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 SeptemberJune 30, 20172019

 

or

 

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

 

For the transition period from _________________________ to_________________________

 

Commission File Number: 001-38036

 

TAKUNG ART CO., LTD

(Exact name of registrant as specified in its charter)

 

Delaware 26-4731758
(State or other jurisdiction of incorporation or
organization)
 (I.R.S. Employer Identification No.)

 

Flat/RM 03-04 20/F Hutchison House 10 HarcourtRoom 1105 Wing On Plaza, 62 Mody Road, Central,Tsim Sha Tsui, Kowloon, Hong Kong

(Address of principal executive offices) (Zip Code)

 

+852 3158 0977

(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which
registered
Common StockTKATNYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYes¨No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactiveInteractive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).xYes¨No

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of NovemberAugust 14, 20172019 is 11,188,882.11,255,129.

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO,CO., LTD

INDEX

 

  Page
   
PART I.Financial Information3
   
 Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited).3
   
 Item 2.  Management’s Discussion and Analysis of Financial Condition and resultsResults of Operation.17
   
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.2629
   
 Item 4.  Controls and Procedures.2729
   
PART II.Other Information2830
   
 Item 1.  Legal Proceedings.6.  Exhibits.2830
   
 Item 1A. Risk Factors.28Signatures
  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.3128
Item 3.  Defaults Upon Senior Securities.28
Item 4.  Mine Safety Disclosures.28
Item 5.  Other Information.28
Item 6.  Exhibits.28
Signatures29

PART I –FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)

 

Item 1. Financial Statements

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 September 30, December 31,  June 30, December 31, 
 2017  2016  2019  2018 
 (Unaudited)      (Unaudited)     
ASSETS                
Current assets                
Cash and cash equivalents $14,887,890  $13,395,337  $7,451,172  $7,974,884 
Restricted cash  19,057,733   21,743,360   27,001,865   4,549,202 
Account receivables, net  3,732,569   3,058,568   -   568,757 
Prepayment and other current assets  870,231   968,446   513,289   955,249 
Amount due from a related party  5,916,824   5,907,789 
Loan receivables  6,806,623   6,374,046   -   2,391,350 
Total current assets  45,355,046   45,539,757   40,883,150   22,347,231 
                
Non-current assets                
Property and equipment, net  2,104,107   2,065,182   1,111,462   1,445,679 
Intangible assets  20,394   20,546   22,341   22,284 
Deferred tax assets  294,676   243,772 
Operating lease right-of-use assets  1,070,655   - 
Deferred tax assets, net  672,223   611,738 
Other non-current assets  535,420   428,764   116,380   142,293 
Total non-current assets  2,954,597   2,758,264   2,993,061   2,221,994 
Total assets $48,309,643  $48,298,021  $43,876,211  $24,569,225 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY        
LIABILITIES AND SHAREHOLDERS’ EQUITY        
                
LIABILITIES                
Current liabilities                
Accrued expenses and other payables $780,800  $608,883  $618,014  $641,692 
Customer deposits  19,057,733   21,743,360   27,001,865   4,549,202 
Advance from customers  -   360,248   7,043   8,995 
Short-term borrowings from third parties  6,371,900   6,308,513 
Amount due to related party  1,085,480   1,031,805 
Taxes payable  1,094,885   549,897 
Short-term borrowings from a related party  -   2,499,500 
Amount due to related parties  6,790,399   6,385,288 
Operating lease liabilities – current  178,917   - 
Tax payables  12,382   15,101 
Total current liabilities  28,390,798   30,602,706   34,608,620   14,099,778 
Deferred tax liabilities  45,301   62,618 
Total non-current liabilities  45,301   62,618 
        
Non-current liabilities        
Operating lease liabilities, non-current  133,200   - 
Amount due to a related party, non-current  411,389   - 
        
Total liabilities  28,436,099   30,665,324   35,153,209   14,099,778 
                
COMMITMENTS AND CONTINGENCIES                
                
STOCKHOLDERS’ EQUITY        
Common stock (1,000,000,000 shares authorized; $0.001 par value;
11,188,882 shares issued and outstanding as of September 30, 2017;
11,169,276 shares issued and outstanding as of December 31, 2016)
  11,189   11,169 
SHAREHOLDERS’ EQUITY        
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of June 30, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018)  11,255   11,226 
Additional paid-in capital  5,928,455   5,532,426   6,312,372   6,281,790 
Retained earnings   14, 229,809   13,172,671   2,642,804   4,479,133 
Accumulated other comprehensive loss  (295,909)  (1,083,569)  (243,429)  (302,702)
Total stockholders’ equity  19,873,544   17,632,697 
Total liabilities and stockholders’ equity $48,309,643  $48,298,021 
Total shareholders’ equity  8,723,002   10,469,447 
Total liabilities and shareholders’ equity $43,876,211  $24,569,225 

 

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

 


TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

OPERATIONS AND COMPREHENSIVE INCOMELOSS

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

(UNAUDITED)

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Revenue                
Listing fee revenue $1,455,498  $2,968,534  $4,606,649  $8,166,072 
Commission revenue  1,496,826   1,669,698   4,970,651   3,739,958 
Gross management fee revenue  402,547   781,219   967,518   1,341,294 
Annual fee revenue  140   440   859   869 
Authorized agent subscription revenue  -   322,318   -   966,059 
Total revenue  3,355,011   5,742,209   10,545,677   14,214,252 
                 
Cost of revenue  (292,168)  (285,252)  (822,335)  (822,735)
                 
Gross profit  3,062,843   5,456,957   9,723,342   13,391,517 
                 
Operating expenses:                
General and administrative expenses  (2,498,848)  (1,744,965)  (7,311,128)  (5,076,689)
Selling expenses  (624,151)  (652,207)  (1,272,010)  (1,993,782)
                 
Income(loss)from operations  (60,156)  3,059,785   1, 140,204   6,321,046 
                 
Other income and expenses:                
Other income  186,259   163,738   440,470   314,268 
Loan interest expense  (152,059)  (62,670)  (455,762)  (62,670)
Exchange gain (loss)  177,652   (112,384)  526,603   (530,934)
Total other income (loss)  211,852   (11,316)  511,311   (279,336)
                 
Income before income taxes  151,696   3,048,469   1,651,515   6,041,710 
                 
Income tax (expense) benefit  (124,662)  (596,732)  (594,377)  (1,377,078)
                 
