UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 20172019

 

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.)

 

Flat/RM 03-04 20/F Hutchison House 10 HarcourtRoom 1105 Wing On Plaza, 62 Mody Road, Central,Tsim Sha Tsui, Kowloon, 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 classTrading Symbol(s)Name of each exchange on which
registered
Common StockTKATNYSE 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.xYes¨No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactiveInteractive Data File required to be submitted and posted 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 and post such files). xYes¨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 (Do not check if a smaller reporting company)¨xSmaller reporting companyx
 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).¨Yesx   No

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of November 14, 201713, 2019 is 11,188,882.11,255,129.

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO,CO., LTD

INDEX

 

  Page
   
PART I.Financial Information3
   
 Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited).3
   
 Item 2.  Management’s Discussion and Analysis of Financial Condition and resultsResults of Operation.17
   
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.2629
   
 Item 4.  Controls and Procedures.2729
   
PART II.Other Information2830
   
 Item 1.  Legal Proceedings.6.  Exhibits.2830
   
 Item 1A. Risk Factors.28
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.28
Item 3.  Defaults Upon Senior Securities.28
Item 4.  Mine Safety Disclosures.28
Item 5.  Other Information.28
Item 6.  Exhibits.28
 Signatures2930


2

PART I –FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)

 

Item 1. Financial Statements

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 September 30, December 31,  September 30, December 31, 
 2017  2016  2019  2018 
 (Unaudited)     (Unaudited)    
ASSETS                
Current assets                
Cash and cash equivalents $14,887,890  $13,395,337  $6,086,637  $7,974,884 
Restricted cash  19,057,733   21,743,360   17,008,251   4,549,202 
Account receivables, net  3,732,569   3,058,568   -   568,757 
Prepayment and other current assets  870,231   968,446   579,107   955,249 
Amount due from a related party  5,682,807   5,907,789 
Loan receivables  6,806,623   6,374,046   1,958,672   2,391,350 
Total current assets  45,355,046   45,539,757   31,315,474   22,347,231 
                
Non-current assets                
Property and equipment, net  2,104,107   2,065,182   941,374   1,445,679 
Intangible assets  20,394   20,546   22,257   22,284 
Deferred tax assets  294,676   243,772 
Operating lease right-of-use assets  904,836   - 
Deferred tax assets, net  776,896   611,738 
Amount due from a related party, non-current  101,420   - 
Other non-current assets  535,420   428,764   114,823   142,293 
Total non-current assets  2,954,597   2,758,264   2,861,606   2,221,994 
Total assets $48,309,643  $48,298,021  $34,177,080  $24,569,225 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY        
LIABILITIES AND SHAREHOLDERS’ EQUITY        
                
LIABILITIES                
Current liabilities                
Accrued expenses and other payables $780,800  $608,883  $522,929  $641,692 
Customer deposits  19,057,733   21,743,360   17,008,251   4,549,202 
Advance from customers  -   360,248   10,227   8,995 
Short-term borrowings from third parties  6,371,900   6,308,513   1,816,837   2,499,500 
Amount due to related party  1,085,480   1,031,805 
Taxes payable  1,094,885   549,897 
Amount due to related parties  6,759,674   6,385,288 
Operating lease liabilities – current  173,156   - 
Tax payables  7,831   15,101 
Total current liabilities  28,390,798   30,602,706   26,298,905   14,099,778 
Deferred tax liabilities  45,301   62,618 
Total non-current liabilities  45,301   62,618 
        
Non-current liabilities        
Operating lease liabilities, non-current  92,027   - 
Amount due to a related party, non-current  197,520   - 
        
Total liabilities  28,436,099   30,665,324   26,588,452   14,099,778 
                
COMMITMENTS AND CONTINGENCIES                
                
STOCKHOLDERS’ EQUITY        
Common stock (1,000,000,000 shares authorized; $0.001 par value;
11,188,882 shares issued and outstanding as of September 30, 2017;
11,169,276 shares issued and outstanding as of December 31, 2016)
  11,189   11,169 
SHAREHOLDERS’ EQUITY        
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of September 30, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018)  11,255   11,226 
Additional paid-in capital  5,928,455   5,532,426   6,318,645   6,281,790 
Retained earnings   14, 229,809   13,172,671   1,514,907   4,479,133 
Accumulated other comprehensive loss  (295,909)  (1,083,569)  (256,179)  (302,702)
Total stockholders’ equity  19,873,544   17,632,697 
Total liabilities and stockholders’ equity $48,309,643  $48,298,021 
Total shareholders’ equity  7,588,628   10,469,447 
Total liabilities and shareholders’ equity $34,177,080  $24,569,225 

 

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

 


3

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

OPERATIONS AND COMPREHENSIVE INCOMELOSS

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

(UNAUDITED)

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Revenue                
Listing fee revenue $1,455,498  $2,968,534  $4,606,649  $8,166,072 
Commission revenue  1,496,826   1,669,698   4,970,651   3,739,958 
Gross management fee revenue  402,547   781,219   967,518   1,341,294 
Annual fee revenue  140   440   859   869 
Authorized agent subscription revenue  -   322,318   -   966,059 
Total revenue  3,355,011   5,742,209   10,545,677   14,214,252 
                 
Cost of revenue  (292,168)  (285,252)  (822,335)  (822,735)
                 
Gross profit  3,062,843   5,456,957   9,723,342   13,391,517 
                 
Operating expenses:                
General and administrative expenses  (2,498,848)  (1,744,965)  (7,311,128)  (5,076,689)
Selling expenses  (624,151)  (652,207)  (1,272,010)  (1,993,782)
                 
Income(loss)from operations  (60,156)  3,059,785   1, 140,204   6,321,046 
                 
Other income and expenses:                
Other income  186,259   163,738   440,470   314,268 
Loan interest expense  (152,059)  (62,670)  (455,762)  (62,670)
Exchange gain (loss)  177,652   (112,384)  526,603   (530,934)
Total other income (loss)  211,852   (11,316)  511,311   (279,336)
                 
Income before income taxes  151,696   3,048,469   1,651,515   6,041,710 
                 
Income tax (expense) benefit  (124,662)  (596,732)  (594,377)  (1,377,078)
                 
Net income $27,034  $2,451,737  $1,057,138  $4,664,632 
                 
Foreign currency translation adjustment  311,485   10,172   787,660   18,322 
                 
Comprehensive income $338,519  $2,461,909  $1,844,798  $4,682,954 
                 
Earnings per common share– basic $0.00  $0.23  $0.10  $0.44 
Earnings per common share– diluted  0.00   0.22   0.09   0.41 
Weighted average number of common shares outstanding-basic  11,188,882   10,632,276   11,039,880   10,632,276 
Weighted average number of common shares outstanding-diluted  11,248,688   11,365,597   11,398,082   11,277,845 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Revenue            
Listing fee $-  $-  $284,090  $3,978,735 
Commission  939,164   253,331   1,655,244   3,557,411 
Management fee  184,428   107,905   346,042   455,133 
Annual fee  -   54   -   378 
Authorized agent subscription revenue  -   -   -   191,623 
Online artwork sales  -   2,244   -   8,548 
Total revenue  1,123,592   363,534   2,285,376   8,191,828 
                 
Cost of revenue  (580,282)  (299,482)  (1,288,589)  (2,173,296)
                 
Gross profit  543,310   64,052   996,787   6,018,532 
                 
Operating expenses:                
General and administrative expenses  (1,159,502)  (2,208,264)  (3,322,547)  (7,791,747)
Selling expenses  (108,458)  (149,035)  (143,054)  (851,173)
Impairment loss-construction-in-progress      (326,227)  -   (326,227)
Total operating expenses  (1,267,960)  (2,683,526)  (3,465,601)  (8,969,147)
                 
Loss from operations  (724,650)  (2,619,474)  (2,468,814)  (2,950,615)
                 
Other income and expenses:                
Other income (expenses)  13,125   65,487   (88,637)  470,752 
Loan interest expense  (18,015)  (199,821)  (18,015)  (504,287)
Exchange loss  (515,808)  (870,218)  (564,233)  (1,132,510)
Total other expenses  (520,698)  (1,004,552)  (670,885)  (1,166,045)
                 
Loss before provision for income taxes  (1,245,348)  (3,624,026)  (3,139,699)  (4,116,660)
                 
Income tax benefit  117,451   742,670   175,473   574,202 
                 
Net loss $(1,127,897) $(2,881,356) $(2,964,226) $(3,542,458)
                 
Foreign currency translation adjustment  (12,750)  (3,668)  46,523   (131,946)
                 
Comprehensive loss $(1,140,647) $(2,885,024) $(2,917,703) $(3,674,404)
                 
Loss per common share – basic $(0.10) $(0.26) $(0.26) $(0.32)
Loss per common share – diluted  (0.10)  (0.26)  (0.26)  (0.32)
Weighted average number of common shares outstanding-basic  11,255,129   11,226,025   11,243,082   11,216,009 
Weighted average number of common shares outstanding-diluted  11,255,129   11,226,025   11,243,082   11,216,009 

 

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

 


4

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

  For the Nine Months  For the Nine Months 
  Ended  Ended 
  September 30,  September 30, 
  2017  2016 
Cash flows from operating activities:        
Net cash provided by operating activities  1,028,524   5,635,391 
         
Cash flows from investing activities:        
Purchase of property and equipment  (455,255)  (976,460)
Purchase of held-to-maturity investments  -   (14,995,876)
Purchase of available-for-sales investment  (53,501,874)  (299,918)
Maturity and redemption of available-for-sales investment  53,501,874   - 
Maturity and redemption of held-to-maturity investments  -   14,995,876 
Loan to third parties  (3,518,325)  - 
Repayment from loan to third parties  3,412,070   - 
Net cash used in investing activities  (561,510)  (1,276,378)
         
Cash Flows from financing activities:        
Proceeds from short-term borrowings  -   3,519,580 
Proceeds from related party loans  -   2,340,895 
Loan to third parties  -   (3,513,534)
Net cash provided by financing activities  -   2,346,941 
         
Effect of exchange rate change on cash and cash equivalents  1,025,539   (644,375)
         
