UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________________ to_________________________
Commission File Number: 001-38036
TAKUNG ART CO., LTD
(Exact name of registrant as specified in its charter)
Delaware | 26-4731758 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, Hong Kong
Room 709 Tower 2, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong |
(Address of principal executive offices) (Zip Code)
+852 3158 0977
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | TKAT | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer x | Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of common stock issued and outstanding as of August 7, 2020May 13, 2021 is 11,271,379.11,662,379.
FORM 10-Q
TAKUNG ART CO., LTD
INDEX
2
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars except Number of Shares)
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 5,511,461 | $ | 5,424,213 | ||||
Restricted cash | 12,435,948 | 16,404,941 | ||||||
Account receivables, net | 154,837 | - | ||||||
Prepayment and other current assets, net | 201,065 | 451,248 | ||||||
Amount due from related parties, net | 5,749,246 | 5,834,554 | ||||||
Loan receivables | 1,981,571 | 2,010,974 | ||||||
Total current assets | 26,034,128 | 30,125,930 | ||||||
Non-current assets | ||||||||
Property and equipment, net | 627,379 | 859,826 | ||||||
Intangible assets | 22,514 | 22,401 | ||||||
Deferred tax assets, net | 549,864 | 540,279 | ||||||
Operating lease right-of-use assets | 241,034 | 731,469 | ||||||
Amount due from a related party | - | 104,128 | ||||||
Other non-current assets | 71,766 | 57,470 | ||||||
Total non-current assets | 1,512,557 | 2,315,573 | ||||||
Total assets | $ | 27,546,685 | $ | 32,441,503 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accrued expenses and other payables | $ | 815,748 | $ | 629,666 | ||||
Customer deposits | 12,435,948 | 16,404,941 | ||||||
Advance from customers | 13,612 | 8,788 | ||||||
Short-term borrowings from a third party | 1,956,287 | 1,868,345 | ||||||
Amount due to related parties | 6,457,827 | 6,862,713 | ||||||
Operating lease liabilities – current | 152,954 | 166,987 | ||||||
Tax payables | 142,330 | 6,050 | ||||||
Total current liabilities | 21,974,706 | 25,947,490 | ||||||
Non-current liabilities | ||||||||
Operating lease liabilities, non-current | 80,040 | 48,856 | ||||||
Total non-current liabilities | 80,040 | 48,856 | ||||||
Total liabilities | 22,054,746 | 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 June 30, 2020; 11,255,129 shares issued and outstanding as of December 31, 2019) | 11,271 | 11,255 | ||||||
Additional paid-in capital | 6,345,877 | 6,320,604 | ||||||
(Accumulated deficit) retained earnings | (581,804 | ) | 386,327 | |||||
Accumulated other comprehensive loss | (283,405 | ) | (273,029 | ) | ||||
Total shareholders’ equity | 5,491,939 | 6,445,157 | ||||||
Total liabilities and shareholders’ equity | $ | 27,546,685 | $ | 32,441,503 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4,383,648 | $ | 4,698,135 | ||||
Restricted cash | 11,478,520 | 9,144,610 | ||||||
Account receivables, net | 154,349 | 154,771 | ||||||
Prepayment and other current assets, net | 572,029 | 279,387 | ||||||
Amount due from related parties | 6,199,670 | 6,225,134 | ||||||
Loan receivables | 2,136,817 | 2,609,748 | ||||||
Total current assets | 24,925,033 | 23,111,785 | ||||||
Non-current assets | ||||||||
Property and equipment, net | 341,758 | 437,996 | ||||||
Intangible assets | 22,443 | 22,504 | ||||||
Deferred tax assets, net | 661,907 | 638,860 | ||||||
Operating lease right-of-use assets | 165,335 | 183,409 | ||||||
Other non-current assets | 26,816 | 18,594 | ||||||
Total non-current assets | 1,218,259 | 1,301,363 | ||||||
Total assets | $ | 26,143,292 | $ | 24,413,148 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accrued expenses and other payables | $ | 784,397 | $ | 728,088 | ||||
Customer deposits | 11,478,520 | 9,144,610 | ||||||
Advance from customers | 8,390 | 17,412 | ||||||
Short-term borrowings from a third party | 1,971,718 | 1,977,109 | ||||||
Amount due to a related party | 6,431,199 | 6,448,784 | ||||||
Operating lease liabilities – current | 73,607 | 72,367 | ||||||
Tax payables | 99,137 | 106,354 | ||||||
Total current liabilities | 20,846,968 | 18,494,724 | ||||||
Non-current liabilities | ||||||||
Operating lease liabilities, non-current | 87,913 | 103,379 | ||||||
Total non-current liabilities | 87,913 | 103,379 | ||||||
Total liabilities | 20,934,881 | 18,598,103 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,271,379 shares issued and outstanding as of March 31, 2021; 11,271,379 shares issued and outstanding as of December 31, 2020) | 11,271 | 11,271 | ||||||
Additional paid-in capital | 6,361,832 | 6,358,115 | ||||||
Accumulated deficit | (798,899 | ) | (226,311 | ) | ||||
Accumulated other comprehensive loss | (365,793 | ) | (328,030 | ) | ||||
Total shareholders’ equity | 5,208,411 | 5,815,045 | ||||||
Total liabilities and shareholders’ equity | $ | 26,143,292 | $ | 24,413,148 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | March 31, | March 31, | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | 2021 | 2020 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Listing fee | $ | 380,846 | $ | - | $ | 557,789 | $ | 284,090 | $ | 273,792 | $ | 176,943 | ||||||||||||
Commission | 1,188,313 | 532,740 | 2,089,136 | 716,080 | 358,086 | 900,823 | ||||||||||||||||||
Management fee | 110,006 | 93,343 | 213,526 | 161,614 | 147,230 | 103,520 | ||||||||||||||||||
Total revenue | 1,679,165 | 626,083 | 2,860,451 | 1,161,784 | 779,108 | 1,181,286 | ||||||||||||||||||
Cost of revenue | (754,062 | ) | (441,028 | ) | (1,410,576 | ) | (708,307 | ) | (252,237 | ) | (656,514 | ) | ||||||||||||
Gross profit | 925,103 | 185,055 | 1,449,875 | 453,477 | 526,871 | 524,772 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
General and administrative expenses | (929,728 | ) | (888,460 | ) | (2,040,175 | ) | (2,163,045 | ) | (1,013,158 | ) | (1,110,447 | ) | ||||||||||||
Selling expenses | (61,585 | ) | (3,784 | ) | (104,574 | ) | (34,596 | ) | (104,911 | ) | (42,989 | ) | ||||||||||||
Total operating expenses | (991,313 | ) | (892,244 | ) | (2,144,749 | ) | (2,197,641 | ) | (1,118,069 | ) | (1,153,436 | ) | ||||||||||||
Loss from operations | (66,210 | ) | (707,189 | ) | (694,874 | ) | (1,744,164 | ) | (591,198 | ) | (628,664 | ) | ||||||||||||
Other income and expenses: | ||||||||||||||||||||||||
Other income (expenses) | 65,139 | (79,772 | ) | 103,444 | (101,762 | ) | 22,813 | 38,305 | ||||||||||||||||
Loan interest expense | (39,447 | ) | - | (78,360 | ) | - | - | (38,913 | ) | |||||||||||||||
Exchange gain (loss) | 33,210 | (407,159 | ) | (203,485 | ) | (48,425 | ) | |||||||||||||||||
Exchange loss | (8,976 | ) | (236,695 | ) | ||||||||||||||||||||
Total other income (expenses) | 58,902 | (486,931 | ) | (178,401 | ) | (150,187 | ) | 13,837 | (237,303 | ) | ||||||||||||||
Loss before provision for income taxes | (7,308 | ) | (1,194,120 | ) | (873,275 | ) | (1,894,351 | ) | ||||||||||||||||
Loss before income tax expense | (577,361 | ) | (865,967 | ) | ||||||||||||||||||||
Income tax (expense) benefit | (7,461 | ) | 66,584 | (94,856 | ) | 58,022 | ||||||||||||||||||
Income tax benefit (expense) | 4,773 | (87,395 | ) | |||||||||||||||||||||
Net loss | $ | (14,769 | ) | $ | (1,127,536 | ) | $ | (968,131 | ) | $ | (1,836,329 | ) | (572,588 | ) | (953,362 | ) | ||||||||
Foreign currency translation adjustment | (1,608 | ) | 64,753 | (10,376 | ) | 59,273 | (37,763 | ) | (8,768 | ) | ||||||||||||||
Comprehensive loss | $ | (16,377 | ) | $ | (1,062,783 | ) | $ | (978,507 | ) | $ | (1,777,056 | ) | $ | (610,351 | ) | $ | (962,130 | ) | ||||||
Loss per common share – basic | $ | (0.001 | ) | $ | (0.100 | ) | $ | (0.086 | ) | $ | (0.163 | ) | $ | (0.05 | ) | $ | (0.08 | ) | ||||||
Loss per common share – diluted | $ | (0.001 | ) | $ | (0.100 | ) | $ | (0.086 | ) | $ | (0.163 | ) | $ | (0.05 | ) | $ | (0.08 | ) | ||||||
Weighted average number of common shares outstanding-basic | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||
Weighted average number of common shares outstanding-diluted | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||
Weighted average number of common shares outstanding –basic | 11,271,379 | 11,255,129 | ||||||||||||||||||||||
Weighted average number of common shares outstanding –diluted | 11,271,379 | 11,255,129 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
Number | Common | Additional Paid-in | Retained earnings (accumulated | Accumulated other comprehensive | Number | Common | Additional Paid-in | Retained | Accumulated other comprehensive | |||||||||||||||||||||||||||||||||||||||
of shares | Stock | capital | deficit) | loss | Total | of shares | stock | capital | earnings | loss | Total | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | 11,271,379 | $ | 11,271 | $ | 6,358,115 | $ | (226,311 | ) | $ | (328,030 | ) | $ | 5,815,045 | |||||||||||||||||||||||||||||||||||
Shared-based compensation | - | - | 5,986 | - | - | 5,986 | - | - | 3,717 | - | - | 3,717 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (953,362 | ) | - | (953,362 | ) | - | - | - | (572,588 | ) | - | (572,588 | ) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (8,768 | ) | (8,768 | ) | - | - | - | - | (37,763 | ) | (37,763 | ) | ||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | 11,255,129 | 11,255 | 6,326,590 | (567,035 | ) | (281,797 | ) | 5,489,013 | ||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for restricted stock award | 6,250 | 6 | (6 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for professional services | 10,000 | 10 | 13,240 | - | - | 13,250 | ||||||||||||||||||||||||||||||||||||||||||