Net income $27,034  $2,451,737  $1,057,138  $4,664,632 
                 
Foreign currency translation adjustment  311,485   10,172   787,660   18,322 
                 
Comprehensive income $338,519  $2,461,909  $1,844,798  $4,682,954 
                 
Earnings per common share– basic $0.00  $0.23  $0.10  $0.44 
Earnings per common share– diluted  0.00   0.22   0.09   0.41 
Weighted average number of common shares outstanding-basic  11,188,882   10,632,276   11,039,880   10,632,276 
Weighted average number of common shares outstanding-diluted  11,248,688   11,365,597   11,398,082   11,277,845 
  For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Revenue            
Listing fee $-  $2,000,068  $284,090  $3,978,735 
Commission  532,740   1,668,563   716,080   3,304,080 
Management fee  93,343   178,913   161,614   347,228 
Annual fee  -   162   -   324 
Authorized agent subscription revenue  -   -   -   191,623 
Online artwork sales  -   6,304   -   6,304 
Total revenue  626,083   3,854,010   1,161,784   7,828,294 
                 
Cost of revenue  (441,028)  (940,221)  (708,307)  (1,873,814)
                 
Gross profit  185,055   2,913,789   453,477   5,954,480 
                 
Operating expenses:                
General and administrative expenses  (888,460)  (2,574,598)  (2,163,045)  (5,583,483)
Selling expenses  (3,784)  (458,547)  (34,596)  (702,138)
Total operating expenses  (892,244)  (3,033,145)  (2,197,641)  (6,285,621)
                 
Loss from operations  (707,189)  (119,356)  (1,744,164)  (331,141)
                 
Other income and expenses:                
Other (expenses) income  (79,772)  165,862   (101,762)  405,265 
Loan interest expense  -   (149,683)  -   (304,466)
Exchange loss  (407,159)  (1,255,187)  (48,425)  (262,292)
Total other expenses  (486,931)  (1,239,008)  (150,187)  (161,493)
                 
Loss before provision for income taxes  (1,194,120)  (1,358,364)  (1,894,351)  (492,634)
                 
Income tax benefit (expense)  66,584   273,972   58,022   (168,468)
                 
Net loss $(1,127,536) $(1,084,392) $(1,836,329) $(661,102)
                 
Foreign currency translation adjustment  64,753   (111,111)  59,273   (128,278)
                 
Comprehensive loss $(1,062,783) $(1,195,503) $(1,777,056) $(789,380)
                 
Loss per common share – basic $(0.10) $(0.10) $(0.16) $(0.06)
Loss per common share – diluted  (0.10)  (0.10)  (0.16)  (0.06)
Weighted average number of common shares outstanding-basic  11,247,773   11,217,359   11,236,959   11,210,918 
Weighted average number of common shares outstanding-diluted  11,247,773   11,217,359   11,236,959   11,210,918 

 

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

 


TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

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

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

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCHANGES IN EQUTIY

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

(UNAUDITED)

 

              Accumulated    
        Additional     other    
  Number  Common  Paid-in  Retained  comprehensive    
  of shares  stock  capital  earnings  Income (loss)  Total 
Balance, December 31, 2018  11,226,025   11,226   6,281,790   4,479,133   (302,702)  10,469,447 
                         
Issuance of ordinary shares for restricted stock award  -   -   -   -   -   - 
                         
Shared-based compensation  -   -   16,851   -   -   16,851 
                         
Net loss  -   -   -   (708,793)  -   (708,793)
                         
Foreign currency translation adjustment  -   -   -   -   (5,480)  (5,480)
                         
Balance, March 31, 2019  11,226,025   11,226   6,298,641   3,770,340   (308,182)  9,772,025 
                         
Issuance of ordinary shares for restricted stock award  29,104   29   4,012   -   -   4,041 
                         
Shared-based compensation  -   -   9,719   -   -   9,719 
                         
Net loss  -   -   -   (1,127,536)  -   (1,127,536)
                         
Foreign currency translation adjustment  -   -   -   -   64,753    64,753  
                         
Balance, June 30, 2019  11,255,129   11,255   6,312,372   2,642,804   (243,429)  8,723,002  

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

5

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

  Six Months  Six Months 
  Ended  Ended 
  June 30,  June 30, 
  2019  2018 
Cash flows from operating activities:        
Net cash provided by (used in) operating activities $21,615,744  $(5,625,065)
         
Cash flows from investing activities:        
Purchase of property and equipment  (33,792)  (790,159)
Purchase of available-for-sale investments  (21,372,178)  (74,934,730)
Maturity and redemption of available-for-sale investments  21,372,178   74,934,730 
Loan to related parties  -   (6,369,809)
Repayment of loan from third parties  2,443,251   239,356 
Net cash provided by (used in) investing activities  2,409,459   (6,920,612)
         
Cash flows from financing activities:        
Proceeds from a related party’s loans  393,158   6,372,430 
Loan repayment to a third party  (2,499,500)  (483,822)
Net cash (used in) provided by financing activities  (2,106,342)  5,888,608 
         
Effect of exchange rate change on cash, cash equivalents and restricted cash  10,090   (239,255)
         
Net increase (decrease) in cash, cash equivalents and restricted cash  21,928,951   (6,896,324)
         
Cash, cash equivalents and restricted cash, beginning balance  12,524,086   37,140,582 
         
Cash, cash equivalents and restricted cash, ending balance $34,453,037  $30,244,258 
         
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets        
Cash and cash equivalents as of June 30, 2019 and 2018, respectively $7,451,172  $10,327,827 
Restricted cash as of June 30, 2019 and 2018, respectively  27,001,865   19,916,431 
Total cash, cash equivalents, and restricted cash as of June 30, 2019 and 2018, respectively $34,453,037  $30,244,258 
         
Supplemental cash flows information:        
         
Cash paid for interest $-  $144,311 
Cash paid for income tax $-  $261,285 

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


TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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

 

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

 

Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015.2015 in the PRC. It is engaged in providing services to its parent company, Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung.

 

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

 

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

 

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

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

Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ has been transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The  consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2016,2018, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of SeptemberJune 30, 20172019 and for the three and six months ended June 30, 2019 and nine months ended September 30, 2017 and 20162018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures, which are normally included in financial statements prepared in accordance with United States (“U.S. GAAP,”) generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to such rules and regulations, although the managementregulations. Management believes that the disclosures made are adequate to provide fora fair presentation. The interim financial information should be read in conjunction with the Financial Statementsfinancial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC.

 

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

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited interim condensed consolidated financial position as of SeptemberJune 30, 2017,2019, its consolidated results of operations and cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016,2018, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods. 

 


Recent Accounting Pronouncements

 

Recently Adopted Accounting Standards

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

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

Except for the ASUs issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2018, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial statements upon adoption. 


