UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
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 class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | TKAT | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.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 | Smaller 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, 2017June 29, 2020 is 11,188,882.11,271,379.
EXPLANATORY NOTE
Takung Art Co., Ltd and subsidiaries (“Takung” or the “Company”) is filing this quarterly report on Form 10-Q after the May 15, 2020 (the “Original Due Date”) deadline applicable to it for the filing of a Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”) in reliance on the 45-day extension provided by an order issued by the U.S. Securities and Exchange Commission (the “SEC”) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), dated March 4, 2020 (Release No. 34-88318), as modified and superseded by a new SEC order issued on March 25, 2020 (Release No. 34-88465) (collectively, the “Order”).
On May 12, 2020, the Company filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with its statements made in the Form 8-K, the Company was unable to file the Quarterly Report by the Original Due Date, and therefore relied on the Order. Due to the circumstances and uncertainty surrounding the effects of the COVID-19 pandemic on the business, employees, consultants and service providers of the Company, and considering the lack of time for the compilation, dissemination and review of the information required to be presented and the importance of markets and investors receiving materially accurate information in the Quarterly Report, the Quarterly Report is hereby filed before the extended due date permitted under the Order, i.e., 45 days after the Original Due Date, or June 29, 2020.
FORM 10-Q
TAKUNG ART CO,CO., LTD
INDEX
2
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars except Number of Shares)
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 5,062,253 | $ | 5,424,213 | ||||
Restricted cash | 15,466,438 | 16,404,941 | ||||||
Account receivables, net | 154,813 | - | ||||||
Prepayment and other current assets, net | 311,103 | 451,248 | ||||||
Amount due from a related party | - | 5,834,554 | ||||||
Loan receivables | 1,977,178 | 2,010,974 | ||||||
Total current assets | 22,971,785 | 30,125,930 | ||||||
Non-current assets | ||||||||
Property and equipment, net | 727,443 | 859,826 | ||||||
Intangible assets | 22,510 | 22,401 | ||||||
Deferred tax assets, net | 557,136 | 540,279 | ||||||
Operating lease right-of-use assets | 582,121 | 731,469 | ||||||
Amount due from related parties | 5,838,877 | 104,128 | ||||||
Other non-current assets | 57,675 | 57,470 | ||||||
Total non-current assets | 7,785,762 | 2,315,573 | ||||||
Total assets | $ | 30,757,547 | $ | 32,441,503 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accrued expenses and other payables | $ | 831,399 | $ | 629,666 | ||||
Customer deposits | 15,466,438 | 16,404,941 | ||||||
Advance from customers | 16,364 | 8,788 | ||||||
Short-term borrowings from a third party | 1,916,540 | 1,868,345 | ||||||
Amount due to related parties | 383,638 | 6,862,713 | ||||||
Operating lease liabilities – current | 132,348 | 166,987 | ||||||
Tax payables | 22,274 | 6,050 | ||||||
Total current liabilities | 18,769,001 | 25,947,490 | ||||||
Non-current liabilities | ||||||||
Operating lease liabilities, non-current | 49,002 | 48,856 | ||||||
Amount due to a related party, non-current | 6,450,531 | - | ||||||
Total non-current liabilities | 6,499,533 | 48,856 | ||||||
Total liabilities | 25,268,534 | 25,996,346 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of March 31, 2020; 11,255,129 shares issued and outstanding as of December 31, 2019) | 11,255 | 11,255 | ||||||
Additional paid-in capital | 6,326,590 | 6,320,604 | ||||||
(Accumulated deficit) retained earnings | (567,035 | ) | 386,327 | |||||
Accumulated other comprehensive loss | (281,797 | ) | (273,029 | ) | ||||
Total shareholders’ equity | 5,489,013 | 6,445,157 | ||||||
Total liabilities and shareholders’ equity | $ | 30,757,547 | $ | 32,441,503 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | March 31, | |||||||
2020 | 2019 | |||||||
Revenue | ||||||||
Listing fee | $ | 176,943 | $ | 289,072 | ||||
Commission | 900,823 | 178,358 | ||||||
Management fee | 103,520 | 68,271 | ||||||
Total revenue | 1,181,286 | 535,701 | ||||||
Cost of revenue | (656,514 | ) | (267,279 | ) | ||||
Gross profit | 524,772 | 268,422 | ||||||
Operating expenses | ||||||||
General and administrative expenses | (1,110,447 | ) | (1,274,585 | ) | ||||
Selling expenses | (42,989 | ) | (30,812 | ) | ||||
Total operating expenses | (1,153,436 | ) | (1,305,397 | ) | ||||
Loss from operations | (628,664 | ) | (1,036,975 | ) | ||||
Other income and expenses: | ||||||||
Other income (expenses) | 38,305 | (21,990 | ) | |||||
Loan interest expense | (38,913 | ) | - | |||||
Exchange (loss) gain | (236,695 | ) | 358,734 | |||||
Total other (expenses) income | (237,303 | ) | 336,744 | |||||
Loss before income tax expense | (865,967 | ) | (700,231 | ) | ||||
Income tax expense | (87,395 | ) | (8,562 | ) | ||||
Net loss | (953,362 | ) | (708,793 | ) | ||||
Foreign currency translation adjustment | (8,768 | ) | (5,480 | ) | ||||
Comprehensive loss | $ | (962,130 | ) | $ | (714,273 | ) | ||
Loss per common share – basic | $ | (0.08 | ) | $ | (0.06 | ) | ||
Loss per common share – diluted | $ | (0.08 | ) | $ | (0.06 | ) | ||
Weighted average number of common shares outstanding –basic | 11,255,129 | 11,226,025 | ||||||
Weighted average number of common shares outstanding –diluted | 11,255,129 | 11,226,025 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUTIY
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
Number | Common | Additional Paid-in | Retained earnings (accumulated | Accumulated other comprehensive | ||||||||||||||||||||
of shares | stock | capital | deficit) | loss | Total | |||||||||||||||||||
Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||
Shared-based compensation | - | - | 5,986 | - | - | 5,986 | ||||||||||||||||||
Net loss | - | - | - | (953,362 | ) | - | (953,362 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (8,768 | ) | (8,768 | ) | ||||||||||||||||
Balance, March 31, 2020 | 11,255,129 | $ | 11,255 | 6,326,590 | (567,035 | ) | (281,797 | ) | 5,489,013 |
Number | Common | Additional Paid-in | Retained | Accumulated other comprehensive | ||||||||||||||||||||
of shares | stock | capital | earnings | loss | Total | |||||||||||||||||||
Balance, December 31, 2018 | 11,226,025 | 11,226 | 6,281,790 | 4,479,133 | (302,702 | ) | 10,469,447 | |||||||||||||||||
Shared-based compensation | - | - | 16,851 | - | - | 16,851 | ||||||||||||||||||
Net loss | - | - | - | (708,793 | ) | - | (708,793 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (5,480 | ) | (5,480 | ) | ||||||||||||||||
Balance, March 31, 2019 | 11,226,025 | 11,226 | 6,298,641 | 3,770,340 | (308,182 | ) | 9,772,025 |
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
(UNAUDITED)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 14,887,890 | $ | 13,395,337 | ||||
Restricted cash | 19,057,733 | 21,743,360 | ||||||
Account receivables, net | 3,732,569 | 3,058,568 | ||||||
Prepayment and other current assets | 870,231 | 968,446 | ||||||
Loan receivables | 6,806,623 | 6,374,046 | ||||||
Total current assets | 45,355,046 | 45,539,757 | ||||||