Shared-based compensation | - | - | 6,053 | - | - | 6,053 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (14,769 | ) | - | (14,769 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (1,608 | ) | (1,608 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | 11,271,379 | $ | 11,271 | $ | 6,345,877 | $ | (581,804 | ) | $ | (283,405 | ) | $ | 5,491,939 | |||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 11,271,379 | $ | 11,271 | $ | 6,361,832 | $ | (798,899 | ) | $ | (365,793 | ) | $ | 5,208,411 |
Number | Common | Additional Paid-in | Retained earnings (accumulated | Accumulated other comprehensive | ||||||||||||||||||||
of shares | stock | capital | deficit) | loss | Total | |||||||||||||||||||
Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||
Shared-based compensation | - | - | 5,986 | - | - | 5,986 | ||||||||||||||||||
Net loss | - | - | - | (953,362 | ) | - | (953,362 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (8,768 | ) | (8,768 | ) | ||||||||||||||||
Balance, March 31, 2020 | 11,255,129 | $ | 11,255 | $ | 6,326,590 | $ | (567,035 | ) | $ | (281,797 | ) | $ | 5,489,013 |
Accumulated | ||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||
Number | Common | Paid-in | Retained | comprehensive | ||||||||||||||||||||
of shares | stock | capital | earnings | loss | Total | |||||||||||||||||||
Balance, December 31, 2018 | 11,226,025 | $ | 11,226 | $ | 6,281,790 | $ | 4,479,133 | $ | (302,702 | ) | $ | 10,469,447 | ||||||||||||
Shared-based compensation | - | - | 16,851 | - | - | 16,851 | ||||||||||||||||||
Net loss | - | - | - | (708,793 | ) | - | (708,793 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (5,480 | ) | (5,480 | ) | ||||||||||||||||
Balance, March 31, 2019 | 11,226,025 | 11,226 | 6,298,641 | 3,770,340 | (308,182 | ) | 9,772,025 | |||||||||||||||||
Issuance of ordinary shares for restricted stock award | 29,104 | 29 | 4,012 | - | - | 4,041 | ||||||||||||||||||
Shared-based compensation | - | - | 9,719 | - | - | 9,719 | ||||||||||||||||||
Net loss | - | - | - | (1,127,536 | ) | - | (1,127,536 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 64,753 | 64,753 | ||||||||||||||||||
Balance, June 30, 2019 | 11,255,129 | $ | 11,255 | $ | 6,312,372 | $ | 2,642,804 | $ | (243,429 | ) | $ | 8,723,002 |
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
(UNAUDITED)
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net cash (used in) provided by operating activities | $ | (3,782,887 | ) | $ | 21,615,744 | |||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (18,388 | ) | (33,792 | ) | ||||
Purchase of available-for-sale investments | - | (21,372,178 | ) | |||||
Maturity and redemption of available-for-sale investments | - | 21,372,178 | ||||||
Loan repayment from a third party | - | 2,443,251 | ||||||
Net cash (used in) provided by investing activities | (18,388 | ) | 2,409,459 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from a related party’s loan | - | 393,158 | ||||||
Loan repayment to a third party | - | (2,499,500 | ) | |||||
Net cash used in financing activities | - | (2,106,342 | ) | |||||
Effect of exchange rate change on cash, cash equivalents and restricted cash | (80,470 | ) | 10,090 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (3,881,745 | ) | 21,928,951 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 17,947,409 | $ | 34,453,037 | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||||||||
Cash and cash equivalents as of June 30, 2020 and 2019, respectively | 5,511,461 | 7,451,172 | ||||||
Restricted cash as of June 30, 2020 and 2019, respectively | 12,435,948 | 27,001,865 | ||||||
Total cash, cash equivalents, and restricted cash as of June 30, 2020 and 2019, respectively | $ | 17,947,409 | $ | 34,453,037 | ||||
Supplemental cash flows information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax | $ | 29,935 | $ | - |
Three Months Ended | ||||||||
March 31, | March 31, | |||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net cash provided by (used in) operating activities | 1,651,695 | (1,214,913 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (1,229 | ) | - | |||||
Repayment of loan from a third party | 390,400 | - | ||||||
Net cash provided by investing activities | 389,171 | - | ||||||
Effect of exchange rate change on cash, cash equivalents and restricted cash | (21,443 | ) | (85,550 | ) | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 2,019,423 | (1,300,463 | ) | |||||
Cash, cash equivalents and restricted cash, beginning balance | 13,842,745 | 21,829,154 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 15,862,168 | $ | 20,528,691 | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||||||||
Cash and cash equivalents as of March 31, 2021 and 2020, respectively | 4,383,648 | 5,062,253 | ||||||
Restricted cash as of March 31, 2021 and 2020, respectively | 11,478,520 | 15,466,438 | ||||||
Total cash, cash equivalents, and restricted cash as of March 31, 2021 and 2020, respectively | $ | 15,862,168 | $ | 20,528,691 | ||||
Supplemental cash flows information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax | $ | - | $ | - |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd and Subsidiaries (“Takung”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Co., Ltd.Company Limited (“Hong Kong Takung”), a Hong Kong company and its wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading artwork. The Company generates revenue from its services in connection with the offering and trading of artwork on its system, primarily consisting of listing fees, trading commissions, and management fees. The Company conducts business primarily in Hong Kong, People’s Republic of China.
Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Takung Cultural Development (Tianjin) Co., Ltd.
Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) provides technology development services to Hong Kong Takung and also carries out marketing and promotion activities in mainland China. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung when Shanghai Takung was deregistered.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of its wholly-owned subsidiary, Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.
Art Era Internet Technology (Tianjin) Co.Ltd., 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 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 will focusfocused 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet as of December 31, 2019,2020, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2020March 31, 2021 and for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures, which are normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, previously filed with the SEC.
Beginning in the first quarter of 2020, a strain of coronavirus (COVID-19) has spread globally and at this point, the extent to which the COVID-19 may impact operations of the Company is uncertain. The extent of the impact of the coronavirus on the Company's business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the sixthree months ended June 30, 2020March 31, 2021 may not be indicative of the future operating results for the fiscal year ending December 31, 20202021 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. Dollars.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of June 30, 2020,March 31, 2021, its interim condensed consolidated results of operations and cash flows for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Recent Accounting Pronouncements
Except for the ASUs issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019,2020, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial statements upon adoption.
3. PREPAYMENT AND OTHER CURRENT ASSETS, NET
Prepayment and other current assets mainly consist of the prepaid tax, prepaid service fees,services for maintenance of online trading system, prepaid advertising and promotional services, prepaid financial advisory and banking services, prepaid rent to a related party, rent deposit and as well as staff advance.other current assets.
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Prepaid tax | $ | 33,495 | $ | 281,582 | ||||
Prepaid service fees | 105,399 | 132,064 | ||||||
Short-term borrowings to a third party | - | 53,919 | ||||||
Staff advance | 42,944 | 18,380 | ||||||
Other current assets | 19,227 | 19,222 | ||||||
Less: allowance for doubtful accounts | - | (53,919 | ) | |||||
Prepayment and other current assets, net | $ | 201,065 | $ | 451,248 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
(Unaudited) | ||||||||
Prepaid tax | $ | 12,139 | $ | 32,262 | ||||
Prepaid service fees | 183,811 | 202,647 | ||||||
Prepaid rent | 359,839 | - | ||||||
Staff advance | 763 | 2,299 | ||||||
Deposit | 15,477 | 35,879 | ||||||
Other current assets | - | 6,300 | ||||||
Less: allowance for doubtful accounts | - | - | ||||||
Prepayment and other current assets, net | $ | 572,029 | $ | 279,387 |
No provision for doubtful accounts was recognized for the three and six months ended June 30, 2020March 31, 2021 and 2019, respectively. The Company has written off the doubtful account balance and deducted from bad debt provision related to the short-term borrowings to a third party in an amount of $54,193 during the six months ended June 30, 2020.
4. ACCOUNT RECEIVABLES, NET
Account receivables consisted of the following:
June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Listing fee | $ | 154,837 | $ | - | $ | 154,349 | $ | 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 | $ | 154,837 | $ | - | $ | 154,349 | $ | 154,771 |
No provision for doubtful accounts was recognized for the three and six months ended June 30, 2020March 31, 2021 and 2019, respectively.