Net increase in cash and cash equivalents  1,492,553   6,061,579 
         
Cash and cash equivalents, beginning balance  13,395,337   10,769,456 
         
Cash and cash equivalents, ending balance $14,887,890  $16,831,035 
         
Supplemental cash flows information:        
Cash paid for interest $212,954  $- 
Cash paid for income tax $136,453  $562,994 

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

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCHANGES IN EQUTIY

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

(UNAUDITED)

 

              Accumulated    
        Additional     other    
  Number  Common  Paid-in  Retained  comprehensive    
  of shares  stock  capital  Earnings  Income (loss)  Total 
Balance, December 31, 2018  11,226,025   11,226   6,281,790   4,479,133   (302,702)  10,469,447 
                         
Issuance of ordinary shares for restricted stock award  -   -   -   -   -   - 
                         
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 
                         
Shared-based compensation  -       6,273   -   -   6,273 
                         
Net loss  -   -   -   (1,127,897)  -   (1,127,897)
                         
Foreign currency translation adjustment  -   -   -   -   (12,750)  (12,750)
                         
Balance, September 30, 2019  11,255,129   11,255   6,318,645   1,514,907   (256,179)  7,588,628 

5

              Accumulated    
        Additional     other    
  Number  Common  Paid-in  Retained  comprehensive    
  of shares  Stock  capital  Earnings  loss  Total 
Balance, December 31, 2017  11,188,882   11,189   6,116,216   12,111,096   (320,290)  17,918,211 
                         
Issuance of ordinary shares for restricted stock award  20,000   20   (20)  -   -   - 
                         
Shared-based compensation  -   -   73,749   -   -   73,749 
                         
Net income  -   -   -   423,290   -   423,290 
                         
Foreign currency translation adjustment  -   -   -   -   (17,167)  (17,167)
                         
Balance, March 31, 2018  11,208,882   11,209   6,189,945   12,534,386   (337,457)  18,398,083 
                         
Issuance of ordinary shares for restricted stock award  17,143   17   (17)  -   -   - 
                         
Shared-based compensation  -   -   55,672   -   -   55,672 
                         
Net loss  -   -   -   (1,084,392)  -   (1,084,392)
                         
Foreign currency translation adjustment  -   -   -   -   (111,111)  (111,111)
                         
Balance, June 30, 2018  11,226,025   11,226   6,245,600   11,449,994   (448,568)  17,258,252 
                         
Issuance of ordinary shares for restricted stock award  -   -   -   -   -   - 
                         
Shared-based compensation  -   -   53,310   -   -   53,310 
                         
Net loss  -   -   -   (2,881,356)  -   (2,881,356)
                         
Foreign currency translation adjustment  -   -   -   -   (3,668)  (3,668)
                         
Balance, September 30, 2018  11,226,025   11,226   6,298,910   8,568,638   (452,236)  14,426,538 

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

6

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

  Nine Months  Nine Months 
  Ended  Ended 
  September 30,  September 30, 
  2019  2018 
Cash flows from operating activities:        
Net cash provided by (used in) operating activities $10,828,217  $(18,589,823)
         
Cash flows from investing activities:        
Purchase of property and equipment  (36,108)  (775,730)
Purchase of available-for-sale investments  (22,205,745)  (90,293,454)
Maturity and redemption of available-for-sale investments  22,205,745   90,293,454 
Loan to third parties  (2,093,555)  - 
Loan to a related party  -   (6,369,809)
Repayment of loan from third parties  2,443,251   3,641,871 
Purchase of held-to-maturity investment  -   (873,617)
Net cash provided by (used in) investing activities  313,588   (4,377,285)
         
Cash flows from financing activities:        
Proceeds from related parties loan  6,226   6,389,042 
Proceeds from a third party’s loan  1,955,669   - 
Repayment of loan to a related party  -   (483,822)
Loan repayment to a third party  (2,499,500)  (3,480,000)
Net cash (used in) provided by financing activities  (537,605)  2,425,220 
         
Effect of exchange rate change on cash, cash equivalents and restricted cash  (33,398)  (664,016)
         
Net increase (decrease) in cash, cash equivalents and restricted cash  10,570,802   (21,205,904)
         
Cash, cash equivalents and restricted cash, beginning balance  12,524,086   37,140,582 
         
Cash, cash equivalents and restricted cash, ending balance $23,094,888  $15,934,678 
         
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets        
Cash and cash equivalents as of September 30, 2019 and 2018, respectively $6,086,637  $8,418,818 
Restricted cash as of September 30, 2019 and 2018, respectively  17,008,251   7,515,860 
Total cash, cash equivalents, and restricted cash as of September 30, 2019 and 2018, respectively $23,094,888  $15,934,678 
         
Supplemental cash flows information:        
         
Cash paid for interest $156,453  $241,727 
Cash paid for income tax $-  $111,917 

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

7

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd and Subsidiariessubsidiaries (“Takung”, or the “Company”, “we”, “us” and “our”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Company Limited (formerly Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd.) (“Hong Kong Takung”), a Hong Kong company (“Hong Kong Takung”) and our 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, selling and trading artwork. For the period from September 17, 2012 (inception) to December 31, 2012, there wasthe company had no operation except for the issuance of shares for subscription receivable. We generatereceivables. The Company generates revenue from ourits services in connection with the offering and trading of artwork on ourits system, primarily consisting of listing fees, trading commissions, and management fees. We conduct ourThe Company conducts its business primarily in Hong Kong, People’s Republic of China.China (the “PRC”).

 

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, 2015.2015 in the PRC. 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 set up a new office in Hangzhou, PRC on November 20, 2016 for technology development. Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) is a limited liability company, with a registered capital of $1 million located in the Pilot Free Trade Zone.Zone in Tianjin. Tianjin Takung was incorporated on January 27, 2016. 2016 and is a direct wholly-owned subsidiary of Hong Kong Takung.

 

Tianjin Takung provides technology supportdevelopment services to Hong Kong Takung and Shanghai Takung and also carries out marketing and promotion activities in mainland China.

 

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.

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

8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2016,2018, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 20172019 and for the three months ended and nine months ended September 30, 20172019 and 20162018 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. GAAP,”) generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to such rules and regulations, although the managementregulations. Management believes that the disclosures made are adequate to provide fora fair presentation. The interim financial information should be read in conjunction with the Financial Statementsfinancial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC.

 

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.Dollars.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited interim condensed consolidated financial position as of September 30, 2017,2019, its consolidated results of operations and cash flows for the nine-month periods ended September 30, 20172019 and 2016,2018, 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

Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these condensed consolidated financial statements. As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less.

As a result of the adoption of the standard, the Company recognized operating lease right-of-use assets and operating lease liabilities on its condensed consolidated balance sheet as of September 30, 2019. The assets and liabilities recognized upon application of the transition provisions were primarily associated with existing office and storage leases. Please refer to footnote 9. Leases for details.

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, 2018, 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. 

9

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

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

 

  September 30,
2017
  December 31, 
2016
 
  (Unaudited)    
Advertising and promotional services  438,741   296,163 
Prepaid professional fee  144,706   - 
Prepaid rental expense  82,793   60,822 
Prepaid insurance  54,875   31,082 
Prepaid maintenance of trading system  78,784   17,514 
Staff advance  11,263   28,806 
Prepaid financial advisory and banking services  39,153   201,808 
Short-term borrowings to third party  -   259,254 
Other current assets  19,916   72,997 
Prepayment and other current assets $870,231  $968,446 

  September 30,  December 31, 
  2019  2018 
   (Unaudited)     
Tax receivables $279,687  $399,026 
Staff advance  -   93,676 
Prepaid service fee  192,435   140,934 
Short-term borrowings to third party  53,571    -  
Deposit  9,234   241,827 
Other current assets  44,180   79,786 
Prepayment and other current assets $579,107  $955,249 

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

 September 30,
2017
  December 31, 
2016
  September 30,
2019
  December 31,
2018
 
 (Unaudited)      (Unaudited)     
Listing fee $1,562,924  $1,403,255  $-  $568,757 
Authorized agent subscription revenue  924,100   995,453   557,154   557,837 
Monthly commission fee  1,422,750   605,677   1,376,460   1,378,148 
Others  63,323   54,183   53,561   53,626 
Less: allowance for doubtful accounts  (240,528)  -   (1,987,175)  (1,989,611)
Account receivables, net $3,732,569  $3,058,568  $-  $568,757 

 

Management reviewed the collectability of the receivables periodically, and identified certain inactive traders during this quarter. Management considered the receivables due from these traders are uncertain and provided bad debt provision of $240,528 for the three and nine months ended September 30, 2017.

10 

5. LOAN RECEIVABLES

 

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

 

Date Borrower Lender Original
Amount
(RMB)
  

September 30,
2017

(USD)

  

December 31,
2016

(USD)

  Annual
Interest
Rate
  Repayment 
Due Date
         (Unaudited)         
7/15/2016 Xiaohui Wang Shanghai Takung  10,080,000  $-  $1,451,822   0% 3/31/2017
8/24/2016 Xiaohui Wang Shanghai Takung  13,350,000  $-  $1,922,800   0% 3/31/2017
11/14/2016 Xiaohui Wang Shanghai Takung  10,275,000  $1,544,346  $1,479,908   0% 10/31/2017
12/9/2016 Xiaohui Wang Tianjin Takung  10,550,000  $1,585,680  $1,519,516   0% 11/30/2017
1/4/2017 Xiaohui Wang Tianjin Takung  24,461,505  $3,676,597  $-   0% 12/31/2017
       Total  $6,806,623  $6,374,046       
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  $699,526   0% 7/17/2020
8/29/2019  Chongqing Aoge Import and Export Co. Tianjin
Takung
  5,000,000   5,000,000  $699,526   0% 8/28/2020
9/20/2019  Chongqing Aoge Import and Export Co. Tianjin
Takung
  4,000,000   4,000,000  $559,620   0% 9/19/2020
       Total      $1,958,672       

  

All the transactions were aimed to meet the Company’s working capital needs in US Dollar, which is freely convertible to Hong Kong Dollar.

The interest-free loans (the “RMB Loans”) that Shanghai Takung andentered into by Tianjin Takung entered were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Wintus (New Star) Enterprises GroupAoge Import and Export Co. (“Chongqing”). XiaohuiMr.  Daquan Wang (“Ms. Wang”) is a nationalcitizen of the People’s Republic of China. Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms.Mr. Daquan Wang are the non-related parties to the Company.