Non-current assets | ||||||||
Property and equipment, net | 2,104,107 | 2,065,182 | ||||||
Intangible assets | 20,394 | 20,546 | ||||||
Deferred tax assets | 294,676 | 243,772 | ||||||
Other non-current assets | 535,420 | 428,764 | ||||||
Total non-current assets | 2,954,597 | 2,758,264 | ||||||
Total assets | $ | 48,309,643 | $ | 48,298,021 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accrued expenses and other payables | $ | 780,800 | $ | 608,883 | ||||
Customer deposits | 19,057,733 | 21,743,360 | ||||||
Advance from customers | - | 360,248 | ||||||
Short-term borrowings from third parties | 6,371,900 | 6,308,513 | ||||||
Amount due to related party | 1,085,480 | 1,031,805 | ||||||
Taxes payable | 1,094,885 | 549,897 | ||||||
Total current liabilities | 28,390,798 | 30,602,706 | ||||||
Deferred tax liabilities | 45,301 | 62,618 | ||||||
Total non-current liabilities | 45,301 | 62,618 | ||||||
Total liabilities | 28,436,099 | 30,665,324 | ||||||
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 | ||||||
Additional paid-in capital | 5,928,455 | 5,532,426 | ||||||
Retained earnings | 14, 229,809 | 13,172,671 | ||||||
Accumulated other comprehensive loss | (295,909 | ) | (1,083,569 | ) | ||||
Total stockholders’ equity | 19,873,544 | 17,632,697 | ||||||
Total liabilities and stockholders’ equity | $ | 48,309,643 | $ | 48,298,021 |
Three Months Ended | ||||||||
March 31, | March 31, | |||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net cash (used in) provided by operating activities | (1,214,913 | ) | 6,175,680 | |||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | - | (27,233 | ) | |||||
Purchase of available-for-sale investments | - | (10,633,534 | ) | |||||
Maturity and redemption of available-for-sale investments | - | 10,633,534 | ||||||
Repayment from loan to third party | - | 2,443,252 | ||||||
Net cash provided by investing activities | - | 2,416,019 | ||||||
Cash flows from financing activities: | ||||||||
Repayment of loan from third party | - | (2,499,500 | ) | |||||
Net cash used in financing activities | - | (2,499,500 | ) | |||||
Effect of exchange rate change on cash, cash equivalents and restricted cash | (85,550 | ) | (503,119 | ) | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (1,300,463 | ) | 5,589,080 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 20,528,691 | $ | 18,113,166 | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||||||||
Cash and cash equivalents as of March 31, 2020 and 2019, respectively | 5,062,253 | 7,740,711 | ||||||
Restricted cash as of March 31, 2020 and 2019, respectively | 15,466,438 | 10,372,455 | ||||||
Total cash, cash equivalents, and restricted cash as of March 31, 2020 and 2019, respectively | 20,528,691 | 18,113,166 | ||||||
Supplemental cash flows information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax | $ | - | $ | - |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(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 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT 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.
5
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd and Subsidiaries (“Takung”, 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 and ourits wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering and trading artwork. For the period from September 17, 2012 (inception) to December 31, 2012, there was no operation except the issuance of shares for subscription receivable. We generateThe 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 business primarily in Hong Kong, People’s Republic of China.
Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Tianjin 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 Pilot Free Trade Zone. Tianjin Takung was incorporated on January 27, 2016.
Tianjin Takung provides technology supportdevelopment services to Hong Kong Takung and Shanghai Takung and also carries out marketing and promotion activities in mainland China. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung when Shanghai Takung was deregistered.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork.
Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing its e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.
Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities and promoting its artwork trading business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2016,2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 2017March 31, 2020 and for the three months ended March 31, 2020 and nine months ended September 30, 2017 and 20162019 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, 2016,2019, previously filed with the SEC.
Beginning in the quarter ended March 31, 2020, a strain of coronavirus (COVID-19) has spread globally and at this point, the extent to which the COVID-19 may impact operations of the Company is uncertain. The extent of the impact of the coronavirus on the Company's business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the three months ended March 31, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. dollars.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,March 31, 2020, its interim condensed consolidated results of operations and cash flows for the nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016,2019, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Recent Accounting Pronouncements
Except for the ASUs issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial statements upon adoption.
3. PREPAYMENT AND OTHER CURRENT ASSETS, NET
Prepayment and other current assets mainly consist of the prepaid tax, 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.
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Prepaid tax | $ | 181,068 | $ | 281,582 | ||||
Prepaid service fees | 101,695 | 132,064 | ||||||
Short-term borrowings to a third party | 54,184 | 53,919 | ||||||
Staff advance | 22,892 | 18,380 | ||||||
Deposit | 311 | 316 | ||||||
Other current assets | 5,137 | 18,906 | ||||||
Less: allowance for doubtful accounts | (54,184 | ) | (53,919 | ) | ||||
Prepayment and other current assets, net | $ | 311,103 | $ | 451,248 |
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 |
No provision for doubtful accounts was recognized for the three months ended March 31, 2020 and 2019.
4. ACCOUNT RECEIVABLES, NET
Account receivables consisted of the following:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Listing fee | $ | 1,562,924 | $ | 1,403,255 | $ | 154,813 | $ | - | ||||||||
Authorized agent subscription revenue | 924,100 | 995,453 | 563,537 | 560,780 | ||||||||||||
Monthly commission fee | 1,422,750 | 605,677 | 1,392,229 | 1,385,420 | ||||||||||||
Others | 63,323 | 54,183 | 54,174 | 53,909 | ||||||||||||
Less: allowance for doubtful accounts | (240,528 | ) | - | (2,009,940 | ) | (2,000,109 | ) | |||||||||
Account receivables, net | $ | 3,732,569 | $ | 3,058,568 | $ | 154,813 | $ | - |
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 debtNo provision of $240,528for doubtful accounts was recognized for the three and nine months ended September 30, 2017.
March 31, 2020 and 2019.
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, (USD) | December 31, (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 |
All the transactions were aimed to meet the Company’s working capital needs in US Dollar, which is freely convertible to Hong Kong Dollar.
