Company Quick10K Filing
Takung Art
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 11 $7
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-16 Quarter: 2019-03-31
10-K 2019-04-16 Annual: 2018-12-31
10-Q 2018-11-19 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-04-02 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-11 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-19 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-02-17 Annual: 2015-12-31
10-Q 2015-11-13 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-20 Quarter: 2014-03-31
10-K 2014-04-07 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-15 Quarter: 2013-06-30
10-Q 2013-05-14 Quarter: 2013-03-31
10-K 2013-04-05 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-15 Quarter: 2012-06-30
10-Q 2012-05-17 Quarter: 2012-03-31
10-K 2012-04-02 Annual: 2011-12-31
8-K 2020-01-17 Officers
8-K 2019-12-31 Shareholder Vote
8-K 2019-08-14 Enter Agreement, Exhibits
8-K 2019-08-06 Officers, Exhibits
8-K 2019-07-08 Officers
8-K 2019-06-17 Enter Agreement, Exhibits
8-K 2019-02-18 Officers, Exhibits
8-K 2019-01-17 Officers, Exhibits
8-K 2018-12-30 Shareholder Vote
8-K 2018-11-19 Officers, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-13 Regulation FD, Exhibits
8-K 2018-05-16 Earnings, Exhibits
8-K 2018-03-27 Other Events
8-K 2018-03-12 Regulation FD, Exhibits
TKAT 2019-09-30
Part I -Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 4.Controls and Procedures.
Part II - Other Information
Item 6. Exhibits.
EX-31.1 tm1919614d1_ex31-1.htm
EX-31.2 tm1919614d1_ex31-2.htm
EX-32.1 tm1919614d1_ex32-1.htm

Takung Art Earnings 2019-09-30

TKAT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
BNED 152 1,502 1,082 2,019 533 -18 34 143 26% 4.2 -1%
FGP 102 1,330 1,330 1,753 0 -127 43 2,141 0% 49.4 -10%
AMRK 85 705 633 4,783 32 0 21 169 1% 8.1 0%
PRTS 58 109 73 218 76 -10 -4 57 35% -13.0 -9%
BGFV 42 700 525 1,000 302 -0 25 35 30% 1.4 -0%
KIRK 23 469 367 620 184 -15 12 8 30% 0.6 -3%
TKAT 7 44 35 2 0 -9 -8 -28 23% 3.4 -20%
ONEW
APU 3,791 3,309 2,737 0 187 370 2,559 0% 6.9 5%
HVT 561 294 799 436 27 62 -63 55% -1.0 5%

10-Q 1 tm1919614-1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

or

 

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

 

For the transition period from _________________________ to_________________________

 

Commission File Number: 001-38036

 

TAKUNG ART CO., LTD

(Exact name of registrant as specified in its charter)

 

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

 

Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, Hong Kong

(Address of principal executive offices) (Zip Code)

 

+852 3158 0977

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which
registered
Common Stock TKAT NYSE American

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x   Yes  ¨  No

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
  Emerging growth company ¨

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of November 13, 2019 is 11,255,129.

 

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO., LTD

INDEX

 

        Page
         
PART I.   Financial Information   3
         
    Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited)   3
         
    Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.   17
         
    Item 3.  Quantitative and Qualitative Disclosures About Market Risk.   29
         
    Item 4.  Controls and Procedures.   29
         
PART II.   Other Information   30
         
    Item 6.  Exhibits.   30
         
    Signatures   30

 

 2 

 

 

PART I –FINANCIAL INFORMATION

 

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, 
   2019   2018 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $6,086,637   $7,974,884 
Restricted cash   17,008,251    4,549,202 
Account receivables, net   -    568,757 
Prepayment and other current assets   579,107    955,249 
Amount due from a related party   5,682,807    5,907,789 
Loan receivables   1,958,672    2,391,350 
Total current assets   31,315,474    22,347,231 
           
