UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 20172018

 

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)

 

Delaware26-4731758
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
organization)

Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong
(Address of principal executive offices) (Zip Code)
+852 3158 0977
(Registrant’s telephone number, including area code)

 

Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong

(Address of principal executive offices)             (Zip Code)

 

+852 3158 0977

(Registrant’s telephone number, including area code)

(Former(Former name, former address and former fiscal year, if changed since last report)

 

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 interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).xYes¨No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨Accelerated filer¨
Non-accelerated filer (Do not check if a smaller reporting company)¨xSmaller reporting companyx
 Emerging growth company¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of November 14, 20172018 is 11,188,882.11,226,025.

 

 

 

 

FORM 10-Q

TAKUNG ART CO,CO., LTD

INDEX

 

  Page
   
PART I.Financial Information3
   
 Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited).3
   
 Item 2.  Management’s Discussion and Analysis of Financial Condition and resultsResults of Operation.1719
   
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.2633
   
 Item 4.  Controls and Procedures.2733
   
PART II.Other Information28
Item 1.  Legal Proceedings.28
Item 1A. Risk Factors.28
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.28
Item 3.  Defaults Upon Senior Securities.28
Item 4.  Mine Safety Disclosures.28
Item 5.  Other Information.2834
   
 Item 6.  Exhibits.2834
   
 Signatures2935


2

PART I –FINANCIAL INFORMATION

 

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)

 

 September 30, December 31,  September 30, December 31, 
 2017  2016  2018  2017 
 (Unaudited)      (Unaudited)     
ASSETS                
Current assets                
Cash and cash equivalents $14,887,890  $13,395,337  $8,418,818  $11,866,965 
Restricted cash  19,057,733   21,743,360   7,515,860   25,273,617 
Account receivables, net  3,732,569   3,058,568   971,480   2,291,698 
Prepayment and other current assets  870,231   968,446   2,257,181   2,300,207 
Inventories  14,859   - 
Amount due from a related party  5,914,240   - 
Short term investments, held to maturity  873,617   - 
Loan receivables  6,806,623   6,374,046   3,859,075   7,834,115 
Total current assets  45,355,046   45,539,757   29,825,130   49,566,602 
                
Non-current assets                
Property and equipment, net  2,104,107   2,065,182   1,992,564   2,191,321 
Intangible assets  20,394   20,546   22,297   22,334 
Deferred tax assets  294,676   243,772   700,668   291,430 
Other non-current assets  535,420   428,764   394,555   757,235 
Total non-current assets  2,954,597   2,758,264   3,110,084   3,262,320 
Total assets $48,309,643  $48,298,021  $32,935,214  $52,828,922 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
LIABILITIES                
Current liabilities                
Accrued expenses and other payables $780,800  $608,883  $623,472  $1,461,858 
Customer deposits  19,057,733   21,743,360   7,515,860   25,273,617 
Advance from customers  -   360,248   14,355   170,078 
Short-term borrowings from third parties  6,371,900   6,308,513   3,950,099   7,208,761 
Amount due to related party  1,085,480   1,031,805 
Taxes payable  1,094,885   549,897 
Amount due to related parties  6,389,042   483,822 
Tax payables  15,848   312,575 
Total current liabilities  28,390,798   30,602,706   18,508,676   34,910,711 
Deferred tax liabilities  45,301   62,618 
Total non-current liabilities  45,301   62,618 
        
Total liabilities  28,436,099   30,665,324  $18,508,676  $34,910,711 
                
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 
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,226,025 shares issued and outstanding as of September 30, 2018;
11,188,882 shares issued and outstanding as of December 31, 2017)
 $11,226  $11,189 
Additional paid-in capital  5,928,455   5,532,426   6,298,910   6,116,216 
Retained earnings   14, 229,809   13,172,671   8,568,638   12,111,096 
Accumulated other comprehensive loss  (295,909)  (1,083,569)  (452,236)  (320,290)
Total stockholders’ equity  19,873,544   17,632,697   14,426,538   17,918,211 
Total liabilities and stockholders’ equity $48,309,643  $48,298,021  $32,935,214  $52,828,922 

 

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

 


3

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2018  2017  2018  2017 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Revenue            
Listing fee $-  $1,455,498  $3,978,735  $4,606,649 
Commission  253,331   1,496,826   3,557,411   4,970,651 
Management fee  107,905   402,547   455,133   967,518 
Annual fee  54   140   378   859 
Authorized agent subscription revenue     -   191,623   - 
Online artwork sales  2,244   -   8,548   - 
Total revenue  363,534   3,355,011   8,191,828   10,545,677 
                 
Cost of revenue  (299,482)  (292,168)  (2,173,296)  (822,335)
                 
Gross profit  64,052   3,062,843   6,018,532   9,723,342 
                 
Operating expenses:                
General and administrative expenses  (2,208,264)  (2,498,848)  (7,791,747)  (7,311,128)
Selling expenses  (149,035)  (624,151)  (851,173)  (1,272,010)
Impairment loss – construction-in-progress  (326,227)  -   (326,227)  - 
Total operating expenses  (2,683,526)  (3,122,999)  (8,969,147)  (8,583,138)
                 
(Loss) income from operations  (2,619,474)  (60,156)  (2,950,615)  1,140,204 
                 
Other income and expenses:                
Other income  65,487   186,259   470,752   440,470 
Loan interest expense  (199,821)  (152,059)  (504,287)  (455,762)
Exchange gain (loss)  (870,218)  177,652   (1,132,510)  526,603 
Total other income (loss)  (1,004,552)  211,852   (1,166,045)  511,311 
                 
(Loss) income before provision for income taxes  (3,624,026)  151,696   (4,116,660)  1,651,515 
                 
Income tax benefit (expense)  742,670   (124,662)  574,202   (594,377)
                 
Net (loss) income $(2,881,356) $27,034  $(3,542,458) $1,057,138 
                 
Foreign currency translation adjustment  (3,668)  311,485   (131,946)  787,660 
                 
Comprehensive (loss) income $(2,885,024) $338,519  $(3,674,404) $1,844,798 
                 
(Loss) earnings per common share– basic $(0.26) $0.00  $(0.32) $0.10 
(Loss) earnings per common share– diluted  (0.26)  0.00   (0.32)  0.09 
Weighted average number of common shares outstanding-basic  11,226,025   11,188,882   11,216,009   11,039,880 
Weighted average number of common shares outstanding-diluted  11,226,025   11,248,688   11,216,009   11,398,082 

 

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

 


4

 

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 

  For the Nine Months  For the Nine Months 
  Ended  Ended 
  September 30,  September 30, 
  2018  2017 
       
Cash flows from operating activities:        
Net (loss) income  (3,542,458)  1,057,138 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  713,933   538,532 
Interest expense  262,561   181,341 
Bad debt expense  (76,402)  241,248 
Changes in exchange rate  1,132,510   (526,603)
Stock-based compensation  217,231   558,704 
Impairment loss on CIP  326,227   - 
Deferred tax liabilities  -   (17,317)
Deferred tax assets  (409,238)  (50,904)
Changes in operating assets and liabilities:        
Account receivables  1,396,620   (915,249)
Prepaid loan interest expense  -   (111,477)
Prepayment and other current assets  (58,673)  (64,440)
Other non-current assets  362,680   (106,656)
Customer deposits  (17,757,757)  (2,685,627)
Amount due to related party  -   53,675 
Tax payables  (296,727)  544,988 
Advance from customer  (155,723)  (360,248)
Accrued expenses and other payables  (704,607)  5,792 
Net cash used in operating activities  (18,589,823)  (1,657,103)
         
Cash flows from investing activities:        
Purchase of property and equipment  (775,730)  (455,255)
Purchase of available-for-sales investment  (90,293,454)  (53,501,874)
Maturity and redemption of available-for-sales investment  90,293,454   53,501,874 
Loan to third parties  -   (3,518,325)
Loan to related parties  (6,369,809)  - 
Repayment from loan to third parties  3,641,871   3,412,070 
Repayment from loan to related parties  -   - 
Purchase of held-to-maturity investment  (873,617)  - 
Net cash used in investing activities  (4,377,285)  (561,510)
 Cash flows from financing activities:        
Proceeds from related party loan  6,389,042   - 
Loan repayment to related party  (483,822)  - 
Loan repayment to third party  (3,480,000)  - 
Net cash provided by financing activities  2,425,220   - 
         
Effect of exchange rate change on cash, cash equivalents and restricted cash  (664,016)  1,025,539 
         
Net decrease in cash, cash equivalents and restricted cash  (21,205,904)  (1,193,074)
         
Cash, cash equivalents and restricted cash, beginning balance  37,140,582   35,138,697 
         
Cash, cash equivalents and restricted cash, ending balance $15,934,678  $33,945,623 
         
Supplemental cash flows information:        
         
Cash $8,418,818  $14,887,890 
Restricted cash included in customer deposits  7,515,860   19,057,733 
Total cash and restricted cash $15,934,678  $33,945,623 
         
Cash paid during the period for:        
Interest $241,727  $212,954 
Income tax $111,917  $136,453 

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 Subsidiariessubsidiaries (“Takung”, or the “Company”, “we”, “us” and “our”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Company Limited (formerly Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd.) (“Hong Kong Takung”), a Hong Kong company (“Hong Kong Takung”) and our wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.