 

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

  

10

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

Through an understanding between Ms. WangChongqing Aoge Import and Merit Crown,Export Co. and Friend Sourcing, the USHong Kong Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that when the USHong Kong Dollar Loans are repaid,and the RMB Loans will be repaid at the same time.

simultaneously.  

 


6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

  September 30, 
2017
  December 31, 
2016
 
  (Unaudited)    
Furniture, fixtures and equipment $157,736  $100,386 
Leasehold improvements  402,597   298,965 
Computer trading and clearing system  3,220,318   2,802,430 
Sub-total  3,780,651   3,201,781 
Less: accumulated depreciation  (1,676,544)  (1,136,599)
Property and equipment, net $2,104,107  $2,065,182 

  September 30,  December 31, 
  2019  2018 
  (Unaudited)    
Furniture, fixtures and equipment $159,239  $156,656 
Leasehold improvements  338,845   447,048 
Computer trading and clearing system  3,339,155   3,382,168 
Transport equipment  100,643   104,628 
Sub-total  3,937,882   4,090,500 
Less: accumulated depreciation  (2,996,508)  (2,644,821)
 Property and equipment, net $941,374  $1,445,679 

 

Depreciation expense amounted to $190,626was $148,774 and $133,608$241,448 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $538,532$463,241 and $373,308$713,933 for the nine months ended September 30, 20172019 and 2016,2018, respectively.

 

7.ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 20172019 and December 31, 20162018 consisted of:of the following:

 

  September 30,  December 31, 
  2017  2016 
  (Unaudited)    
Trading and clearing system $54,688  $61,735 
Accruals for professional fees  19,972   49,952 
Accruals for consulting fees  297,461   290,773 
Payroll payables  295,722   141,022 
Accruals for business trip expense  23,722   - 
Other payables     89,235   65,401 
Total accrued expenses and other payables $780,800  $608,883 

  September 30,  December 31, 
  2019  2018 
   (Unaudited)     
Accruals for consulting fees $264,469  $264,793 
Accruals for professional fees  110,442   49,518 
Payroll payables  70,231   104,437 
Trading and clearing system  49,970   86,208 
Other payables  27,817   136,736 
Total accrued expenses and other payables $522,929  $641,692 

 


8. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

In July 2019, Hong Kong Takung entered into a loan agreement (the “HKD Loan”) with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum. The following table sets forth a summary of the loan agreements in loan receivables balance:

Date Borrower Lender Original Amount
(HKD)
  September 30, 
2017
(USD)
  December 31,
2016
(USD)
  Annual
Interest Rate
  Repayment 
Due Date
         (Unaudited)         
7/15/2016 Hong Kong Takung Merit Crown Limited  11,700,000  $1,497,888  $1,509,015   8% 12/31/2017
8/24/2016 Hong Kong Takung Merit Crown Limited  15,596,100  $1,996,684  $2,011,518   8% 12/31/2017
11/18/2016 Hong Kong Takung Merit Crown Limited  11,479,102  $1,469,607  $1,480,525   8% 10/31/2017
12/9/2016 Hong Kong Takung Merit Crown Limited  11,787,600  $1,509,103  $1,520,314   8% 11/30/2017
                       
  Less: Discount loan payable       $101,382  $212,859       
                       
       Total  $6,371,900  $6,308,513       

The US Dollar Loans areHKD Loan is to provide Hong Kong Takung with sufficient US Dollar-denominatedHKD currency to meet its working capital requirements. ItFriend Sourcing is a non-related party to the Company.

In the meantime, Tianjin Takung entered an interest-free loan (the “RMB Loan”) to another third party as a guarantee for the HKD Loan. The loan amount was $ 1,955,245 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan is “secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and guarantor affiliated with the lender of the US Dollar Loans.Loan. It is thean understanding between the parties that when the US DollarHKD Loans areis repaid, the RMB Loan will be repaid at the same time. 

Date Borrower Lender September 30, 
2019
(USD)
  December 31,
2018
(USD)
  Annual
Interest
Rate
  Repayment 
Due Date
 
8/24/2016 Hong Kong Takung Merit Crown Limited $-  $1,499,500   8%  1/2/2019 
12/19/2017 Hong Kong Takung Merit Crown Limited $-  $500,000   8%  1/2/2019 
12/22/2017 Hong Kong Takung Merit Crown Limited $-  $500,000   8%  1/2/2019 
7/18/2019 Hong Kong Takung Friend Sourcing Ltd. $710,186  $-   8%  7/17/2020 
8/29/2019 Hong Kong Takung Friend Sourcing Ltd. $691,699  $-   8%  8/28/2020 
9/20/2019 Hong Kong Takung Friend Sourcing Ltd. $553,360  $-   8%  9/19/2020 
                     
     Less: Discount loan payable $(138,408) $-         
                     
    Total $1,816,837  $2,499,500         

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The U.S. Dollar Loans will similarly be repaid.of $2,499,500 as of December 31, 2018 was settled on January 2, 2019.

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2017 and December 31, 2016.2019. The fair valuesvalue of the short-term borrowings approximateapproximates their carrying amounts. The weighted average short-term borrowing was $6,419,099borrowings were $256,074 and $1,678,803$7,319,041 for the nine months period ended September 30, 20172019 and year ended December 31, 2016,2018, respectively. The interest expenses for the short-term borrowings were $133,174$18,015 and $62,670$199,822 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $394,295$18,015 and $62,670$500,080 for the nine months ended September 30, 20172019 and 2016,2018, respectively.

 

On October 30, 2017, Hong Kong Takung entered into agreements with both Merit Crown Limited and Ms. Wang to extend the US Dollar Loan and RMB Loan (see Note 5) with the original maturity date on October 31, 2017, to October 31, 2018.

9. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

(a) Wang Song (“Wang”), the General Manager of Tianjin Takung and Shanghai Takung, and Director of Hong Kong Takung, Tianjin Takung and Shanghai Takung.

(b) Liu Zhenying (“Liu”), the former Vice President of Hong Kong Takung. Liu resigned from the Company on September 30, 2018.

(c) Mao Jianping Mao (“Mao”), the wife of the Vice General ManagerHuman Resources Management Director of Hong Kong Takung.

 

(d) Li Shuhai (“Li”), the legal representative of Tianjin Takung.

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

  September 30,
2019
  December 31,
2018
 
  (Unaudited)    
Wang (a)(i) $  $5,907,789 
Li (d)(i)  5,682,807   - 
Total current amount due from related parties $5,682,807  $5,907,789 

  September 30,
2019
  December 31,
2018
 
  (Unaudited)    
Mao (c) (ii) $101,420  $             - 
         
Total noncurrent amount due from a related party $101,420  $- 

Amount due to related partyparties

 

Amount due to related partyparties consisted of the following as of the periodsyears indicated:

 

  September 30,
2017
  December 31,
2016
 
  (Unaudited)    
Mao (a) $1,085,480  $1,031,805 
Total  1,085,480   1,031,805 

  September 30,
2019
  December 31,
2018
 
  (Unaudited)    
Wang (a) (i) $-  $6,385,288 
Li (d) (i)  6,377,470   - 
Mao (c) (ii)  382,204   - 
Total current amount due to related parties $6,759,674  $6,385,288 

 

  September 30,
2019
  December 31,
2018
 
   (Unaudited)     
Mao (c) (ii) $197,520  $                - 
Total noncurrent amount due to a related party $197,520  $- 

The interest rate of the outstanding short-term loan from Mao was 8% per annum as of September 30, 2017 and December 31, 2016. The interest expense was $61,283 and $19,941 for the nine months ended September 30, 2017 and 2016, respectively, and $20,652 and $19,941 for the three months ended September 30, 2017 and 2016, respectively.

 

12

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

On October 26, 2017,May 16, 2018, Hong Kong Takung entered into a supplementaryan interest-free loan agreement (the "HK Dollar Working Capital Loan") with MaoLiu that aswas transferred to Wang on October 18, 2018 for the loan of 30 September 2017, the outstanding principal amount$6,377,470 (HK$50,000,000) to Hong Kong Takung. The purpose of the Loan (as defined in the Loan Agreement)loan is to be repaid byprovide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to Mao is HK$8,000,000 (Hong Kong Dollars Eight Million) (“Outstanding Principal Loan Amount”), and the accrued interest of the Outstanding Principal Loan Amount is HK$478,685 (“Accrued Interest”). Mao hereby agreed to extendmeet its working capital requirements with the maturity date of the Outstanding Principal Loan Amount and the interest thereof byloan is May 15, 2019. On May 15, 2019, Hong Kong Takung as below: (i) HK$4,500,000entered into an extension agreement with Wang to extend the HK Dollar Loan with a due date on May 15, 2020. On September 16, 2019, Wang transferred this loan to Li, Shuhai, the legal representative of Tianjin Takung with the same extended maturity date.

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Liu that was transferred to Wang on October 18, 2018 for the loan of $5,682,807 (RMB40,619,000) with the maturity date of the loan is May 15, 2019. On May 15, 2019, Tianjin Takung entered into an extension agreement with Wang to extend the RMB Loan with a due date on May 15, 2020. On September 16, 2019, Wang transferred this loan to Li, the legal representative of Tianjin Takung with the same extended maturity date.

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

(ii)Amount due to / from Mao

The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for the Accrued Interestoffice location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will be expired 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 $202,840 (RMB1,449,838.04) every nine months and a deposit of $101,420 (RMB724,919.02). The deposit is refundable to be duethe Company. The total lease liability is $573,500, of which $375,980 and payable by November$197,520 were included in current and noncurrent portions, respectively, as of September 30, 2017; and (ii) HK$3,500,000 together with the interest thereof2019.

As of September 30, 2019, Mao also lent a startup deposit of $6,224 to be due and payable by December 31, 2017.Hong Kong MQ.


10. INCOME TAXES

Takung was incorporated in the State of Delaware and is subject to United States income tax. Hong Kong Takung, Takung Art Holding 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

Tax Cuts and Jobs Act Enacted in 2017

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal corporate income taxes on dividends from foreign subsidiaries; and (4) providing modification to subpart F provisions and new taxes on certain foreign earnings such as Global Intangible Low-Taxed Income (GILTI). Except for the one-time transition tax, most of these provisions went into effect starting January 1, 2018.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB118”) was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As of December 22, 2018, the Company has completed the assessment of the income tax effect of the Tax Act and there were no adjustments recorded to the provisional amounts.