The Company has written off the doubtful accounts balance and deducted from bad debt provision in an amount of $2,010,251 during the six months ended June 30, 2020.
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 | 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 | $ | 707,704 | 0 | % | 7/17/2020 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 763,149 | 0 | % | 7/30/2021 | ||||||||||||||||||||||||||||
8/29/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 707,704 | 0 | % | 8/28/2020 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | 763,149 | 0 | % | 7/30/2021 | |||||||||||||||||||||||||||||
9/20/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | $ | 566,163 | 0 | % | 9/19/2020 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | 610,519 | 0 | % | 7/30/2021 | |||||||||||||||||||||||||||||
Total | $ | 1,981,571 | Total | $ | 2,136,817 |
All the transactions entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative ofwith Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen ofco. were aimed to meet the People’s Republic of China. Both Chongqing and Mr. Daquan WangCompany’s working capital needs in U.S. Dollars, which are non-related partiesfreely convertible to the Company.
· | The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company. |
· | Hong Kong Takung entered into loan agreements (the “Hong Kong Dollar Loans”) with Friend Sourcing Ltd., a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum (See Note 8). Friend Sourcing is a non-related party to the Company. |
The transactions with Friend Sourcing were aimed to meet the Company’s working capital needs in Hong Kong Dollars.
Through an understanding between Chongqing Aoge Import and Export Co. and Friend Sourcing, the HKDHong Kong Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that the HKDHong Kong Dollar Loans and the RMB Loans will be repaid simultaneously.
OneOn November 30, 2020, Tianjin offered a short-term financing in an amount of $992,094 (RMB6,500,000) with an annual interest rate at 6% to a non-related third party, Tianjin Zhiyuan Enterprise Management Co., Ltd. The loan was matured on February 2, 2021. $534,204 (RMB 3,500,000) was paid off on December 31, 2020 and $462,255 (RMB3,028,603), inclusive of the outstanding principal balance, $457,889 (RMB3,000,000) and interest receivable, $4,366 (RMB28,603). This loan receivables with a repayment due date of July 17, 2020receivable was overdue. The Company and Chongqing are currently in the process of negotiating a loan extension agreement.fully repaid on January 27, 2021.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Furniture, fixtures and equipment | $ | 205,178 | $ | 201,093 | $ | 217,623 | $ | 218,430 | ||||||||
Leasehold improvements | 210,299 | 343,697 | 23,152 | 23,216 | ||||||||||||
Computer trading and clearing system | 3,390,531 | 3,379,654 | 3,458,697 | 3,468,346 | ||||||||||||
Transport equipment | 101,819 | 103,330 | 109,796 | 110,245 | ||||||||||||
Sub-total | 3,907,827 | 4,027,774 | 3,809,268 | 3,820,237 | ||||||||||||
Less: accumulated depreciation | (3,280,448 | ) | (3,167,948 | ) | (3,467,510 | ) | (3,382,241 | ) | ||||||||
Property and equipment, net | $ | 627,379 | $ | 859,826 | $ | 341,758 | $ | 437,996 |
Depreciation expense was $119,060$96,613 and $157,687$127,930 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $246,990 and $314,466 for the six months ended June 30, 2020 and 2019, respectively.
7. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of June 30, 2020March 31, 2021 and December 31, 20192020 consisted of the following:
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Accruals for professional fees | $ | 431,240 | $ | 168,040 | ||||
Accruals for consulting fees | 267,540 | 311,122 | ||||||
Payroll payables | 38,642 | 79,710 | ||||||
Payables for trading and clearing system | 50,550 | 50,295 | ||||||
Other payables | 27,776 | 20,499 | ||||||
Total accrued expenses and other payables | $ | 815,748 | $ | 629,666 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
(Unaudited) | ||||||||
Accruals for professional fees | $ | 471,002 | $ | 267,427 | ||||
Accruals for consulting fees | 266,697 | 365,634 | ||||||
Payroll payables | 29,696 | 80,026 | ||||||
Trading and clearing system | 3,089 | - | ||||||
Other payables | 13,913 | 15,001 | ||||||
Total accrued expenses and other payables | $ | 784,397 | $ | 728,088 |
8. SHORT-TERM BORROWINGS FROM A THIRD PARTY
In July 2019, Hong Kong Takung entered into HKD Loans with Friend Sourcing with interest accruing at a rate of 8% per annum. The HKD Loans are to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company. On April 1, 2021, Hong Kong Takung extended the due date of the HKD Loans with Friend Sourcing to July 30, 2021.
In the meantime, Tianjin Takung entered interest-free RMB Loans towith another third party as a guarantee for the HKD Loans. The loan amount was $1,981,571$2,136,817 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loans are “secured” by the RMB Loans. It is an understanding between the parties that when the HKD Loans are repaid, the RMB Loans will be repaid at the same time.
Date | Borrower | Lender | June 30, 2020 (USD) | December 31, 2019 (USD) | Annual Interest Rate | Repayment Due Date | Borrower | Lender | March 31, 2021 (USD) | December 31, 2020 (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||||||||||||||||
7/18/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 718,433 | $ | 714,808 | 8 | % | 7/17/2020 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 716,169 | $ | 718,127 | 8 | % | 7/30/2021 | ||||||||||||||||||||
8/29/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 699,732 | $ | 696,202 | 8 | % | 8/28/2020 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 697,527 | $ | 699,434 | 8 | % | 7/30/2021 | ||||||||||||||||||||
9/20/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 559,786 | $ | 556,961 | 8 | % | 9/19/2020 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 558,022 | $ | 559,548 | 8 | % | 7/30/2021 | ||||||||||||||||||||
Less: Discount loan payable | $ | (21,664 | ) | $ | (99,626 | ) | Less: Discount loan payable | $ | - | $ | - | |||||||||||||||||||||||||||
Total | $ | 1,956,287 | $ | 1,868,345 | Total | $ | 1,971,718 | $ | 1,977,109 |
The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of June 30,March 31, 2020. The fair value of the short-term borrowings approximates their carrying amounts.
One of The weighted average short-term borrowings were $1,971,718 and $1,247,691 for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively. The interest expenses for the short-term borrowings with a repayment due date of July 17,were $nil and $38,913 for the three months ended March 31, 2021 and 2020, was overdue. The Company and Friend Sourcing are currently in the process of negotiating a loan extension agreement.respectively.
9. RELATED PARTY BALANCES AND TRANSACTIONS
The following is a list of director and related parties to which the Company has transactions with:
(a) Jianping Mao (“Mao”), the Human Resources Management Director of Hong Kong Takung.Takung
(b) Shuhai Li (“Li”), the 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 sinceduring period from May 28, 2020.2020 to September 24, 2020
Amount due from related parties net
Amount due from related parties consisted of the following as of the yearsperiods indicated:
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b)(i) | $ | - | $ | 5,834,554 | ||||
Wang (c)(i) | 5,749,246 | - | ||||||
Mao (a) (ii) | 102,606 | - | ||||||
Less: allowance for doubtful accounts (ii) | (102,606 | ) | ||||||
Total current amount due from related parties, net | $ | 5,749,246 | $ | 5,834,554 |
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Mao (a) (ii) | $ | - | $ | 104,128 | ||||
Total noncurrent amount due from a related party | $ | - | $ | 104,128 |
March 31, 2021 | December 31, 2020 | |||||||
(Unaudited) | ||||||||
Wang (b)(i) | $ | 6,199,670 | $ | 6,225,134 | ||||
Mao(a)(ii) | - | 111,099 | ||||||
Less: allowance for doubtful accounts (ii) | - | (111,099 | ) | |||||
Total current amount due from a related party | $ | 6,199,670 | $ | 6,225,134 |
Amount due to a related partiesparty
Amount due to a related partiesparty consisted of the following as of the yearsperiods indicated:
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b) (i) | $ | - | $ | 6,418,980 | ||||
Wang (c)(i) | 6,451,530 | - | ||||||
Mao (a) (ii) | 6,297 | 443,733 | ||||||
Total current amount due to related parties | $ | 6,457,827 | $ | 6,862,713 |
March 31, 2021 | December 31, 2020 | |||||||
(Unaudited) | ||||||||
Wang (b)(i) | $ | 6,431,199 | $ | 6,448,784 | ||||
Total current amount due to a related party | $ | 6,431,199 | $ | 6,448,784 |
(i) | Amount due to and due from |
On September 16, 2019,May 29, 2020, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with LiWang for the loan of $6,451,530$6,431,199 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan as May 15, 2020. On May 15, 2020,2021. Hong Kong Takung entered intois currently negotiating 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,of the loan was transferred to Wang, the Chief Financial Officer of the Company and the legal representative of Tianjin Takung.with Wang.
In thea meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with LiWang for the loan of $5,749,246$6,199,670 (RMB40,619,000) with the maturity date of the loan as May 15, 2020. On May 15, 2020,2021. Tianjin Takung entered intois currently negotiating an extension agreement with Li to extend the RMB Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020,of the loan was transferred towith 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 |
The amount due tofrom Mao is primarily related to the lease deposit from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will expire on May 12, 2021. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $205,211$209,994 (RMB1,449,838) every six months and a deposit of $102,606$111,099 (RMB724,919). On May 12, 2020, the Company terminated the lease early and recorded a $102,606 associatedrecognized bad debt provisionexpense 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 June 30,December 31, 2020.