 

Hong Kong Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering, selling and trading artwork. For the period from September 17, 2012 (inception) to December 31, 2012, there wasthe company had no operation except for the issuance of shares for subscription receivable. We generatereceivables. The Company generates revenue from ourits services in connection with the offering and trading of artwork on ourits system, primarily consisting of listing fees, trading commissions, and management fees. We conduct ourThe Company conducts its business primarily in Hong Kong, People’s Republic of China.China (the “PRC”).

 

Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015.2015 in the PRC. It is engaged in providing services to its parent company, Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Starting the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform. The offering is to further promote the artwork’s recognition.

  

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

 

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

 

Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork.

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) was formed in Tianjin on September 7, 2018,is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art and copyright registration (Takung Online) with the use of blockchain technology.

6

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2016,2017, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 20172018 and for the three months ended and nine months ended September 30, 20172018 and 20162017 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, 2016,2017, previously filed with the SEC.

 

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

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited interim condensed consolidated financial position as of September 30, 2017,2018, its consolidated results of operations and cash flows for the nine-month periods ended September 30, 20172018 and 2016,2017, 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. 

 


7

Recently Adopted Accounting Standards

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

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

We recognize revenue when control of the promised services is transferred to our traders and offering agents. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to our traders and offering agents. Our revenue mainly falls into the following broad categories: (i) listing fees, (ii) trading commissions, (iii) management fees, (iv) authorized agent subscription fee, (v) annual fee, and (vi) online artwork sales. 

Listing fee revenue

Using the output method, we recognize the listing fee revenue at a point when the ownership units of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance of such units accounted as the listing fee revenue accordingly. When the ownership units of the artwork are listed and starts trading on our system, the original owner and/or the offering agent pays us a one-time offering fee and a listing deposit.

Commission fee revenue

We generate commission fee from non-VIP traders and selected traders. We measure the progress of performance obligations using the output method, as traders obtain the benefits of receiving access to making transactions on our trading platform.

For non-VIP traders, the commission revenue is calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. 

8

For selected traders, starting from April 1, 2016, we charge a predetermined monthly fee which allows unlimited trades for specific artworks. 

Commission rebate programs are offered to traders and service agents. We pay to existing traders and service agents a commission rebate at a predetermined referral rate of commission earned from the transactions of new traders referred by them. The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting from January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606-10-32-26. Since this is a reclassification between revenue and cost of revenue, it would have no impact on the opening balance for the year beginning January 1, 2018. Commission rebates were $1,207,104 and $201,524 for the nine months period ended September 30, 2018 and 2017, and were $2,094 and $103,742 for the three months ended September 30, 2018 and 2017.

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

Management fee revenue

A custody and insurance service are provided for each individual artwork on a daily basis. The cost of custody and insurance for each unit of artwork is constant for all artworks. Using the cost-based input method, we charge traders a management fee to cover the costs of insurance, storage and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units daily. The management fee is accounted for as revenue, and immediately deducted from proceeds from the sale of artwork ownership shares when a transaction is completed. A discount program is offered to waive the management fee during certain promotion periods. Such discounts are recognized as a reduction of the revenue upon the completion of the transactions.'

Authorized agent subscription revenue

We charge an authorized agent subscription fee, which is an annual service fee paid by authorized agents to grant them the right to allow their network of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period for each agent.

Annual fee revenue

We charge an up-front annual fee for providing traders with premium services, including in-depth information and tools on the trading platform. This revenue is recognized ratably over the service agreement period for each trader.

Online artwork sales

From the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped direct from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed. 

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through its online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.

9

For comparative purpose, we adjusted the revenue for three and nine months ended September 30, 2017 as if retrospectively adopted ASC 606.

The following tables identify the disaggregation of our revenue for the three months ended September 30, 2018 and 2017, respectively:

  Three months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
     As previously
reported
  Adjustments  Adjusted 
Listing fee revenue $-  $1,455,498   -  $1,455,498 
Commission  253,331   1,496,826   103,742   1,600,568 
Management fee revenue  107,905   402,547   -   402,547 
Annual fee revenue  54   140   -   140 
Online artwork sales  2,244   -   -   - 
Total $363,534  $3,355,011  $103,742  $3,458,753 

The following tables identify the disaggregation of our revenue for the nine months ended September 30, 2018 and 2017, respectively:  

  Nine months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
     As previously
reported
  Adjustments  Adjusted 
Listing fee revenue $3,978,735  $4,606,649   -  $4,606,649 
Commission  3,557,411   4,970,651   201,524   5,172,175 
Management fee revenue  455,133   967,518   -   967,518 
Authorized agent subscription revenue  191,623   -   -   - 
Annual fee revenue  378   859   -   859 
Online artwork sales  8,548   -   -   - 
Total $8,191,828  $10,545,677  $201,524  $10,747,201 

The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

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

Statement of Cash Flows: In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, as a result, the Company no longer presents transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Furthermore, an additional reconciliation will be required to reconcile Cash, cash equivalents, and restricted cash reported within the Interim Condensed Consolidated Balance Sheets to sum to the total shown in the Interim Condensed Consolidated Statement of Cash Flows. The Company has already disclosed the restricted cash separately on its Interim Condensed Consolidated Statements of Financial Position. Beginning the first quarter of 2018, the Company has adopted and included the restricted cash balances on the Interim Condensed Consolidated Statement of Cash Flows and reconciliation of Cash, cash equivalent, and restricted cash within its Interim Condensed Consolidated Statements of Financial Positions that sum to the total of the same such amounts shown in Interim Condensed Consolidated Statement of Cash Flows. The Cash Flows of nine months ended September 30, 2017 has been applied retrospectively.

10

In January 2018, the FASB staff released guidance on accounting for the tax provisions of Global Intangible Low-Taxed Income (“GILTI”) as provided under the Tax Cuts and Jobs Act (“the Act”). GILTI refers to the tax on the excess of a United States shareholder’s total net foreign income over a deemed return on tangible assets. Based on the information available for the third quarter of 2018, the Company provisionally made a policy election and accounted for its potential GILTI tax as a period cost when incurred.

Accounting Pronouncements Issued But Not Yet Adopted

Codification Improvements: In July 2018, the FASB issued ASU No. 2018-09,Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 are effective for periods beginning after December 15, 2018. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

Leases: In July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This guidance provides further clarification to the new lease standard ASC Topic 842 in certain aspects: residual value guarantees rates implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term, and purchase option variable lease payments that depend on an index or a rate investment tax credit.

This amendment affects the amendments in ASU 2016-12, which are not yet effective, but early adoption is allowed. For entities that adopted ASC Topic 842 early, the amendments are effective upon issuance of ASU No. 2018-10, and the transition requirements are identical to those in ASC Topic 842. For entities that have not adopted ASC Topic 842, the effective date and transition requirements will be identical to the effective date and transition requirements in ASC Topic 842. This amendment will be effective for the Company in March 2019 by which time ASC Topic 842 will be adopted. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

In July 2018, FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements. This guidance amends ASC 842, Leases in two major areas.First ASU 842 permits lessors to combine lease and non-lease components by class of underlying assets in agreements that meet certain criteria. For a lessor to qualify for this practical expedient, the lease and non-lease components must have the same timing and pattern of transfer, and the lease component, if accounted for on a stand-alone basis, would be classified as an operating lease. Second, this guidance provides entities with a transition option for adopting ASU 842. This transition option allows entities not to apply the new lease standard at the adoption date by recognizing a cumulative effect by adjusting the opening balance of the retained earnings rather than restate the comparative periods presented in the financial statements. The Company determined that the practical expedient to the lessors is not applicable while it is evaluating the transition option.