Non-current assets          
Property and equipment, net   941,374    1,445,679 
Intangible assets   22,257    22,284 
Operating lease right-of-use assets   904,836    - 
Deferred tax assets, net   776,896    611,738 
Amount due from a related party, non-current   101,420    - 
Other non-current assets   114,823    142,293 
Total non-current assets   2,861,606    2,221,994 
Total assets  $34,177,080   $24,569,225 
           
 LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
LIABILITIES          
Current liabilities          
Accrued expenses and other payables  $522,929   $641,692 
Customer deposits   17,008,251    4,549,202 
Advance from customers   10,227    8,995 
Short-term borrowings from third parties   1,816,837    2,499,500 
Amount due to related parties   6,759,674    6,385,288 
Operating lease liabilities – current   173,156    - 
Tax payables   7,831    15,101 
Total current liabilities   26,298,905    14,099,778 
           
Non-current liabilities          
Operating lease liabilities, non-current   92,027    - 
Amount due to a related party, non-current   197,520    - 
           
Total liabilities   26,588,452    14,099,778 
           
 COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of September 30, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018)   11,255    11,226 
Additional paid-in capital   6,318,645    6,281,790 
Retained earnings   1,514,907    4,479,133 
Accumulated other comprehensive loss   (256,179)   (302,702)
Total shareholders’ equity   7,588,628    10,469,447 
Total liabilities and shareholders’ equity  $34,177,080   $24,569,225 

 

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

 

 3 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(UNAUDITED)

 

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

 

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

 

 4 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUTIY

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

(UNAUDITED)

 

                   Accumulated     
           Additional       other     
   Number   Common   Paid-in   Retained   comprehensive     
   of shares   stock   capital   Earnings   Income (loss)   Total 
Balance, December 31, 2018   11,226,025    11,226    6,281,790    4,479,133    (302,702)   10,469,447 
                               
Issuance of ordinary shares for restricted stock award   -    -    -    -    -    - 
                               
Shared-based compensation   -    -    16,851    -    -    16,851 
                               
Net loss   -    -    -    (708,793)   -    (708,793)
                               
Foreign currency translation adjustment   -    -    -    -    (5,480)   (5,480)
                               
Balance, March 31, 2019   11,226,025    11,226    6,298,641    3,770,340    (308,182)   9,772,025 
                               
Issuance of ordinary shares for restricted stock award   29,104    29    4,012    -    -    4,041 
                               
Shared-based compensation   -    -    9,719    -    -    9,719 
                               
Net loss   -    -    -    (1,127,536)   -    (1,127,536)
                               
Foreign currency translation adjustment   -    -    -    -    64,753    64,753 
                               
Balance, June 30, 2019   11,255,129    11,255    6,312,372    2,642,804    (243,429)   8,723,002 
                               
Shared-based compensation   -         6,273    -    -    6,273 
                               
Net loss   -    -    -    (1,127,897)   -    (1,127,897)
                               
Foreign currency translation adjustment   -    -    -    -    (12,750)   (12,750)
                               
Balance, September 30, 2019   11,255,129    11,255    6,318,645    1,514,907    (256,179)   7,588,628 

 

 5 

 

 

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

 

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

 

 6 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

 

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

 

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

 

 7 

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Takung Art Co., Ltd and subsidiaries (“Takung” or the “Company”), 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.), 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, the company had no operation except for the issuance of shares for subscription receivables. The Company generates revenue from its services in connection with the offering and trading of artwork on its system, primarily consisting of listing fees, trading commissions, and management fees. The Company conducts its business primarily in Hong Kong, People’s Republic of 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 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.

 

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 in Tianjin. Tianjin Takung was incorporated on January 27, 2016 and is a direct wholly-owned subsidiary of Hong Kong Takung.

 

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

 

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

 

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

 

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

 

MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities and promoting our artwork trading business.