(iii) | Rent prepayment to Mao |
On October 16, 2019,March 1, 2021, Tianjin MQTakung entered into two lease agreements with a non-cancellable lease agreement with Ms.related party, Mao for its office facilitylocation in Tianjin, PRC.PRC and employee accommodation in Hong Kong. The leasedleases will expire on February 28, 2022. Monthly rental payments for the office location is approximately 1,475.67 square meters.and employee accommodation are $25,070 (RMB 162,500) and $7,135 (RMB46,250), respectively. The lease was terminated on February 15, 2020agreements require lump sum payments of $300,847 (RMB1,950,000) and monthly rent payment is approximately $24,254 (RMB 170,563).$85,626 (RMB555,000), respectively. As of June 30, 2020, theMarch 31, 2021, total rent amount duepaid to Mao pertinentwith respect to this lease agreementthese agreements included in prepayment was $nil.
As of June 30, 2020, Mao also lent a startup deposit of $6,297 to Hong Kong MQ.$349,777 (RMB2,291,667).
10. INCOME TAXES
Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.
United States of America
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for net operation loss (“NOL”)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 June 30, 2020March 31, 2021 due to the recent enactment.
As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company in the United States had $2,570,094$1,809,680 and $2,167,494$1,454,286 in net operating loss carry forwards available to offset future taxable income, respectively. For net operating losses arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable income and carryforward the NOL indefinitely. NOLs generated prior to January 1, 2018 will not be subject to the taxable income limitation and will begin to expire in 2033 if not utilized.
Hong Kong
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,705)$257,808) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Takung Art Holdings and Hong Kong MQ still apply the original tax rate of 16.5% for its provision for current income and deferred taxes.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.
The income tax provision consists of the following components:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
State | - | - | - | - | - | - | ||||||||||||||||||
Foreign | (131 | ) | - | (101,692 | ) | - | 20,208 | 101,561 | ||||||||||||||||
Total Current | $ | (131 | ) | $ | - | $ | (101,692 | ) | $ | - | $ | 20,208 | $ | 101,561 | ||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
State | - | - | - | - | - | - | ||||||||||||||||||
Foreign | (7,330 | ) | 66,584 | 6,836 | 58,022 | (24,981 | ) | (14,166 | ) | |||||||||||||||
Total Deferred | $ | (7,330 | ) | $ | 66,584 | $ | 6,836 | $ | 58,022 | $ | (24,981 | ) | $ | (14,166 | ) | |||||||||
Total income tax (expense) benefit | $ | (7,461 | ) | $ | 66,584 | $ | (94,856 | ) | $ | 58,022 | ||||||||||||||
Total income tax expense | $ | (4,773 | ) | $ | 87,395 |
A reconciliation between the Company’s actual provision for income taxes and the provision at the Hong Kong statutory rate is as follows:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Loss before income tax expense | $ | (7,308 | ) | $ | (1,194,120 | ) | $ | (873,275 | ) | $ | (1,894,351 | ) | $ | (577,361 | ) | $ | (865,967 | ) | ||||||
Computed tax benefit with statutory tax rate | 1,207 | 197,073 | 144,091 | 312,567 | ||||||||||||||||||||
Computed tax expense with statutory tax rate | (121,245 | ) | (142,884 | ) | ||||||||||||||||||||
Impact of different tax rates in other jurisdictions | (3,342 | ) | 12,427 | 1,677 | 16,794 | 3,719 | (5,019 | ) | ||||||||||||||||
Impact of preferred tax rate | 2,666 | (82,047 | ) | (54,519 | ) | (125,895 | ) | 46,150 | 57,184 | |||||||||||||||
Non-deductible items: | ||||||||||||||||||||||||
Tax effect of non-deductible expenses | (170,572 | ) | (11,061 | ) | (183,900 | ) | (17,886 | ) | (7,078 | ) | 13,328 | |||||||||||||
Changes in valuation allowance | 162,756 | (49,808 | ) | 134,157 | (127,558 | ) | 74,827 | 28,600 | ||||||||||||||||
Others | (176 | ) | - | (136,362 | ) | - | (1,146 | ) | 136,186 | |||||||||||||||
Total income tax (expense) benefit | $ | (7,461 | ) | $ | 66,584 | $ | (94,856 | ) | $ | 58,022 | ||||||||||||||
Total income tax expense | $ | (4,773 | ) | $ | 87,395 |
The effective tax rate was (102.1)%0.8% and 5.6%(10.1)% for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and (10.9)% and 3.1% for the six months ended June 30, 2020 and 2019, respectively.
Uncertain tax positions
The reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
March 31, 2021 | December 31, 2020 | |||||||||||||||
June 30, 2020 | December 31, 2019 | (Unaudited) | ||||||||||||||
Uncertain tax liabilities, beginning of period | $ | - | $ | - | $ | 101,789 | $ | - | ||||||||
Additions for tax position of current period | 73,357 | - | ||||||||||||||
Settlements with tax authority during current year | (28,562 | ) | 101,789 | |||||||||||||
Uncertain tax liabilities, end of period | $ | 73,357 | $ | - | $ | 73,227 | $ | 101,789 |
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the interim condensed consolidated financial statements as of June 30, 2020.March 31, 2021. The Company anticipated that the settlements with the taxing authority are remitted within one year.
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nilnil as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended 31 December 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company had $73,357$73,227 and $nil,$101,789, respectively, of uncertain tax liabilities related to the different methodology of certain tax non-deductible expenses applied by the IRD. The examination is currently in progress. Due to the uncertain tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in an adverse finding and we would be subject to additional liability which could be materially different from these estimates. In such circumstances, we will record additional tax expense or tax benefit in the period in which such the resolution occurs. The Company does not expect the position of uncertain tax liabilities will significantly fluctuate within the next twelve months.
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profitsincome 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.
11. LEASES
The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately six years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.
The following table provides a summary of leases by balance sheet location as of June 30, 2020:March 31, 2021:
Assets/liabilities | Classification | As of June 30, 2020 | Classification | As of March 31, 2021 | ||||||||
Assets | (Unaudited) | |||||||||||
Operating lease right-of-use assets | Operating lease assets | $ | 241,034 | Operating lease assets | $ | 165,335 | ||||||
Liabilities | ||||||||||||
Current | ||||||||||||
Operating lease liability - current | Current operating lease liabilities | $ | 152,954 | Current operating lease liabilities | $ | 73,607 | ||||||
Long-term | ||||||||||||
Operating lease liability - non-current | Long-term operating lease liabilities | 80,040 | Long-term operating lease liabilities | 87,913 | ||||||||
Total lease liabilities | $ | 232,994 | $ | 161,520 |
The operating lease expenses for the three months ended March 31, 2021 and six months ended June 30, 2020 and 2019 were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||
Lease Cost | Classification | 2020 | 2019 | 2020 | 2019 | Classification | 2021 | 2020 | ||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Operating lease cost | Cost of revenue, general and administrative expenses | $ | 160,850 | $ | 86,395 | $ | 361,212 | $ | 137,173 | Cost of revenue, general and administrative expenses | $ | 57,275 | $ | 200,362 | ||||||||||||||
Total lease cost | $ | 160,850 | $ | 86,395 | $ | 361,212 | $ | 137,173 | $ | 57,275 | $ | 200,362 |
Maturities of operating lease liabilities at June 30, 2020on March 31, 2021 were as follows:
Maturity of Lease Liabilities | Operating Leases | Operating Leases | ||||||||
2020 (remaining) | $ | 131,141 | ||||||||
2021 | 76,936 | |||||||||
2021 (remaining) | $ | 66,528 | ||||||||
2022 | 14,154 | 80,493 | ||||||||
2023 | 14,154 | 15,263 | ||||||||
2024 | 14,154 | 15,263 | ||||||||
2025 | - | |||||||||
Thereafter | - | - | ||||||||
Total lease payments | $ | 250,539 | $ | 177,547 | ||||||
Less: interest | (17,545 | ) | (16,027 | ) | ||||||
Present value of lease payments | $ | 232,994 | $ | 161,520 |
Six Months Ended June 30, | ||||||||
Lease Term and Discount Rate | 2020 | 2019 | ||||||
(Unaudited) | (Unaudited) | |||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 2.32 | 2.06 | ||||||
Weighted-average discount rate (%) | ||||||||
Operating leases | 8 | % | 8 | % |
Six Months Ended June 30, | ||||||||
Other Information | 2020 | 2019 | ||||||
(Unaudited) | (Unaudited) | |||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 111,303 | $ | 94,573 | ||||
Leased assets obtained in exchange for new operating lease liabilities | 115,667 | 275,189 |
Three Months Ended March 31, | ||||||||
Lease Term and Discount Rate | 2021 | 2020 | ||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 2.57 | 1.51 | ||||||
Weighted-average discount rate (%) | ||||||||
Operating leases | 8 | % | 8 | % |
Three Months Ended March 31, | ||||||||
Other Information | 2021 | 2020 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 17,126 | $ | 28,478 | ||||
Leased assets obtained in exchange for new operating lease liabilities | - | - |
12. LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net loss | $ | (14,769 | ) | $ | (1,127,536 | ) | $ | (968,131 | ) | $ | (1,836,329 | ) | $ | (572,588 | ) | $ | (953,362 | ) | ||||||
Denominator: | ||||||||||||||||||||||||
Weighted-average shares outstanding - Basic | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||
Weighted-average shares outstanding – Basic | 11,271,379 | 11,255,129 | ||||||||||||||||||||||
Stock options and restricted shares | - | - | - | - | - | - | ||||||||||||||||||
Weighted-average shares outstanding - Diluted | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||
Weighted-average shares outstanding – Diluted | 11,271,379 | 11,255,129 | ||||||||||||||||||||||
Loss per share | ||||||||||||||||||||||||
-Basic | (0.001 | ) | (0.100 | ) | (0.086 | ) | (0.163 | ) | $ | (0.05 | ) | $ | (0.08 | ) | ||||||||||
-Diluted | (0.001 | ) | (0.100 | ) | (0.086 | ) | (0.163 | ) | $ | (0.05 | ) | $ | (0.08 | ) |
Due to the loss for the three and six months ended June 30, 2019,March 31, 2020, approximately 148,890100,890 options and 15,000 options and6,250 restricted shares, respectively, were excluded from the calculation of diluted net loss per share.