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 
  June 30,  December 31, 
  2019  2018 
  (Unaudited)    
Tax receivables $280,891  $399,026 
Staff advance  66,861   93,676 
Prepaid service fee  72,807   140,934 
Short-term borrowings to third party  53,775    -  
Deposit  5,096   241,827 
Other current assets  33,859   79,786 
Prepayment and other current assets $513,289  $955,249 

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

  September 30,
2017
  December 31, 
2016
 
  (Unaudited)    
Listing fee $1,562,924  $1,403,255 
Authorized agent subscription revenue  924,100   995,453 
Monthly commission fee  1,422,750   605,677 
Others  63,323   54,183 
Less: allowance for doubtful accounts  (240,528)  - 
Account receivables, net $3,732,569  $3,058,568 

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

10 

5. LOAN RECEIVABLES

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

Date Borrower Lender Original
Amount
(RMB)
  

September 30,
2017

(USD)

  

December 31,
2016

(USD)

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

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

The interest-free loans (the “RMB Loans”) that Shanghai Takung and Tianjin Takung entered were guaranteed by Chongqing Wintus (New Star) Enterprises Group (“Chongqing”). Xiaohui Wang (“Ms. Wang”) is a national 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 Dollar Loans”) with Merit Crown Limited, a Hong Kong company (“Merit 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 US Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will be repaid at the same time.

  June 30,
2019
  December 31,
2018
 
  (Unaudited)     
Listing fee $-  $568,757 
Authorized agent subscription revenue  559,280   557,837 
Monthly commission fee  1,381,712   1,378,148 
Others  53,765   53,626 
Less: allowance for doubtful accounts  (1,994,757)  (1,989,611)
Account receivables, net $-  $568,757 

 


6.5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

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

  June 30,  December 31, 
  2019  2018 
  (Unaudited)     
Furniture, fixtures and equipment $162,712  $156,656 
Leasehold improvements  343,361   447,048 
Computer trading and clearing system  3,390,702   3,382,168 
Transport equipment  104,787   104,628 
Sub-total  4,001,562   4,090,500 
Less: accumulated depreciation  (2,890,100)  (2,644,821)
 Property and equipment, net $1,111,462  $1,445,679 

 

Depreciation expense amounted to $190,626was $157,687 and $133,608$243,781 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $538,532$314,466 and $373,308$472,485 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 

7.6. ACCRUED EXPENSES AND OTHER PAYABLES

 

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

 

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


  June 30,  December 31, 
  2019  2018 
  (Unaudited)    
Accruals for consulting fees $265,478  $264,793 
Accruals for professional fees  225,100   49,518 
Payroll payables  54,193   104,437 
Trading and clearing system  50,161   86,208 
Other payables  23,082   136,736 
Total accrued expenses and other payables $618,014  $641,692 

 

8. SHORT-TERM BORROWINGS FROM THIRD PARTIES

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

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

The US Dollar Loans are to provide Hong Kong Takung with sufficient US Dollar-denominated currency to meet its working capital requirements. It is “secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and guarantor affiliated with the lender of the US Dollar Loans. It is the understanding between the parties that when the US Dollar Loans are repaid, the RMB Loans will similarly be repaid.

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2017 and December 31, 2016. The fair values of the short-term borrowings approximate their carrying amounts. The weighted average short-term borrowing was $6,419,099 and $1,678,803 for the nine months period ended September 30, 2017 and year ended December 31, 2016, respectively. The interest expenses for the short-term borrowings were $133,174 and $62,670 for the three months ended September 30, 2017 and 2016, respectively and $394,295 and $62,670 for the nine months ended September 30, 2017 and 2016, 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.

9.7. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

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

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

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

 

Amount due to related party

Amount due tofrom a related party consisted of the following as of the periodsyears indicated:

 

 September 30,
2017
  December 31,
2016
  June 30,
2019
  December 31,
2018
 
 (Unaudited)     (Unaudited)    
Mao (a) $1,085,480  $1,031,805 
Wang (a) $5,916,824  $5,907,789 
Total  1,085,480   1,031,805   5,916,824   5,907,789 


Amount due to related parties

 

The interest rateAmount due to related parties consisted of the outstanding short-term loan from Mao was 8% per annumfollowing as of September 30, 2017 and December 31, 2016. The interest expense was $61,283 and $19,941 for the nine months ended September 30, 2017 and 2016, respectively, and $20,652 and $19,941 for the three months ended September 30, 2017 and 2016, respectively.years indicated:

  June 30,
2019
  December 31,
2018
 
  (Unaudited)    
Wang (a) (i) $6,401,803  $6,385,288 
Mao (c) (ii)  388,596   - 
Total current amount due to related parties  6,790,399   6,385,288 

June 30,
2019
December 31,
2018
(Unaudited)
Mao (c) (ii)411,389                 -
Total noncurrent amount due to a related party411,389-

(i)Amount due from and due to Wang

 

On October 26, 2017,May 16, 2018, Hong Kong Takung entered into a supplementaryan interest-free loan agreement (the "HK Dollar Loan") with MaoLiu that aswas transferred to Wang on October 18, 2018 for the loan of 30 September 2017, the outstanding principal amount$6,401,803 (HK$50,000,000) to Hong Kong Takung. The purpose of the Loan (as defined in the Loan Agreement)loan is to be repaid byprovide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to Mao is HK$8,000,000 (Hong Kong Dollars Eight Million) (“Outstanding Principal Loan Amount”), and the accrued interest of the Outstanding Principal Loan Amount is HK$478,685 (“Accrued Interest”). Mao hereby agreed to extendmeet its working capital requirements with the maturity date of the Outstanding Principal Loan Amount and the interest thereof byloan is May 15, 2019. On May 15, 2019, Hong Kong Takung as below: (i) HK$4,500,000entered into an extension agreement with Wang to extend the HK Dollar Loan with a due date on May 15, 2020.

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Loan") with Liu that was transferred to Wang on October 18, 2018 for the loan of $5,916,824 (RMB40,619,000) to Wang with the maturity date of the loan is May 15, 2019. On May 15, 2019, Tianjin Takung entered into an extension agreement with Wang to extend the RMB Loan with a due date on May 15, 2020.

Through an understanding between Wang and the interest thereof, togetherCompany, 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. 

(ii)Amount due to Mao

The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, we entered into a non-cancellable lease agreement with the Accrued Interesta related party, Mao for our office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will be expired on May 12, 2021. We are charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $211,193 (RMB1,449,838.04) every six months and a deposit in an amount of $105,596 (RMB724,919.02). The total lease liability is $793,737 as of June 30, 2019.

As of June 30, 2019, Mao also lent a startup deposit of $6,248 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.Hong Kong MQ.


10.8. INCOME TAXES

Takung was incorporated in the State of Delaware and is subject to United States income tax. Hong Kong Takung, Takung Art Holding and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung 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 Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal corporate income taxes on dividends from foreign subsidiaries; and (4) providing modification to subpart F provisions and new taxes on certain foreign earnings such as Global Intangible Low-Taxed Income (GILTI). Except for the one-time transition tax, most of these provisions went into effect starting January 1, 2018.


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

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

As of SeptemberJune 30, 20172019, and December 31, 2016,2018, the Company in the United States had $4,008,459$1,680,046 and $2,212,890$1,332,438 in net operating loss carried forwardcarry forwards available to offset future taxable income, respectively. FederalFor net operating losses can 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 the future. Therefore, the Company has provided a full valuation allowance for the deferred tax assets arising from the losses at the U.S. during the nine months ended September 30, 2017 and year ended December 31, 2016 amounting to $1,414,445 and $962,012, respectively. Accordingly, the Company has no net deferred tax assets under the US entity.2033 if not utilized.

