suppliers, the Company performs on-going credit evaluations of the financial condition of these suppliers. The Company establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific service providers and other information.

 

Concentration of customers

 

There were no revenues from customers that individually represent greater than 10% of the total revenues during the years ended December 31, 2020 and 2019.

 

Concentration of customer deposits

 

As of December 31, 2020, there were no traders that individually accounted for greater than 10% of the Company’s total customer deposits. As of December 31, 2019, two traders accounted for 25.64% and 10.80% of the Company’s total customer deposits.

 

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Accounting standards adopted on January 1, 2019

 

Adoption of ASC Topic 842, “Leases”

 

The Company adopted ASC Topic 842 using the modified retrospective transition method effective January 1, 2019. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. See Note 2 “Leases” above for further details.

 

Accounting standards adopted on January 1, 2020

 

Fair Value Measurement: In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. Under this guidance, entities will no longer be required to disclose the amount of and the rationale for transfers between level 1 and level 2 of the fair value hierarchy. For level 3 fair value measurement, disclosures for the range and weighted average used to establish significant unobservable inputs are required. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company adopted this guidance on January 1, 2020 and there was no impact to its consolidated financial statements.

 

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Accountingpronouncements issued but not yet adopted

 

Financial Instruments - Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements, particularly its recognition of allowances for accounts receivable.

 

Income Taxes: On December 18, 2019, the FASB issued ASU No. 2019-12, Income taxes (Topic 740), Simplifying the Accounting for Income Taxes. This guidance amends ASC Topic 740 and addresses several aspects including 1) evaluation of step-up tax basis of goodwill when there is not a business combination, 2) policy election to not allocate consolidated taxes on a separate entity basis to entities not subject to income tax, 3) accounting for tax law changes or rates during interim periods, 4) ownership changes from equity method investment to subsidiary or vice versa, 5) elimination of exception to intraperiod allocation when there is gain in discontinued operations and a loss from continuing operations, 6) treatment of franchise taxes that are partially based on income. The guidance is effective for calendar year-end public entities on January 1, 2021 and other entities on January 1, 2022. The Company is evaluating the impact of this guidance on its consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

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3. PREPAYMENT AND OTHER CURRENT ASSETS, NET

 

Prepayment and other current assets mainly consist of the prepaid tax, the prepaid services for maintenance of online trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current assets.

 

    December 31,
2020
    December 31,
2019
 
Prepaid tax   $ 32,262     $ 281,582  
Prepaid service fees     202,647       132,064  
Staff advance     2,299       18,380  
Deposit     35,879       316  
Short-term borrowings to third parties     -       53,919  
Other current assets     6,300       18,906  
Less: allowance for doubtful accounts     -       (53,919 )
Prepayment and other current assets, net   $ 279,387     $ 451,248  

 

For the years ended December 31, 2020 and 2019, the Company has recorded provision for doubtful accounts, nil and $53,605, respectively.

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

    December 31,
2020
    December 31, 
2019
 
Listing fee   $ 154,771     $ -  
Authorized agent subscription revenue     -       560,780  
Monthly commission fee     -       1,385,420  
Others     -       53,909  
Less: allowance for doubtful accounts     -       (2,000,109 )
Account receivables, net   $ 154,771     $ -  

 

No provision for doubtful accounts was recognized during the year ended December 31, 2020 and 2019.

 

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     $ 766,284       0 %   4/1/2021
8/29/2019    Chongqing Aoge Import and Export Co.   Tianjin Takung     5,000,000       5,000,000       766,284       0 %   4/1/2021
9/20/2019    Chongqing Aoge Import and Export Co.   Tianjin Takung     4,000,000       4,000,000       613,027       0 %   4/1/2021
11/30/2020   Tianjin Zhiyuan Enterprise Management Co., Ltd   Tianjin Takung     6,500,000       3,028,603       464,153       6 %   2/2/2021
              Total             $ 2,609,748              

 

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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 10). 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 $996,169 (RMB6,500,000) with an annual interest rate at 6% to a non-related third party, Tianjin Zhiyuan Enterprise Management Co., Ltd. The loan is matured on February 2, 2021. As of December 31, 2020, the outstanding balance of this loan receivable was $464,153 (RMB3,028,603), inclusive of the outstanding principal balance, $459,770 (RMB3,000,000) and interest receivable, $4,383 (RMB28,603). This loan receivable was fully repaid on January 27, 2021.