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 | $ | 706,135 | 0 | % | 7/17/2020 | |||||||||||||||
8/29/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 706,135 | 0 | % | 8/28/2020 | |||||||||||||||
9/20/2019 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | $ | 564,908 | 0 | % | 9/19/2020 | |||||||||||||||
Total | $ | 1,977,178 |
Hong Kong Takung entered into loan agreements (the “US Dollar“HKD 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.
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 US DollarHKD Loans are “secured” by the RMB Loans. It is the understanding between the parties that the HKD Loans and the RMB Loans will be repaid simultaneously.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Furniture, fixtures and equipment | $ | 199,091 | $ | 201,093 | ||||
Leasehold improvements | 342,465 | 343,697 | ||||||
Computer trading and clearing system | 3,375,544 | 3,379,654 | ||||||
Transport equipment | 101,594 | 103,330 | ||||||
Sub-total | 4,018,694 | 4,027,774 | ||||||
Less: accumulated depreciation | (3,291,251 | ) | (3,167,948 | ) | ||||
Property and equipment, net | $ | 727,443 | $ | 859,826 |
Depreciation expense was $127,930 and $156,779 for the three months ended March 31, 2020 and 2019, respectively.
7. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of March 31, 2020 and December 31, 2019 consisted of the following:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Accruals for professional fees | 434,650 | 168,040 | ||||||
Accruals for consulting fees | $ | 267,499 | $ | 311,122 | ||||
Payroll payables | 33,105 | 79,710 | ||||||
Trading and clearing system | 50,543 | 50,295 | ||||||
Other payables | 45,602 | 20,499 | ||||||
Total accrued expenses and other payables | $ | 831,399 | $ | 629,666 |
8. SHORT-TERM BORROWINGS FROM A THIRD PARTY
In July 2019, Hong Kong Takung entered into loan agreements (the “HKD Loans”) with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum. The HKD Loans are to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company.
In the meantime, Tianjin Takung entered interest-free loan (the “RMB Loans”) to another third party as a guarantee for the HKD Loans. The loan amount was $1,977,178 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loans are “secured” by the RMB Loans. It is an understanding between the parties that when the US DollarHKD Loans are repaid, the RMB Loans will be repaid at the same time.
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 |
Depreciation expense amounted to $190,626 and $133,608 for the three months ended September 30, 2017 and 2016, respectively, and $538,532 and $373,308 for the nine months ended September 30, 2017 and 2016, respectively.
7.ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of September 30, 2017 and December 31, 2016 consisted of:
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 |
8. SHORT-TERM BORROWINGS FROM THIRD PARTIES
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 are to provide Hong Kong Takung with sufficient US Dollar-denominated currency to meet its working capital requirements. It 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. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.
Date | Borrower | Lender | March 31, 2020 (USD) | December 31, 2019 (USD) | Annual Interest Rate | Repayment Due Date | ||||||||||||||||
7/18/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 718,322 | $ | 714,808 | 8 | % | 7/17/2020 | |||||||||||||
8/29/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 699,624 | $ | 696,202 | 8 | % | 8/28/2020 | |||||||||||||
9/20/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 559,699 | $ | 556,961 | 8 | % | 9/19/2020 | |||||||||||||
Less: Discount loan payable | $ | (61,105 | ) | $ | (99,626 | ) | ||||||||||||||||
Total | $ | 1,916,540 | $ | 1,868,345 |
The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2017 and DecemberMarch 31, 2016.2020. The fair valuesvalue of the short-term borrowings approximateapproximates their carrying amounts. The weighted average short-term borrowing was $6,419,099borrowings were $1,916,540 and $1,678,803$686,884 for the ninethree months period ended September 30, 2017March 31, 2020 and the year ended December 31, 2016,2019, respectively. The interest expenses for the short-term borrowings were $133,174$38,913 and $62,670$nil for the three months ended September 30, 2017March 31, 2020 and 2016, respectively and $394,295 and $62,670 for the nine months ended September 30, 2017 and 2016,2019, 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) Jianping Mao (“Mao”), the wife of the Vice General ManagerHuman Resources Management Director of Hong Kong Takung.
(b) Shuhai Li (“Li”), the legal representative of Tianjin Takung, resigned on April 3, 2020.
(c) Jing Wang (“Wang”), the Chief Financial Officer of the Company since June 1, 2020 and the legal representative of Tianjin Takung since May 28, 2020.
Amount due from related parties
Amount due from related parties consisted of the following as of the years indicated:
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b)(i) | - | 5,834,554 | ||||||
Total current amount due from a related party | $ | - | $ | 5,834,554 |
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b)(i) | 5,736,499 | - | ||||||
Mao (a) (ii) | $ | 102,378 | $ | 104,128 | ||||
Total noncurrent amount due from related parties | $ | 5,838,877 | $ | 104,128 |
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 |
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b) (i) | - | 6,418,980 | ||||||
Mao (a) (ii) | 383,638 | 443,733 | ||||||
Total current amount due to related parties | $ | 383,638 | $ | 6,862,713 |
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b)(i) | 6,450,531 | - | ||||||
Total noncurrent amount due to a related party | $ | 6,450,531 | $ | - |
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.
(i) | Amount due to and due from Li and Wang |
On October 26, 2017,September 16, 2019, Hong Kong Takung entered into a supplementaryan interest-free loan agreement (the "HK Dollar Working Capital Loan") with Mao that, asLi for the loan of 30 September 2017, the outstanding principal amount$6,450,531 (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 as May 15, 2020. On May 15, 2020, Hong Kong Takung as below: (i) HK$4,500,000entered into an extension agreement with Li to extend the HK Dollar Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to Wang, the Chief Financial Officer of the Company and the interest thereof, togetherlegal representative of Tianjin Takung. Thus, the amount was reclassified to non-current assets as of March 31, 2020. As of March 31, 2020, the current and noncurrent portions of this loan obligation were nil and $6,450,531, respectively.
In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Li for the loan of $5,736,499 (RMB40,619,000) with the Accrued Interestmaturity date of the loan as May 15, 2020. On May 15, 2020, Tianjin Takung entered into an extension agreement with Li to extend the RMB Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to Wang. Thus, the amount was reclassified to non-current liabilities as of March 31, 2020. As of March 31, 2020, the current and noncurrent portions of this loan receivable were nil and $5,736,499, respectively.
Through an understanding between Wang and the Company, the HK Dollar Working Capital Loan is "secured" by the RMB Working Capital Loan. It is the understanding between the parties that the HK Dollar Working Capital Loan and the RMB Working Capital Loan will be repaid simultaneously.
(ii) | Amount due to and due from Mao |
The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will expire on May 12, 2021. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $204,756 (RMB1,449,838.04) every six months and payable by November 30, 2017;a deposit of $102,378 (RMB724,919.02). The deposit is refundable to the Company. The total lease liability was $377,342, which was included in current portion as of March 31, 2020.
On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Ms. Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The lease was terminated on February 15, 2020 and (ii) HK$3,500,000 together withmonthly rent payment is approximately $24,441 (RMB 170,563). As of March 31, 2020, the interest thereofamount due to be due and payable by DecemberMao pertinent to this lease agreement was $nil.