Except for the above ASUs issued but not yet adopted and the ones disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2017, 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.

11

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

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

 

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

  September 30,
2018
  December 31, 
2017
 
   (Unaudited)     
Tax receivables $1,286,415  $1,132,140 
Prepaid service fees  241,064   489,424 
Short-term borrowings to third party  436,809   461,092 
Staff advance  90,054   52,124 
Prepaid repair and maintenance  1,704   46,733 
Other current assets  201,135   118,694 
Prepayment and other current assets $2,257,181  $2,300,207 

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

 September 30,
2017
  December 31, 
2016
  September 30,
2018
  December 31,
2017
 
 (Unaudited)      (Unaudited)     
Listing fee $1,562,924  $1,403,255  $971,134  $2,259,671 
Authorized agent subscription revenue  924,100   995,453   

558,165

   559,101 
Monthly commission fee  1,422,750   605,677   1,455,501   1,463,243 
Others  63,323   54,183   

54,004

   80,473 
Subtotal  3,038,804   4,362,488 
Less: allowance for doubtful accounts  (240,528)  -   (2,067,324)  (2,070,790)
Account receivables, net $3,732,569  $3,058,568  $971,480  $2,291,698 

 

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

10 

12

 

 

5. LOAN RECEIVABLES

 

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

 

Date Borrower Lender Original
Amount
(RMB)
  

September 30,
2017

(USD)

  

December 31,
2016

(USD)

  Annual
Interest
Rate
  Repayment 
Due Date
         (Unaudited)         
7/15/2016 Xiaohui Wang Shanghai Takung  10,080,000  $-  $1,451,822   0% 3/31/2017
8/24/2016 Xiaohui Wang Shanghai Takung  13,350,000  $-  $1,922,800   0% 3/31/2017
11/14/2016 Xiaohui Wang Shanghai Takung  10,275,000  $1,544,346  $1,479,908   0% 10/31/2017
12/9/2016 Xiaohui Wang Tianjin Takung  10,550,000  $1,585,680  $1,519,516   0% 11/30/2017
1/4/2017 Xiaohui Wang Tianjin Takung  24,461,505  $3,676,597  $-   0% 12/31/2017
       Total  $6,806,623  $6,374,046       
Date Borrower Lender 

Original

Amount
(RMB)

  

Outstanding

Balance

(RMB)

  

Amount in

Reporting

Currency

(USD)

  

Annual 
Interest

Rate

  Repayment 
Due Date
                   
12/9/2016 Xiaohui Wang Tianjin Takung  10,550,000   10,062,400  $1,465,114   0% 11/30/2018
4/4/2017 Xiaohui Wang Tianjin Takung  22,921,725   9,821,725  $1,430,071   0% 12/31/2018
12/15/2017 Xiaohui Wang Tianjin Takung  3,310,000   3,310,000  $481,945   0% 12/14/2018
12/19/2017 Xiaohui Wang Tianjin Takung  3,310,000   3,310,000  $481,945   0% 12/18/2018
       Total      $3,859,075       

 

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

 

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

 

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

  

Through an understanding between Ms. Wang and Merit Crown, the USU.S. Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that when the USU.S. Dollar Loans are repaid,and the RMB Loans will be repaid at the same time.

simultaneously.  

 


13

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

 September 30, 
2017
  December 31, 
2016
  September 30, 
2018
  December 31, 
2017
 
 (Unaudited)     (Unaudited)    
Furniture, fixtures and equipment $157,736  $100,386  $332,529  $167,651 
Leasehold improvements  402,597   298,965   473,183   426,138 
Computer trading and clearing system  3,220,318   2,802,430   3,642,143   3,485,844 
Transport equipment  104,741   - 
Sub-total  3,780,651   3,201,781   4,552,596   4,079,633 
Less: accumulated depreciation  (1,676,544)  (1,136,599)  (2,560,032)  (1,888,312)
Property and equipment, net $2,104,107  $2,065,182  $1,992,564  $2,191,321 

 

Depreciation expense amounted towas $241,448 and $190,626 and $133,608 for the three months ended September 30, 20172018 and 2016,2017, respectively, and $538,532$713,933 and $373,308$538,532 for the nine months ended September 30, 2018 and 2017, and 2016, respectively.

 

As of September 30, 2018 and December 31, 2017, due to the close of Hangzhou branch office during the third quarter of 2018, the technology developments were downsized and the software projects were halted, we provide an impairment reserve for unamortized capitalized costs incurred in connection with developing or obtaining internal use software, which were included in computer and trading system, of $309,321 and $0, respectively.

7.ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 20172018 and December 31, 20162017 consisted of:of the following:

 

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


  September 30,  December 31, 
  2018  2017 
  (Unaudited)    
Accruals for consulting fees $264,949  $265,393 
Trading and clearing system  82,122   52,564 
Payroll payables  81,455   827,246 
Discount payable to traders  79,324   - 
Accruals for business trip expense  17,382   27,186 
Accruals for professional fees  33,215   192,067 
Other payables  65,025   97,402 
Total accrued expenses, account & other payables $623,472  $1,461,858 

 

8. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

The following table sets forth a summary of the loan agreements in loan receivables balance:short-term borrowings:

 

Date Borrower Lender Original Amount
(HKD)
  September 30, 
2017
(USD)
  December 31,
2016
(USD)
  Annual
Interest Rate
  Repayment 
Due Date
 Borrower Lender September 30, 
2018
(USD)
  December 31,
2017
(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 Hong Kong Takung Merit Crown Limited $-  $1,500,000   8% 12/31/2018
8/24/2016 Hong Kong Takung Merit Crown Limited  15,596,100  $1,996,684  $2,011,518   8% 12/31/2017 Hong Kong Takung Merit Crown Limited $1,499,500  $1,999,500   8% 12/31/2018
11/18/2016 Hong Kong Takung Merit Crown Limited  11,479,102  $1,469,607  $1,480,525   8% 10/31/2017 Hong Kong Takung Merit Crown Limited $-  $1,480,000   8% 10/31/2018
12/9/2016 Hong Kong Takung Merit Crown Limited  11,787,600  $1,509,103  $1,520,314   8% 11/30/2017 Hong Kong Takung Merit Crown Limited $1,520,000  $1,520,000   8% 11/30/2018
12/19/2017 Hong Kong Takung Merit Crown Limited $500,000  $500,000   8% 12/18/2018
12/22/2017 Hong Kong Takung Merit Crown Limited $500,000  $500,000   8% 12/21/2018
                       Less: Discount loan payable $(69,401) $(290,739)     
 Less: Discount loan payable       $101,382  $212,859                    
                       Total $3,950,099  $7,208,761      
      Total  $6,371,900  $6,308,513       

14

 

The USU.S. Dollar Loans are to provide Hong Kong Takung with sufficient USU.S. 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 USU.S. Dollar Loans. It is the understanding between the parties that when the USU.S. Dollar Loans are repaid,and the RMB Loans will similarly be repaid.repaid simultaneously.

On July 4, 2018 and July 20, 2018, Hong Kong Takung repaid $2,000,000 and $1,480,000, respectively, to Merit Crown. Meanwhile, Ms. Wang repaid RMB13,100,000 (equals to USD 2,000,000) and RMB9,827,200 (equals to USD 1,480,000), respectively, to Shanghai Takung and Tianjin Takung, respectively.

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 20172018 and December 31, 2016.2017. The fair valuesvalue of the short-term borrowings approximateapproximates their carrying amounts. The weighted average short-term borrowing was $6,419,099borrowings were $7,319,041 and $1,678,803$6,315,799 for the nine months period ended September 30, 20172018 and the year ended December 31, 2016,2017, respectively. The interest expenses for the short-term borrowings were $133,174$199,822 and $62,670$133,174 for the three months ended September 30, 20172018 and 2016,2017, respectively, and $394,295$500,080 and $62,670$394,295 for the nine months ended September 30, 20172018 and 2016,2017, 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 related parties to which the Company has transactions with:

 

(a) Jianping Mao (“Mao”), the wife of the Vice General Manager of Hong Kong Takung.