 

Hong Kong

 

The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $255,010) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung Art Co., Ltd, both entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its Profits Tax Return. The election is irrevocable. We elected Hong Kong Takung to be subject to the two-tier profits tax rates.

The provision for current income taxes of the subsidiary operating in Hong Kong Takung has been calculated by applying the current rate of taxation of 8.25% for three and six months ended June 30, 2019, 16.5% for the ninethree and six months ended SeptemberJune 30, 20172018, if applicable. Takung Art Holdings and 2016, if applicable.Hong Kong MQ still applied  the original tax rate of 16.5% for three and six months ended June 30, 2019 and 2018.

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.

 

The income tax provision consists of the following components:

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Current $159,281  $684,801  $662,598  $1,561,728 
Deferred  (34,619)  (88,069)  (68,221)  (184,650)
                 
Total provision for income taxes $124,662  $596,732  $594,377  $1,377,078 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Current:                
Federal $-  $-  $-  $- 
State  -   -   -   - 
Foreign  -   (183,911)  -   172,370 
Total Current $-  $(183,911) $-  $172,370 
                 
Deferred:                
Federal $   $-  $   $37,398 
State      -       - 
Foreign  (66,584)  (90,061)  (58,022)  (41,300)
Total Deferred $(66,584) $(90,061) $(58,022) $(3,902)
                 
Total income tax (benefit) expense $(66,584) $(273,972) $(58,022) $168,468 

 


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

 

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

  For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Loss before income tax expense $(1,194,120) $(1,358,364) $(1,894,351) $(492,634)
                 
Computed tax (benefit) expense with statutory tax rate  (197,073)  (224,130)  (312,567)  (81,285)
Impact of different tax rates in other jurisdictions  69,620   17,108   109,101   37,808 
                 
Non-deductible items:                
Tax effect of non-deductible expenses  11,061   (137,980)  17,886   3,330 
Previous years unrecognized taxation effect      -       - 
Changes in valuation allowance  49,808   71,030   127,558   208,615 
                 
Total income tax (benefit) expense $(66,584) $(273,972) $(58,022) $168,468 

 

The Company's effective tax rate was 82.2%5.6% and 19.6%20.2% for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and 36.0%3.1% and 22.8%(34.2)% for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 


11. COMMITMENTS AND CONTINGENCIES

Operation Commitments9. LEASES

 

The total futureCompany has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately six years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.

The following table provides a summary of leases by balance sheet location as of June 30, 2019:

 Assets/liabilities Classification As of June 30,
2019
 
Assets      
Operating lease right-of-use assets Operating lease assets $1,070,655 
       
Liabilities      
Current      
Operating lease liability - current Current operating lease liabilities $178,917 
  Amount due to related parties  382,348 
       
Long-term      
Operating lease liability - non-current Long-term operating lease liabilities  133,200 
  Amount due to related parties, non-current  411.389 
       
Total lease liabilities   $1,105,854 

The operating lease expenses, including lease from the related party, for the six and three months ended June 30, 2019 were as follows:

    Three months
ended
  Six months
ended
 
Lease Cost Classification June 30, 2019  June 30, 2019 
Operating lease cost Cost of revenue, general and administrative expenses $86,395  $137,173 
Total lease cost   $86,395  $137,173 

Maturities of operating lease liabilities at June 30, 2019 were as follow:

Maturity of Lease Liabilities Operating Leases 
2019 (remainder) $524,245 
2020  600,072 
2021  14,566 
2022  14,566 
2023  14,566 
Thereafter  21,849 
Total lease payments $1,189,864 
Less: interest  (84,010)
Present value of lease payments $1,105,854 


Future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of September 30, 2017 are payableDecember 31, 2018 were as follows:

 

Three months ending December 31, 2017 $244,960 
    
Year ending December 31, 2018  761,175 
     Lease (1) 
Year ending December 31, 2019  223,026  $396,243 
        
Year ending December 31, 2020  39,999   230,683 
        
Year ending December 31, 2021  15,030   14,737 
        
Year ending December 31, 2022 and thereafter  53,232 
Year ending December 31, 2022  14,737 
    
Year ending December 31, 2023 and thereafter  37,457 
        
Total $1,337,422  $693,857 

 

Rental expense(1) Amounts are based on ASC 840, Leases that was superseded upon our adoption of the Company was $293,338 and $199,514 for the three months ended September 30, 2017 and 2016, respectively, and $721,492 and $428,440 for the nine months ended September 30, 2017 and 2016, respectively.ASC 842, Lease on January 1, 2019.

 

15 

Lease Term and Discount RateJune 30, 2019
Weighted-average remaining lease term (years)
Operating leases2.06
Weighted-average discount rate (%)
Operating leases8%

 

Other Information June 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities    
  Operating cash flows from operating leases $94,573 
Leased assets obtained in exchange for new operating lease liabilities  275,189 

 

12.10. EARNINGS PER SHARE

 

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

 

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

  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2019  2018  2019  2018 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Numerator:                
Net loss $(1,127,536) $(1,084,392) $(1,836,329) $(661,102)
                 
Denominator:                
Weighted-average shares outstanding - Basic  11,247,773   11,217,359   11,236,959   11,210,918 
Stock options and restricted shares      -       - 
Weighted-average shares outstanding - Diluted  11,247,773   11,217,359   11,236,959   11,210,918 
                 
Loss per share                
-Basic  (0.10)  (0.10)  (0.16)  (0.06)
-Diluted  (0.10)  (0.10)  (0.16)  (0.06)

 


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

 

ForDue to the loss from continued operations for the three and six months ended SeptemberJune 30, 2017,2019, approximately 148,890 and 15,000 options and restricted shares, respectively, were excluded from the calculation of diluted earningsnet loss 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.share. 

 

There were dilutive effects11. SUBSEQUENT EVENTS

In July 2019, Hong Kong Takung entered into a loan agreement (the “HKD Loan”) with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 487,000 shares8% per annum. The HKD Loan is to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company. In the meantime, Tianjin Takung entered an interest-free loan (the “RMB Loan”) to another third party as a guarantee for the nine months period ended September 30, 2017HKD Loan. The loan amount was $ 2,039,330 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan is “secured” by the RMB Loan. It is the understanding between the parties that when the HKD Loans is repaid, the RMB Loan will be repaid at the same time. 

On August 6, 2019, Mr. Chun Hin Leslie Chow tendered his resignation as Chief Executive Officer of Takung Art Co., Ltd (the “Company”) for personal reasons. In order to fill the vacancy, the Company’s Nominating and 2016. The 487,000 restricted sharesCompensation Committee met on August 6, 2019 to nominate Ms. Fang Mu as the Company’s new Chief Executive Officer. On August 6, 2019, the Company’s Board 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 EVENTDirectors approved Ms. Fang Mu’s appointment.