The Global Intangible Low-taxed Income (GILTI) is a new provision introduced by the Tax Cuts and Jobs Act. U.S. shareholders, who are domestic corporations, of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current period expense when incurred. For the three and nine months ended September 30, 2019 and 2018, the Company does not have any aggregated positive tested income; and as such, does not have additional provision amount recorded for GILTI tax.

13

As of September 30, 20172019, and December 31, 2016,2018, the Company in the United States had $4,008,459$1,886,422 and $2,212,890$1,332,438 in net operating loss carried forwardcarry forwards available to offset future taxable income, respectively. FederalFor net operating losses can generallyarising 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. Carrybacks are now prohibited. NOLs generated prior to January 1, 2018 will not be carried forward twenty years. The federal corporate net operating loss carryover is expired in 20 taxable years followingsubject to the taxable year of the loss.income limitation and will begin to expire in 2033 if not utilized.

Hong Kong

 

The Company believes thattwo-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 $255,154) 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 Art Co., Ltd, both entities are connected entities. Under the Ordinance, it is more likely than notan entity’s election to nominate the entity that these net accumulated operating losses will not be utilized insubject to the future. Therefore, the Company has provided a full valuation allowance for the deferredtwo-tier profits tax assets arising from the losses at the U.S. during the nine months ended September 30, 2017 and year ended December 31, 2016 amounting to $1,414,445 and $962,012, respectively. Accordingly, the Company has no net deferred tax assets under the US entity.

rates on its Profits Tax Return. The election is irrevocable. We elected Hong Kong Takung to be subject to the two-tier profits tax rates.

 

The provision for current income taxes of the subsidiary operating in Hong Kong Takung has been calculated by applying the current rate of taxation of 16.5%8.25% for thethree and nine months ended September 30, 20172019, 16.5% for three and 2016,nine months ended September 30, 2018, if applicable. Takung Art Holdings and Hong Kong MQ still applied the original tax rate of 16.5% for three and nine months ended September 30, 2019.

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:

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Current $159,281  $684,801  $662,598  $1,561,728 
Deferred  (34,619)  (88,069)  (68,221)  (184,650)
                 
Total provision for income taxes $124,662  $596,732  $594,377  $1,377,078 

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Current:                
Federal $-  $-  $-  $- 
State  -   -   -   - 
Foreign  -   (332,918)  -   (160,548)
Total Current $-  $(332,918) $-  $(160,548)
                 
Deferred:                
Federal $-  $-  $-  $37,398 
State  -   -   -   - 
Foreign  (117,451)  (409,752)  (175,473)  (451,052)
Total Deferred $(117,451) $(409,752) $(175,473) $(413,654)
                 
Total income tax benefit $(117,451) $(742,670) $(175,473) $(574,202)

  


14

 

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

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Income before income tax expense $151,697  $3,048,469  $1,651,515  $6,041,710 
                 
Computed tax expense with statutory tax rate  25,030   502,998   271,806   994,688 
Impact of different tax rates in other jurisdictions  (73,258)  (24,505)  (230,651)  (254,199)
                 
Non-deductible items:                
Tax effect of non-deductible expenses  25,896   11,117   100,789   32,742 
Changes in valuation allowance  146,994   107,122   452,433   603,847 
                 
Actual income tax expense $124,662  $596,732  $594,377  $1,377,078 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Loss before income tax expense $(1,245,348) $(3,624,026) $(3,139,699) $(4,116,660)
                 
Computed tax (benefit) expense with statutory tax rate  (205,484)  (597,964)  (518,050)  (679,249)
Impact of different tax rates in other jurisdictions  15,956   (89,082)  125,056   (51,274)
                 
Non-deductible items:                
Tax effect of non-deductible expenses  17,096   (167,031)  34,982   (163,701)
Previous years unrecognized taxation effect  7,134   6,870   7,134   6,870 
Changes in valuation allowance  47,847   104,537   175,405   313,152 
                 
Total income tax benefit $(117,451) $(742,670) $(175,473) $(574,202)

 

The Company's effective tax rate was 82.2%9.4% and 19.6%20.5% for the three months ended September 30, 20172019 and 2016,2018, respectively, and 36.0%5.6% and 22.8%13.9% for the nine months ended September 30, 20172019 and 2016,2018, respectively.

 

11. COMMITMENTS AND CONTINGENCIES

Operation CommitmentsLEASES

 

The total future minimumCompany has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately nine years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease payments underexpense for these leases on a straight-line basis over the non-cancellable operating 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 respect to the office and the dormitorythat 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 September 30, 2017 are payable as follows: 2019:

 

Three months ending December 31, 2017 $244,960 
     
Year ending December 31, 2018  761,175 
     
Year ending December 31, 2019  223,026 
     
Year ending December 31, 2020  39,999 
     
Year ending December 31, 2021  15,030 
     
Year ending December 31, 2022 and thereafter  53,232 
     
Total $1,337,422 
Assets/liabilities Classification As of September 30,
2019
 
Assets      
Operating lease right-of-use assets Operating lease assets $904,836 
       
Liabilities      
Current      
Operating lease liability - current Current operating lease liabilities $173,156 
  Amount due to related parties  375,980 
       
Long-term      
Operating lease liability - non-current Long-term operating lease liabilities  92,027 
  Amount due to related parties, non-current  197,520 
       
Total lease liabilities   $838,683 

 

Rental expense ofThe operating lease expenses, including lease from the Company was $293,338 and $199,514related party, for the nine and three months ended September 30, 2017 and 2016, respectively, and $721,492 and $428,440 for the nine months ended2019 were as follows:

    Three months
ended
  Nine months
ended
 
Lease Cost Classification September 30, 2019  September 30, 2019 
Operating lease cost Cost of revenue, general and administrative expenses $145,313  $282,486 
Total lease cost   $145,313  $282,486 

Maturities of operating lease liabilities at September 30, 2017 and 2016, respectively.2019 were as follow:

 

Maturity of Lease Liabilities Operating Leases 
2019 (remainder) $255,774 
2020  582,171 
2021  13,991 
2022  13,991 
2023  13,991 
Thereafter  20,986 
Total lease payments $900,904 
Less: interest  (62,221)
Present value of lease payments $838,683 

15 

15

 

Future minimum lease payments as of December 31, 2018 were as follows:

  Lease (1) 
Year ending December 31, 2019 $396,243 
     
Year ending December 31, 2020  230,683 
     
Year ending December 31, 2021  14,737 
     
Year ending December 31, 2022  14,737 
     
Year ending December 31, 2023 and thereafter  37,457 
     
Total $693,857 

(1) Amounts are based on ASC 840, Leases that was superseded upon our adoption of ASC 842, Lease on January 1, 2019.

Lease Term and Discount RateSeptember 30,
2019
Weighted-average remaining lease term (years)
Operating leases1.86
Weighted-average discount rate (%)
Operating leases8%

Other Information September 30,
2019
 
Cash paid for amounts included in the measurement of lease liabilities    
Operating cash flows from operating leases $448,405 
Leased assets obtained in exchange for new operating lease liabilities  1,032,824 

12. EARNINGSLOSS PER SHARE

 

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

 

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Numerator:                
Net loss $(1,127,897) $(2,881,356) $(2,964,226) $(3,542,458)
                 
Denominator:                
Weighted-average shares outstanding - Basic  11,255,129   11,226,025   11,243,082   11,216,009 
Stock options and restricted shares      -       - 
Weighted-average shares outstanding - Diluted  11,255,129   11, 226,025   11,243,082   11,216,009 
                 
Loss per share                
-Basic  (0.10)  (0.26)  (0.26)  (0.32)
-Diluted  (0.10)  (0.26)  (0.26)  (0.32)

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Numerator:                
Net income $27,034   2,451,737  $1,057,138   4,664,632 
                 
Denominator:                
Weighted-average shares outstanding                
Weighted-average shares outstanding - Basic  11,188,882   10,632,276   11,039,880   10,632,276 
Stock options and restricted shares  59,806   733,321   358,202   645,569 
Weighted-average shares outstanding - Diluted  11,248,688   11,365,597   11,398,082   11,277,845 
                 
Earnings per share                
-Basic  0.00   0.23   0.10   0.44 
-Diluted  0.00   0.22   0.09   0.41 

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

 

ForDue to the loss from continued operations for the three months ended September 30, 2017, the diluted earnings per share calculation did not include options to purchase up to 109,160 shares of the Company's common stock, because they were out of money. It has no such impact for three months ended September 30, 2016,and nine months ended September 30, 2017 and 2016 respectively.2019, approximately 130,890 options were excluded from the calculation of diluted net loss per share. 

 

There were dilutive effects of 487,000 shares for the nine months period ended September 30, 2017 and 2016. The 487,000 restricted shares of Common Stock (the “Compensation Shares”) related to the Consulting Agreement with Regeneration Capital Group, LLC (“Regeneration”) were placed in an escrow account and were subject to Regeneration’s performance condition. The shares were released from escrow account and transferred to Regeneration since the Company successfully listed on NYSE on March 22, 2017. 

13. SUBSEQUENT EVENTEVENTS

 

Other than the newly signed extension agreements as disclosed in Note 8,Management assessed and the supplementary agreement with related party as disclosed in Note 9 above, the Company does not identify any otherdetermined there were no significant and material subsequent events with material financial impact onoccurred that would require recognition or disclosure in the unauditedinterim condensed consolidated financial statements.

 


16

   

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 and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “Filings”) containcontains 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 filingsreport 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.results unless required by applicable securities regulations or rules. The following discussion should be read in conjunction with our pro forma financial statements and the related notes that will be filed herein.

 

Overview

 

We 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 basedpeptide-based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke.

 

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.

17

 

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 operates an electronic online platform located at http://eng.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.

 

Through Hong Kong Takung, we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.

 

We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, 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 is engagedassists in providing services to its parent company Hong Kong TakungTakung’s operations by receiving deposits from and making payments to online artwork traders for andin mainland China on behalf of Hong Kong Takung.


On January 27, 2016, Hong Kong Takung incorporated anothera wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a limited liability company, in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China.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.