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

    December 31,
2020
    December 31, 
2019
 
Furniture, fixtures and equipment   $ 218,430     $ 201,093  
Leasehold improvements     23,216       343,697  
Computer trading and clearing system     3,468,346       3,379,654  
Transport equipment     110,245       103,330  
Sub-total     3,820,237       4,027,774  
Less: accumulated depreciation     (3,382,241 )     (3,167,948 )
 Property and equipment, net   $ 437,996     $ 859,826  

 

Depreciation expense was $459,515 and $597,654 for the years ended December 31, 2020 and 2019, respectively.

 

7. INTANGIBLE ASSETS

 

Intangible assets consist of the Company’s trademarks with indefinite useful life. The intangible asset was $22,504 and $22,401 as of December 31, 2020 and 2019, respectively.

 

8. OTHER NON-CURRENT ASSETS

 

Other non-current assets as of December 31, 2020 and 2019 consisted of:

 

    December 31,
2020
    December 31,
2019
 
Deposit – non-current   $ 18,312     $ 53,431  
Prepayment – non-current     282       4,039  
Total other non-current assets   $ 18,594     $ 57,470  

 

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9. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of December 31, 2020 and 2019 consisted of:

 

    December 31,     December 31,  
    2020     2019  
Accruals for consulting fees   $ 267,427     $ 311,122  
Accruals for professional fees     365,634       168,040  
Payroll payables     80,026       79,710  
Trading and clearing system     -       50,295  
Other payables     15,001       20,499  
Total accrued expenses and other payables   $ 728,088     $ 629,666  

 

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 September 30, 2020, Hong Kong Takung extended the due date of the HKD Loans with Friend Sourcing to April 1, 2021 with an interest rate of 3% of the total loan amount, or $63,358, for the period from September 30, 2020 to April 1, 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 $2,145,594 (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   December 31, 
2020
(USD)
    December 31,
2019
(USD)
    Annual
Interest
Rate
    Repayment 
Due Date
7/18/2019   Hong Kong Takung   Friend Sourcing Ltd.   $ 718,127     $ 714,808       8 %   4/1/2021
8/29/2019   Hong Kong Takung   Friend Sourcing Ltd.   $ 699,434     $ 696,202       8 %   4/1/2021
9/20/2019   Hong Kong Takung   Friend Sourcing Ltd.   $ 559,548     $ 556,961       8 %   4/1/2021
         Less: Discount loan payable   $ -     $ (99,626 )            
                                     
        Total   $ 1,977,109     $ 1,868,345              

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of December 31, 2020. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings were $1,247,691 and $686,884 for the years ended December 31, 2020 and 2019, respectively. The interest expenses for the short-term borrowings were $163,401 and $57,474 for the years ended December 31, 2020 and 2019, respectively.

 

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11. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

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

 

(b) Shuhai Li (“Li”), the former legal representative of Tianjin Takung, resigned on April 3, 2020.

 

(c) 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 years indicated:

 

    December 31,
2020
    December 31,
2019
 
Li (b)(i)   $ -     $ 5,834,554  
Wang (c)(i)     6,225,134       -  
Mao(a)(ii)     111,099       -  
Less: allowance for doubtful accounts (ii)     (111,099 )     -  
Total current amount due from related parties, net   $ 6,225,134     $ 5,834,554  

 

    December 31,
2020
    December 31,
2019
 
Mao (a) (ii)   $               -     $ 104,128  
Total noncurrent amount due from a related party   $ -     $ 104,128  

 

Amount due to related parties

 

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

 

    December 31,
2020
    December 31,
2019
 
Li (b) (i)   $ -     $ 6,418,980  
Wang (c)(i)     6,448,784       -  
Mao (a) (ii)     -       443,733  
Total current amount due to related parties   $ 6,448,784     $ 6,862,713  

 

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

 

On September 16, 2019, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with Li for the loan of $6,448,784 (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, 2020. On May 15, 2020, Hong Kong Takung entered into an extension agreement with Li to extend the HK Dollar Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to Wang.

 

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Li for the loan of $6,225,134 (RMB40,619,000) with the maturity date of the loan as May 15, 2020. On May 15, 2020, Tianjin Takung entered into an extension agreement with Li to extend the RMB Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to 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 to and due from Mao

 

The amount due to Mao is primarily related to the lease 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.

 

On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Ms. Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The monthly rent payment is approximately $24,704 (RMB 170,563). The lease was terminated on February 15, 2020. As of December 31, 2020, the amount due to Mao pertinent to this lease agreement was $nil.

 

Mao also lent a startup deposit of $6,265 to Hong Kong MQ during the year ended December 31, 2019. The amount was discharged by Mao in December 2020.

 

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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 27 March 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of December 31, 2020 due to the recent enactment.