 

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 anythat, there were no other subsequent events with material financial impact onoccurred that would require recognition or disclosure in the unauditedinterim condensed consolidated financial statements.

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q and other reports filed by us from time to time with the Securities and Exchange Commission (collectively the “Filings”) containcontains or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, our management as well as estimates and assumptions made by our management. When used in the filingsreport the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results.results unless required by applicable securities regulations or rules. The following discussion should be read in conjunction with our pro forma financial statements and the related notes that will be filed herein.

 

Overview

 

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

 

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

 


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

 

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

 

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

 

We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, management fees and authorized agent subscription.

 

On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung is engagedassists in providing services to its parent company Hong Kong TakungTakung’s operations by receiving deposits from and making payments to online artwork traders for andin mainland China on behalf of Hong Kong Takung.


On January 27, 2016, Hong Kong Takung incorporated anothera wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a limited liability company, in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China.million. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China. Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s and eventually dissolve Shanghai Takung in order to save costs.

 

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

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

 

Since July 28, 2016, we have expanded accessHong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ has been transferred from Ms. Hiu Ngai Ma to our trading platform to residentsthe Company. The consideration paid for the ownership transfer, which represent 100% of Russia, Mongolia, Australiathe issued and New Zealand – our first major expansionoutstanding share capital of operations outsideHong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary 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.  the Company.

 

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

 

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

 

Results of Operation of Takung

 

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

 


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

Revenue2018

 

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

 

 Three Months Ended
September 30,
  Three Months Ended June 30, 
 2017  2016  2019  % of
Revenue
  2018  % of
Revenue
 
 (Unaudited) (Unaudited)  (Unaudited)     (Unaudited)    
Revenue $3,355,011  $5,742,209  $626,083   100  $3,854,010   100 
Cost of revenue  (292,168)  (285,252)  (441,028)  (70)  (940,221)  (24)
Selling expense  (624,151)  (652,207)  (3,784)  (1)  (458,547)  (12)
General and administrative expenses  (2,498,848)  (1,744,965)  (888,460)  (142)  (2,574,598)  (67)
Total costs and expenses  (3,415,167)  (2,682,424)  (1,333,272)  (213)  (3,973,366)  (103)
Income from operations  (60,156)  3,059,785 
Interest and other income (loss), net  211,852   (11,316)
Income before income taxes  151,696   3,048,469 
Income tax benefit (expense)  (124,662)  (596,732)
Net income $27,034  $2,451,737 
Loss from operations  (707,189)  (113)  (119,356)  (3)
Total other expenses  (486,931)  (78)  (1,239,008)  (32)
(Loss) income before income tax expenses  (1,194,120)  (191)  (1,358,364)  (35)
Income tax benefit  66,584   11   273,972   7 
Net loss $(1,127,536)  (180) $(1,084,392)  (28)

 


Revenue

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

 

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

Three months ended

June 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Listing fee revenue $-  $2,000,068 
Commission  532,740   1,668,563 
Management fee revenue  93,343   178,913 
Online artwork sales  -   6,304 
Annual fee revenue  -   162 
Total $626,083  $3,854,010 

 

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


(i)Listing fee revenue

 

Listing fee revenue is calculated based onAs of June 30, 2019, a percentagetotal of the listing value and transaction value285 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 60 sets of paintings and calligraphies 9from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones 1with a total listing value of $16,835,824 (HK$132,040,000); 29 pieces of jewelry and 1 set of Unit+ product listed on our platform. Theiramber with a total listing values were $2,118,726value of $12,113,021 (HK$16,500,000) for the95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of paintingsUnit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000); and calligraphies, $1,132,5557 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$ 8,820,000) for8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 9134 pieces of precious stones, $46,227 (HK$360,000) forstones), 29%-48% (for the 135 pieces of jewelry and $152,578 (HK$1,188,000) forjewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 1 set29 pieces of Unit+ product,amber), 45%-46% (for the 2 pieces of which 41.5%-47%porcelain pastel paintings), 25%-48% (for the 7 pieces of 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 SeptemberJune 30, 2016,2019, there were 7 sets of paintings and calligraphies, 7 pieces of amber, 14 pieces of precious stones, 5 pieces of jewelry successfullyno new artworks listed on our system. platform.

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.

The decrease in number of pieces listed, listing values and corresponding listing fees charged decreased to $0 during the three months ended SeptemberJune 30, 20172019 compared to $2,000,068 for the same period ended SeptemberJune 30, 2016 resulted in a decrease in listing fee revenue in2018. During the current period. The decrease in numbersecond quarter of pieces listed was due2019, we did not have any new listings of artwork on our platform because we focused on the promotion of transactions on our platform as opposed to a new listing category (“A-tier”) implemented on July 3, 2017. A-tier is aim to meet an elevated setlistings. We are also more discreet about the future listings of standards including higher levels of liquidity, market value, number of owners and number of VIP traders. Therefore,more valuable artworks. Accordingly, new listings were put off during the listing schedule of some artworks were deferred to a later time.three months ended June 30, 2019.

 

 (ii)Commission fee revenue

 

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

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


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

 

For selected Traders,traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These Traderstraders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different Traderstraders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.

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

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


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

 

Commission rebate programs are offered to Traderstraders and service agents. We would rebatepay to existing traders 5% of the commission earned from the transactions of new Traderstraders referred by them. The rebate was adjusted from 15% to 5%, starting January 1, 2017. For service agents, we rebate a total of 40% to 75% of the commission earned from transactions with new traders to the service agents when they bring in an agreed number of traders to the trading platform. For service agents who have individual referrers referring traders to us, we will, after rebating such individual referrers 5% of the commission earned from the transactions of new traders they referred, deduct such 5% of the commission from the rebates payable to the service agents to which such individual referrers relate.

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

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

Total commission revenue decreased by $1,135,823 or 68% for the three months ended June 30, 2019 to $532,740 compared to $1,668,563 for the three months ended June 30, 2018 primarily because of there were no new listings of artwork during the three months ended June 30, 2019, resulting in a decrease in trading activities on our 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. On November 7, 2018 we lowered the minimum charge to $0.0013 (HK$0.01). The management fee is deducted from proceeds from the sale of artwork units.

During the three-month period ended June 30, 2019, management fee revenue decreased by $85,570, from $178,913 for the three months ended June 30, 2018 to $93,343, due to the decrease in trading transactions.