As of March 31, 2017.2020, Mao also lent a startup deposit of $6,296 to Hong Kong MQ.
10. INCOME TAXES
Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.
United States of America
The Coronavirus Aid, Relief and Economy Security (CARES) Act (“the CARES Act, H.R. 748”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for NOL deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of March 31, 2020 due to the recent enactment.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the Company in the United States had $4,008,459$2,403,141 and $2,212,890$2,167,494 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. 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 $257,374) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities are connected entities. Under the Ordinance, it is 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, thetwo-tier profits tax rates on its profits tax return. The election is irrevocable. The Company has provided a full valuation allowance for the deferred 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.
elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for current income and deferred taxes of the subsidiary operating in Hong Kong Takung has been calculated by applying the currentnew tax rate of taxation8.25%. Takung Art Holdings and Hong Kong MQ still apply the original tax rate of 16.5% for the nine months ended September 30, 2017its provision for current income and 2016, if applicable.deferred taxes.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.
The income tax provision consists of the following components:
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 March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Current: | ||||||||
Federal | $ | - | $ | - | ||||
State | - | - | ||||||
Foreign | 101,561 | - | ||||||
Total Current | $ | 101,561 | $ | - | ||||
Deferred: | ||||||||
Federal | $ | - | $ | - | ||||
State | - | - | ||||||
Foreign | (14,166 | ) | 8,562 | |||||
Total Deferred | $ | (14,166 | ) | $ | 8,562 | |||
Total income tax expense | $ | 87,395 | $ | 8,562 |
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 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Loss before income tax expense | $ | (865,967 | ) | $ | (700,231 | ) | ||
Computed tax expense with statutory tax rate | (142,884 | ) | (115,494 | ) | ||||
Impact of different tax rates in other jurisdictions | (5,019 | ) | (4,365 | ) | ||||
Impact of preferred tax rate | 57,184 | 43,848 | ||||||
Non-deductible items: | ||||||||
Tax effect of non-deductible expenses | 13,328 | 6,825 | ||||||
Changes in valuation allowance | 28,600 | 77,748 | ||||||
Others | 136,186 | - | ||||||
Total income tax expense | $ | 87,395 | $ | 8,562 |
The Company's effective tax rate was 82.2%(10.1)% and 19.6%(1.2)% for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and 36.0% and 22.8% for the nine months ended September 30, 2017 and 2016,2019, respectively.
11. COMMITMENTS AND CONTINGENCIES
Operation CommitmentsUncertain tax positions
The total future minimumreconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
March 31, 2020 | December 31, 2019 | |||||||
Uncertain tax liabilities, beginning of period | - | - | ||||||
Additions for tax position of current period | 73,446 | - | ||||||
Uncertain tax liabilities, end of period | $ | 73,446 | $ | - |
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the interim condensed consolidated financial statements as of March 31, 2020. The Company anticipated that the settlements with the taxing authority are remitted within one year.
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of nil as of March 31, 2020 and December 31, 2019, respectively.
Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended 31 December 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of March 31, 2020 and December 31, 2019, the Company had $73,446 and nil, respectively, of uncertain tax liabilities related to the different methodology of certain tax non-deductible expenses applied by the IRD. The examination is currently in progress. Due to the uncertain tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in an adverse finding and we would be subject to additional liability which could be materially different from these estimates. In such circumstances, we will record additional tax expense or tax benefit in the period in which such the resolution occurs. The Company does not expect the position ofuncertain tax liabilities will significantly fluctuate within the next twelve months.
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the income tax return or the date on which it was filed, whichever is later.
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
11. LEASES
The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately six years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease payments underexpense for these leases on a straight-line basis over the non-cancellablelease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.
The following table provides a summary of leases by balance sheet location as of March 31, 2020:
Assets/liabilities | Classification | As of March 31, 2020 | ||||
Assets | ||||||
Operating lease right-of-use assets | Operating lease assets | $ | 582,121 | |||
Liabilities | ||||||
Current | ||||||
Operating lease liability - current | Current operating lease liabilities | $ | 132,348 | |||
Amount due to a related party | 377,342 | |||||
Long-term | ||||||
Operating lease liability - non-current | Long-term operating lease liabilities | 49,002 | ||||
Total lease liabilities | $ | 558,692 |
The operating lease with respect to the office and the dormitory as of September 30, 2017 are payable as follows:
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 |
Rental expense of the Company was $293,338 and $199,514expenses for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $721,492 and $428,440 for the nine months ended September 30, 2017 and 2016, respectively.2019 were as follows:
15
Three Months Ended March 31, | ||||||||||
Lease Cost | Classification | 2020 | 2019 | |||||||
Operating lease cost | Cost of revenue, general and administrative expenses | $ | 200,362 | 190,449 | ||||||
Total lease cost | $ | 200,362 | 190,449 |
Maturities of operating lease liabilities at March 31, 2020 were as follows:
Maturity of Lease Liabilities | Operating Leases | |||
2020 (remaining) | $ | 530,175 | ||
2021 | 14,123 | |||
2022 | 14,123 | |||
2023 | 14,123 | |||
2024 | 14,123 | |||
Thereafter | - | |||
Total lease payments | $ | 586,667 | ||
Less: interest | (27,975 | ) | ||
Present value of lease payments | $ | 558,692 |
Three Months Ended March 31, | ||||||||
Lease Term and Discount Rate | 2020 | 2019 | ||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 1.51 | 2.60 | ||||||
Weighted-average discount rate (%) | ||||||||
Operating leases | 8 | % | 8 | % |
Three Months Ended March 31, | ||||||||
Other Information | 2020 | 2019 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 28,478 | $ | 41,063 | ||||
Leased assets obtained in exchange for new operating lease liabilities | - | 275,189 |
12. EARNINGSLOSS PER SHARE
Basic earningsloss per share is computed by dividing net incomeloss by the weighted-average number of common shares outstanding during the period. Diluted earningsloss 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.
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 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Numerator: | ||||||||
Net loss | $ | (953,362 | ) | $ | (708,793 | ) | ||
Denominator: | ||||||||
Weighted-average shares outstanding – Basic | 11,255,129 | 11,226,025 | ||||||
Stock options and restricted shares | - | - | ||||||
Weighted-average shares outstanding – Diluted | 11,255,129 | 11,226,025 | ||||||
Loss per share | ||||||||
-Basic | (0.08 | ) | (0.06 | ) | ||||
-Diluted | (0.08 | ) | (0.06 | ) |
Diluted earnings per share takes into accountDue to the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
Forloss for the three months ended September 30, 2017,March 31, 2019, approximately 149,323 options and 15,000 restricted shares, respectively, were excluded from the calculation of diluted earningsnet loss per share calculation did not include optionsshare.