 

 8 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

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

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

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

 

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

 

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

 

 9 

 

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

Prepayment and other current assets consisted of the following:

 

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

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

   September 30,
2019
   December 31,
2018
 
    (Unaudited)      
Listing fee  $-   $568,757 
Authorized agent subscription revenue   557,154    557,837 
Monthly commission fee   1,376,460    1,378,148 
Others   53,561    53,626 
Less: allowance for doubtful accounts   (1,987,175)   (1,989,611)
Account receivables, net  $-   $568,757 

 

5. LOAN RECEIVABLES

 

 

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

 

Date  Borrower  Lender 

Original
Amount
(RMB)

  

Outstanding
Balance
(RMB)

  

Amount in
Reporting
Currency
(USD)

  

Annual 
Interest
Rate

   Repayment 
Due Date
7/18/2019  Chongqing Aoge Import and Export Co.  Tianjin
Takung
   5,000,000    5,000,000   $699,526    0%  7/17/2020
8/29/2019   Chongqing Aoge Import and Export Co.  Tianjin
Takung
   5,000,000    5,000,000   $699,526    0%  8/28/2020
9/20/2019   Chongqing Aoge Import and Export Co.  Tianjin
Takung
   4,000,000    4,000,000   $559,620    0%  9/19/2020
          Total        $1,958,672         

  

  The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr.  Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company.

 

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

  

 10 

 

 

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

 

Through an understanding between Chongqing Aoge Import and Export Co. and Friend Sourcing, the Hong Kong Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that the Hong Kong Dollar Loans and the RMB Loans will be repaid simultaneously.  

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

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

 

Depreciation expense was $148,774 and $241,448 for the three months ended September 30, 2019 and 2018, respectively, and $463,241 and $713,933 for the nine months ended September 30, 2019 and 2018, respectively.

 

7. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 2019 and December 31, 2018 consisted of the following:

 

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

 

8. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

In July 2019, Hong Kong Takung entered into a loan agreement (the “HKD Loan”) with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum. The 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 HKD Loan. The loan amount was $ 1,955,245 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan is “secured” by the RMB Loan. It is an understanding between the parties that when the HKD Loans is repaid, the RMB Loan will be repaid at the same time. 

 

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

 

 11 

 

 

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

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2019. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings were $256,074 and $7,319,041 for the nine months period ended September 30, 2019 and 2018, respectively. The interest expenses for the short-term borrowings were $18,015 and $199,822 for the three months ended September 30, 2019 and 2018, respectively, and $18,015 and $500,080 for the nine months ended September 30, 2019 and 2018, respectively.

 

9. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

(a) 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”), the Human Resources Management Director of Hong Kong Takung.

 

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

 

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

 

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

 

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

 

Amount due to related parties

 

Amount due to related parties consisted of the following as of the years indicated:

 

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

 

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

 

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

 

On May 16, 2018, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with Liu that was transferred to Wang on October 18, 2018 for the loan of $6,377,470 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan is May 15, 2019. On May 15, 2019, Hong Kong Takung entered into an extension agreement with Wang to extend the HK Dollar Loan with a due date on May 15, 2020. On September 16, 2019, Wang transferred this loan to Li, Shuhai, the legal representative of Tianjin Takung with the same extended maturity date.

 

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

 

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

 

(ii) Amount due to / from Mao

 

The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for the 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. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $202,840 (RMB1,449,838.04) every nine months and a deposit of $101,420 (RMB724,919.02). The deposit is refundable to the Company. The total lease liability is $573,500, of which $375,980 and $197,520 were included in current and noncurrent portions, respectively, as of September 30, 2019.

 

As of September 30, 2019, Mao also lent a startup deposit of $6,224 to Hong Kong MQ.