 

Recently ShanghaiHong Kong Takung set upArt Holdings Company Limited (“Takung Art Holdings”) was incorporated in Hong Kong on July 20, 2018 and operates as a holding company to operate an officee-commerce platform for offering, selling and trading whole pieces of artwork instead of units of artwork.

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) was incorporated in HangzhouTianjin, China on September 7, 2018, and is a directly wholly-owned subsidiary of Takung Art Holdings. It is a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era will focus on developing our e-commerce platform. Art Era was deregistered on June 18, 2019 due to carry out technologyCompany’s plan to put off the e-commerce platform development.

 

SinceHong 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 has been transferred from Ms. Hiu Ngai Ma to the Company. 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 on July 28, 2016, we have expanded access to9, 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 for and promoting our artwork trading platform to residents of Russia, Mongolia, Australia and New Zealand – our first major expansion of operations outside of China. To further stimulate trading interest, we have added selected portfolios from these countries to our platform, which now numbers 199 artworks including three Russian painting portfolios and fifteen Mongolian paintings.  business.

 

Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong, Shanghai and Tianjin. Recently, we set up a new office in Hangzhou to conduct technology development. Our principal executive offices are located at Flat/RM 03-04, 20/F, Hutchison House, 10 HarcourtRoom 1105 Wing On Plaza, 62 Mody Road, CentralTsim Sha Tsui, Kowloon, Hong Kong.

 

Our common stock began trading on the NYSE American under the symbol “TKAT” on March 22, 2017.

 

Results of Operation of Takung

 

The following discussion should be readHong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in conjunctionconnection with the unaudited condensed consolidated Financial Statementsoffering and trading of the Company for the three-monthartwork ownership units on our system, primarily consisting of listing fees, trading commissions, and nine-month period ended September 30, 2017 and 2016 and related notes thereto.management fees. 

18

 

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 20172019 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2016

Revenue2018

 

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

 

 Three Months Ended
September 30,
  Three Months Ended September 30, 
 2017  2016  2019  % of
Revenue
  2018  % of
Revenue
 
 (Unaudited) (Unaudited)  (Unaudited)   (Unaudited)   
Revenue $3,355,011  $5,742,209  $1,123,592   100  $363,534   100 
Cost of revenue  (292,168)  (285,252)  (580,282)  (52)  (299,482)  (82)
Selling expense  (624,151)  (652,207)  (108,458)  (10)  (149,035)  (41)
General and administrative expenses  (2,498,848)  (1,744,965)  (1,159,502)  (103)  (2,208,264)  (608)
Impairment loss-construction-in-progress  -       (326,227)  (90)
Total costs and expenses  (3,415,167)  (2,682,424)  (1,848,242)  (165)  (2,983,008)  (821)
Income from operations  (60,156)  3,059,785 
Interest and other income (loss), net  211,852   (11,316)
Income before income taxes  151,696   3,048,469 
Income tax benefit (expense)  (124,662)  (596,732)
Net income $27,034  $2,451,737 
Loss from operations  (724,650)  (65)  (2,619,474)  (721)
Total other expenses  (520,698)  (46)  (1,004,552)  (276)
Loss before income tax expenses  (1,245,348)  (111)  (3,624,026)  (997)
Income tax benefit  117,451   10   742,670   204 
Net loss $(1,127,897)  (101) $(2,881,356)  (793)

 


Revenue

The following tables settable sets forth our condensed consolidated statements of income data (as a percentage of revenue):revenue by revenue source:

 

  Three Months Ended
September 30,
 
  2017  2016 
  (Unaudited)  (Unaudited) 
Revenue  100%  100%
   Cost of revenue – Direct revenue  (9)  (5)
   Selling expense  (18)  (11)
   General and administrative expenses  (74)  (30)
Total costs and expenses  (101)  (46)
Income from operations  (1)  54 
Interest and other income (loss), net  6   - 
Income before income taxes  5   54 
Income tax expense  (4)  (10)
Net income  1%  44%
  

Three months ended

September 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Listing fee revenue $-  $- 
Commission  939,164   253,331 
Management fee revenue  184,428   107,905 
Online artwork sales  -   2,244 
Annual fee revenue  -   54 
Total $1,123,592  $363,534 

 

19

Listing fee revenue was $1,455,498 and $2,968,534; commission revenue was $1,496,826 and $1,669,698, gross management fee revenue was $402,547 and $781,219, annual fee revenue was $140 and $440 , authorized agent subscription revenue was $nil and $322,318 for the three months ended September 30, 2017 and 2016, respectively.

 

(i)Listing fee revenue

 

Listing fee revenue is calculated basedAs of September 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 percentagetotal listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (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 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 listing value and transaction value of artworks. 

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

Takung Unit+ is a new unit trading platform for collectibles. It allows investors to buy and trade shared ownership units of portfolios of collectibles, however, unlike the Company's standard Unit trading platform, each Takung Unit+ portfolio will contain multiple numbers of the same item, and traders will have the option of direct ownership with physical delivery by trading the units they own for one or more of the items in the portfolio. Takung will collect listing fees, on the initial listing values of new portfolios, commissions on trades made by investors using the platform, and management fees for the storage, transportation, and insurance of the items in the portfolio.respectively. 

 

During the three months ended September 30, 2017,2019, there were 6 sets of paintings and calligraphies, 9 pieces of precious stones, 1 pieces of jewelry and 1 set of Unit+ productno new artworks listed on our platform. Their total listing values were $2,118,726 (HK$16,500,000) for the 6 sets of paintings and calligraphies, $1,132,555 (HK$ 8,820,000) for the 9 pieces of precious stones, $46,227 (HK$360,000) for the 1 pieces of jewelry and $152,578 (HK$1,188,000) for the 1 set of Unit+ product, of which 41.5%-47% (for the 6 sets of paintings and calligraphies), 26%-46% (for the 9 pieces of precious stones), 43% (for the 1 pieces of jewelry) and 30.3% (for the 1 set of Unit+ product) of the listed values were charged as listing fees, respectively.

 

Compared to the corresponding period ended September 30, 2016, there were 7 sets of paintings and calligraphies, 7 pieces of amber, 14 pieces of precious stones, 5 pieces of jewelry successfully listed on our system. The totalWe had no listing values were $1,802,475 (HK$14,000,000)fee revenue for the 7 sets of paintings and calligraphies, $2,974,083 (HK$23,100,000) for the 7 pieces of amber, $1,042,860 (HK$8,100,000) for the 14 pieces of precious stones, $746,739 (HK$5,800,000) for 5 pieces of jewelry, of which 47.75%-48% (for the 7 sets of paintings and calligraphies) ,46% (for the 7 pieces of amber), 32%-48.5% (for the 14 pieces of precious stones), 29%-48% (for the 5 pieces of jewelry) of the listed values were charged as listing fees, respectively.

The decrease in number of pieces listed, listing values and corresponding listing fees charged during the three months ended September 30, 2017 compared2019 and 2018. During the third quarter of 2019, we suspended and did not have any new listings of artwork on our platform because we focused on the promoting the trading of our existing listed artwork as opposed to new listings. We also felt that any new listings would be unfavorably impacted by current market conditions. We will be more discreet about the same period ended September 30, 2016 resulted in a decrease in listing fee revenue in the current period. The decrease in numberfuture listings of pieces listed was due to a new listing category (“A-tier”) implemented on July 3, 2017. A-tier is aim to meet an elevated set of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore, the listing schedule of some artworks were deferred to a later time.more valuable artworks.

  

 (ii)Commission fee revenue

 

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

For non-VIP Traders,traders, the commission revenue was calculated based on a percentage of transaction value of artworks, whichwhere we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed.


For selected VIP Traders, On November 7, 2018 we ran a discount program for them starting from April 1, 2015, when their trading volumes oflowered the certain artworks reached an agreed level in each month, a contractually determined flat rate of trading commission was appliedminimum charge to the transactions of these certain artworks. Any trading commission charges incurred by the VIP Traders over the flat rate would be waived. The discounted rate varied between selected artworks. This discount program ended on March 31, 2016.$0.0013 (HK$0.01).

 

For selected Traders,traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traderstraders 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 Traderstraders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.

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

The trader defaults in payment over three months;
The trader did not incur any transactions in the month of reassessment;
The service agent has confirmed with the relevant trader that he/she was inactive.

20

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

 

Commission rebate programs are offered to Traderstraders and service agents. We would rebatepay to existing traders 5% of the commission earned from the transactions of new Traderstraders referred by the existing Traders.them. The rebate was adjusted from 15% to 5%, starting January 1, 2017. For service agents, we rebate 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. For service agents who have individual referrers referring traders to us, we will, after rebating such individual referrers 5% of the commission earned from the transactions of new traders they referred, deduct such 5% of the commission from the rebates payable to the service agents to which such individual referrers relate.

The rebates and discounts are recognized in the same period the related revenue is recognized.

Our trading volume and transaction value amounts increased significantly from 2016 when we commenced operations in Shanghai and consequently added a significant number of traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2017. However, there has been a decrease in our trading volume and transaction value amounts since the second half of 2018 because of the deteriorating economy in China due to the under-performance of its financial stock markets as well as the fall-out from the P2P (peer-to-peer) lending market. The situation has continued into 2019. 

Total commission revenue increased by $685,833 for the three months ended September 30, 2019 to $939,164 compared to $253,331 for the three months ended September 30, 2018 primarily because our transaction volume increased as a result of our efforts in promoting our existing listed artworks.

(iii)Management fee revenue

We charge traders a management fee to cover the costs of insurance, storage, and transportation for artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. On November 7, 2018 we lowered the minimum charge to $0.0013 (HK$0.01). The management fee is deducted from proceeds from the sale of artwork units.

During the three-month period ended September 30, 2019, management fee revenue increased by $76,523, from $107,905 for the three months ended September 30, 2018 to $184,428, due to the increase in trading transactions.