Due to purchase up to 109,160 shares of the Company's common stock, because they were out of money. It has no such impact forloss or the three months ended September 30, 2016, nine months ended September 30, 2017March 31, 2020, approximately 100,890 options and 2016 respectively.6,250 restricted shares, respectively, were excluded from the calculation of diluted net loss per share.
There
13. CONTINGENCIES
The Company received two summons dated on May 22, 2020 and June 9, 2020, respectively, there were dilutive effectstwo individuals filing claims against Shanghai Takung and Tianjing Takung in the Shanghai Pudong People’s Court, China, as a result of 487,000 sharescontractual disputes and misrepresentations over ownership units made by certain service agent. The claims amounted to approximately $0.23 million. The Company hired legal counsel to evaluate the case. The Company believes that the allegations are without merit and intends to vigorously defend itself. Currently, the cases are under review by the Shanghai Pudong People’s Court. In the opinion of management, it is not probable that the Company will incur any losses arising from these two litigation cases. As such, as of March 31, 2020, the Company has not accrued any liability in connection with potential losses from the legal proceedings.
Except for the nine months period ended September 30, 2017above, as of March 31, 2020 and 2016. through the issuance date of the condensed consolidated financial statements included in this Form 10-Q, the Company does not have any other significant indemnification claims.
14. SUBSEQUENT EVENTS
On May 15, 2020, Hong Kong Takung entered into a loan extension agreement for its HK Dollar Working Capital Loan with Shuhai Li, the legal representative of Tianjin Takung who resigned on April 3, 2020, with a maturity date on May 15, 2021. On the same day, Tianjin Takung also entered into a loan extension agreement for its RMB Working Capital Loan with Shuhai Li with a maturity date on May 15, 2021.
On May 29, 2020, the Company’s Hong Kong subsidiary, Hong Kong Takung entered into a loan transfer agreement for its HK Dollar Working Capital Loan with Shuhai Li, and Jing Wang, the Chief Financial Officer of the Company and the new legal representative of Tianjin Takung. Simultaneously, the Company’s PRC subsidiary, Tianjin Takung entered into a loan transfer agreement for its RMB Working Capital Loan with Shuhai Li and Jing Wang.
The 487,000 restrictedCompany had subsequently granted an aggregate of 10,000 shares of Common Stock (the “Compensation Shares”) relatedcommon stock as a stock-based awards 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 listedCompany’s SEC legal counsel on NYSE on March 22, 2017. May 27, 2020 as a compensation for legal advisory services rendered.
13. SUBSEQUENT EVENT
Other than the newly signed extension agreements as disclosed in Note 8, and the supplementary agreement with related party as disclosed in Note 9 above,events aforementioned, the Company does not identify anyhas evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no other subsequent events with material financial impact onoccurred that would require recognition or disclosure in the unauditedinterim condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 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 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.
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.comen.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. Shanghai Takung was deregistered on May 8, 2020.
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 office in Hangzhou to carry out technology development.e-commerce platform for offering, selling and trading whole pieces of artwork instead of units of artwork.
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 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 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 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.
Recent Impacts of COVID-19 on Our Business
While the ongoing coronavirus pandemic is spreading throughout the world, the Company’s operations have fully resumed in March 2020 and we have not identified any significant decrease in the number of transactions on our platform since then. We have also maintained a stable number of new account openings.
The extent to which the COVID-19 impacts our operations is highly uncertain and cannot be predicted with confidence. It will depend on various factors including the duration and severity of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, COVID-19 may eventually affect the Company's 2020 overall business performance. The operating results for the three months ended March 31, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
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.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2020 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2016
RevenueMARCH 31, 2019
The following tables set forth our condensed consolidated statements of income data:
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenue | $ | 3,355,011 | $ | 5,742,209 | ||||
Cost of revenue | (292,168 | ) | (285,252 | ) | ||||
Selling expense | (624,151 | ) | (652,207 | ) | ||||
General and administrative expenses | (2,498,848 | ) | (1,744,965 | ) | ||||
Total costs and expenses | (3,415,167 | ) | (2,682,424 | ) | ||||
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 |
The following tables set forth ourinterim condensed consolidated statements of income data (aswith a percentage of revenue):percentage:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||
2017 | 2016 | 2020 | % of Revenue | 2019 | % of Revenue | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||
Revenue | 100 | % | 100 | % | $ | 1,181,286 | 100 | $ | 535,701 | 100 | ||||||||||||||
Cost of revenue – Direct revenue | (9 | ) | (5 | ) | ||||||||||||||||||||
Cost of revenue | (656,514 | ) | (56 | ) | (267,279 | ) | (50 | ) | ||||||||||||||||
Selling expense | (18 | ) | (11 | ) | (42,989 | ) | (4 | ) | (30,812 | ) | (6 | ) | ||||||||||||
General and administrative expenses | (74 | ) | (30 | ) | (1,110,447 | ) | (94 | ) | (1,274,585 | ) | (238 | ) | ||||||||||||
Total costs and expenses | (101 | ) | (46 | ) | (1,809,950 | ) | (154 | ) | (1,572,676 | ) | (294 | ) | ||||||||||||
Income from operations | (1 | ) | 54 | |||||||||||||||||||||
Interest and other income (loss), net | 6 | - | ||||||||||||||||||||||
Income before income taxes | 5 | 54 | ||||||||||||||||||||||
Loss from operations | (628,664 | ) | (54 | ) | (1,036,975 | ) | (194 | ) | ||||||||||||||||
Interest and other (expenses) income, net | (237,303 | ) | (20 | ) | 336,744 | 63 | ||||||||||||||||||
Loss before income tax expense | (865,967 | ) | (74 | ) | (700,231 | ) | (131 | ) | ||||||||||||||||
Income tax expense | (4 | ) | (10 | ) | (87,395 | ) | (7 | ) | (8,562 | ) | (2 | ) | ||||||||||||
Net income | 1 | % | 44 | % | ||||||||||||||||||||
Net loss | $ | (953,362 | ) | (81 | ) | $ | (708,793 | ) | (133 | ) |
Revenue
Listing fee
The following table sets forth our interim condensed consolidated revenue was $1,455,498 and $2,968,534; commissionby 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.source:
Three Months Ended March 31, | ||||||||
2020 | 2019 | �� | ||||||
(Unaudited) | (Unaudited) | |||||||
Listing fee revenue | $ | 176,943 | $ | 289,072 | ||||
Commission revenue | 900,823 | 178,358 | ||||||
Management fee revenue | 103,520 | 68,271 | ||||||
Total | $ | 1,181,286 | $ | 535,701 |
(i) | Listing fee revenue |
Listing fee revenue is calculated based onAs of March 31, 2020, a percentagetotal of the listing value and transaction value287 sets of artworks.
Listing value is the total offering price of an artwork when the ownership units are initiallywere listed for trade on our trading platform. We utilize an appraised value as a basis to determine the appropriate listing value for each artwork, or portfolio of artworks.
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.