Due to the loss for the three and six months ended June 30, 2020March 31, 2021, approximately 100,890 options and no restricted shares, respectively, were excluded from the calculation of diluted net loss per share.
13. CONTINGENCIES
Around May and June 2020, the Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, Tianjin Takung and Hong Kong Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by a certain service agent. The claims amounted to approximately $0.23 million. Subsequently, one of the plaintiffs with a claim amount of $0.15 million withdrew his claim against Tianjin Takung on July 1, 2020. The withdrawal was approved by the Shanghai Pudong People’s courtCourt 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.
The Company hired legal counsel to evaluate the cases. The Company believes that both these claims are both without merit and intends to vigorously defend itself. Currently, the outstanding case is under review by On November 24, 2020, the Tianjin City Beicheng District People’s Court.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.
In the opinion of management, it is not probable that the Company A court hearing will incur any losses arising from the above litigation cases. As such, as of June 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings. be held on July 20, 2021.
Except for the above, as of June 30, 2020March 31, 2021 and through the issuance date of the condensed consolidated financial statements included in this Form 10-Q, the Company does not have any other significant indemnification claims.
14. SUBSEQUENT EVENTS
On April 1, 2021, Hong Kong Takung entered into a loan extension agreement for its HK Dollar Working Capital Loan with Friend Sourcing Ltd, with an extended maturity date to July 30, 2021. On the same day, Tianjin Takung also entered into a loan extension agreement for its RMB Working Capital Loan with Chongqing Aoge Import and Export Co. with an extended maturity date to July 30, 2021.
On April 21, 2021, our board of directors approved an award of the Company’s common stock to its directors, employees and consultants at a par value of $0.001 under the 2015 Incentive Stock Plan. The aggregate number of shares of the Company’s common stock granted was 335,000.
Other than the events aforementioned, the Company has evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the report the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Although we believe that the expectations reflected in the forward lookingforward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results unless required by applicable securities regulations or rules. The following discussion should be read in conjunction with our financial statements and the related notes filed herein.
Overview
Takung Art Co., Ltd and Subsidiaries (“Takung”) were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development of novel biologic and peptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke.
We, through our wholly owned subsidiary, Hong Kong Takung, Art Co., Ltd. (“Hong Kong Takung”) is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Takung was incorporated in 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 are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operatesoperate an electronic online platform located at http://en.takungae.com/en.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Through Hong Kong Takung, we We offer on-line listing and trading services that allow artists/artists, art dealers/dealers and owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions and management fees and authorized agent subscription.
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 eventually dissolve Shanghai Takung in order to save costs. Shanghai Takung was deregistered on May 8, 2020.
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 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 will focus on exploring business opportunities and promoting our artwork trading business.fees.
Our headquarters areheadquarter is located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong and Tianjin. Our new principal executive offices areoffice is located at Room 1105 Wing On Plaza, 62 Mody709, Tower 2, Admiralty Centre, 18 Harcourt Road, Tsim Sha Tsui, Kowloon,Admiralty, Hong Kong.
Our common stock began trading on the NYSE American under the symbol “TKAT” on March 22, 2017.
Recent Impacts of COVID-19 on Our BusinessDevelopments
While the ongoing coronavirus pandemic is spreading throughout the world, the Company’sour operations have fully resumed in March 20202020. Overall, we had additional pieces of artwork listed and we have not identified any significant decreasea larger trading transaction amounts during the first quarter in the number of transactions on our platform since then. We have also maintained a stable number of new account openings.
The extent to which the COVID-19 impacts our operations is highly uncertain and cannot be predicted with confidence. It will depend on various factors including the duration and severity of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
2021 as discussed underneath. Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, COVID-19 may eventually affectit is not possible to predict the Company's 2020 overall business performance. The operating results for the three and six months ended June 30, 2020 may not be indicativeunanticipated consequence of the pandemic on our future operating results forbusiness performance and liquidity due to the fiscal year ending December 31, 2020 or other future periods, particularlyseverity of global situation of COVID-19. To minimize the impact of such uncertainties, we reduced our workforces during the first quarter in light of the uncertain impact COVID-19 could have on the Company's business.
2021.
Results of Operation of Takung
Hong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees.
THREE-MONTH PERIOD ENDED JUNE 30, 2020MARCH 31, 2021 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 2019MARCH 31, 2020
The following tables set forth our interim condensed consolidated statements of income data with a percentage:
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2020 | % of Revenue | 2019 | % of Revenue | 2021 | % of Revenue | 2020 | % of Revenue | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||
Revenue | $ | 1,679,165 | 100 | $ | 626,083 | 100 | $ | 779,108 | 100 | $ | 1,181,286 | 100 | ||||||||||||||||||||
Cost of revenue | (754,062 | ) | (45 | ) | (441,028 | ) | (70 | ) | (252,237 | ) | (32 | ) | (656,514 | ) | (56 | ) | ||||||||||||||||
Selling expense | (61,585 | ) | (4 | ) | (3,784 | ) | (1 | ) | (104,911 | ) | (14 | ) | (42,989 | ) | (4 | ) | ||||||||||||||||
General and administrative expenses | (929,728 | ) | (55 | ) | (888,460 | ) | (142 | ) | (1,013,158 | ) | (130 | ) | (1,110,447 | ) | (94 | ) | ||||||||||||||||
Total costs and expenses | (1,745,375 | ) | (104 | ) | (1,333,272 | ) | (213 | ) | (1,370,306 | ) | (176 | ) | (1,809,950 | ) | (154 | ) | ||||||||||||||||
Loss from operations | (66,210 | ) | (4 | ) | (707,189 | ) | (113 | ) | (591,198 | ) | (76 | ) | (628,664 | ) | (54 | ) | ||||||||||||||||
Interest and other income (expenses), net | 58,902 | 4 | (486,931 | ) | (78 | ) | 13,837 | 2 | (237,303 | ) | (20 | |||||||||||||||||||||
Loss before income taxes | (7,308 | ) | 0 | (1,194,120 | ) | (191 | ) | |||||||||||||||||||||||||
Income tax (expense) benefit | (7,461 | ) | (1 | ) | 66,584 | 11 | ||||||||||||||||||||||||||
Loss before income tax expense | (577,361 | ) | (74 | ) | (865,967 | ) | (74 | ) | ||||||||||||||||||||||||
Income tax benefit (expense) | 4,773 | 1 | (87,395 | ) | (7 | ) | ||||||||||||||||||||||||||
Net loss | $ | (14,769 | ) | (1 | ) | $ | (1,127,536 | ) | (180 | ) | $ | (572,588 | ) | (73 | ) | $ | (953,362 | ) | (81 | ) |
Revenue
The following table sets forth our interim condensed consolidated revenue by revenue source:
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Listing fee revenue | $ | 380,846 | $ | - | $ | 273,792 | $ | 176,943 | ||||||||
Commission revenue | 1,188,313 | 532,740 | 358,086 | 900,823 | ||||||||||||
Management fee revenue | 110,006 | 93,343 | 147,230 | 103,520 | ||||||||||||
Total | $ | 1,679,165 | $ | 626,083 | $ | 779,108 | $ | 1,181,286 |
(i) | Listing fee revenue |
As of June 30, 2020,March 31, 2021, a total of 292298 sets of artwork were listed for trade on our platform —comprising 6773 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $28,489,331$30,627,634 (HK$221,100,000)237,600,000); 35 pieces of jewelry with a total listing value of $9,362,437$9,366,178 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,013,710$17,020,509 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,241,006$12,245,898 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,034$670,302 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,017$335,151 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,095,248$1,095,686 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,328,987(HK$$1,329,518 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,853$128,904 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,096,459$1,096,897 (HK$8,509,400), of which 22.5%-48% (for 6773 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months ended June 30, 2020,March 31, 2021, there were 5 new3 sets of paintings listed on our platform. Their total listing values were $1,675,085$1,095,686 (HK$13,000,000)8,500,000) for the paintings, of which 22.90-23%24.9%-25% (for the paintings) of the listed values were charged as listing fees.
As of June 30, 2019,March 31, 2020, a total of 285287 sets of artwork were listed for trade on our platform —comprising 6062 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858$26,779,740 (HK$202,100,000)208,100,000); 35 pieces of jewelry with a total listing value of $9,264,548$9,350,389 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824$16,991,816 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021$12,225,254 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029$669,172 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514$334,586 (HK$2,600,000); 7 pieces of porcelainsporcelain with a total listing value of $1,083,797$1,093,838 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092$1,327,276 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505$128,687 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995$1,095,048 (HK$8,509,400), of which 22.5%-48% (for 6062 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 porcelains)porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months ended June 30, 2019,March 31, 2020, there were no new artworks2 sets of paintings listed on our platform. Their total listing values were $772,121 (HK$6,000,000) for the paintings, of which 22.83%-23% (for the paintings) of the listed values were charged as listing fees.