(b) Liu Zhenying (“Liu”), the Vice President of Hong Kong Takung

Amount due from a related party

  September 30,
2018
  December 31,
2017
 
   (Unaudited)     
Liu (b) $5,914,240  $- 
Total  5,914,240   - 

 

Amount due to related partyparties

 

  September 30,
2018
  December 31,
2017
 
   (Unaudited)     
Mao (a) $-  $483,822 
Liu (b)  6,389,042   - 
Total  6,389,042   483,822 

Amount

The Company fully repaid the amount due to related party consistedMao on March 13, 2018.

On May 16, 2018, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Loan") with Liu for the loan of $6,389,042 (HK$50,000,000) to Hong Kong Takung. The purpose of the following asloan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements. The maturity date of the periods indicated:loan is May 15, 2019.

 

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

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Loan") with Liu for the loan of $5,914,240 (RMB40,619,000) to Liu. The maturity date of the loan is May 15, 2019.

Through an understanding between Liu and the Company, the HK Dollar Loan is "secured" by the RMB Loan. It is the understanding between the parties that the HK Dollar Loan and the RMB Loan will be repaid simultaneously.

15

 

10. INCOME TAXES

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

United States of America

Tax Cuts and Jobs Act Enacted in 2017

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

Under the Tax Act, the Company is subject to tax on GILTI earned by its foreign subsidiaries and made a reasonable estimate 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 $19,941impact for the nine months ended September 30, 20172018. The GILTI provision requires the Company to include the excess of the U.S. shareholder’s net controlled foreign corporations’ earnings over the U.S. shareholder’s deemed tangible income return. The Company provisionally made a policy election and 2016, respectively, and $20,652 and $19,941accounted for its estimated tax on GILTI for the threenine months ended September 30, 2017 and 2016, respectively.2018 as a period cost when incurred since the Company does not anticipate any deferred tax impact around GILTI due to its current period impact on the U.S. tax payable.

  

On October 26, 2017, Hong Kong Takung entered into a supplementary agreement with Mao that, as of 30 September 2017, the outstanding principal amount of the Loan (as defined in the Loan Agreement) to be repaid by Hong Kong Takung 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 extend the maturity date of the Outstanding Principal Loan Amount and the interest thereof by Hong Kong Takung as below: (i) HK$4,500,000 and the interest thereof, together with the Accrued Interest to be due and payable by November 30, 2017; and (ii) HK$3,500,000 together with the interest thereof to be due and payable by December 31, 2017.


10. INCOME TAXES

United States of America

As of September 30, 20172018 and December 31, 2016,2017, the Company in the United States had $4,008,459$1,003,852 and $2,212,890$250,590 in net operating loss carried forwardcarry forwards available to offset future taxable income, respectively. FederalFor net operating losses can generally be carried forward twenty years. The federal corporate net operating loss carryover is expired in 20arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable years followingincome and carryforward the taxable year of the loss.

The Company believes that it is more likely than not that these net accumulated operating lossesNOL indefinitely. Carrybacks are now prohibited. NOLs generated prior to January 1, 2018 will not be utilizedsubject to the taxable income limitation and will begin to expire in 2033 if not utilized.

On December 22, 2017, the future. Therefore,SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of September 30, 2018, the Company has provided a full valuation allowancenot completed its accounting for all tax effects of the deferredTax Act and has made reasonable estimates during 2017. The Company will monitor future guidance set forth by the Department of Treasury with regard to the 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 assetsprovisions under the US entity.Act that are applicable and will revise relevant estimates as appropriate within the one year measurement period.

 

16

Hong Kong

 

The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the nine months ended September 30, 20172018 and 2016,the year ended December 31, 2017, if applicable.

 

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 
  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2018  2017  2018  2017 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Current:            
Federal $-  $-  $-  $- 
State  -   -   -   - 
Foreign  (332,918)  159,281   (160,548  662,598 
Total Current $(332,918) $159,281  $(160,548) $662,598 
                 
Deferred:                
Federal $-  $-  $37,398  $- 
State  -   -   -   - 
Foreign  (409,752)  (34,619)  (451,052)  (68,221)
Total Deferred $(409,752) $(34,619) $(413,654) $(68,221)
                 
Total income tax (benefit) expense $(742,670) $124,662  $(574,202) $594,377 


 

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,
  For the Three Months Ended
September 30,
 For the Nine Months Ended
September 30,
 
 2017  2016  2017  2016  2018 2017 2018 2017 
 (Unaudited) (Unaudited) (Unaudited) (Unaudited)  (Unaudited) (Unaudited) (Unaudited) (Unaudited) 
Income before income tax expense $151,697  $3,048,469  $1,651,515  $6,041,710 
Income (loss) before income tax expense $(3,624,026) $151,696 $(4,116,660) $1,651,515 
                         
Computed tax expense with statutory tax rate  25,030   502,998   271,806   994,688  (597,964) 25,030 (679,249) 271,806 
Impact of different tax rates in other jurisdictions  (73,258)  (24,505)  (230,651)  (254,199) (89,082) (73,258) (51,274) (230,651)
                         
Non-deductible items:                         
Tax effect of non-deductible expenses  25,896   11,117   100,789   32,742  (167,031) 25,896 (163,701) 100,789 

Previous years unrecognized taxation effect

 6,870 - 6,870   
Changes in valuation allowance  146,994   107,122   452,433   603,847  104,537 146,994 313,152 452,433 
                         
Actual income tax expense $124,662  $596,732  $594,377  $1,377,078 
Total income tax (benefit) expense $(742,670) $124,662 $(574,202) $594,377 

 

The Company's effective tax rate was 82.2%20.5% and 19.6%82.2% for the three months ended September 30, 20172018 and 2016,2017, respectively, and 36.0%13.9% and 22.8%36.0% for the nine months ended September 30, 20172018 and 2016,2017, respectively.

 

17

11. COMMITMENTS AND CONTINGENCIES

 

Operation Commitments

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of September 30, 20172018 are payable as follows: 

 

Three months ending December 31, 2017 $244,960 
    
Year ending December 31, 2018  761,175 
Nine months ending December 31, 2018 $205,025 
        
Year ending December 31, 2019  223,026   170,022 
        
Year ending December 31, 2020  39,999   39,736 
        
Year ending December 31, 2021  15,030   14,560 
        
Year ending December 31, 2022 and thereafter  53,232   51,568 
        
Total $1,337,422  $480,911 

 

Rental expense of the Company was $293,338$276,246 and $199,514$293,338 for the three months ended September 30, 20172018 and 2016,2017, respectively, and $721,492$831,308 and $428,440$721,492 for the nine months ended September 30, 20172018 and 2016,2017, respectively.

15 

12. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income 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,
  For the Three Months Ended
September 30,
 For the Nine Months Ended
September 30,
 
 2017  2016  2017  2016  2018 2017 2018 2017 
 (Unaudited) (Unaudited) (Unaudited) (Unaudited)  (Unaudited) (Unaudited) (Unaudited) (Unaudited) 
Numerator:                         
Net income $27,034   2,451,737  $1,057,138   4,664,632 
Net (loss) income $(2,881,356) $27,034 $(3,542,458) $1,057,138 
                         
Denominator:                         
Weighted-average shares outstanding                
Weighted-average shares outstanding - Basic  11,188,882   10,632,276   11,039,880   10,632,276   11,226,025  11,188,882  11,216,009  11,039,880 
Stock options and restricted shares  59,806   733,321   358,202   645,569  - 59,806 - 358,202 
Weighted-average shares outstanding - Diluted  11,248,688   11,365,597   11,398,082   11,277,845   11,226,025  11,248,688  11,216,009  11,398,082 
                         
Earnings per share                
(Loss) earnings per share         
-Basic  0.00   0.23   0.10   0.44   (0.26)  0.00  (0.32)  0.10 
-Diluted  0.00   0.22   0.09   0.41   (0.26)  0.00  (0.32)  0.09 

 

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

 

ForDue to the loss from continuing operations, approximately 29,104 restricted shares for the three months ended September 30, 2017,2018 and 34,915 restricted shares for the diluted earnings per share calculation did not include options to purchase up to 109,160 shares of the Company's common stock, because they were out of money. It has no such impact for three months ended September 30, 2016, nine months ended September 30, 2017 and 2016 respectively.2018, were excluded from the calculation of diluted earnings (loss) per share, because their effect would have been antidilutive.