(iv)Annual fee revenue

During the three-month period ended September 30, 2019, there was no annual fee revenue, compared to $54 for the three-month period ended September 30, 2018

(v)Online artwork sales

During the three-month period ended September 30, 2019, there was no online artwork sales, compared to $2,244 for the three-month period ended September 30, 2018

21

Revenue by customer type

The following table presents our revenue by customer type:

  

Three months ended

September 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Artwork owners $-  $- 
Non - VIP  traders  853,276   140,581 
VIP  traders  270,316   220,709 
Online artwork sales  -   2,244 
Total $1,123,592  $363,534 

Cost of Revenue

  Three months ended
September 30,
 
  2019  2018 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $370,204  $2,094 
Depreciation  116,082   163,736 
Internet service charge  62,104   53,676 
Artwork insurance  12,192   50,983 
Artwork storage  19,700   27,533 
Others  -   1,460 
Total $580,282  $299,482 

Cost of revenue for the three months ended September 30, 2019 and September 30, 2018 was $580,282 and $299,482, respectively. The increase in cost of revenue by $280,800 for the three months ended September 30, 2019 compared to September 30, 2018 was mainly due to higher commission rebates to service agents. The increase in commission rebates by $368,110 correlated to the higher commission revenue earned from transactions during the three months ended September 30, 2019. Such an increase was offset by the decrease in depreciation expense and artwork insurance expense by $47,654 and $38,791, respectively. The fall in depreciation expense was a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018. The reduction in the artwork insurance expense was due to a negotiated discount in our new insurance contract for 2019.

Gross Profit

Gross profit was $543,310 for the three months ended September 30, 2019, compared to $64,052 for the three months ended September 30, 2018. The increase was due to the increase in our total revenue.

As previously discussed, the spike in total revenue was largely attributable to the rise in our commission revenue earned from transactions in the three months ended September 30, 2019. Our commission revenue contributed 83.6% for the quarter ended September 30, 2019 compared to 69.7% in the corresponding period in 2018. Consequently, we posted a gross profit margin of 48.4% for the three months ended September 30, 2019 compared to 17.6% for the same period in 2018.

22

Operating Expenses

General and administrative expenses for the three months ended September 30, 2019 were $1,159,502 compared to $2,208,264 for the three months ended September 30, 2018. The significant plunge in general and administrative expenses by $1,048,762 was attributed to a decrease in salary and welfare by $829,072 due to reduction in force since July 2018, a decrease in traveling and accommodation expenses by $48,427 as a result of fewer marketing events, a decrease in non-deductible input VAT by $4,027, a decrease in consultancy fees by $29,698, share-based compensation by $58,537, depreciation by $45,020 and other expenses by $89,927.

The following table sets forth the main components of our general and administrative expenses for the three months ended September 30, 2019 and 2018.

  Three months ended
September 30, 2019
  Three months ended
September 30, 2018
 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Salary and welfare  405,620   35.0   1,234,692   55.9 
Office, insurance and rental expenses  369,947   31.9   361,402   16.4 
Legal and professional fees  213,263   18.4   165,862   7.5 
Traveling and accommodation fees  28,939   2.5   77,366   3.5 
Non-deductible input VAT expense  40,718   3.5   44,745   2.0 
Consultancy fee  46,494   4.0   76,192   3.5 
Share based compensation expense  6,273   0.5   64,810   2.9 
Depreciation  32,692   2.8   77,712   3.5 
Others  15,556   1.4   105,483   4.8 
Total general and administrative expense $1,159,502   100  $2,208,264   100 

Other expenses

Other expenses for the three-month period ended September 30, 2019 were $520,698 compared to other expenses of $1,004,552 for the same period in 2018. The decrease in other expenses by $483,854 was predominately resulted from a significant decrease in exchange loss by $354,410, arising from the depreciation of Renminbi against US dollar and a decrease in loan interest by $181,806 due to the loan due to a third party paid off in January 2019. Such decrease was offset by decrease in bank interest income by $49,266.

Income tax benefit

The Company’s effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate at 8.25% for the first HKD 2 million (approximately $255,154) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,154) (16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%.

The effective tax rates for the three months ended September 30, 2019 and 2018 were 9.4% and 20.5%, respectively.  

Income taxes benefit for the three months ended September 30, 2019 and 2018 were $117,451 and $742,670, respectively.

Net Loss

We had a net loss for the three months ended September 30, 2019 of $1,127,897 compared net loss of $2,881,356 for the three months ended September 30, 2018.

The decrease in net loss during the three months ended September 30, 2019 was predominately due to a rise in revenue by $760,058, and a decrease in operating expenses by $1,415,566, compared to the three months ended September 30, 2018 as a result of cost-cutting measures. It was also affected by a decrease in exchange losses by $354,410.

We announced on August 13, 2018 the suspension of new listings of artwork. We were on the downside of a downturn in the online fine art and collectibles platform space, a by-product of a downturn in A-shares on the Chinese markets tightening of liquidity in China, declines in both the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We slowly resumed new listings in January 2019 but there were no new listings this quarter. We were focused on resuscitating interest in the trading of our existing artwork and generating more commission revenue.

23

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2019 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018

The following tables set forth our condensed consolidated statements of income data:

  Nine Months Ended    
  September 30,    
  2019  % of
Revenue
  2018  % of
Revenue
 
  (Unaudited)     (Unaudited)    
Revenue $2,285,376   100  $8,191,828   100 
Cost of revenue  (1,288,589)  (56)  (2,173,296)  (27)
Selling expense  (143,054)  (6)  (851,173)  (10)
General and administrative expenses  (3,322,547)  (146)  (7,791,747)  (95)
Impairment loss – construction-in-progress  -   -   (326,227   (4)
Total costs and expenses  (4,754,190)  (208)  (11,142,443)  (136)
Loss from operations  (2,468,814)  (108)  (2,950,615)  (36)
Interest and other expenses, net  (670,885)  (29)  (1,166,045)  (14)
Loss before income taxes  (3,139,699)  (137)  (4,116,660)  (50)
Income tax benefit  175,473   8   574,202   7)
Net loss $(2,964,226)  (129) $(3,542,458)  (43)

Revenue

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

  Nine months ended 
  September 30, 
  2019  2018 
  (Unaudited)  (Unaudited) 
Listing fee revenue $284,090  $3,978,735 
Commission  1,655,244   3,557,411 
Management fee revenue  346,042   455,133 
Authorized agent subscription revenue  -   191,623 
Annual fee revenue  -   378 
Online artwork sales  -   8,548 
Total $2,285,376  $8,191,828 

(i)Listing fee revenue

As of September 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 $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (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 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. 

24

During the nine months ended September 30, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,148,194 (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 charged decreased to $284,090 during the nine months ended September 30, 2019 compared to $3,978,735 for the same period ended September 30, 2018. During the nine months ended September 30, 2019, we suspended new listings of artwork on our platform because we were more focused on promoting the trading of our existing listed artworks and felt that any new listings would be unfavorably impacted by current market conditions. We will also be more discreet about future listings of more valuable artworks. Accordingly, there were no listings during the nine months ended September 30, 2019.

(ii)Commission fee revenue

We generate a 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, which we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). On November 7, 2018, we lowered the minimum charge to $0.0013 (HK$0.01). The commission is accounted for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is complete.

For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee that allows unlimited trades for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each reviewed traders 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 upon the selected traders that receives access to our trading platform to make unlimited trades for specific artworks. 

We defined a selected trader as an inactive trader who meets one of the following criteria:

·The trader has been default in making monthly commission payment over three months.

·The trader has not incurred any sales or purchase transactions in the month of reassessment.

·The offering agent confirms that the respective selected trader is inactive.

Commission rebate programs are offered to traders and service agents. We pay to existing traders 5% of the commission earned from the transactions of new traders referred by them. The rebate was adjusted from 15% to 5%, starting from January 1, 2017. For service agents, we rebate a total of 40% to 60%68% 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. For service agents who have individual referrers referring Traderstraders to us, we will, after rebating such individual referrers 15%5% of the commission earned from the transactions of new Traderstraders they referred, deduct such 15%5% of the commission from the rebates payable to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue. relate.

The rebates and discounts are recognized as a reduction of revenue in the same period the related revenue is recognized.

 

In spite of this, total

Total commission revenue decreased by $172,872 or 10%$1,902,167 for the threenine months ended September 30, 20172019 to $1,496,826$1,655,244 compared to $1,669,698$3,557,411 for the threenine months ended September 30, 20162018 primarily because there were no new listings of artwork on our platform in the change in our commission fee policysecond and the decrease of transaction volume of non VIP tradersthird quarters and non-selected traders. From April 1, 2016 onwards, selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continuethis drove down overall trading activity during this period compared to pay a commission calculated based on a percentage of transaction value of artworks.last year.

  

 (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 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 three-monthnine-month period ended September 30, 2017,2019, management fee revenue decreaseddropped by $378,672,$109,091, from $781,219$455,133 for the threenine months ended September 30, 20162018 to $402,547. From September 1, 2016, we waived management fees for certain VIP Traders. We recognized these promotions as a reduction of revenue, which was recognized upon$346,042, due to the completion of the transactions. Although the listed artworks increased, the management fee decreased by the promotions.decrease in overall trading transactions this period compared to last year.

  

 (iv)Other revenue

During the three-month period ended September 30, 2017, annual fee revenue decreased by $300, from $440 for the three-month period ended September 30, 2016 to $140.

(v) Authorized agent subscription revenue

Authorized agent subscription revenue was nil for the three-month period ended September 30, 2017 compared to $322,318 for the three-month period ended September 30, 2016. We have ceased charging new authorized agent with subscription revenue in order to encourage high quality authorized agent to sign up with our platform.

Cost of Revenue

Cost of revenue for the three months ended September 30, 2017 and 2016 was $292,168 and $285,252, respectively. Our cost of revenue primarily includes internet service fee, depreciation and amortization of hardware and software for our trading platform.


Gross Profit

Gross profit was $3,062,843 for the three months ended September 30, 2017, compared to $5,456,957 for the three months ended September 30, 2016. The decrease was due to the less artworks listed on our platform, the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.

Listing fees contributed 43.4% of the total revenue for the three months ended September 30, 2017 compared to 51.7% in the corresponding period in 2016, while commission revenue contributed 44.6% for the three months ended September 30, 2017 compared to 29% in the corresponding period in 2016. While there was a decrease in commission revenue in the current period, the negative factors were catalyzed by a decrease in listing fees due to less artworks listing on the platform during the current period. Consequently, we posted a comparable gross profit margin of 91% for the three months ended September 30, 2017 compared to 95% for the same period in 2016.