The listing fees charged increased to $380,846$273,792 during the three months ended June 30, 2020March 31, 2021 compared to $nil$176,943 for the same period ended June 30, 2019.March 31, 2020. Compared to those for the three months ended June 30, 2019,March 31, 2020, the number of new listing of paintings and the value of the artworks were slightly higher during the same period in 2020.2021. There were fivethree sets of paintings listed during the three months ended June 30, 2020March 31, 2021 while there was no new artworks listed on our platformwere two sets of paintings during the same period in 2019.2020 listed on our platform. The total listing value of the new artworks for the three months ended March 31, 2021 was $1,095,686 compared to $772,121 for the three months ended March 31, 2020.
(ii) | Commission fee revenue |
We generate commission fee from non-VIP traders and selected traders as follows:
For non-VIP traders, the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.0013 (HK$0.01).
For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.
We define traders as “inactive” if they meet the following criteria;
· | The trader defaults in payment over three months; |
· | The trader did not incur any transactions in the month of reassessment; |
· | The service agent has confirmed with the relevant trader that he/she was inactive. |
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)606-10-25-1(e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.
We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
We used to offer commissions to tradersTraders and service agents. Effective January 1, 2019, we no longer offered commission to our traders.Traders. For service agents, we offer a total of 40% to 75% of the commission earned from transactions with new tradersTraders to the service agents when they bring in an agreed number of tradersTraders to the trading platform.
The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.
Total commission revenue increaseddecreased by $655,573$542,737 or 123%60.2% for the three months ended June 30, 2020March 31, 2021 to $1,188,313$358,086 compared to $532,740$900,823 for the three months ended June 30, 2019.March 31, 2020. For the three months ended June 30, 2020,March 31, 2021, the trading amount was approximately $2,215,309,610 (HK$17,192,574,819)$3,625,533,613 (HKD28,125,802,109) compared to $825,532,976(HK$6,474,490,023)$1,669,248,138 (HK$12,971,393,429) in the same period in 2019. The number2020. Although we incurred a higher amount of active traders increased by 27,171, from 38,786trading amount in the three months ended June 30, 2019first quarter 2021 compared to 65,957that in the same period in 2020, majority of the transactions were initiated by our VIP traders that would not incur commission revenue. Therefore, our commission revenue for the first quarter in 2021 was significantly lower than that in the same period in 2020.
(iii) | Management fee revenue |
We charge tradersTraders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which areis 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 units.ownership shares when there is a purchase and sale transaction.
During the three-monththree months period ended June 30, 2020March 31, 2021, management fee revenue increased by $16,663,$43,710, from $93,343$103,520 for the three months ended June 30, 2019March 31, 2020 to $110,006$147,230 in the same period in 2021, due to thean increase in trading.trading transaction volume in the first quarter in 2021 compared to that in the same period in 2020 as discussed above.
Revenue by customer type
The following table presents our revenue by customer type:
Three months ended June 30, | Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Artwork owners | $ | 380,846 | $ | - | $ | 273,792 | $ | 176,943 | ||||||||
Non – VIP Traders | 1,078,701 | 481,162 | 312,640 | 856,132 | ||||||||||||
VIP Traders | 219,618 | 144,921 | 192,676 | 148,211 | ||||||||||||
Total | $ | 1,679,165 | $ | 626,083 | $ | 779,108 | $ | 1,181,286 |
Cost of Revenue
Three months ended June 30, | Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Commissions paid to service agents | $ | 601,704 | $ | 235,088 | $ | 135,174 | $ | 497,601 | ||||||||
Depreciation | 88,245 | 121,763 | 69,062 | 96,191 | ||||||||||||
Internet service charge | 36,303 | 47,104 | 19,169 | 34,332 | ||||||||||||
Artwork insurance | 12,151 | 11,971 | 12,744 | 12,120 | ||||||||||||
Artwork storage | 15,659 | 25,091 | 16,088 | 16,270 | ||||||||||||
Others | - | 11 | ||||||||||||||
Total | $ | 754,062 | $ | 441,028 | $ | 252,237 | $ | 656,514 |
Cost of revenue for the three months ended June 30,March 31, 2021 and March 31, 2020 was $252,237 and June 30, 2019 was $754,062 and $441,028,$656,514, respectively. The increasedecrease in cost of revenue by $313,034,$404,277, for the three months ended June 30, 2020March 31, 2021 compared to June 30, 2019,March 31, 2020, was mainly due to an increasea decrease in commissions paid to service agents by $366,616$362,427 because of increasea decrease in trading transactions duringinitiated by non-VIP traders in the three months ended June 30, 2020 as discussed above. Such increase was primarily offset byfirst quarter in 2021, a decrease in depreciation by $33,518$27,129 due to having fully depreciated of some of our computer equipment and trading systems, having been fully depreciated, a decline in internet service charges by $10,801$15,163 and a decrease of artwork storage costs by $9,432.$182.
Gross Profit
Gross profit was $925,103$526,871 or 55.1% of67.6% for the three months ended March 31, 2021, compared to $524,772 or 44.4% for the three months ended March 31, 2020.
Although our total revenue for the three months ended June 30, 2020March 31, 2021 decreased by $402,178 or 34% compared to $185,055 or 29.6% of the total revenuethat for the three months ended June 30, 2019.
Listing fees contributed 22.7% of the total revenue for the three months ended June 30, 2020 compared to 0% in the corresponding period in 2019, while commission revenue contributed 70.8% for the three months ended June 30, 2020 compared to 85.1% in the corresponding period in 2019. Our management fee contributed to 6.5% of the total revenue for the three months ended June 30, 2020 compared to 14.9% in the same period in 2019. Although the percentages of commission and management fee revenues were2020, our gross profit margin was higher for the three months ended June 30, 2019March 31, 2021 compared to those inthat for the same period in 2020 by 23.2%. The higher gross profit margin in current period was primarily driven by the dollar amount of those revenue were higherplummet in the three months ended June 30, 2020. Particularly, our commission revenue for the three months ended June 30, 2020 increased by $655,573 from $532,740 for the three months ended June 30, 2019 to $1,188,313 in same period in 2020. Moreover, our cost of revenue for the three months ended June 30, 2020 was 44.9% of the total revenue compared to 70.4% for the same period in 2019. Consequently, we posted a higher gross profit and gross profit margin of $925,103 or 55.1%, respectively, for the three months ended June 30, 2020 compared to $185,055 or 29.6%, respectively, for the same period in 2019.by 61.6% as discussed aforementioned.
Operating Expenses
General and administrative expenses for the three months ended June 30, 2020March 31, 2021 were $929,728$1,013,158 compared to $888,460$1,110,447 for the three months ended June 30, 2019.March 31, 2020. The increasedecrease in general and administrative expenses by $41,268 or 5%$97,289 was predominantly attributable to an increasea decrease in office, insurance and rental expenses by $38,155$198,521 due to an early termination of a new office being leasedlease agreement by Tianjin Takung in mid-May 2019,May 2020, a reduction in salary and welfare expense by $98,490 due to fewer employees in the first quarter 2021, a lower travel and accommodation fees by $28,274 and a decrease in non-deductible input VAT expense by $35,951 as a result of a fall in service fees paid to Tianjin Takung in the first quarter 2021 compared to that in the same period in 2020. The overall decrease was offset by a rise in consultancy fee by $199,815 as we engaged third-party computer technicians for system upgrades and an increase in legal and professional fees by $46,362$71,760 due to higher audit fee, an increase in share-based compensation expense by $5,543 due to the additional shares issued for legal fees, an increase in non-deductible input VAT expenses by $35,919 as a result of an increase in service fees paid to Tianjin Takung and an increase in others by $112,515. The overall increase was offset by a fall in salaries and welfare by $136,333 as a result of salary reductions for our executives, a reduction in consultancy fees by $32,089 attributable to lower consulting fee charged by our consultants of Tianjin Takung, a decrease in depreciation by $5,109 and a decrease in travel and accommodation fees by $23,695 due to lower overseas travel and accommodation during the three months ended June 30, 2020 compared to the same period in 2019.auditor’s fee.
The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended June 30, 2020March 31, 2021 and June 30, 2019.March 31, 2020.