(iv)Annual fee revenue

During the three-month period ended June 30, 2019, there is no annual fee revenue, compared to $162 for the three-month period ended June 30, 2018

(v)

Online artwork sales

During the three-month period ended June 30, 2019, there is no online artwork sales, compared to $6,304 for the three-month period ended June 30, 2018


Revenue by customer type

The following table presents our revenue by customer type:

  

Three months ended

June 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Artwork owners $-  $2,000,068 
Non - VIP  traders  481,162   993,674 
VIP  traders  144,921   853,964 
Online artwork sales  -   6,304 
Total $626,083  $3,854,010 

Cost of Revenue

  Three months ended
June 30,
 
  2019  2018 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $235,088  $598,519 
Depreciation  121,763   168,424 
Internet service charge  47,104   94,051 
Artwork insurance  11,971   50,958 
Artwork storage  25,091   24,995 
Others  11   3,274 
Total $441,028  $940,221 

Cost of revenue for the three months ended June 30, 2019 and June 30, 2018 was $441,028 and $940,221, respectively. The decrease in cost of revenue for the three months ended June 30, 2019 compared to June 30, 2018, was mainly due to the decrease in the commission rebates to service agents by $363,431. Management was focused on resuscitating interest in the existing Traders.listed artwork in the second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of revenue was also due to a decrease in the depreciation and amortization of hardware and software on our trading platform by $46,661 as a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decrease in internet services charges by $46,947 due to the termination of two network lines between Macau and Hong Kong, and the decrease in artwork insurance by $38,987 due to a negotiated discount in our new insurance contract for 2019.

Gross Profit

Gross profit was $185,055 for the three months ended June 30, 2019, compared to $2,913,789 for the three months ended June 30, 2018. The decrease was due to the decrease in total revenue.

Listing fees contributed 0% of the total revenue for the quarter ended June 30, 2019 compared to 51.9% in the corresponding period in 2018, while commission revenue contributed 85.1% for the quarter ended June 30, 2019 compared to 43.3% in the corresponding period in 2018. Compared to the same period in 2018, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a gross profit margin of 29.6% for the three months ended June 30, 2019 compared to 75.6% for the same period in 2018.


Operating Expenses

General and administrative expenses for the three months ended June 30, 2019 were $888,460 compared to $2,574,598 for the three months ended June 30, 2018. The significant plunge in general and administrative expense by $1,686,138 was attributed to a decrease in salary and welfare by $826,334 due to redundancies since July 2018, a decrease in insurance and rental expenses by $297,275 due to the relocation of our Hong Kong office to a non-central district, a decrease in legal and professional fees by $106,624, a decrease in traveling and accommodation expenses by $113,152 as a result of fewer marketing events, a decrease in non-deductible input VAT by $88,699, a decrease in consultancy fees by $21,075, share-based compensation by $53,412, depreciation by $39,434 and also other expenses by $140,133.

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended June 30, 2019 and 2018.

  Three months ended
June 30, 2019
  Three months ended
June 30, 2018 
 
  (Unaudited)  (Unaudited) 
 Amount($)  % of Total  Amount($)  % of Total 
Salary and welfare  430,369   48.4   1,256,703   48.8 
Office, insurance and rental expenses  147,542   16.6   444,817   17.3 
Legal and professional fees  108,542   12.2   215,166   8.4 
Traveling and accommodation fees  30,985   3.5   144,137   5.6 
Non-deductible input VAT expense  44,567   5.0   133,266   5.2 
Consultancy fee  67,277   7.6   88,352   3.4 
Share Based Compensation Expense  13,760   1.6   67,172   2.6 
Depreciation  35,924   4.0   75,358   2.9 
Others  9,494   1.1   149,627   5.8 
Total general and administrative expense $888,460   100  $2,574,598   100 

Other expenses

Other expenses for the three-month period ended June 30, 2019 were $486,931, compared to other expenses of $1,239,008 for the same period in 2018. There was a significant decrease in exchange loss by $848,028, arising from the appreciation of Renminbi against US dollar.

Income tax benefit

The Company’s effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate at 8.25% for the first HKD 2 million (approximately $255,010) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,010)(16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%.

The effective tax rates for the three months ended June 30, 2019 and 2018 were 5.6% and 20.2%, respectively.  

Income taxes benefit for the three months ended June 30, 2019 and 2018 were $66,584 and $273,972, respectively.

Net Loss

We had a net loss for the three months ended June 30, 2019 of $1,127,536 compared net loss of $1,084,392 for the three months ended June 30, 2018.

Increase in net loss during the three months ended June 30, 2019 was predominately due to a fall in revenue by $3,227,927 at 84%, and a decrease in operating expenses by $2,140,901, or 71% compared to the three months ended June 30, 2018 because of cost-cutting measures. It was also affected by a decrease of exchange losses by $848,028.

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


SIX-MONTH PERIOD ENDED JUNE 30, 2019 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 2018

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

  Six Months Ended    
  June 30,    
  2019  % of
Revenue
  2018  % of
Revenue
 
  (Unaudited)     (Unaudited)    
Revenue $1,161,784   100   $7,828,294   100 
Cost of revenue  (708,307)  (61)   (1,873,814)  (24)
Selling expense  (34,596)  (3)   (702,138)  (9)
General and administrative expenses  (2,163,045)  (186)   (5,583,483)  (71)
Total costs and expenses  (2,905,948)  (250)   (8,159,435)  (104)
(Loss) income from operations  (1,744,164)  (150)   (331,141)  (4)
Interest and other (expenses) income, net  (150,187)  (13)   (161,493)  (2)
(Loss) income before income taxes  (1,894,351)  (163)   (492,634)  (6)
Income tax benefit (expense)  58,022   5    (168,468)  (2)
Net loss $(1,836,329)  (158)  $(661,102)  (8)

Revenue

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

  Six months ended 
  June 30, 
  2019  2018 
  (Unaudited)  (Unaudited) 
Listing fee revenue $284,090  $3,978,735 
Commission  716,080   3,304,080 
Management fee revenue  161,614   347,228 
Authorized agent subscription revenue  -   191,623 
Annual fee revenue      324 
Online artwork sales  -   6304 
Total $1,161,784  $7,828,294 

(i)Listing fee revenue

As of June 30, 2019, a total of 285 sets of artwork were listed for trade on our platform -comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.


During the six months ended June 30, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,147,549 (HK$9,000,000) for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.

The listing fees charged decreased to $284,090 during the six months ended June 30, 2019 compared to $3,978,735 for the same period ended June 30, 2018. During the six months ended June 30, 2019, we have slowed down the listings of artwork on our platform because we focused on the promotion of transactions on our platform as opposed to new listings. We will also be more discreet about the future listings of more valuable artworks. Hence, new listings were put off during the six months ended June 30, 2019.

(ii)Commission fee revenue

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

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

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

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

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

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

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

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

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

 

In spite of this, total

Total commission revenue decreased by $172,872$2,588,000 or 10%78% for the threesix months ended SeptemberJune 30, 20172019 to $1,496,826$716,080 compared to $1,669,698$3,304,080 for the threesix months ended SeptemberJune 30, 20162018 primarily because there were no new listings of artwork on our platform in the change in our commission fee policysecond quarter and this drove down trading activity during 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.second quarter.