Operating Expenses

Selling expenses were $624,151, or 20% of net sales, for the three months ended September 30, 2017 compared to $652,207, or 12% of net sales, for the comparable period in 2016, a decrease by $28,056. Selling expenses consist primarily of marketing expenses.

General and administrative expenses for the three months ended September 30, 2017 were $2,498,848 compared to $1,744,965 for the three months ended September 30, 2016. The substantial increase was primarily due to an increase in salaries by $258,469 because of an increase in employee headcount, accrual of doubtful account by $241,248, office, insurance and rental expense by $141,281 and an increase in travelling expenses by $116,220 which were incurred to attend to the listing of our common stock on the NYSE American.

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2017 and 2016.

  Three months ended
September 30, 2017
  Three months ended
September 30, 2016
 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Consultancy fee $46,059   2% $92,809   5%
Legal and professional fees  218,066   9%  247,278   14%
Salary and welfare  1,008,736   40%  750,267   43%
Office, insurance and rental expenses  430,047   17%  288,766   17%
Non-deductible input VAT expenses  6,924   0%  -   -%
Traveling and accommodation fees  187,780   8%  71,560   4%
Share-based compensation  138,161   6%  186,928   11%
Bad debt expenses  241,248   10%  -   -%
Others  221,827   8%  107,357   6%
Total general and administrative expenses $2,498,848   100.0% $1,744,965   100.0%

Net Income

We had a net income for the three months ended September 30, 2017 of $27,034 compared to net income of $2,451,737 for the three months ended September 30, 2016.

The decrease in net income by $2,424,703 during this current period was primarily due to a decrease of revenue by $2,387,198 as discussed in the previous paragraphs.


NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2017 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2016

Revenue

The following tables set forth our condensed consolidated statements of income data:

  Nine Months Ended
September 30,
 
  2017  2016 
  (Unaudited)  (Unaudited) 
Revenue $10,545,677  $14,214,252 
Cost of revenue  (822,335)  (822,735)
Selling expense  (1,272,010)  (1,993,782)
General and administrative expenses  (7,311,128)  (5,076,689)
Total costs and expenses  (9,405,473)  (7,893,206)
Income from operations  1,140,204   6,321,046 
Interest and other income (loss), net  511,311   (279,336)
Income before income taxes  1,651,515   6,041,710 
Income tax expense  (594,377)  (1,377,078)
Net income $1,057,138  $4,664,632 

The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue):

  Nine Months Ended
September 30,
 
  2017  2016 
  (Unaudited)  (Unaudited) 
Revenue  100%  100%
   Cost of revenue – Direct revenue  (8)  (6)
   Selling expense  (12)  (14)
   General and administrative expenses  (69)  (36)
Total costs and expenses  (89)  (56)
Income from operations  11   44 
Interest and other income (loss), net  5   (2)
Income before income taxes  16   42 
Income tax expense  (6)  (10)
Net income  10%  32%

Listing fee revenue was $4,606,649 and $8,166,072; commission revenue was $4,970,651 and $3,739,958, gross management fee revenue was $967,518 and $1,341,294, annual fee revenue was $859 and $869, authorized agent subscription revenue was $nil and $966,059, for the nine months ended September 30, 2017 and 2016, respectively.

(i)ListingAnnual fee revenue

 

During the nine months ended September 30, 2017, there were 49 sets of artwork listed for trade on our platform —comprising 8 sets of paintings and calligraphies, with a total listing value of $2,632,356 (HK$20,500,000), 16 pieces of jewelry with a total listing value of $5,567,754 (HK$43,360,000), 23 pieces of precious stones with a total listing value of $3,212,759 (HK$25,020,000), 1 piece of porcelains with a total listing value of $38,522 (HK$300,000) and 1 set of Unit+ product which was listed in Unit+ trading platform, with a total listing value of $152,548 (HK$1,188,000), of which 41.5%-47% (for 8 sets of paintings and calligraphies), 33.5%-48% (for the 16 pieces of jewelry), 26%-47% (for the 23 pieces of precious stones), 46% (for the 1 pieces of porcelains) and 43% (for the 1 set of Unit+ product) of the listed values were charged as listing fees, respectively.


Compared to the correspondingnine-month period ended September 30, 2016,2019, there were 15 pieces of painting, 59 pieces of precious stones, 11 pieces of jewelry, 3 pieces of ivory, 18 pieces of amber and 2 pieces of porcelain pastel paintings successfully listed on our system. The total listing values were $3,349,005 (HK$26,000,000)was no annual fee revenue, compared to $378 for the 15 pieces of painting, $5,744,832 (HK$44,600,000) for the 59 pieces of precious stones, $1,816,191 (HK$14,100,000) for the 11 pieces of jewelry, $515,232 (HK$4,000,000) for the 3 pieces of ivory, $7,239,003 (HK$56,200,000) for the 18 pieces of amber, and $334,900 (HK$2,600,000) for the 2 pieces of porcelain pastel paintings, of which 47.75%-48% (for the 15 pieces of painting), 29%-48.5% (for the 59 pieces of precious stones), 29%-48% (for the 11 pieces of jewelry), 47% (for the 3 pieces of ivory), 45%-48% (for the 18 pieces of amber), and 45%-46% (for 2 pieces of porcelain pastel paintings ) of the relevant listed values were charged as listing fees, respectively.

The decrease in number of pieces listed, listing values and corresponding listing fees charged during the nine months ended September 30, 2017 compared to the samenine-month period ended September 30, 2016 resulted in a decrease in listing fee revenue in the current period. The decrease in number of pieces listed was due to a new listing category (A-tier) implemented on July 3, 2017. A-tier is aim to meet an elevated set of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore, the rigorous listing requirements of A-tier led some artworks listing deferred.2018.

25

  

 (ii)(v)Commission fee revenue

Our trading volume and transaction value amounts increased significantly from 2015 when we commenced operations in Shanghai and consequently added a significant number of Traders from mainland China as they could now settle their trades in Renminbi. This trend continued into 2017. Trading volume increased by 193% and trading amount increased by 178% for the nine months ended September 30, 2017 compared to corresponding period in 2016.

In spite of this, total commission revenue increased by $1,230,693 or 33% for the nine months ended September 30, 2017 to $4,970,651 compared to $3,739,958 for the nine months ended September 30, 2016 primarily because of the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders . From April 1, 2016 onwards, selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.

(iii)Management fee revenue

During the nine month period ended September 30, 2017, management fee revenue decreased by $373,776, from $1,341,294 for the nine months ended September 30, 2016 to $967,518. From September 1, 2016, we waived management fees for certain VIP Traders. We recognized these promotions as a reduction of revenue, which was recognized upon the completion of the transactions.

(iv)OtherAuthorized agent subscription revenue

 

During the nine-month period ended September 30, 2017, annual fee2019, there was no authorized agent subscription revenue, increased by $10, from $869compared to $191,623 for the nine-month period ended September 30, 2016 to $859.2018.

 

(v) Authorized agent subscription revenue

(vi)Online artwork sales

 

Authorized agent subscription revenueDuring the nine-month period ended September 30, 2019, there were no online artwork sales, compared to $8,548 for the nine-month period ended September 30, 2017 was nil compared to $966,059 for the nine-month period ended September 30, 2016. We have ceased charging new authorized agent with subscription revenue in order to encourage high quality authorized agent to sign up with2018 because we shut down online artwork sales on our platform.

Revenue by customer type

The following table presents our revenue by customer type:

  

Nine months ended

September 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Artwork owners $284,090  $3,978,735 
Non - VIP  traders  1,494,066   2,235,789 
VIP  traders  507,220   1,777,133 
Authorized agents  -   191,623 
Online artwork sales  -   8,548 
Total $2,285,376  $8,191,828 

 

Cost of Revenue

  Nine months ended
September 30,
 
  2019  2018 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $660,208  $1,207,104 
Depreciation  359,878   491,297 
Internet service charge  159,882   240,165 
Artwork insurance  36,124   155,635 
Artwork storage  72,033   74,110 
Others  464   4,985 
Total $1,288,589  $2,173,296 

 

Cost of revenue for the nine months ended September 30, 20172019 and 2016September 30, 2018 was $822,335$1,288,589 and $822,735,$2,173,296, respectively. OurThe decrease in cost of revenue primarily includes internetfor the nine months ended September 30, 2019 compared to September 30, 2018, was mainly due to the decrease in the commission rebates to service fee,agents by $546,896. Management focused on resuscitating interest in listed artwork and no new artwork had been listed since the second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of revenue was also due to a fall in the depreciation and amortization of hardware and software foron our trading platform.


Inplatform by $131,419 as a result of the third quartersuspension of 2014, we entered into an agreement with a third party service provider, Shenzhen Qianrong Cultural Investment Development Co., Ltd (“Qianrong”), to providee-commerce activity and impairment of all online software development assets in 2018, the decline in internet services withcharges by $80,283 due to the termination of two network lines between Macau and Hong Kong, the decrease in artwork insurance expense by $119,511 due to a totalnegotiated discount in our new insurance contract amount of $902,592 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades2019, the decrease in artwork storage fee by $2,077 and new functionalities. As of September 30, 2017 and 2016, nine out of the ten modules have been completed and are operational. We capitalized (with a total cost of $1,069,853 (HK$8,295,000)) and amortized these costs once the modules were completed.drop in other expenses by $4,521.

 

Gross Profit

 

Gross profit was $9,723,342$996,787 for the nine months ended September 30, 2017,2019, compared to $13,391,517$6,018,532 for the nine months ended September 30, 2016.2018. The decrease was mainly due to the less artworks listed on our platform, the changesignificant decline in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.total revenue.

 

Operating Expenses

Selling expenses were $1,272,010, or 13% of net sales,Overall total revenue for the nine months ended September 30, 20172019 dropped by $5,906,452 or 72.1% compared to $1,993,782 or 15%the same period in 2018. Compared to the same period in 2018, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a gross profit margin of net sales,43.6% for the comparablenine months ended September 30, 2019 compared to 73.5% for the same period in 2016, a decrease by 36%. Selling expenses consist primarily of marketing expenses.

2018.