  

10. INCOME TAXES

 

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

 

United States of America

 

Tax Cuts and Jobs Act Enacted in 2017

 

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

  

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

 

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

 

 13 

 

 

As of September 30, 2019, and December 31, 2018, the Company in the United States had $1,886,422 and $1,332,438 in net operating loss carry forwards available to offset future taxable income, respectively. For net operating losses arising after December 31, 2017, the Tax Act limits the Company’s ability to utilize NOL carryforwards to 80% of taxable income and carryforward the NOL indefinitely. Carrybacks are now prohibited. NOLs generated prior to January 1, 2018 will not be subject to the taxable income limitation and will begin to expire in 2033 if not utilized.

 

Hong Kong

 

The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $255,154) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung Art Co., Ltd, both entities are connected entities. Under the Ordinance, it is 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 Hong Kong Takung has been calculated by applying the current rate of taxation of 8.25% for three and nine months ended September 30, 2019, 16.5% for three and nine months ended September 30, 2018, if applicable. Takung Art Holdings and Hong Kong MQ still applied the original tax rate of 16.5% for three and nine months ended September 30, 2019.

 

PRC

 

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

 

The income tax provision consists of the following components:

 

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

  

 14 

 

 

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

 

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

 

The effective tax rate was 9.4% and 20.5% for the three months ended September 30, 2019 and 2018, respectively, and 5.6% and 13.9% for the nine months ended September 30, 2019 and 2018, respectively.

 

11. LEASES

 

The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately nine 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 September 30, 2019:

 

Assets/liabilities  Classification  As of September 30,
2019
 
Assets        
Operating lease right-of-use assets  Operating lease assets  $904,836 
         
Liabilities        
Current        
Operating lease liability - current  Current operating lease liabilities  $173,156 
   Amount due to related parties   375,980 
         
Long-term        
Operating lease liability - non-current  Long-term operating lease liabilities   92,027 
   Amount due to related parties, non-current   197,520 
         
Total lease liabilities     $838,683 

 

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

 

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

 

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

 

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

  

 15 

 

 

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

 

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

 

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

 

Lease Term and Discount Rate  September 30,
2019
 
Weighted-average remaining lease term (years)     
Operating leases   1.86 
      
Weighted-average discount rate (%)     
Operating leases   8%

 

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

 

12. LOSS PER SHARE

 

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

 

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

 

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.

 

Due to the loss from continued operations for the three and nine months ended September 30, 2019, approximately 130,890 options were excluded from the calculation of diluted net loss per share. 

 

13. SUBSEQUENT EVENTS

 

Management assessed and determined there were no significant and material subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements.

 

 16 

 

   

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

 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

Overview

 

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.

 

 17 

 

 

 

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

 

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

 

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

 

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

 

On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s operations by receiving deposits from and making payments to online artwork traders in mainland China on behalf of Hong Kong Takung. On January 27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China. Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s and eventually dissolve Shanghai Takung in order to save costs.

 

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

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) was incorporated in Tianjin, 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 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 consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.

 

MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities for and promoting our artwork trading business.

 

Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong, Shanghai and Tianjin. Our principal executive offices are located at Room 1105 Wing On Plaza, 62 Mody Road, Tsim 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

 

Hong Kong Takung operates a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees. 

 

 18 

 

 

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

 

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

 

   Three Months Ended September 30, 
   2019   % of
Revenue
   2018   % of
Revenue
 
   (Unaudited)       (Unaudited)     
Revenue  $1,123,592    100   $363,534    100 
Cost of revenue   (580,282)   (52)   (299,482)   (82)
Selling expense   (108,458)   (10)   (149,035)   (41)
General and administrative expenses   (1,159,502)   (103)   (2,208,264)   (608)
Impairment loss-construction-in-progress   -         (326,227)   (90)
Total costs and expenses   (1,848,242)   (165)   (2,983,008)   (821)
Loss from operations   (724,650)   (65)   (2,619,474)   (721)
Total other expenses   (520,698)   (46)   (1,004,552)   (276)
Loss before income tax expenses   (1,245,348)   (111)   (3,624,026)   (997)
Income tax benefit   117,451    10    742,670    204 
Net loss  $(1,127,897)   (101)  $(2,881,356)   (793)

 

Revenue

 

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

 

  

Three months ended

September 30,

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

 

 19 

 

 

  (i) Listing fee revenue

 

As of September 30, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of sports memorabilia) of the listed values were charged as listing fees, respectively. 