 

There were dilutive effects13. SUBSEQUENT EVENT

Pursuant to the notice of 487,000 sharestermination of tenancy for redevelopment from the landlord of the Hong Kong office on July 31, 2018, the Company will be required to vacate the Hong Kong office on or by January 31, 2019. Meanwhile, the Company is in process of the tenancy search for the nine months period ended September 30, 2017 and 2016. The 487,000 restricted shares of Common Stock (the “Compensation Shares”) related to the Consulting Agreement with Regeneration Capital Group, LLC (“Regeneration”) were placed in an escrow account and were subject to Regeneration’s performance condition. The shares were released from escrow account and transferred to Regeneration since the Company successfully listed on NYSE on March 22, 2017. 

13. SUBSEQUENT 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, the Company does not identify any other subsequent events with material financial impact on the unaudited condensed consolidated financial statements.new Hong Kong office.

  


18

 

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 filingsthis report, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Although we believe that the expectations reflected in the forward 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.

 

19

As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it now our only operating wholly-owned subsidiary.

 

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

 

Through Hong Kong Takung, we offer an on-line listing and trading services that allow artists/allows artists, art dealers/dealers and owners to access a much bigger artlarger artwork trading market where they can engage with a wide range of investors that they mightmay not encounter without access of our platform. Our platform also makes investmentinvestments 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 engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders for and on behalf of Hong Kong Takung.

 


On January 27, 2016, Hong Kong Takung incorporated another subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a limited liability company, with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.

 

Recently Shanghai Takung set up an office in Hangzhou to carry out technology development.

Since July 28, 2016, we have expanded access to our 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.  

 

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 Harcourt Road, Central Hong Kong.

 

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

 

Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork.

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) was formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art and copyright registration (Takung Online) with the use of blockchain technology.

Shanghai Takung closed its office in Hangzhou, used for technology development on September 13, 2018.

On October 1, 2018, Wang Song (Marketing Manager) was appointed as Hong Kong Takung’s new CEO and President and Xiao Di resigned therefrom effective as of the same day. As from October 1, 2018, Xiao Di is mainly responsible for the e-commerce business, with a focus on the Company’s new subsidiary, Takung Art Holdings and diversity in the new e-commerce business, such as combining Takung Online, the development of the application of blockchain and the use of intellectual property among others.

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 artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees. Starting in the Companysecond quarter of 2018, Shanghai Takung launched an offering of artwork and artwork related merchandise for sales on our online platform. The offering is to further promote the three-month and nine-month period ended September 30, 2017 and 2016 and related notes thereto.artwork’s recognition.

20

 

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 20172018 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2016

Revenue2017

 

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

 

 Three Months Ended
September 30,
  Three Months Ended
September 30,
 
 2017  2016  2018  2017 
 (Unaudited) (Unaudited)  (Unaudited) (Unaudited) 
Revenue $3,355,011  $5,742,209  $363,534  $3,355,011 
Cost of revenue  (292,168)  (285,252)  (299,482)  (292,168)
Selling expense  (624,151)  (652,207)  (149,035)  (624,151)
General and administrative expenses  (2,498,848)  (1,744,965)  (2,208,264)  (2,498,848)
Impairment loss – construction-in-progress  (326,227)  - 
Total costs and expenses  (3,415,167)  (2,682,424)  (2,983,008)  (3,415,167)
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 
Loss from operations  (2,619,474)  (60,156)
Interest and other (expenses) income, net  (1,004,552)  211,852 
(Loss) income before income taxes  (3,624,026)  151,696 
Income tax benefit (expense)  (124,662)  (596,732)  742,670   (124,662)
Net income $27,034  $2,451,737 
Net (loss) income $(2,881,356) $27,034 

 


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

 

 Three Months Ended
September 30,
  Three Months Ended
September 30,
 
 2017  2016  2018 2017 
 (Unaudited) (Unaudited)  (Unaudited) (Unaudited) 
Revenue  100%  100% 100% 100%
Cost of revenue – Direct revenue  (9)  (5) (82) (9)
Selling expense  (18)  (11) (41) (18)
General and administrative expenses  (74)  (30) (608) (74)
Impairment loss – construction-in-progress  (90)  - 
Total costs and expenses  (101)  (46)  (821)  (101)
Income from operations  (1)  54 
Interest and other income (loss), net  6   - 
Income before income taxes  5   54 
Income tax expense  (4)  (10)
Net income  1%  44%
(Loss) income from operations (721) (1)
Interest and other (expenses) income, net  (276)  6 
(Loss) income before income taxes  (997)  5 
Income tax benefit (expense)  204  (4)
Net (loss) income  (793)%  1%

  

Revenue

Listing fee

For comparative purpose, we adjusted the revenue was $1,455,498 and $2,968,534; commission revenue was $1,496,826 and $1,669,698, gross management fee revenue was $402,547 and $781,219, annual fee revenue was $140 and $440 , authorized agent subscription revenue was $nil and $322,318 for the three months ended September 30, 2017 and 2016, respectively.as if retrospectively adopting ASC 606. 

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

  Three months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
     As previously
reported
  Adjustments  Adjusted 
Listing fee revenue $-  $1,455,498   -  $1,455,498 
Commission  253,331   1,496,826   103,742   1,600,568 
Management fee revenue  107,905   402,547   -   402,547 
Annual fee revenue  54   140   -   140 
Online artwork sales  2,244   -   -   - 
Total $363,534  $3,355,011  $103,742  $3,458,753 

21

 

(i)Listing fee revenue

 

Listing fee revenue is calculated based onAs of September 30, 2018, a percentagetotal of the listing value and transaction value278 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 54 sets of paintings and calligraphies 9from famous Chinese, Russian and Mongolian artists, with a total listing value of $24,628,845 (HK$193,100,000); 35 pieces of jewelry with a total listing value of $9,267,384 (HK$72,660,000); 134 pieces of precious stones 1with a total listing value of $16,267,027 (HK$127,540,000); 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 $12,690,679 (HK$16,500,000) for the99,500,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,231 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,616 (HK$2,600,000); 6 pieces of porcelains with a total listing value of $956,584 (HK$7,500,000); 6 sets of paintingsUnit+ products with a total listing value of $1,315,494 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,545 (HK$1,000,000); and calligraphies, $1,132,5557 pieces of Sports memorabilia with a listing value of $1,085,327 (HK$ 8,820,000) for8,509,400), of which 22.5%-48% (for 54 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), 44.94%-48% (for the 6 pieces of porcelains), 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, 2016,2018, there were 7 sets of paintings and calligraphies, 7 pieces of amber, 14 pieces of precious stones, 5 pieces of jewelry successfullyno more artworks listed on our system. The total listing values were $1,802,475 (HK$14,000,000) for the 7 sets of paintings and calligraphies, $2,974,083 (HK$23,100,000) for the 7 pieces of amber, $1,042,860 (HK$8,100,000) for the 14 pieces of precious stones, $746,739 (HK$5,800,000) for 5 pieces of jewelry, of which 47.75%-48% (for the 7 sets of paintings and calligraphies) ,46% (for the 7 pieces of amber), 32%-48.5% (for the 14 pieces of precious stones), 29%-48% (for the 5 pieces of jewelry) of the listed values were charged as listing fees, respectively.platform.

 

The decrease in number of pieces listed, listing values and corresponding listing fees charged during the three months ended September 30, 20172018 compared to the same period ended September 30, 2016 resulted2017 due to the downsizing of online fine art and collectibles platforms, tightening of liquidity in China, and the Company’s decision of suspending the new artwork listing activities that was announced in a decrease in listing fee revenuepress release furnished in the current period. The decrease in number of pieces listed was due to a new listing category (“A-tier”) implementedreport on July 3, 2017. A-tier is aim to meet an elevated set of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore, the listing schedule of some artworks were deferred to a later time.Form 8-K dated August 13, 2018.

   

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

For selected traders, starting April 1, 2016, we charged a predetermined monthly fee allowing unlimited trades for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each reviewed trader to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue, whereby the selected traders receive access to our trading platform where they can make unlimited trades for specific artworks.