Three months ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||
June 30, | March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||||
2020 | % of Total | 2019 | % of Total | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | Amount ($) | % of Total | Amount ($) | % of Total | |||||||||||||||||||||||||||
Salary and welfare | $ | 294,036 | 31.6 | $ | 430,369 | 48.4 | 226,242 | 22.3 | 324,732 | 29.2 | ||||||||||||||||||||||
Office, insurance and rental expenses | 185,697 | 20.0 | 147,542 | 16.6 | 126,258 | 12.5 | 324,779 | 29.2 | ||||||||||||||||||||||||
Legal and professional fees | 154,904 | 16.7 | 108,542 | 12.2 | 260,978 | 25.8 | 189,218 | 17.1 | ||||||||||||||||||||||||
Non-deductible input VAT expense | 80,486 | 8.7 | 44,567 | 5.0 | 36,142 | 3.6 | 72,093 | 6.5 | ||||||||||||||||||||||||
Travel and accommodation fees | 7,290 | 0.8 | 30,985 | 3.5 | 8,567 | 0.8 | 36,841 | 3.3 | ||||||||||||||||||||||||
Consultancy fee | 35,188 | 3.8 | 67,277 | 7.6 | 234,932 | 23.2 | 35,117 | 3.2 | ||||||||||||||||||||||||
Depreciation | 30,815 | 3.3 | 35,924 | 4.0 | 27,551 | 2.7 | 31,739 | 2.9 | ||||||||||||||||||||||||
Share based compensation expense | 19,303 | 2.0 | 13,760 | 1.6 | 3,717 | 0.4 | 5,986 | 0.5 | ||||||||||||||||||||||||
Others | 122,009 | 13.1 | 9,494 | 1.1 | 88,771 | 8.7 | 89,942 | 8.1 | ||||||||||||||||||||||||
Total general and administrative expense | $ | 929,728 | 100.0 | $ | 888,460 | 100.0 | $ | 1,013,158 | 100.0 | $ | 1,110,447 | 100.0 |
Other income (expenses)
Other income for the three months ended June 30, 2020 was $58,902, compared to other expenses of $486,931 for the same period in 2019. The significant increase inWe incurred other income for the three months ended June 30, 2020 is predominantly dueMarch 31, 2021, $13,837, compared to other expenses of $237,303 for the same period in 2020. There was a significant increasedecrease in foreign currency exchange gainloss by $440,369,$227,719, arising from the depreciationappreciation of the Renminbi against the US dollar and sundry income by $159,343, slightly offset by loan interest for our third party financing sincein the thirdfirst quarter 2019.2021.
Income tax (expenses) benefitsexpenses
The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,705)$257,808) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,705)$257,808) and PRC enterprise income tax rate of 25%.
The effective tax rates for the three months ended June 30,March 31, 2021 and 2020 were 0.8% and 2019 were (102.1)(10.1)% and 5.6%, respectively.
The income tax expense and incomeIncome tax benefit were $7,461 and $66,584(expense) for the three months ended June 30,March 31, 2021 and 2020 were $4,773 and 2019,$(87,395), respectively. TheOur income tax expense was due to Hong Kong Takung generating operating income before tax forhigher in the three months ended June 30,March 31, 2020 while all subsidiaries incurred losses beforeas during the three months ended March 31, 2020, we recognized an uncertain tax position driven by the income tax inexamination preliminary result from the same period in 2019.tax authority of Hong Kong on the profits tax returns filed for the tax years December 31, 2016 through 2018 by Takung Hong Kong. The tax examination hasn’t been closed as of the filing of this quarterly report.
Net lossLoss
We recorded a net loss of $14,769$572,588 and $1,127,536$953,362 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
The decreasereduction in the net loss by $1,112,767$380,774 during this current period compared to the same period in 2019 was predominantlypredominately due to a growth in total revenues by $1,053,082 and an increase in exchange gain by $440,369.
SIX-MONTH PERIOD ENDED JUNE 30, 2020 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 2019
The following tables set forth our condensed consolidated statements of income data:
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2020 | % of Revenue | 2019 | % of Revenue | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenue | $ | 2,860,451 | 100 | $ | 1,161,784 | 100 | ||||||||||
Cost of revenue | (1,410,576 | ) | (49 | ) | (708,307 | ) | (61 | ) | ||||||||
Selling expense | (104,574 | ) | (4 | ) | (34,596 | ) | (3 | ) | ||||||||
General and administrative expenses | (2,040,175 | ) | (71 | ) | (2,163,045 | ) | (186 | ) | ||||||||
Total costs and expenses | (3,555,325 | ) | (124 | ) | (2,905,948 | ) | (250 | ) | ||||||||
Loss from operations | (694,874 | ) | (24 | ) | (1,744,164 | ) | (150 | ) | ||||||||
Interest and other expenses, net | (178,401 | ) | (6 | ) | (150,187 | ) | (13 | ) | ||||||||
Loss before income taxes | (873,275 | ) | (30 | ) | (1,894,351 | ) | (163 | ) | ||||||||
Income tax (expense) benefit | (94,856 | ) | (3 | ) | 58,022 | 5 | ||||||||||
Net loss | $ | (968,131 | ) | (33 | ) | $ | (1,836,329 | ) | (158 | ) |
Revenue
The following table sets forth our condensed consolidated revenue by revenue source:
Six months ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Listing fee revenue | $ | 557,789 | $ | 284,090 | ||||
Commission | 2,089,136 | 716,080 | ||||||
Management fee revenue | 213,526 | 161,614 | ||||||
Total | $ | 2,860,451 | $ | 1,161,784 |
As of June 30, 2020, a total of 292 sets of artwork were listed for trade on our platform —comprising 67 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $28,489,331 (HK$221,100,000); 35 pieces of jewelry with a total listing value of $9,362,437 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,013,710 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,241,006 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,034 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,017 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,095,248 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,328,987(HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,853 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,096,459 (HK$8,509,400), of which 22.5%-48% (for 67 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the six months ended June 30, 2020, there were 7 new sets of paintings listed on our platform. Their total listing values were $2,448,201 (HK$19,000,000) for the paintings, of which 22.83-23% (for the paintings) of the listed values were charged as listing fees.
As of June 30, 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, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400), of which 22.5%-48% (for 60 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 porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the six months ended June 30, 2019, there were 6 new sets of paintings listed on our platform. Their total listing values were $1,147,549 (HK$9,000,000) for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.
The listing fees revenue rose to $557,789 during the six months ended June 30, 2020 compared to $284,090 for the same period ended June 30, 2019. During the six months ended June 30, 2020, we had 7 new sets of paintings listed on our online platform.
We generate commission fee from non-VIP traders and selected traders as follows:
For non-VIP traders, the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.0013 (HK$0.01).
For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.
We defined a selected trader as an inactive trader who meets one of the following criteria:
Once an inactive trader has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.
We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
We used to offer commissions to traders and service agents. Effective January 1, 2019, we no longer offered commission to our traders. For service agents, we offer a total of 40% to 75% of the commission earned from transactions with new traders to the service agents when they bring in an agreed number of traders to the trading platform.
The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.
Total commission revenue grew by $1,373,056 or 192% for the six months ended June 30, 2020 to $2,089,136 compared to $716,080 for the six months ended June 30, 2019 chiefly due to higher trading transaction amount incurred and more active traders involved during the six months ended June 30, 2020. Total transaction amounts for the six months ended June 30, 2020 and 2019 were $3,884,557,747 (HKD30,163,968,248) and $989,151,757 (HKD7,757,719,400), respectively. Total active traders involved for the six months ended June 30, 2020 and 2019 were 126,334 and 53,860, respectively.
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 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.
During the six-month period ended June 30, 2020, management fee revenue increased by $51,912, from $161,614 for the six months ended June 30, 2019 to $213,526, due to the higher trading transactions in the current quarter.
Revenue by customer type
The following table presents our revenue by customer type:
Six months ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Artwork owners | $ | 557,789 | $ | 284,090 | ||||
Non – VIP traders | 1,934,832 | 640,789 | ||||||
VIP traders | 367,830 | 236,905 | ||||||
Total | $ | 2,860,451 | $ | 1,161,784 |
Cost of Revenue
Six months ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Commissions paid to service agents | $ | 1,099,305 | $ | 290,004 | ||||
Depreciation | 184,436 | 243,795 | ||||||
Internet service charge | 70,635 | 97,778 | ||||||
Artwork insurance | 24,271 | 23,933 | ||||||
Artwork storage | 31,929 | 52,333 | ||||||
Others | - | 464 | ||||||
Total | $ | 1,410,576 | $ | 708,307 |
Cost of revenue for the six months ended June 30, 2020 and June 30, 2019 was $1,410,576 and $708,307, respectively. The rise in cost of revenue for the six months ended June 30, 2020 compared to June 30, 2019 was mainly due to an increase in the commissions paid to service agents by $809,301. This increase was driven by an increase in trading transactions during the six months ended June 30, 2020 as discussed above. Such increase was offset by a decrease in depreciation by $59,359 due to some of our computer equipment and trading systems having been fully depreciated, a decline in internet service charges by $27,143 and a decrease of artwork storage costs by $20,404.
Gross Profit
Gross profit was $1,449,875 or 50.7% of the total revenue for the six months ended June 30, 2020, compared to $453,477 or 39.0% of the total revenue for the six months ended June 30, 2019. The increase in gross profit and margin was mainly due to the growth in total revenue.
Overall total revenue for the six months ended June 30, 2020 rose by $1,698,667 or 146.2% compared to the same period in 2019. Compared to the same period in 2019, there was a significant increase in commission revenue for the six months ended June 30, 2020 by $1,373,056 or 191.7%. Consequently, we posted a gross profit margin of 50.7% for the six months ended June 30, 2020 compared to 39.0% for the same period in 2019.
Operating Expenses
General and administrative expenses for the six months ended June 30, 2020 were $2,040,175, compared to $2,163,045 for the six months ended June 30, 2019. The reduction in general and administrative expense by $122,870 or 5.7% was attributed to a decrease in salaryforeign exchange loss by $227,719 and welfare by $259,098 due to salary reductions for our executives, a decrease in consultancy fee by $102,130 due to the lower consulting fee charged by our consultants of Tianjin Takung, a decrease in legal and professional fees by $38,518 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in travel and accommodation fees by $8,212 due to lower overseas travel and accommodation, a fall in share-based compensation by $5,322 as there were no additional stock options granted and a decrease in depreciation by $8,117 as some of our furniture and fixtures and computer equipment had been fully depreciated. The overall decline in general and administrative expenses was offset by an increase in office, insurance and rental expenses by $182,794 due to a new office being leased by Tianjin Takung in mid-May 2019 and an increase in non-deductible input VATincome tax expense by $62,981 as a result of an increase in service fees paid to Tianjin Takung.$92,168.