 

During the three months ended September 30, 2019, there were no new artworks listed on our platform.

 

We had no listing fee revenue for the three months ended September 30, 2019 and 2018. During the third quarter of 2019, we suspended and did not have any new listings of artwork on our platform because we focused on the promoting the trading of our existing listed artwork as opposed to new listings. We also felt that any new listings would be unfavorably impacted by current market conditions. We will be more discreet about the future listings of more valuable artworks.

  

  (ii) Commission fee revenue

 

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

 

For non-VIP traders, the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, 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. On November 7, 2018 we lowered the minimum charge to $0.0013 (HK$0.01).

 

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

 

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

 

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

 

 20 

 

 

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

 

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

 

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

  

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

 

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

 

  (iii) Management fee revenue

 

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

 

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

 

  (iv) Annual fee revenue

 

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

 

  (v) Online artwork sales

 

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

 

 21 

 

 

Revenue by customer type

 

The following table presents our revenue by customer type:

 

  

Three months ended

September 30,

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

 

Cost of Revenue

 

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

 

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

 

Gross Profit

 

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

 

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

  

 22 

 

 

Operating Expenses

 

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

 

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

  

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

 

Other expenses

 

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

 

Income tax benefit

  

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

 

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

 

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

 

Net Loss

 

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

 

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

 

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

 

 23 

 

 

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

 

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

 

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

  

Revenue

   

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

 

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

  

  (i) Listing fee revenue

 

As of September 30, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of sports memorabilia) of the listed values were charged as listing fees, respectively. 

  

 24 

 

 

During the nine months ended September 30, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,148,194 (HK$9,000,000) for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.

 

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

   

  (ii) Commission fee revenue

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Total commission revenue decreased by $1,902,167 for the nine months ended September 30, 2019 to $1,655,244 compared to $3,557,411 for the nine months ended September 30, 2018 primarily because there were no new listings of artwork on our platform in the second and third quarters and this drove down overall trading activity during this period compared to last year.

  

  (iii) Management fee revenue

 

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

 

During the nine-month period ended September 30, 2019, management fee revenue dropped by $109,091, from $455,133 for the nine months ended September 30, 2018 to $346,042, due to the decrease in overall trading transactions this period compared to last year.

  

  (iv) Annual fee revenue

 

During the nine-month period ended September 30, 2019, there was no annual fee revenue, compared to $378 for the nine-month period ended September 30, 2018.

  

 25 

 

  

  (v) Authorized agent subscription revenue

 

During the nine-month period ended September 30, 2019, there was no authorized agent subscription revenue, compared to $191,623 for the nine-month period ended September 30, 2018.

 

  (vi) Online artwork sales

 

During the nine-month period ended September 30, 2019, there were no online artwork sales, compared to $8,548 for the nine-month period ended September 30, 2018 because we shut down online artwork sales on our platform.

 

Revenue by customer type

 

The following table presents our revenue by customer type:

 

  

Nine months ended

September 30,

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

 

Cost of Revenue

 

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

 

Cost of revenue for the nine months ended September 30, 2019 and September 30, 2018 was $1,288,589 and $2,173,296, respectively. The decrease in cost of revenue for the nine months ended September 30, 2019 compared to September 30, 2018, was mainly due to the decrease in the commission rebates to service agents by $546,896. Management focused on resuscitating interest in listed artwork and no new artwork had been listed since the second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of revenue was also due to a fall in the depreciation and amortization of hardware and software on our trading platform by $131,419 as a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decline in internet services charges by $80,283 due to the termination of two network lines between Macau and Hong Kong, the decrease in artwork insurance expense by $119,511 due to a negotiated discount in our new insurance contract for 2019, the decrease in artwork storage fee by $2,077 and the drop in other expenses by $4,521.