During the three months ended September 30, 2017, there were 6—comprising 62 sets of paintings and calligraphies 9from famous Chinese, Russian and Mongolian artists, with a total listing value of $26,779,740 (HK$208,100,000); 35 pieces of jewelry with a total listing value of $9,350,389 (HK$72,660,000); 134 pieces of precious stones 1with a total listing value of $16,991,816 (HK$132,040,000); 29 pieces of jewelry and 1 set of Unit+ product listed on our platform. Theiramber with a total listing values were $2,118,726value of $12,225,254 (HK$16,500,000) for the95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $669,172 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $334,586 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,093,838 (HK$8,500,000); 6 sets of paintingsUnit+ products with a total listing value of $1,327,276 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,687 (HK$1,000,000); and calligraphies, $1,132,5557 pieces of Sports memorabilia with a listing value of $1,095,048 (HK$ 8,820,000) for8,509,400), of which 22.5%-48% (for 62 sets of paintings), 24%-48.5% (for the 9134 pieces of precious stones, $46,227 (HK$360,000) forstones), 29%-48% (for the 135 pieces of jewelry and $152,578 (HK$1,188,000) forjewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 1 set29 pieces of Unit+ product,amber), 45%-46% (for the 2 pieces of which 41.5%-47%porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of paintingsUnit+ products), 45% (1 piece of Yixing collectable) and calligraphies), 26%-46%45% (for the 97 pieces of precious stones), 43% (for the 1 pieces of jewelry) and 30.3% (for the 1 set of Unit+ product)Sports memorabilia) of the listed values were charged as listing fees, respectively.
Compared toDuring the corresponding periodthree months ended September 30, 2016,March 31, 2020, there were 72 sets of paintings listed on our platform. Their total listing values were $772,121 (HK$6,000,000) for the paintings, of which 22.83%-23% (for the paintings) of the listed values were charged as listing fees.
As of March 31, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies 7from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,758,348 (HK$202,100,000); 35 pieces of amber, 14jewelry with a total listing value of $9,260,770 (HK$72,660,000); 134 pieces of precious stones 5with a total listing value of $16,828,957 (HK$132,040,000); 29 pieces of jewelry successfully listed on our system. Theamber with a total listing values were $1,802,475value of $12,108,081 (HK$14,000,000) for the 7 sets95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $662,758 (HK$5,200,000); 2 pieces of porcelain pastel paintings and calligraphies, $2,974,083with a total listing value of $331,379 (HK$23,100,000) for the2,600,000); 7 pieces of amber, $1,042,860porcelain with a total listing value of $1,083,355 (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 78,500,000); 6 sets of paintingsUnit+ products with a total listing value of $1,314,555 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,453 (HK$1,000,000); and calligraphies) ,46% (for the 7 pieces of amber)Sports memorabilia with a listing value of $1,084,553 (HK$8,509,400), 32%of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 14134 pieces of precious stones), 29%-48% (for the 535 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.
The decrease in numberDuring the three months ended March 31, 2019, there were 6 sets of piecespaintings listed on our platform. Their total listing values and correspondingwere $1,147,081 (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 $176,943 during the three months ended September 30, 2017March 31, 2020 compared to $289,072 for the same period ended September 30, 2016 resulted in a decrease in listing fee revenue inMarch 31, 2019. Compared to those for the current period. The decrease inthree months ended March 31, 2019, the 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 levelspaintings and the value of liquidity, market value, number of owners and number of VIP traders. Therefore, the listing schedule of some artworks were deferredlower during the same period in 2020. There were only two sets of paintings listed during the three months ended March 31, 2020 while there were six sets of paintings during the same period in 2019 listed on our platform. The total listing value of the new artworks for the three months ended March 31, 2020 was $772,121 compared to a later time.$1,147,081 for the three months ended March 31, 2019.
(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$0.0013 (HK$1)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 completed.
For selected VIP Traders, we ran a discount program for them starting from April 1, 2015, when their trading volumes of the certain artworks reached an agreed level in each month, a contractually determined flat rate of trading commission was applied 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.
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.
Commission rebate programs are offeredWe define traders as “inactive” if they meet the following criteria;
· | The trader defaults in payment over three months; |
· | The trader did not incur any transactions in the month of reassessment; |
· | The service agent has confirmed with the relevant trader that he/she was inactive. |
Once an inactive trader has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.
We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
We used to offer commissions to Traders and service agents. We would rebate 5% of the commission earned from the transactions of new Traders referred by the existing Traders. The rebate rate was adjusted from 15% to 5%, starting fromEffective January 1, 2017.2019, we no longer offered commission to our Traders. For service agents, we rebateoffer a total of 40% to 60%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 15% of the
The commission earned from the transactions of new Traders they referred, deduct such 15% of the commission from the rebates payablepaid to the service agents to which such individual referrers belong. The commission rebate is recognized as reduction of the commission revenue. The rebates and discounts are recognized as a reductioncost of revenue in the same period the related revenue is recognized.
In spiteSince the second half of this, total2018, there was a decrease in our trading volume and transaction value amounts 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. Our trading volume and transaction value amounts increased in the fourth quarter of 2019 and first quarter of 2020.
Total commission revenue decreasedincreased by $172,872$722,465 or 10%405.1% for the three months ended September 30, 2017March 31, 2020 to $1,496,826$900,823 compared to $1,669,698$178,358 for the three months ended September 30, 2016 primarily becauseMarch 31, 2019. For the three months ended March 31, 2020, the trading amount was approximately $1,669,248,138 (HK$12,971,393,429) compared to $163,552,049 (HK$1,283,229,377) in the same period in 2019. The number of active traders increased by 45,303, from 15,074 in the changethree months ended March 31, 2019 to 60,377 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 tradessame period in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.2020.
(iii) | Management fee revenue |
We charge Traderstraders a management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units, which 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-month period ended September 30, 2017,March 31, 2020, management fee revenue decreasedincreased by $378,672,$35,249, from $781,219$68,271 for the three months ended September 30, 2016March 31, 2019 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$103,520, due to the completion of the transactions. Although the listed artworks increased, the management fee decreased by the promotions.increase in trading.
During the three-month period ended September 30, 2017, annual fee revenue decreasedRevenue by $300, from $440 for the three-month period ended September 30, 2016 to $140.