 

 (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-monthsix-month period ended SeptemberJune 30, 2017,2019, management fee revenue decreased by $378,672,$185,614, from $781,219$347,228 for the threesix months ended SeptemberJune 30, 20162018 to $402,547. From September 1, 2016, we waived management fees for certain VIP Traders. We recognized these promotions as a reduction of revenue, which was recognized upon$161,614, due to the completion ofdecrease in trading transactions in the transactions. Although the listed artworks increased, the management fee decreased by the promotions.current quarter.

 

 (iv)OtherAnnual fee revenue

 

During the three-monthsix-month period ended SeptemberJune 30, 2017,2019, there is no annual fee revenue, decreased by $300, from $440compared to $324 for the three-monthsix-month period ended SeptemberJune 30, 20162018.


(v)Authorized agent subscription revenue

During the six-month period ended June 30, 2019, there are no authorized agent subscription revenue, compared to $140.$191,623 for the six-month period ended June 30, 2018.

(v)Online artwork sales

During the six-month period ended June 30, 2019, there are no online artwork sales, compared to $6,304 for the six-month period ended June 30, 2018 primarily because of shutting down of online artwork sales on our platform.  

 

(v) Authorized agent subscription revenueRevenue by customer type

 

The following table presents our revenue by customer type:

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.

  

Six months ended

June 30,

 
  2019  2018 
  (Unaudited)  (Unaudited) 
Artwork owners $284,090  $3,978,735 
Non - VIP  traders  640,789   2,095,208 
VIP  traders  236,905   1,556,424 
Authorized agents  -   191,623 
Online artwork sales  -   6,304 
Total $1,161,784  $7, 828,294 

 

Cost of Revenue

  Six months ended
June 30,
 
  2019  2018 
  (Unaudited)  (Unaudited) 
Commission rebate to service agent $290,004  $1,205,010 
Depreciation  243,795   327,561 
Internet service charge  97,778   186,489 
Artwork insurance  23,933   104,652 
Artwork storage  52,333   46,577 
Others  464   3,525 
Total $708,307  $1,873,814 

 

Cost of revenue for the threesix months ended SeptemberJune 30, 20172019 and 2016June 30, 2018 was $292,168$708,307 and $285,252,$1,873,814, respectively. OurThe decrease in cost of revenue primarily includes internetfor the six months ended June 30, 2019 compared to June 30, 2018, was mainly due to the decrease in the commission rebates to service fee,agents by $915,006. Management was focused on resuscitating interest in the listed artwork and no new artwork was listed in the second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of revenue was also due to a decrease in the depreciation and amortization of hardware and software foron our trading platform.platform by $83,766 as a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decrease in internet services charges by $88,711 due to the termination of two network lines between Macau and Hong Kong, and the decrease in artwork insurance by $80,719 due to a negotiated discount in our new insurance contract for 2019.

 


Gross Profit

 

Gross profit was $3,062,843$453,477 for the threesix months ended SeptemberJune 30, 2017,2019, compared to $5,456,957$5,954,480 for the threesix months ended SeptemberJune 30, 2016.2018. The decrease was mainly due to the less artworks listed on our platform, the changedecrease in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.total revenue.

 

Listing fees contributed 43.4% of theOverall total revenue for the threesix months ended SeptemberJune 30, 20172019 dropped by $6,666,510 or 85.2% compared to 51.7% in the correspondingsame period in 2016, while commission revenue contributed 44.6% for2018. Compared to the three months ended September 30, 2017 compared to 29% in the correspondingsame period in 2016. While2018, there was a decrease in commission revenue in the current period, the negative factors were catalyzed by asignificant decrease in listing fees due to less artworks listing on the platform during the current period.fee revenue and commission revenue. Consequently, we posted a comparable gross profit margin of 91%39.0% for the threesix months ended SeptemberJune 30, 20172019 compared to 95%76.1% for the same period in 2016.2018.

 

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 threesix months ended SeptemberJune 30, 20172019 were $2,498,848$2,163,045, compared to $1,744,965$5,583,483 for the threesix months ended SeptemberJune 30, 2016.2018. The substantial increasesignificant plunge in general and administrative expense by $3,420,438 was primarilyattributed to a decrease in salary and welfare by $1,786,374 due to an increaseredundancies since July 2018, a decrease 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$534,273 due to the listingrelocation of our common stock on the NYSE American.Hong Kong office to a non-central district, a decrease in legal and professional fees by $206,548, a decrease in traveling and accommodation expenses by $415,331 as a result of fewer marketing events, a decrease in non-deductible input VAT by $203,622, a decrease in consultancy fees by $42,155, share-based compensation by $121,810, depreciation by $74,253 and also other expenses by $36,072.

 


The following table sets forth the main components of the Company’s general and administrative expenses for the threesix months ended SeptemberJune 30, 20172019 and 2016.June 30, 2018.

 

  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%

  Six months ended  Six months ended 
  30-Jun-19  30-Jun-18 
  (Unaudited)  (Unaudited) 
  Amount($)  % of Total  Amount($)  % of Total 
Salary and welfare  877,866   40.6   2,664,240   47.7 
Legal and professional fees  382,640   17.7   589,188   10.6 
Office, insurance and rental expenses  327,682   15.1   861,955   15.4 
Consultancy fee  172,435   8.0   214,590   3.8 
Non-deductible input VAT expense  89,598   4.1   293,220   5.3 
Depreciation  70,671   3.3   144,924   2.6 
Traveling and accommodation fees  52,343   2.4   467,674   8.4 
Share Based Compensation Expense  30,611   1.4   152,421   2.7 
Others  159,199   7.4   195,271   3.5 
Total general and administrative expense $2,163,045   100  $5,583,483   100 

 

Other income and expenses

Other expenses for the six months ended June 30, 2019 was $150,187, compared to $161,493 for the six months ended June 30, 2018. The amount was comparable between two periods.

Income tax benefit (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 at 8.25% for the first HKD 2 million (approximately $255,010) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,010) (16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%. 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 six months ended June 30, 2019 and 2018 were 3.1% and (34.2)%, respectively.

Income taxes benefit (expense) for the six months ended June 30, 2019 and 2018 were $58,022 and $(168,468), respectively.

Net Incomeloss

 

We had a net incomeloss for the threesix months ended SeptemberJune 30, 20172019 of $27,034$1,836,329 compared to net incomeloss of $2,451,737$661,102 for the threesix months ended SeptemberJune 30, 2016.2018.

 

The decrease in net loss after income by $2,424,703tax expense incurred during this current period was primarily due to a decrease of revenuepredominantly driven 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 increasedgross profit by 193% and trading amount increased by 178% for the nine months ended September 30, 2017 compared to corresponding period in 2016.