 

Gross Profit

 

Gross profit was $996,787 for the nine months ended September 30, 2019, compared to $6,018,532 for the nine months ended September 30, 2018. The decrease was mainly due to the significant decline in total revenue.

 

Overall total revenue for the nine months ended September 30, 2019 dropped by $5,906,452 or 72.1% compared to the same period in 2018. Compared to the same period in 2018, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a gross profit margin of 43.6% for the nine months ended September 30, 2019 compared to 73.5% for the same period in 2018.

 

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Operating Expenses

 

General and administrative expenses for the nine months ended September 30, 2019 were $3,322,547, compared to $7,791,747 for the nine months ended September 30, 2018. The significant plunge in general and administrative expense by $4,469,200 was attributed to a decrease in salary and welfare by $2,615,446 due to reduction in force since July 2018, a decrease in insurance and rental expenses by $525,728 due to the relocation of our Hong Kong office to a non-central district, a decrease in legal and professional fees by $159,147, a decrease in traveling and accommodation expenses by $463,758 as a result of fewer marketing events, a decrease in non-deductible input VAT by $207,649, a decrease in consultancy fees by $71,853, share-based compensation by $180,347, depreciation by $119,273 and also other expenses by $202,401.

  

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

  

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

 

Other expenses

  

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

 

Income tax benefit (expenses)

 

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

 

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

 

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

 

Net loss

 

We had a net loss for the nine months ended September 30, 2019 of $2,964,226 compared to a net loss of $3,542,458 for the nine months ended September 30, 2018. The lower net loss incurred in the nine months ended September 30, 2019, compared to the same period in 2018, resulted from a lower operating expenses and exchange loss in the current period.

 

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Liquidity and Capital Resources

 

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

 

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

 

Sources of Liquidity

 

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

 

During the nine months ended September 30, 2018, net cash used in operating activities totaled $18,589,823 and it was resulted in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity due to the adoption of ASU2016-18 since beginning of 2018. The reduction in net cash in operating activities was predominately triggered by a decline in client deposits by $17,757,757 which influenced the fall in the amount due to clients simultaneously. The Company assessed and evaluated it was rather a presentation issue and there should have no actual impact to the operating activities. Net cash used in investing activities totaled $4,377,285. Net cash generated from financing activities totaled $2,425,220. The resulting change in cash for the period was a decrease of $21,205,904. The cash balance at the beginning of the period was $37,140,582. The cash balance on September 30, 2018 was $15,934,678.

 

As of September 30, 2019, the Company had $26,298,905 in total current liabilities, which comprised of $522,929 in accrued expense and other payables, $17,008,251 in customers’ deposits, $10,227 in advance from customer, $6,759,674 in amount due to related parties, $1,816,837 in loan from a third party, $173,156 in lease liabilities and $7,831 in tax payables. As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included $641,692 in accrued expenses and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500 in short-term borrowings from third parties, $6,385,288 in amount due to related party, and $15,101 in tax payables.

  

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

 

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

 

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

 

Off-Balance Sheet Arrangements 

 

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

 

Future Financings

 

Although 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 sufficient cash from our operations to fund our business organically. However, we may conduct equity sales of our shares of common stock in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, and if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.

 

Critical Accounting Policies

 

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

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 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, 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, Ms. Fang Mu and our Chief Financial Officer, Mr. Jehn Ming Lim. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2019 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

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 (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)
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.

 

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SIGNATURES

 

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

 

  TAKUNG ART CO., LTD
     
Date: November 14, 2019 By: /s/ Fang Mu
    Fang Mu
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 14, 2019 By: /s/ Jehn Ming Lim
    Jehn Ming Lim
    Chief Financial Officer
    (Principal Financial Officer)

 

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