 

As of December 31, 2020 and 2019, the Company in the United States had $1,454,286 and $2,167,494 in net operating loss carry forwards available to offset future taxable income, respectively. For net operating losses arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable income and carryforward the NOL indefinitely. NOLs generated prior to January 1, 2018 will not be subject to the taxable income limitation and will begin to expire in 2033 if not utilized.

 

Hong Kong

 

Two-tier Profits Tax Rates

 

The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,868) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. 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.

 

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As of December 31, 2020 and 2019, the Company’s subsidiaries in Hong Kong had $6,327,044 and 7,453,397 in net operating loss carry forwards available to offset future taxable income, respectively. These net operating losses will be carryforward indefinitely under Hong Kong Profits Tax regulation.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries that are not entitled to any tax holiday were subject to income tax at a rate of 25% for the year ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, the Company in PRC had $38,985 and $1,263,472 in net operating loss carryforwards available to offset future taxable income, respectively. According to PRC tax regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted. If not utilized, the PRC net operating loss of $38,985 will expire in 2024.

 

The income tax expense was $12,550 and $73,269 for the years ended December 31, 2020 and 2019, respectively, related primarily to the Company’s subsidiaries located outside of the U.S. The loss before provision for income taxes for the years ended December 31, 2020 and 2019 was as follows:

 

The income tax provision consists of the following components:

 

   

For the year ended

December 31,
2020

   

For the year ended

December 31,
2019

 
Current:                
Federal   $ -     $ -  
State     -       -  
Foreign     101,756       -  
Total current   $ 101,756     $ -  
                 
Deferred:                
Federal   $ -     $ -  
State     -       -  
Foreign     (89,206 )     73,269  
Total deferred   $ (89,206 )   $ 73,269  
Total income tax expense   $ 12,550     $ 73,269  

 

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

 

   

For the year ended

December 31,
2020

   

For the year ended

December 31,
2019

 
Loss before income tax expense     $ (600,089 )   $ (4,019,537 )
Computed tax benefit with statutory tax rate     (126,019 )     (663,224 )
Impact of different tax rates in other jurisdictions     24,629       (113,115 )
Effect of preferred tax rate     (72,807 )     189,288  
Tax effect of non-deductible expenses     437,383       110,044  
U.S. tax on foreign entities     280,444       -  
Changes in valuation allowance     (604,154 )     543,150  
Previous years unrecognized tax effects     73,074       7,126  
Total income tax expense   $ 12,550     $ 73,269  

 

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The effective tax rate was (2.1)% and (1.8)% for the years ended December 31, 2020 and 2019, respectively.

 

The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:

 

    As of
December 31,
    As of 
December 31,
 
    2020     2019  
Deferred tax assets                
Tax loss carried forward   $ 835,859     $ 1,460,573  
Unvested restricted share carried forward     -       1,105  
Deferred advertising expenses     1,149       55,178  
Accrued rental expense     -       8,264  
Provision for doubtful accounts     114,943       107,731  
Others     490       459  
Total deferred tax assets     952,441       1,633,310  
Less: valuation allowance     (305,400 )     (1,093,031 )
Total Deferred tax assets, net of valuation allowance     647,041       540,279  
Deferred tax liabilities                
PPE, due to difference in depreciation     (8,181 )     -  
Total Deferred tax liabilities   $ (8,181 )   $ -  
Deferred tax assets, net of valuation allowance and deferred tax liabilities   $ 638,860     $ 540,279  

 

Uncertain tax positions

 

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

 

    December 30,
2020
    December 31,
2019
 
Uncertain tax liabilities, beginning of period   $ -     $ -  
Additions for tax position of current period     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 consolidated financial statements as of December 31, 2020. The Company anticipated that the settlements with the taxing authority are remitted within one year.

 

Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil as of December 31, 2020 and 2019, 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 December 31, 2020 and 2019, the Company had $101,789 and $nil, 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 profits tax return or the date on which it was filed, whichever is later.

 

In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.

 

In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.

 

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13. LEASES

 

The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately nine years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

 

The following table provides a summary of leases by balance sheet location as of December 31, 2020:

 

Assets/liabilities   Classification   As of December 31, 2020  
Assets            
Operating lease right-of-use assets   Operating lease assets   $ 183,409  
             
Liabilities            
Current            
Operating lease liability - current   Current operating lease liabilities   $ 72,367  
             
Long-term            
Operating lease liability - non-current   Long-term operating lease liabilities     103,379  
             
Total lease liabilities       $ 175,746  

 

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The operating lease expense, including two lease arrangements from a related party, for the year ended December 31, 2020 was as follows:

 

        For the year ended  
Lease Cost   Classification   December 31, 2020  
Operating lease cost   Cost of revenue, general and administrative expenses   $ 593,962  
Total lease cost       $ 593,962  

 

Total lease cost incurred under operating leases was $812,586 for the year ended December 31, 2019.