(v) Authorized agent subscription revenuecustomer type
Authorized agent subscriptionThe following table presents our 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.
by customer type:
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Artwork owners | $ | 176,943 | $ | 289,072 | ||||
Non – VIP Traders | 856,132 | 154,645 | ||||||
VIP Traders | 148,211 | 91,984 | ||||||
Total | $ | 1,181,286 | $ | 535,701 |
Cost of Revenue
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Commissions paid to service agents | $ | 497,601 | $ | 54,916 | ||||
Depreciation | 96,191 | 122,032 | ||||||
Internet service charge | 34,332 | 50,674 | ||||||
Artwork insurance | 12,120 | 11,962 | ||||||
Artwork storage | 16,270 | 27,242 | ||||||
Others | - | 453 | ||||||
Total | $ | 656,514 | $ | 267,279 |
Cost of revenue for the three months ended September 30, 2017March 31, 2020 and 2016March 31, 2019 was $292,168$656,514 and $285,252,$267,279, respectively. OurThe increase in cost of revenue primarily includesby $389,235, for the three months ended March 31, 2020 compared to March 31, 2019, was mainly due to an increase in commissions paid to service agents by $442,685 because of increase in trading transactions in the first quarter of 2020 as discussed above. Such increase was offset by a decrease in depreciation by $25,841 due to having fully depreciated of some of our computer equipment and trading systems, a decline in internet service fee, depreciationcharges by $16,342 and amortization of hardware and software for our trading platform.artwork storage costs by $10,972.
Gross Profit
Gross profit was $3,062,843$524,772 or 44.4% for the three months ended September 30, 2017,March 31, 2020, compared to $5,456,957$268,422 or 50.1% 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.March 31, 2019.
Listing fees contributed 43.4%15.0% of the total revenue for the quarter ended March 31, 2020 compared to 54.0% in the corresponding period in 2019, while commission revenue contributed 76.3% for the quarter ended March 31, 2020 compared to 33.3% in the corresponding period in 2019. Compared to the same period in 2019, there was a significant increase in commission revenue. On the other hand, our cost of revenue for the three months ended March 31, 2020 was 55.6% of the total revenue compared to 49.9% for the same period in 2019. The higher cost of revenue over the total revenue for the three months ended September 30, 2017 comparedMarch 31, 2020 was primarily due to 51.7% in the corresponding period in 2016, while commission revenue contributed 44.6%more commissions being paid to service agents as discussed above. Consequently, we posted a gross profit and gross profit margin of $524,772 and 44.4%, respectively, for the three months ended September 30, 2017March 31, 2020 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%$268,422 and 50.1% for the same period in 2016.2019, respectively.
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, 2017March 31, 2020 were $2,498,848$1,110,447 compared to $1,744,965$1,274,585 for the three months ended September 30, 2016.March 31, 2019. The substantial increasedecrease in general and administrative expenses by $164,138 was primarilyattributable to a decrease in salaries and welfare by $122,765 as a result of salary reductions for our executives, a decrease in legal and professional fees by $84,880 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in consultancy fees by $70,041 as no such fees were incurred in 2020, a decrease in share-based compensation by $10,865 as there were no restricted shares granted in 2020, a reduction in research and development expenses by $50,540 because such expenses were incurred by Art Era for the development of a software platform in 2019 but not in 2020, a decrease in depreciation by $3,008 and others by $9,223. The overall decrease was offset by an increase in salariesoffice, insurance and rental expenses by $258,469 because$144,639 due to new offices being leased by Tianjin Takung in the second quarter in 2019, travel and accommodation fees by $15,483 attributable to meeting and conference fees incurred by Tianjin Takung for human resources and software program training, and an increase in non-deductible input VAT expenses by $27,062 as a result of an increase in employee headcount, accrual of doubtful account by $241,248, office, insurance and rental expense by $141,281 and an increaseservice fees paid to Tianjin Takung in travelling expenses by $116,220 which were incurredthe first quarter 2020 compared to attend tothat in the listing of our common stock on the NYSE American.same period in 2019.
The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2017March 31, 2020 and 2016.March 31, 2019.
Three months ended September 30, 2017 | Three months ended September 30, 2016 | Three months ended | Three months ended | |||||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||||||||
Amount($) | % of Total | Amount($) | % of Total | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Consultancy fee | $ | 46,059 | 2 | % | $ | 92,809 | 5 | % | ||||||||||||||||||||||||
Legal and professional fees | 218,066 | 9 | % | 247,278 | 14 | % | ||||||||||||||||||||||||||
Amount ($) | % of Total | Amount ($) | % of Total | |||||||||||||||||||||||||||||
Salary and welfare | 1,008,736 | 40 | % | 750,267 | 43 | % | 324,732 | 29.2 | 447,497 | 35.1 | ||||||||||||||||||||||
Office, insurance and rental expenses | 430,047 | 17 | % | 288,766 | 17 | % | 324,779 | 29.2 | 180,140 | 14.1 | ||||||||||||||||||||||
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 | % | - | - | % | ||||||||||||||||||||||||||
Legal and professional fees | 189,218 | 17.1 | 274,098 | 21.5 | ||||||||||||||||||||||||||||
Non-deductible input VAT expense | 72,093 | 6.5 | 45,031 | 3.5 | ||||||||||||||||||||||||||||
Travel and accommodation fees | 36,841 | 3.3 | 21,358 | 1.7 | ||||||||||||||||||||||||||||
Consultancy fee | 35,117 | 3.2 | 105,158 | 8.3 | ||||||||||||||||||||||||||||
Depreciation | 31,739 | 2.9 | 34,747 | 2.7 | ||||||||||||||||||||||||||||
R&D expense | - | - | 50,540 | 4.0 | ||||||||||||||||||||||||||||
Share based compensation expense | 5,986 | 0.5 | 16,851 | 1.3 | ||||||||||||||||||||||||||||
Others | 221,827 | 8 | % | 107,357 | 6 | % | 89,942 | 8.1 | 99,165 | 7.8 | ||||||||||||||||||||||
Total general and administrative expenses | $ | 2,498,848 | 100.0 | % | $ | 1,744,965 | 100.0 | % | ||||||||||||||||||||||||
Total general and administrative expense | $ | 1,110,447 | 100.0 | $ | 1,274,585 | 100.0 |
Net IncomeOther (expenses) income
Other expenses for the three-month period ended March 31, 2020 were $237,303, compared to other income of $336,744 for the same period in 2019. There was a significant increase in exchange loss by $595,429, arising from the depreciation of the Renminbi against the US dollar and loan interest expenses of $38,913 incurred in the first quarter of 2020 by a third party financing obtained in the third quarter 2019.
We hadIncome tax expenses
The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a netU.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,374) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,374) and PRC enterprise income tax rate of 25%.
The effective tax rates for the three months ended September 30, 2017 of $27,034 compared to net income of $2,451,737March 31, 2020 and 2019 were (10.1)% and (1.2)%, respectively.
Income taxes expense for the three months ended September 30, 2016.March 31, 2020 and 2019 were $87,395 and $8,562, respectively.
Net Loss
We recorded a net loss of $953,362 and $708,793 for the three months ended March 31, 2020 and 2019, respectively.
The decreaseincrease in the net incomeloss by $2,424,703$244,569 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.
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 corresponding period ended September 30, 2016, 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) 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 same 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.
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.
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.
During the nine-month period ended September 30, 2017, annual fee revenue increased by $10, from $869 for the nine-month period ended September 30, 2016 to $859.