The following table sets forth the main components of the Company’s general and administrative expenses for the six months ended June 30, 2020 and June 30, 2019.
Six months ended | ||||||||||||||||
June 30, | ||||||||||||||||
2020 | % of Total | 2019 | % of Total | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Salary and welfare | $ | 618,768 | 30.3 | $ | 877,866 | 40.6 | ||||||||||
Legal and professional fees | 344,122 | 16.9 | 382,640 | 17.7 | ||||||||||||
Office, insurance and rental expenses | 510,476 | 25.0 | 327,682 | 15.1 | ||||||||||||
Consultancy fee | 70,305 | 3.4 | 172,435 | 8.0 | ||||||||||||
Non-deductible input VAT expense | 152,579 | 7.5 | 89,598 | 4.1 | ||||||||||||
Depreciation | 62,554 | 3.1 | 70,671 | 3.3 | ||||||||||||
Traveling and accommodation fees | 44,131 | 2.2 | 52,343 | 2.4 | ||||||||||||
Share Based Compensation Expense | 25,289 | 1.2 | 30,611 | 1.4 | ||||||||||||
Others | 211,951 | 10.4 | 159,199 | 7.4 | ||||||||||||
Total general and administrative expense | $ | 2,040,175 | 100.0 | $ | 2,163,045 | 100.0 |
Other expenses
Other expenses for the six months ended June 30, 2020 was $178,401 compared to $150,187 for the six months ended June 30, 2019. The amount was comparable between two periods.
Income tax (expense) benefits
The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,705) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,705) and PRC enterprise income tax rate of 25%.
The effective tax rates for the six months ended June 30, 2020 and 2019 were (10.9)% and 3.1%, respectively.
The income tax expense and income tax benefit were $94,856 and $58,022 for the six months ended June 30, 2020 and 2019, respectively.
Net loss
We recorded a net loss for the six months ended June 30, 2020 of $968,131 compared to net loss of $1,836,329 for the six months ended June 30, 2019.
The decrease in the net loss by $868,198 during this current period compared to the same period in 2019 was predominantly triggered by the growth in total revenue for the six months ended June 30, 2020 as discussed above.
Liquidity and Capital Resources
The following tables set forth our interim condensed consolidated statements of cash flow:
Six months ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net cash (used in) provided by operating activities | $ | (3,782,887 | ) | $ | 21,615,744 | |||
Net cash (used in) provided by investing activities | (18,388 | ) | 2,409,459 | |||||
Net cash used in financing activities | - | (2,106,342 | ) | |||||
Effect of exchange rate change on cash and cash equivalents | (80,470 | ) | 10,090 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (3,881,745 | ) | 21,928,951 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 17,947,409 | $ | 34,453,037 |
30
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net cash provided by (used in) operating activities | $ | 1,651,695 | $ | (1,214,913 | ) | |||
Net cash provided by investing activities | 389,171 | - | ||||||
Effect of exchange rate change on cash and cash equivalents | (21,443 | ) | (85,550 | ) | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 2,019,423 | (1,300,463 | ) | |||||
Cash, cash equivalents and restricted cash, beginning balance | 13,842,745 | 21,829,154 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 15,862,168 | $ | 20,528,691 |
Sources of Liquidity
During the sixthree months ended June 30,March 31, 2021, net cash provided by operating activities totaled $1,651,695, which chiefly driven by a net increase in operating assets and liabilities, $2,139,959, non-cash adjustments to net loss, $84,324 offset by net loss, $572,588. Net cash provided by investing activities, $389,171, included loan repayment from a third party, $390,400 offset by a purchase of computer equipment by Tianjin Takung, $1,229. There was no net cash provided by or used in financing activities during the three months ended March 31, 2021. The resulting change in cash for the period was an increase of $2,019,423. The cash balance at the beginning of the period was $13,842,745. The cash balance as of March 31, 2021 was $15,862,168.
During the three months ended March 31, 2020, net cash used in operating activities totaled $3,782,887,$1,214,913, which predominantlypredominately resulted from the net loss of $968,131$953,362 and a decline in net change in operating assets and liabilities of $3,462,397$654,218 and offset by non-cash adjustments to net loss of $647,641. Net cash used in investing activities included purchase of furniture and computer equipment by Tianjin Takung.$392,667. There was no net cash provided by or used in investing or provided by financing activities forduring the sixthree months ended June 30,March 31, 2020. The resulting change in cash for the period was a decrease of $3,881,745.$1,300,463. The cash balance at the beginning of the period was $21,829,154. The cash balance as of June 30,March 31, 2020 was $17,947,409.
During the six months ended June 30, 2019, net cash generated from operating activities totaled $21,615,744. Although the Company incurred a net loss of $1,836,329 during the six months ended June 30, 2019, such net loss was offset by an increase in net change in operating assets and liabilities of $23,063,582 and non-cash adjustments to net loss of $388,491. Net cash generated from investing activities totaled $2,409,459. Net cash used in financing activities totaled $2,106,342. The resulting change in cash for the period was an increase of $21,928,951. The cash balance at the beginning of the period was $12,524,086. The cash balance on June 30, 2019 was $34,453,037.$20,528,691.
As of June 30, 2020,March 31, 2021, the Company had $21,974,706$20,846,968 in total current liabilities, which included $815,748$784,397 in accrued expenses and other payables, $12,435,948$11,478,520 in customercustomers’ deposits, $1,956,287$1,971,718 in short-term borrowings from a third party, $6,457,827$6,431,199 in amount due to a related parties, $13,612party, $8,390 in advancesadvance from customers, $152,954$73,607 in lease liabilities and $142,330$99,137 in taxVAT payables.
As of December December��31, 2019,2020, the Company had $25,947,490$18,494,724 in total current liabilities, which included $629,666consisted of $728,088 in accrued expenses and other payables, $16,404,941$9,144,610 in customer deposits, $1,868,345$1,977,109 in short-term borrowings from a third party, $6,862,713$6,448,784 in amount due to related parties, $8,788$17,412 in advancesadvance from customers, $166,987$72,367 in lease liabilities and $6,050$106,354 in VAT payables.
The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RMB is only currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.
If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.
Future Financings
Although we are suffering business downturn including a decrease inour trading volume and customer deposits, we are also undergoing aincreased in the first quarter 2021, our commission revenue was lower in the three months ended March 31, 2021 compared to that in the same period in 2020 as discussed aforementioned. We continue to explore company restructuring and business opportunities, including re-evaluatingre-evaluation of the company’s Unitunit business and a downsize of the workforce.workforce to further streamline our costs of operation. Our management forecasts that we have sufficient cash from our operations to fund our business organically. However, we may conduct equity sales of our common shares in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, and if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.
Critical Accounting Policies
We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019,2020, previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019,2020, previously filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Ms. Fang MuZhihua Yang and our Chief Financial Officer, Mrs. Jing Wang. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2020March 31, 2021 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2020March 31, 2021 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 1. Legal Proceedings.
On or aroundAround May and June 2020, plaintiffs Chunji Zhao and Guangming Su commenced legalthe Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, (Shanghai) Co., Ltd (“Tianjin Takung and Hong Kong Takung in the Shanghai Takung”) overPudong People’s Court, China, as a contract dispute relating to the Company’s trading platform use agreementresult of contractual disputes and misrepresentations over ownership units made by a certain service agent amountingagent. The claims amounted to an aggregate of approximately $0.23 million.
Both cases originated in Subsequently, one of the Shanghai Pudong People’s Court. However, because Shanghai Takung was subsequently deregistered on May 8, 2020, both plaintiffs requested the defendant in their respective cases be re-named Hong Kong Takung Art Co. Ltd, its parent company. The plaintiffs also requested that Takung Cultural Development (Tianjin) Co., Ltd be named as additional defendant. In addition to damages, plaintiffs Chunji Zhao and Guangming Su were also claiming litigation costswith a claim amount of RMB1,090,000 (approximately, $0.15 million) and RMB 536,025 (approximately, $0.08 million) respectively.
On July 1, 2020, Chunji Zhaomillion withdrew his claim against Tianjin Takung.Takung on July 1, 2020. The withdrawal was approved by the courtShanghai Pudong People’s Court on July 20, 2020. TheMeanwhile, the other litigation proceeding from Guangming Suwith 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, and is presently under review. We do not believethe Tianjin City Beicheng District People’s Court ruled that the proceedings have anyclaim was without merit and intend to vigorously defend against them.dismissed the case.
On or around July 2020, a third filing claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung Art Co. Ltd in the Shanghai Pudong People’s Court, China, on the basis of alleged breaches of contract. The claim amount has yet to be determined. In our management’s opinion, it is not probable that weA court hearing will incur any losses arising from this litigation case. As such, as of June 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings.be held on July 20, 2021.
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
(1) Incorporated by reference to the exhibit to our registration statement on Form S-1 filed with the SEC on August 16, 2011.
(2) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013.
(3) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014.
(4) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014.
*Filed herewith.
**Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAKUNG ART CO., LTD | ||
Date: | By: | /s/ |
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | By: | /s/ Jing Wang |
Jing Wang | ||
Chief Financial Officer | ||
(Principal Financial Officer) |