22

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

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

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

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

Commission rebate programs are offered to traders and service agents. We pay to existing traders 5% of the commission earned from the transactions of new traders referred by them. The rebate was adjusted from 15% to 5%, starting January 1, 2017. For service agents, we rebate a total of 40% to 68% of the commission earned from transactions with new traders to the service agents when they bring in an agreed number of traders to the trading platform. For service agents who have individual referrers referring traders to us, we will, after rebating such individual referrers 5% of the commission earned from the transactions of new traders they referred, deduct such 5% of the commission from the rebates payable to the service agents to which such individual referrers relate. The commission rebate is recognized as reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606.  

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

Total commission revenue decreased by $1,243,495 or 83% for the three months ended September 30, 2018 to $253,331 compared to $1,496,826 for the three months ended September 30, 2017 primarily because of the suspension of new listings of products, with the decrease of trading activity on the artwork platform.  

(iii)Management fee revenue

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

During the three-month period ended September 30, 2018, management fee revenue decreased by $294,642, from $402,547 for the three months ended September 30, 2017 to $107,905, due to the decrease in trading transactions in the current quarter.

(iv)Annual fee revenue

During the three-month period ended September 30, 2018, annual fee revenue decreased by $86, from $140 for the three-month period ended September 30, 2017 to $54.

23

(v)Online artwork sales

Since the second quarter of 2018, we have provided an offering of artwork and artwork related merchandise for sale on our online platform.

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks ,which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped directly from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed.

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through its online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.

During the three-month period ended September 30, 2018, online artwork sales were $2,244.

Revenue by customer type

The following table presents our revenue by customer type:

  

Three months ended

September 30,

 
  2018  2017 
  (Unaudited)  (Unaudited) 
Artwork owners $-  $1,455,498 
Non - VIP  traders  140,581   199,929 
VIP  traders  220,709   1,699,584 
Online artwork sales  2,244   - 
Total $363,534  $3,355,011 

24

Cost of Revenue

  Three months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $2,094  $- 
Depreciation  163,736   100,769 
Internet service charge  53,676   139,174 
Artwork insurance  50,983   43,818 
Artwork storage  27,533   8,407 
Others  1,460   - 
Total $299,482  $292,168 

Cost of revenue for the three months ended September 30, 2018 and September 30, 2017 was $299,482 and $292,168, respectively. The increase in cost of revenue, for the three months ended September 30, 2018 compared to September 30, 2017, was mainly due to the increase in the commission rebates to service agents by $2,094, subject to the new trader transaction, which is pursuant to the commission rebate program. During the three months ended September 30, 2017, the Company paid to existing traders and service agents a referral rebate of $103,742 at a predetermined referral rate of commission earned from the transactions of new traders referred by those existing traders and service agents. (SeeAdoption of ASC Topic 606, “Revenue from Contracts with Customers”) The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605.  Despite the increase in commission rebate, the increase in cost of revenue was also due to increases in the depreciation and amortization of hardware and software for our trading platform by $62,967 due to the termination of the software development team and amortization of all of the “work in process” items at one time during the third quarter of 2018, the decrease in the internet services charge by $85,498 due to the termination of two network lines between Macau and Hong Kong; the increase in artwork insurance by $7,165; and the increase in artwork storage by $19,126, because of the number of artwork listed increased. Our cost of revenue primarily includes the commission rebate to service agents, internet service charge, artwork insurance, artwork storage and depreciation and amortization of hardware and software for our trading platform.

Gross Profit

Gross profit was $64,052 for the three months ended September 30, 2018, compared to $3,062,843 for the three months ended September 30, 2017. The decrease was due to the significant decrease in listing fee revenue and commission revenue earned in the three months ended September 30, 2018.

Listing fees contributed 0% of the total revenue for the quarter ended September 30, 2018 compared to 43.4% in the corresponding period in 2017, while commission revenue contributed 69.7% for the quarter ended September 30, 2018 compared to 44.6% in the corresponding period in 2017. Compared to the same period in 2017, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a comparable gross profit margin of 17.6% for the three months ended September 30, 2018 compared to 91.3% for the same period in 2017.

25

Operating Expenses

General and administrative expenses for the three months ended September 30, 2018 were $2,208,264 compared to $2,498,848 for the three months ended September 30, 2017. A slight decrease in general and administrative expense by $290,584 was primarily due to a decrease in the following items: legal and professional fees by $52,204, office expenses and rental by $68,645, traveling and accommodation by $110,414, stock-based compensation by $73,351, depreciation by $12,145, bad debt expense by $241,226 and others by $26,509,which was offset by an increase in consultancy fee of $30,133, salary and welfare of $225,956 and non-deductible input VAT expense of $37,821. In the three months ended September 30, 2017, the Company wrote off the receivables related to listing revenue. In the three months ended September 30, 2018, the increase in salary and welfare was driven by the severance packages paid during the reduction in the workforce.

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2018 and September 30, 2017.

  Three months ended
September 30, 2018
  Three months ended
September 30, 2017
 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Consultancy fee  76,192   3%  46,059   2%
Legal and professional fees  165,862   8%  218,066   9%
Salary and welfare  1,234,692   56%  1,008,736   40%
Office, insurance and rental expenses  361,402   16%  430,047   17%
Non-deductible input VAT expenses  44,745   2%  6,924   0%
Traveling and accommodation fees  77,366   4%  187,780   8%
Share-based compensation  64,810   3%  138,161   6%
Depreciation  77,712   4%  89,857   3%
Bad debt expenses  22   0%  241,248   10%
Other  105,461   4%  131,970   5%
Total general and administrative expense $2,208,264   100.0% $2,498,848   100.0%

Other income (loss) and expenses

Other loss and expenses for the three months ended September 30, 2018 were $1,004,552, compared to other income of $211,852 for the three months ended September 30, 2017. The significant increase in other expenses was primarily attributable to the exchange loss incurred in the three months ended September 30, 2018 by $870,218. The exchange loss arose from the fluctuation of exchange rate between the Renminbi and the US dollar.

Income tax benefit (expense)

The Company’s effective tax rate varies due to its multiple jurisdictions where pre-tax income or losses occur. The Company is subject to a Hong Kong profits tax rate of 16.5%, PRC enterprise income tax rate of 25% and U.S. income tax rate of 34% prior to January 1, 2018, whereas 21% after January 1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

The effective tax rates for the three months ended September 30, 2018 and 2017 were 20.5% and 82.2%, respectively.  

Income tax benefit for the three months ended September 30, 2018 was $742,670 and income tax expense for the three months ended September 30, 2017 was $124,662.

Net (Loss) Income

We had a net loss for the three months ended September 30, 2018 of $2,881,356 compared to net income of $27,034 for the three months ended September 30, 2017.

The decrease in net income during this current period was predominately due to a fall in revenue by $2,991,477, an increase in impairment loss on CIP by $326,227 and an increase of exchange loss by $1,047,870, as discussed in the previous paragraphs.

The reason for the decrease in revenue is because of the following: the Company announced, on August 13, 2018, the suspension of new listings of its art products, the company faced the downside of a downturn in the online fine art and collectibles platforms space, downturns in A-shares, and the tightening of liquidity in China.

26

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2017

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

  Nine Months Ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
Revenue $8,191,828  $10,545,677 
Cost of revenue  (2,173,296)  (822,335)
Selling expense  (851,173)  (1,272,010)
General and administrative expenses  (7,791,747)  (7,311,128)
Impairment loss – construction-in-progress  (326,227)  - 
Total costs and expenses  (11,142,443)  (9,405,473)
(Loss) income from operations  (2,950,615)  1,140,204 
Interest and other (expenses) income, net  (1,166,045)  511,311 
(Loss) income before income taxes  (4,116,660)  1,651,515 
Income tax benefit (expense)  574,202   (594,377)
Net (loss) income $(3,542,458) $1,057,138 

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

  Nine Months Ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
Revenue  100%  100%
   Cost of revenue – Direct revenue  (27)  (8)
   Selling expense  (10)  (12)
   General and administrative expenses  (95)  (69)
       Impairment loss – construction-in-progress  (4)  - 
Total costs and expenses  (136)  (89)
(Loss) income from operations  (36)  11 
Interest and other (expenses) income, net  (14)  5 
(Loss) income before income taxes  (50)  16 
Income tax benefit (expense)  7   (6)
Net (loss) income  (43)%  10%

Revenue

For comparative purpose, we adjusted the revenue for nine months ended September 30, 2017 as if retrospectively adopting ASC 606. 