 

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Operating Expenses

General and administrative expenses for the nine months ended September 30, 20172019 were $7,311,128$3,322,547, compared to $5,076,689$7,791,747 for the nine months ended September 30, 2016.2018. The substantial increasesignificant plunge in general and administrative expense by $2,234,439 or 44%$4,469,200 was chieflyattributed to a decrease in salary and welfare by $2,615,446 due to an increasereduction in salaries by $1,314,324 because of an increaseforce since July 2018, a decrease in employee headcount, accrual of doubtful accounts, by $241,248, office, insurance and rental expenses by $400,067$525,728 due to the relocation of our Hong Kong office to a non-central district, a decrease in legal and an increaseprofessional fees by $159,147, a decrease in travellingtraveling and accommodation expenses by $495,715 which were incurred to attend to the listing$463,758 as a result of our common stock on the NYSE American.

fewer marketing events, a decrease in non-deductible input VAT by $207,649, a decrease in consultancy fees by $71,853, share-based compensation by $180,347, depreciation by $119,273 and also other expenses by $202,401.

  

The following table sets forth the main components of the Company’sour general and administrative expenses for the nine months ended September 30, 20172019 and 2016.September 30, 2018.

  Nine months ended
September 30, 2019
  Nine months ended
September 30, 2018
 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Salary and welfare  1,283,486   38.6%  3,898,932   50.0%
Office, insurance and rental expenses  697,629   21.0%  1,223,357   15.7%
Legal and professional fees  595,903   18.0%  755,050   9.7%
Traveling and accommodation fees  81,282   2.4%  545,040   7.0%
Non-deductible input VAT expense  130,316   3.9%  337,965   4.3%
Consultancy  218,929   6.6%  290,782   3.7%
Share based compensation  36,884   1.1%  217,231   2.8%
Depreciation  103,363   3.1%  222,636   2.9%
Bad debt expense  -   -%  (76,402)  (1.0)%
Other  174,755   5.3%  377,156   4.9%
Total general and administrative expense $3,322,547   100.0% $7,791,747   100.0%

Other expenses

Other expenses for the nine months ended September 30, 2019 were $670,885, compared to $1,166,045 for the nine months ended September 30, 2018. The decrease in other expenses by $495,160 was primarily driven by the decrease in exchange loss by $568,277, due to the appreciation of Renminbi against US dollar and drop in loan interest by $486,272 due to a third-party loan being paid off in January 2019, offset by an increase in sundry expense by $357,053, a decrease in bank interest income by $132,218 and a loss in fixed asset disposal incurred in the nine months ended September 30, 2019 by $57,295.

 

Income tax benefit (expenses)

  Nine months ended
September 30, 2017
  Nine months ended
September 30, 2016
 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Consultancy fee $187,230   3% $361,610   7%
Legal and professional fees  733,466   10%  728,856   14%
Salary and welfare  3,166,679   43%  1,852,355   36%
Office, insurance and rental expenses  1,252,561   17%  852,494   17%
Non-deductible input VAT expense  16,369   -%  -   -%
Traveling and accommodation fees  679,950   9%  184,235   4%
Share-based compensation  562,184   8%  846,703   17%
Bad debt expenses  241,248   4%  -   -%
Others  471,441   6%  250,436   5%
Total general and administrative expenses $7,311,128   100.0% $5,076,689   100.0%

The Company's effective tax rate varies due to its multiple jurisdictions where pre-tax income or losses occur. The Company is subject to a Hong Kong profits tax rate at 8.25% for the first HKD 2 million (approximately $255,154) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,154) (16.5% prior to January 1, 2018), PRC enterprise income tax rate at 25% and U.S. income tax rate of 21% (34% prior to January 1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017).

 

The effective tax rates for the nine months ended September 30, 2019 and 2018 were 5.6% and 13.9%, respectively.

Income taxes benefit for the nine months ended September 30, 2019 and 2018 were $175,473 and $574,202, respectively.

Net Incomeloss

 

We had a net incomeloss for the nine months ended September 30, 20172019 of $1,057,138$2,964,226 compared to a net incomeloss of $4,664,632$3,542,458 for the nine months ended September 30, 2016.

2018. The decrease inlower net income by $3,607,494 during this current period was due to a fall of revenue by $3,668,575, and the increase of general and administrative expenses by $2,234,439 as discussedloss incurred in the previous paragraphs.nine months ended September 30, 2019, compared to the same period in 2018, resulted from a lower operating expenses and exchange loss in the current period.


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Liquidity and Capital Resources

 

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

 

  Nine months ended 
  September 30, 
  2019  2018 
  (Unaudited)  (Unaudited) 
Net cash provided by (used in) operating activities $10,828,217  $(18,589,823)
Net cash provided by (used in) investing activities  313,588   (4,377,285)
Net cash (used in) provided by financing activities  (537,605)  2,425,220 
Effect of exchange rate change on cash and cash equivalents  (33,398)  (664,016)
Net increase (decrease) in cash, cash equivalents and restricted cash  10,570,802   (21,205,904)
Cash, cash equivalents and restricted cash, beginning balance  12,524,086   37,140,582 
Cash, cash equivalents and restricted cash, ending balance $23,094,888  $15,934,678 

  Nine months ended September 30 
  2017  2016 
  (Unaudited)  (Unaudited) 
Net cash provided by operating activities $1, 028,524  $5,635,391 
Net cash used in investing activities  (561,510)  (1,276,378)
Net cash provided by financing activities  -   2,346,941 
Effect of exchange rate change on cash and cash equivalents  1,025,539   (644,375)
Net increase in cash and cash equivalents  1,492,553   6,061,579 
Cash and cash equivalents, beginning balance  13,395,337   10,769,456 
Cash and cash equivalents, ending balance $14,887,890  $16,831,035 

Sources of Liquidity

 

During the nine months ended September 30, 2017,2019, net cash generated from operating activities totaled $1,028,524.$10,828,217 which resulted from the implementation of ASU2016-18 since the beginning of 2018. In fact, there was an increase in client deposits by $12,459,049 placed by the customers for upcoming transactions which influenced the increased amounts due to clients simultaneously. The Company assessed and evaluated that it was truly a presentation issue and there should be no actual impact to the operating activities. Net cash generated from investing activities totaled $313,588. Net cash used in investingfinancing activities totaled $561,510. No cash was generated from financing activities during the period.$537,605. The resulting change in cash for the period was an increase of $1,492,553.$10,570,802. The cash balance at the beginning of the period was $13,395,337.$12,524,086. The cash balance on September 30, 20172019 was $14,887,890.$23,094,888.

 

During the nine months ended September 30, 2016,2018, net cash provided byused in operating activities totaled $5,635,391.$18,589,823 and it was resulted in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity due to the adoption of ASU2016-18 since beginning of 2018. The reduction in net cash in operating activities was predominately triggered by a decline in client deposits by $17,757,757 which influenced the fall in the amount due to clients simultaneously. The Company assessed and evaluated it was rather a presentation issue and there should have no actual impact to the operating activities. Net cash used in investing activities totaled $1,276,378.$4,377,285. Net cash provided bygenerated from financing activities totaled $2,346,941.$2,425,220. The resulting change in cash for the period was an increasea decrease of $6,061,579.$21,205,904. The cash balance at the beginning of the period was $10,769,456.$37,140,582. The cash balance on September 30, 20162018 was $16,831,035.$15,934,678.

 

As of September 30, 2017,2019, the Company had $28,390,798$26,298,905 in total current liabilities, which comprised of $780,800$522,929 in accrued expense and other payables, $19,057,733$17,008,251 in customers’ deposits, $6,371,900$10,227 in advance from customer, $6,759,674 in amount due to related parties, $1,816,837 in loan from a third party, $173,156 in lease liabilities and $7,831 in tax payables. As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included $641,692 in accrued expenses and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500 in short-term borrowings from third parties, $1,085,480$6,385,288 in amount due to related party, and $1,094,885 in tax payables. As of December 31, 2016, the Company had $30,602,706 in total current liabilities, which included $608,883 in accrued expense and other accruals, $21,743,360 in customers’ deposits, $360,248 in advance from customers, $6,308,513 in short-term borrowings from third parties, $1,031,805 in amount due to related party and $549,897$15,101 in tax payables.

  

The Company had deferred tax liabilities as long-term liability of $45,301 as of September 30, 2017, and $62,618 as of December 31, 2016, respectively. The Company’s total liabilities as of September 30, 2017 and December 31, 2016 amounted to $28,436,099 and $30,665,324, respectively.


The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RenminbiRMB is only currently convertible under the “current account”,"current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”,"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-foreignwholly foreign owned enterprises, may purchase foreign currency for settlement of “current"current account transactions”,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.

 

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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

 

WeAlthough we are suffering downside business including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring, including re-evaluating the Company’s core business and a downsizing of its workforce. Our management forecasts that we have always been generating sufficient cash from our operationoperations to fund our business organically. However, we may conduct equity sales of our shares of common sharesstock 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, orand 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, 2016,2018, 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, 2016,2018, previously filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 


Item 4. Controls and Procedures.

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, Mr. Di XiaoMs. Fang Mu and our Chief Financial Officer, Mr. Chun Hin Leslie Chow.Jehn Ming Lim. 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 September 30, 20172019 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 September 30, 20172019 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

27 

29

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

Item 6.Exhibits.

 

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

 

Exhibit
No.
 Description
   
3.1 Certificate of Incorporation (1)
3.2��By-laws of the Company (1)(2)
3.3 Certificate of Amendment of the Certificate of Incorporation (1)
3.4 Certificate of Amendment of the Certificate of Incorporation (1)
3.5 Certificate of Amendment (2)
3.6 Certificate of Amendment of the Certificate of Incorporation (4)
3.7 Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
3.8 Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)

3.9Certificate of Change of Name of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.*

31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Label Linkbase Document*
101.PRE XBRL Taxonomy Presentation Linkbase Document*

  

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

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

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

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

 

*Filed herewith.

**Furnished herewith.

 


30

SIGNATURES

 

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

 

 TAKUNG ART CO., LTD
   
Date: November 14, 20172019By:/s/ Di XiaoFang Mu
  Di XiaoFang Mu
  Chief Executive Officer
  (Principal Executive Officer) and Director
   
Date: November 14, 20172019By:/s/ Chun Hin Leslie ChowJehn Ming Lim
  Chun Hin Leslie ChowJehn Ming Lim
  Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)


31