 

Maturities of operating lease liabilities as of December 31, 2020 were as follow:

 

Maturity of Lease Liabilities   Operating Leases  
2021   $ 83,867  
2022     80,734  
2023     15,326  
2024     15,326  
2025     -  
Thereafter     -  
Total undiscounted lease payments   $ 195,253  
Less: interest     (19,507 )
Present value of lease payments   $ 175,746  

 

Supplemental information related to operating leases was as follows:

 

   

For the year ended

December 31, 2020

 
Cash paid for amounts included in the measurement of lease liabilities   $ 243,077  
New operating lease assets obtained in exchange for operating lease liabilities   $ 124,760  

 

As of December 31, 2020, the operating leases had a weighted average remaining lease term of 2.7 years and a weighted average discount rate of 8%.

 

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14. COMMITMENTS AND CONTINGENCIES

 

Capital Commitments

 

The Company purchased property and equipment which the payment was due within one year. As of December 31, 2020 and 2019, the Company has capital commitments of $0 and $3,591, respectively.

 

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.

 

15. NET LOSS PER SHARE

 

The computation of the Company’s basic and diluted net loss per share is as follows:

 

    For the year ended
December 31,
2020
    For the year ended
December 31,
2019
 
Numerator:                
Net loss   $ (612,638 )   $ (4,092,806 )
Denominator:                
Weighted-average shares outstanding-Basic     11,264,128       11,246,119  
Stock options and restricted shares     -       -  
Weighted-average shares outstanding-Diluted     11,264,128       11,246,119  
Earnings per share                
-Basic     (0.05 )     (0.36 )
-Diluted     (0.05 )     (0.36 )

 

Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

Due to the loss for the year ended December 31, 2019, approximately 100,890 and 6,250 options and restricted shares, respectively, were excluded from the calculation of diluted net loss per share.

 

Due to the loss for the year ended December 31, 2020, approximately 100,890 options were excluded from the calculation of diluted net loss per share.

 

16. SHAREHOLDERS’ EQUITY

 

On August 26, 2015, the 2015 Incentive Share Plan (“2015 Plan”) was approved by the Board of Directors for rewarding the Company’s directors, executives and selected employees and consultants for making major contributions to the success of the Company. 1,037,000 shares were registered on August 27, 2015. On August 28, 2015, the Board approved an increase in the number of shares of common stock by additional 500,000 shares.

 

On October 2, 2017, the Company entered into a prepaid retainer contract with Regeneration Capital Group, LLC to render consulting and advisory services in connection with investor relations. The Company recognized the cost of the 20,000 shares at the current fair value of $46,000 as of October 2, 2017 as prepayment, and amortized the cost subsequently in a straight-line method until Regeneration has completed its performance for one year ended October 2, 2018. On January 22, 2018, the Company issued 20,000 restricted shares of common stock to Regeneration.

 

87

 

 

On March 1, 2019, 5,000 of restricted share-based awards were granted. 8,323 of restricted share-based awards were vested during the fiscal year ended December 31, 2019.

 

On May 27, 2020, 10,000 shares of common stock were granted to the Company’s SEC legal counsel as a compensation for legal advisory services rendered.

 

The exercise price of share options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years.

 

10,178 share options have been vested and 153,348 share options were forfeited by employees during the fiscal year ended December 31, 2019, and no share options were exercised in the year ended December 31, 2019.

 

10,178 share options have been vested during the fiscal year ended December 31, 2020, and no share options were forfeited nor exercised in the year ended December 31, 2020.

 

Share Options:

 

The number of share options as of December 31, 2020 is as follows:

 

    Options     Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Terms
    Aggregate
Intrinsic
Value
 
Outstanding, beginning of year     100,890     $ 3.08       0.59       -  
Granted     -       -       -       -  
Exercised     -       -       -       -  
Forfeited or expired     -       -       -       -  
Outstanding, end of year     100,890       3.08       0.07       -  
Exercisable, end of year     90,712       3.06       0.07       -  
Expected to vest     10,178     $ 3.24       0.16       -  

 

The following table sets forth changes in compensation-related restricted share awards during year ended December 31, 2020. The Company uses fair market value of its common stock publicly traded on the date of the grant to determine the fair value of restricted shares.

 

      Number of       Weighted
Average
Grant Date
      Weighted
Average
Remaining
Contractual
 
      Shares       Fair Value       Term  
Unvested at December 31, 2019     -     $ -       0.00 year  
Granted     -       -       0.00 year  
Forfeited     -       -          
Vested &nbs