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

(iii)Management fee revenue

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

(iv)Other revenue

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

(v) Authorized agent subscription revenue

Authorized agent subscription revenue for the nine-month period ended September 30, 2017 was nil compared to $966,059 for the nine-month period ended September 30, 2016. We have ceased charging new authorized agent with subscription revenue in order to encourage high quality authorized agent to sign up with our platform.

Cost of Revenue

Cost of revenue for the nine months ended September 30, 2017 and 2016 was $822,335 and $822,735, respectively. Our cost of revenue primarily includes internet service fee, depreciation and amortization of hardware and software for our trading platform.


In the third quarter of 2014, we entered into an agreement with a third party service provider, Shenzhen Qianrong Cultural Investment Development Co., Ltd (“Qianrong”), to provide software development services with a total contract amount of $902,592 (HK$6,995,000). The services contracted for are divided into different modules, according to different upgrades and new functionalities. As of September 30, 2017 and 2016, nine out of the ten modules have been completed and are operational. We capitalized (with a total cost of $1,069,853 (HK$8,295,000)) and amortized these costs once the modules were completed.

Gross Profit

Gross profit was $9,723,342 for the nine months ended September 30, 2017, compared to $13,391,517 for the nine months ended September 30, 2016. The decrease was due to the less artworks listed on our platform, the change in our commission fee policy and the decrease of transaction volume of non VIP traders and non-selected traders.

Operating Expenses

Selling expenses were $1,272,010, or 13% of net sales, for the nine months ended September 30, 2017 compared to $1,993,782 or 15% of net sales, for the comparable period in 2016, a decrease by 36%. Selling expenses consist primarily of marketing expenses.

General and administrative expenses for the nine months ended September 30, 2017 were $7,311,128 compared to $5,076,689 for the nine months ended September 30, 2016. The substantial increase by $2,234,439 or 44% was chiefly due to an increase in salaries by $1,314,324 because of an increase in employee headcount, accrual of doubtful accounts, by $241,248, office, insurance and rental expenses by $400,067 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.

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

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

Net Income

We had a net income for the nine months ended September 30, 2017 of $1,057,138 compared to net income of $4,664,632 for the nine months ended September 30, 2016.

The decrease in net income by $3,607,494 during this current period was due to a fall of revenue by $3,668,575, and the increase of general and administrative expenses by $2,234,439 as discussed in the previous paragraphs.$5,501,003.


 

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 
  Six months ended 
  June 30, 
  2019  2018 
  (Unaudited)  (Unaudited) 
Net cash provided by (used in) operating activities $21,615,744  $(5,625,065)
Net cash provided by (used in) investing activities  2,409,459   (6,920,612)
Net cash (used in) provided by financing activities  (2,106,342)  5,888,608 
Effect of exchange rate change on cash and cash equivalents  10,090   (239,255)
Net increase (decrease) in cash, cash equivalents and restricted cash  21,928,951   (6,896,324)
Cash, cash equivalents and restricted cash, beginning balance  12,524,086   37,140,582 
Cash, cash equivalents and restricted cash, ending balance $34,453,037  $30,244,258 

Sources of Liquidity

 

During the ninesix months ended SeptemberJune 30, 2017,2019, net cash generated from operating activities totaled $1,028,524.$21,615,744, which resulted from the implementation of ASU2016-18 since the beginning of 2018. In fact, there was an increase in client deposits by $22,452,663 placed by the customers for upcoming transactions which influenced the increased amounts 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 generated from investing activities totaled $2,409,459. Net cash used in investingfinancing activities totaled $561,510. No cash was generated from financing activities during the period.$2,106,342. The resulting change in cash for the period was an increase of $1,492,553.$21,928,951. The cash balance at the beginning of the period was $13,395,337.$12,524,086. The cash balance on SeptemberJune 30, 20172019 was $14,887,890.$34,453,037.

 

During the ninesix months ended SeptemberJune 30, 2016,2018, net cash provided byused in operating activities totaled $5,635,391.$5,625,065 and it was resulted in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in (approximately $5.3M provided by) restricted cash activity due to the adoption of ASU2016-18 since beginning of 2018. Actually, there was a decline in client deposits by $5,357,186 in which influenced the drop of the amount due to clients simultaneously. The Company assessed and evaluated it was rather a presentation issue and there should have no actual impact to the operating activities. Net cash used in investing activities totaled $1,276,378.$6,920,612. Net cash provided bygenerated from financing activities totaled $2,346,941.$5,888,608. The resulting change in cash for the period was an increasea decrease of $6,061,579.$6,896,324. The cash balance at the beginning of the period was $10,769,456.$37,140,582. The cash balance on SeptemberJune 30, 20162018 was $16,831,035.$30,244,258.

. 

As of SeptemberJune 30, 2017,2019, the Company had $28,390,798$34,608,620 in total current liabilities, which comprised of $780,800$618,014 in accrued expense and other payables, $19,057,733$27,001,865 in customers’ deposits, $6,371,900$7,043 in advance from customer, $6,790,399 in amount due to related parties, $178,917 in lease liabilities and $12,382 in tax payables. As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included $641,692 in accrued expenses and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500 in short-term borrowings from third parties, $1,085,480$6,385,288 in amount due to related party, and $1,094,885 in tax payables. As of December 31, 2016, the Company had $30,602,706 in total current liabilities, which included $608,883 in accrued expense and other accruals, $21,743,360 in customers’ deposits, $360,248 in advance from customers, $6,308,513 in short-term borrowings from third parties, $1,031,805 in amount due to related party and $549,897$15,101 in tax payables.

  

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


The Company is aware of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RenminbiRMB is only currently convertible under the “current account”,"current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”,"capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of “current"current account transactions”,transactions," including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.

 

Applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.


 

If our operating subsidiaries were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.

 

Off-Balance Sheet Arrangements 

 

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

 

Future Financings

 

WeAlthough we are suffering downside business including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring, including re-evaluating the Company’s core business and a downsizing of its workforce. Our management forecasts that we have always been generating sufficient cash from our operationoperations to fund our business organically. However, we may conduct equity sales of our shares of common sharesstock in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, orand if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.

 

Critical Accounting Policies

 

We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC.

 

Recent Accounting Pronouncements

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.


Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Mr. Di XiaoMs. Fang Mu and our Chief Financial Officer, Mr. Chun Hin Leslie Chow.Jehn Ming Lim. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of SeptemberJune 30, 20172019 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended SeptemberJune 30, 20172019 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

27 


 

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

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

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

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

 

*Filed herewith.

**Furnished herewith.


 


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: NovemberAugust 14, 20172019By:/s/ Di XiaoFang Mu
  Di XiaoFang Mu
  Chief Executive Officer
  (Principal Executive Officer) and Director
   
Date: NovemberAugust 14, 20172019By:/s/ Chun Hin Leslie ChowJehn Ming Lim
  Chun Hin Leslie ChowJehn Ming Lim
  Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)