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

  Nine months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
     As previously
reported
  Adjustments  Adjusted 
Listing fee revenue $3,978,735  $4,606,649   -  $4,606,649 
Commission  3,557,411   4,970,651   201,524   5,172,175 
Management fee revenue  455,133   967,518   -   967,518 
Authorized agent subscription revenue  191,623   -   -   - 
Annual fee revenue  378   859   -   859 
Online artwork sales  8,548   -   -   - 
Total $8,191,828  $10,545,677  $201,524  $10,747,201 

27

(i)Listing fee revenue

As of September 30, 2018, a total of 278 sets of artwork were listed for trade on our platform —comprising 54 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $24,628,845 (HK$193,100,000); 35 pieces of jewelry with a total listing value of $9,267,384 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,267,027 (HK$127,540,000); 29 pieces of amber with a total listing value of $12,690,679 (HK$99,500,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,231 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,616 (HK$2,600,000); 6 pieces of porcelains with a total listing value of $956,584 (HK$7,500,000); 6 sets of Unit+ products with a total listing value of $1,315,494 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,545 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,085,327 (HK$8,509,400), of which 22.5%-48% (for 54 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 44.94%-48% (for the 6 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.

During the nine months ended September 30, 2018, there were 14 sets of paintings, 8 pieces of precious stones, 4 pieces of porcelains, 5 sets of Unit+ products and 6 pieces of Sports memorabilia listed on our platform. Their total listing values were $5,229,325 (HK$41,000,000) for the paintings, $984,644 (HK$7,720,000) for the precious stones, $854,548 (HK$6,700,000) for the porcelains, $1,163,971 (HK$9,126,000) for the Unit+ products, and $957,202 (HK$7,505,000) for the Sports memorabilia, of which 41.67%-47.3% (for the paintings), 24%-46% (for the precious stones), 44.94%-48% (for porcelains), 45% (for the Unit+ products), and 45% (for the Sports memorabilia) of the listed values were charged as listing fees, respectively.

The decrease in the listing of artworks during the nine months ended September 30, 2018, compared to the same period ended September 30, 2017, resulted in a decrease in the listing fee value in the current period, the cause of which was announced in a press release furnished in the Company’s current report on Form 8-K dated August 13, 2018.

(ii)Commission fee revenue

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

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

 

For selected Traders,traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimitedthat allows 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 themreviewed traders 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 upon the selected traders that receives access to our trading platform to make unlimited trades for specific artworks.

28

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

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

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

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

 

Commission rebate programs are offered to Traderstraders and service agents. We would rebatepay to existing traders 5% of the commission earned from the transactions of new Traderstraders referred by the existing Traders.them. The rebate rate was adjusted from 15% to 5%, starting from January 1, 2017. For service agents, we rebate a total of 40% to 60%68% of the commission earned from transactions with new Traderstraders to the service agents when they bring in an agreed number of Traderstraders to the trading platform. For service agents who have individual referrers referring Traderstraders to us, we will, after rebating such individual referrers 15%5% of the commission earned from the transactions of new Traderstraders they referred, deduct such 15%5% of the commission from the rebates payable to the service agents to which such individual referrers belong.relate. The commission rebate is recognized as reduction of the commission revenue. revenue prior to January 1, 2018 under Topic 605. Starting January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606.  

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

  

In spite of this, total

Total commission revenue decreased by $172,872$1,413,240 or 10%28.4% for the threenine months ended September 30, 2018 to $3,557,411 compared to $4,970,651 for the nine months ended September 30, 2017 to $1,496,826 compared to $1,669,698 for the three months ended September 30, 2016 primarily because of a decrease in selected traders commission revenue by $3,309,553 and an increase in transaction commission revenue by $1,700,029 resulting from the changeimplementation of an A-tier model, which led to an increase in our commission fee policy and the decreasenumber 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.new product categories.

   

(iii)Management fee revenue

 

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

 

During the three-monthnine-month period ended September 30, 2017,2018, management fee revenue decreased by $378,672,$512,385, from $781,219 for the three months ended September 30, 2016 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 the completion of the transactions. Although the listed artworks increased, the management fee decreased by the promotions.

(iv)Other revenue

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

(v) Authorized agent subscription revenue

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

Cost of Revenue

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


Gross Profit

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

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

Operating Expenses

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

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

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

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

Net Income

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

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


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

Revenue

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

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

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

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

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

(i)Listing fee revenue

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


Compared to the 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.

(ii)Commission fee revenue

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

In spite of this, total commission revenue increased by $1,230,693 or 33% for the nine months ended September 30, 2017 to $4,970,651 compared$455,133, due to $3,739,958 for the nine months ended September 30, 2016 primarily because of the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders . From April 1, 2016 onwards, selected Traders pay a predetermined monthly fixed fee for their trades in specific artworks while our other non-VIP Traders continue to pay a commission calculated based on a percentage of transaction value of artworks.

(iii)Management fee revenue

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

 

 (iv)OtherAnnual fee revenue

 

During the nine-month period ended September 30, 2017,2018, annual fee revenue increaseddecreased by $10,$481, from $869 for the nine-month period ended September 30, 2016 to $859.

(v) Authorized agent subscription revenue

Authorized agent subscription revenue$859 for the nine-month period ended September 30, 2017 was nil compared to $966,059 for$378.

(v)Authorized agent subscription revenue

During the nine-month period ended September 30, 2016. We have ceased charging new2018, authorized agent with subscription revenue was $191,623, compared to $0 for the same period ended in 2017.

(vi)Online artwork sales

From the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped directly from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed. 

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through the online platform. Revenue is recognized when control of the goods is transferred to encourage high quality authorized agentthe customer, which generally occurs upon our delivery to sign up withthe carrier or the customer.

During the nine-month period ended September 30, 2018, online artwork sales was $8,548 comparing to $0 for the nine months ended September 30, 2017.

Revenue by customer type

The following table presents our platform.revenue by customer type:

  

Nine months ended

September 30,

 
  2018  2017 
  (Unaudited)  (Unaudited) 
Artwork owners $3,978,735  $4,606,649 
Non - VIP  traders  2,235,789   779,208 
VIP  traders  1,777,133   5,159,820 
Authorized agents  191,623   - 
Online artwork sales  8,548   - 
Total $8,191,828  $10,545,677 

29

 

Cost of Revenue

  Nine months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $1,207,104  $- 
Depreciation  491,297   301,538 
Internet service charge  240,165   344,986 
Artwork insurance  155,635   126,789 
Artwork storage  74,110   49,022 
Others  4,985   - 
Total $2,173,296  $822,335 

Cost of revenue for the nine months ended September 30, 2018 and September 30, 2017 was $2,173,296 and 2016$822,335, respectively. The increase in cost of revenue by $1,350,961 was $822,335mainly due to the increase in commission rebates to service agents by $1,207,104, subject to the trader transaction, which is pursuant to the commission rebate program. During the nine months ended September 30, 2017, the Company paid to existing traders and $822,735, respectively.service agents a referral rebate of $201,524 at a predetermined referral rate of commission earned from the transactions of new traders referred by those existing traders and service agents. (SeeAdoption of ASC Topic 606, “Revenue from Contracts with Customers”.) The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605.  Despite the increase in commission rebates, the increase in cost of revenue was also due to increases in the depreciation and amortization of hardware and software for our trading platform by $189,759, due to the termination of the software development team and amortization of all of the “work in process” items at one time during the third quarter of 2018; the decrease in the internet services charge by $104,821, due to the termination of two network lines between Macau and Hong Kong; the increase in artwork insurance by $28,846; and the increase in artwork storage by $25,088, because of the number of artwork listed increased. Our cost of revenue primarily includes the commission rebates to service agents, the internet service fee,services charge, artwork insurance, artwork storage, and 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 $6,018,532 for the nine months ended September 30, 2018, compared to $9,723,342 for the nine months ended September 30, 2017, compared2017. The decrease was mainly due to $13,391,517the increase in service agent rebates and a decrease in listing fee and commission revenue.