(v) Authorized agent subscription revenue
Authorized agent subscription revenue 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 with our platform.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2017 and 2016 was $822,335 and $822,735, respectively. Our cost of revenue primarily includes internet service fee, depreciation and amortization of hardware and software for our trading platform.
In the third quarter of 2014, we entered into an agreement with a third party service provider, Shenzhen Qianrong Cultural Investment Development Co., Ltd (“Qianrong”), to provide software development services with a total contract amount of $902,592 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades 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.
Gross Profit
Gross profit was $9,723,342 for the nine months ended September 30, 2017, compared to $13,391,517 for the nine 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.
Operating Expenses
Selling expenses were $1,272,010, or 13% of net sales, for the nine months ended September 30, 2017 compared to $1,993,782 or 15% of net sales, for the comparable period in 2016, a decrease by 36%. Selling expenses consist primarily of marketing expenses.
General and administrative expenses for the nine months ended September 30, 2017 were $7,311,128 compared to $5,076,689 for the nine months ended September 30, 2016. The substantial increase by $2,234,439 or 44% was chieflypredominately due to an increase in salariesforeign exchange loss by $1,314,324 because of an increase in employee headcount, accrual of doubtful accounts, by $241,248, office, insurance and rental expenses by $400,067$595,429 and an increase in travellingincome tax expense by $78,833, which were offset by an increase in gross profit by $256,350, a decrease in operating expenses by $495,715 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$151,961 and administrative expenses for the nine months ended September 30, 2017 and 2016.
Nine months ended September 30, 2017 | Nine months ended September 30, 2016 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Amount($) | % 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 | % |
Net Income
We had a net income for the nine months ended September 30, 2017 of $1,057,138 compared to net income of $4,664,632 for the nine months ended September 30, 2016.
The decrease in net incomebank charges 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 discussed in the previous paragraphs.$25,468.
Liquidity and Capital Resources
The following tables set forth our condensed consolidated statements of cash flow:
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 |
Three months ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net cash (used in) provided by operating activities | $ | (1,214,913 | ) | $ | 6,175,680 | |||
Net cash provided by investing activities | - | 2,416,019 | ||||||
Net cash used in financing activities | - | (2,499,500 | ) | |||||
Effect of exchange rate change on cash and cash equivalents | (85,550 | ) | (503,119 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (1,300,463 | ) | 5,589,080 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 20,528,691 | $ | 18,113,166 |
Sources of Liquidity
During the ninethree months ended September 30, 2017,March 31, 2020, net cash used in operating activities totaled $1,214,913, which predominately resulted from the net loss of $953,362 and a decline in net change in operating assets and liabilities of $654,218 and offset by non-cash adjustments to net loss of $392,667. There was no net cash used in or provided by investing or financing activities for the three months ended March 31, 2020. The resulting change in cash for the period was a decrease of $1,300,463. The cash balance at the beginning of the period was $21,829,154. The cash balance as of March 31, 2020 was $20,528,691.
During the three months ended March 31, 2019, net cash generated from operating activities totaled $1,028,524.$6,175,680, which predominately resulted from the increase in client deposits by $5,823,253 placed by the customers for upcoming transactions which influenced the increased amounts due to clients. Net cash generated from investing activities totaled $2,416,019. Net cash used in investingfinancing activities totaled $561,510. No cash was generated from financing activities during the period.$2,499,500. The resulting change in cash for the period was an increase of $1,492,553.$5,589,080. The cash balance at the beginning of the period was $13,395,337.$12,524,086. The cash balance on September 30, 2017as of March 31, 2019 was $14,887,890.
During the nine months ended September 30, 2016, net cash provided by operating activities totaled $5,635,391. Net cash used in investing activities totaled $1,276,378. Net cash provided by financing activities totaled $2,346,941. The resulting change in cash for the period was an increase of $6,061,579. The cash balance at the beginning of the period was $10,769,456. The cash balance on September 30, 2016 was $16,831,035.$18,113,166.
As of September 30, 2017,March 31, 2020, the Company had $28,390,798 in total current liabilities, which comprised of $780,800 in accrued expense and other payables, $19,057,733 in customers’ deposits, $6,371,900 in short-term borrowings from third parties, $1,085,480 in amount due to related party and $1,094,885 in tax payables. As of December 31, 2016, the Company had $30,602,706$18,769,001 in total current liabilities, which included $608,883$831,399 in accrued expenseexpenses and other accruals, $21,743,360payables, $15,466,438 in customers’ deposits, $360,248 in advance from customers, $6,308,513$1,916,540 in short-term borrowings from a third parties, $1,031,805party, $383,638 in amount due to related partyparties, $16,364 in advances from customers, $132,348 in lease liabilities and $549,897$22,274 in tax payables.
The Company had deferred tax liabilities as long-term liability of $45,301 as of September 30, 2017, and $62,618 asAs of December 31, 2016, respectively. The Company’s2019, the Company had $25,947,490 in total current liabilities, as of September 30, 2017which included $629,666 in accrued expenses and December 31, 2016 amountedother payables, $16,404,941 in customers’ deposits, $1,868,345 in short-term borrowings from a third party, $6,862,713 in amount due to $28,436,099related parties, $8,788 in advances from customers, $166,987 in lease liabilities and $30,665,324, respectively.$6,050 in VAT payables.
The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The 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-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.
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 business downturn including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring, including re-evaluating the company’s Unit business and a downsize of the 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 common shares in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, 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, 2016,2019, 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, 2016,2019, previously filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Mr. Di XiaoMs. Fang Mu and our Chief Financial Officer, Mr. Chun Hin Leslie Chow.Mrs. Jing Wang. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2017March 31, 2020 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, 2017March 31, 2020 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
27
None.
Not applicable.
Item 2. Unregistered SalesOn or around early April and May, 2020, plaintiffs Chunji Zhao Guangming Su respectively, commenced legal proceedings against Hong Kong Takung Art Co. Ltd and Takung Cultural Development (Tianjin) Co., Ltd, over a contract dispute relating to the Company’s trading platform use agreement amounting to an aggregate of Equity Securitiesapproximately $0.23 million. Both cases originated in the Shanghai Pudong People’s Court and Usewere originally brought against Takung (Shanghai) Co., Ltd (“Shanghai Takung. However, because Shanghai Takung was deregistered on May 8, 2020, both plaintiffs requested in their respective cases that the named defendant in the case be changed to Hong Kong Takung Art Co. Ltd, its parent company. The plaintiffs also requested that Takung Cultural Development (Tianjin) Co., Ltd be named as an additional defendant in each case. In addition to damages, plaintiffs Chunji Zhao and Guangming Su are also claiming litigation costs of Proceeds.RMB1,090,000 (approximately, $152,000) and RMB 536,025 (approximately,$75,733) respectively. We do not believe that the proceedings have any merit and intend to vigorously defend against them.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAKUNG ART CO., LTD | ||
Date: | By: | /s/ |
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | By: | /s/ |
Chief Financial Officer | ||
(Principal Financial |