Overall total revenue for the nine months ended September 30, 2016.2018 reduced by $2,353,849 or 22% compared to the same period in 2017. The decrease in revenue was duechiefly attributable to fewer listing of artwork and lower trading transactions in the less artworks listed on our platform,third quarter of 2018. The shrinkage in gross profit was also triggered by the changerise in our commission fee policy and the decreasecost of transaction volume of non VIP traders and non-selected traders.

Operating Expenses

Selling expenses were $1,272,010, or 13% of net sales,revenue for the nine months ended September 30, 20172018. In the current period, the cost of revenue increased by $1,350,961 or 164% compared to $1,993,782 or 15%the same period in 2017. Consequently, we posted a comparable gross profit margin of net sales,73% for the comparablenine months ended September 30, 2018 compared to 92% for the same period in 2016, a decrease by 36%. Selling expenses consist primarily of marketing expenses.2017.

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Operating Expenses

 

General and administrative expenses for the nine months ended September 30, 20172018 were $7,311,128$7,791,747 compared to $5,076,689$7,311,128 for the nine months ended September 30, 2016.2017. The substantialsignificant increase by $2,234,439 or 44%in general and administrative expense of $480,619 was chieflyprimarily due to anincreases in the following items: salary and welfare by $732,253, non-deductible input VAT expense by $321,596, consultancy fee by $103,552, legal and professional fees by $21,584, and others by $142,709, which was offset by a decrease in stock-based compensation by $344,953, bad debt expense by $317,650, traveling and accommodation by $134,910, office expenses and rental by $29,204, and depreciation by $14,358. In the nine months ended September 30, 2017, the Company wrote off the receivables related to listing revenue. In the nine months ended September 30, 2018, the increase in salariessalary and welfare was driven by $1,314,324 because of an increasethe severance packages paid during the reduction in employee headcount, accrual of doubtful accounts, by $241,248, office, insurance and rental expenses by $400,067 and an increase in travelling expenses by $495,715 which were incurred to attend to the listing of our common stock on the NYSE American.

workforce.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the nine months ended September 30, 20172018 and 2016.September 30, 2017.

 

 Nine months ended
September 30, 2017
  Nine months ended
September 30, 2016
  Nine months ended
September 30, 2018
  Nine months ended
September 30, 2017
 
 (Unaudited) (Unaudited)  (Unaudited)  (Unaudited) 
 Amount($) % of Total Amount($) % of Total  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%  3,898,932   50.0%  3,166,679   43.3%
Office, insurance and rental expenses  1,252,561   17%  852,494   17%  1,223,357   15.7%  1,252,561   17.1%
Legal and professional fees  755,050   9.7%  733,466   10.0%
Traveling and accommodation fees  545,040   7.0%  679,950   9.3%
Non-deductible input VAT expense  16,369   -%  -   -%  337,965   4.3%  16,369   0.2%
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%
Consultancy  290,782   3.7%  187,230   2.6%
Share based compensation  217,231   2.8%  562,184   7.7%
Depreciation  222,636   2.9%  236,994   3.2%
Bad debt expense  (76,402)  (1.0)%  241,248   3.3%
Other  377,156   4.9%  234,447   3.3%
Total general and administrative expense $7,791,747   100.0% $7,311,128   100.0%

 

Other income (loss) and expenses

Other loss and expenses for the nine months ended September 30, 2018 was $1,166,045, compared to other income of $511,311 for the nine months ended September 30, 2017. The significant increase in other expenses for the nine months ended September 30, 2018 was primarily attributed to the exchange loss arising from the fluctuation of the exchange rate between Renminbi and the US dollar. Such increase was slightly offset by the interest earned from the short-term investments in the current period.

Income Taxes Expenses

The Company’s effective tax rate varies due to its multiple jurisdictions where pre-tax income or losses occur. The Company is subject to a Hong Kong profits tax rate of 16.5%, PRC enterprise income tax rate of 25% and U.S. income tax rate of 34% prior to January 1, 2018 while 21% after January 1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

The effective tax rates for the nine months ended September 30, 2018 and 2017 were 13.9% and 36.0%, respectively.

Income taxes benefit for the nine months ended September 30, 2018 was $574,202 and income taxes expense for the nine months ended September 30, 2017 was $594,377.

Net Income

 

We had a net incomeloss for the nine months ended September 30, 20172018 of $1,057,138$3,542,458 compared to a net income of $4,664,632$1,057,138 for the nine months ended September 30, 2016.2017.

 

The decrease in net loss after income by $3,607,494tax expense incurred during this current period was due topredominantly driven by a fall of revenuedecrease in gross profit by $3,668,575, and the$3,704,810, an increase of general and administrative expenses by $2,234,439expense of $480,619, an increase of impairment loss on CIP of $326,227, and an increase of exchange loss of $1,659,113, as discussed in the previous paragraphs.


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Liquidity and Capital Resources

 

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

 

  Nine months ended September 30 
  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 
  Nine months ended
September 30,
 
  2018  2017 
  (Unaudited)  (Unaudited) 
Net cash used in operating activities $(18,589,823) $(1,657,103)
Net cash used in investing activities  (4,377,285)  (561,510)
Net cash provided by financing activities  2,425,220   - 
Effect of exchange rate change on cash and cash equivalents  (664,016)  1,025,539 
Net decrease in cash, cash equivalents and restricted cash  (21,205,904)  (1,193,074)
Cash, cash equivalents and restricted cash, beginning balance  37,140,582   35,138,697 
Cash, cash equivalents and restricted cash, ending balance $15,934,678  $33,945,623 

 

Sources of Liquidity

During the nine months ended September 30, 2018, net cash used in operating activities totaled $18,589,823,which resulted from the implementation of ASU2016-18 since the beginning of 2018. In fact, there was a decline in client deposits by $17,757,757 which influenced the drop of the amount due to clients simultaneously. The Company assessed and evaluated that it was really a presentation issue and there should be no actual impact to the operating activities. Net cash used in investing activities totaled $4,377,285. Net cash generated from financing activities totaled $2,425,220. The resulting change in cash for the period was a decrease of $21,205,904. The cash balance at the beginning of the period was $37,140,582. The cash balance on September 30, 2018 was $15,934,678.

 

During the nine months ended September 30, 2017, net cash generated fromused in operating activities totaled $1,028,524.$1,657,103. Net cash used in investing activities totaled $561,510. No cash was generated from financing activities during the period. The resulting change in cash for the period was an increasea decrease of $1,492,553.$1,193,074. The cash balance at the beginning of the period was $13,395,337.$35,138,697. The cash balance on September 30, 2017 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.$33,945,623.

 

As of September 30, 2017,2018, the Company had $28,390,798$18,508,676 in total current liabilities, which comprised of $780,800$623,472 in accrued expense and other payables, $19,057,733$7,515,860 in customers’ deposits, $6,371,900$14,355 in advance from customer, $3,950,099 in short-term borrowings from third parties, $1,085,480$6,389,042 in amount due to related party, and $1,094,885$15,848 in tax payables. As of December 31, 2016,2017, the Company had $30,602,706$34,910,711 in total current liabilities, which included $608,883$1,461,858 in accrued expense and other accruals, $21,743,360$25,273,617 in customers’ deposits, $360,248$170,078 in advance from customers, $6,308,513$7,208,761 in short-term borrowings from third parties, $1,031,805$483,822 in amount due to related party, and $549,897$312,575 in tax payables.

  

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


The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RenminbiRMB is only currently convertible under the “current account”,"current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”,"capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-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.

 

32

Off-Balance Sheet Arrangements 

 

We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.

 

Future Financings

 

WeAlthough we are suffering downside business including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring, including re-evaluating the company’s 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 23 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016,2017, previously filed with the SEC.

 

Recent Accounting Pronouncements

 

See Note 23 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016,2017, 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 Xiao and our Chief Financial Officer, Mr. Chun Hin Leslie Chow. 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 the nine months ended September 30, 20172018 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, 20172018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

27 

33

 

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

Item 6. Exhibits.

 

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

 

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

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

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

  

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

 

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

 

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

 

(4)(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.

 


34

SIGNATURES

 

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

 

 TAKUNG ART CO., LTD
   
Date: November 14, 201719, 2018By:/s/ Di Xiao
  Di Xiao
  Chief Executive Officer
  (Principal Executive Officer) and Director
   
Date: November 14, 201719, 2018By:/s/ Chun Hin Leslie Chow
  Chun Hin Leslie Chow
  Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)


35