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 SeptemberJune 30, 20192020
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, 2019August 7, 2020 is 11,255,129.11,271,379.
FORM 10-Q
TAKUNG ART CO., LTD
INDEX
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars except Number of Shares)
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 6,086,637 | $ | 7,974,884 | $ | 5,511,461 | $ | 5,424,213 | ||||||||
Restricted cash | 17,008,251 | 4,549,202 | 12,435,948 | 16,404,941 | ||||||||||||
Account receivables, net | - | 568,757 | 154,837 | - | ||||||||||||
Prepayment and other current assets | 579,107 | 955,249 | ||||||||||||||
Amount due from a related party | 5,682,807 | 5,907,789 | ||||||||||||||
Prepayment and other current assets, net | 201,065 | 451,248 | ||||||||||||||
Amount due from related parties, net | 5,749,246 | 5,834,554 | ||||||||||||||
Loan receivables | 1,958,672 | 2,391,350 | 1,981,571 | 2,010,974 | ||||||||||||
Total current assets | 31,315,474 | 22,347,231 | 26,034,128 | 30,125,930 | ||||||||||||
Non-current assets | ||||||||||||||||
Property and equipment, net | 941,374 | 1,445,679 | 627,379 | 859,826 | ||||||||||||
Intangible assets | 22,257 | 22,284 | 22,514 | 22,401 | ||||||||||||
Deferred tax assets, net | 549,864 | 540,279 | ||||||||||||||
Operating lease right-of-use assets | 904,836 | - | 241,034 | 731,469 | ||||||||||||
Deferred tax assets, net | 776,896 | 611,738 | ||||||||||||||
Amount due from a related party, non-current | 101,420 | - | ||||||||||||||
Amount due from a related party | - | 104,128 | ||||||||||||||
Other non-current assets | 114,823 | 142,293 | 71,766 | 57,470 | ||||||||||||
Total non-current assets | 2,861,606 | 2,221,994 | 1,512,557 | 2,315,573 | ||||||||||||
Total assets | $ | 34,177,080 | $ | 24,569,225 | $ | 27,546,685 | $ | 32,441,503 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accrued expenses and other payables | $ | 522,929 | $ | 641,692 | $ | 815,748 | $ | 629,666 | ||||||||
Customer deposits | 17,008,251 | 4,549,202 | 12,435,948 | 16,404,941 | ||||||||||||
Advance from customers | 10,227 | 8,995 | 13,612 | 8,788 | ||||||||||||
Short-term borrowings from third parties | 1,816,837 | 2,499,500 | ||||||||||||||
Short-term borrowings from a third party | 1,956,287 | 1,868,345 | ||||||||||||||
Amount due to related parties | 6,759,674 | 6,385,288 | 6,457,827 | 6,862,713 | ||||||||||||
Operating lease liabilities – current | 173,156 | - | 152,954 | 166,987 | ||||||||||||
Tax payables | 7,831 | 15,101 | 142,330 | 6,050 | ||||||||||||
Total current liabilities | 26,298,905 | 14,099,778 | 21,974,706 | 25,947,490 | ||||||||||||
Non-current liabilities | ||||||||||||||||
Operating lease liabilities, non-current | 92,027 | - | 80,040 | 48,856 | ||||||||||||
Amount due to a related party, non-current | 197,520 | - | ||||||||||||||
Total non-current liabilities | 80,040 | 48,856 | ||||||||||||||
Total liabilities | 26,588,452 | 14,099,778 | 22,054,746 | 25,996,346 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of September 30, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018) | 11,255 | 11,226 | ||||||||||||||
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,271,379 shares issued and outstanding as of June 30, 2020; 11,255,129 shares issued and outstanding as of December 31, 2019) | 11,271 | 11,255 | ||||||||||||||
Additional paid-in capital | 6,318,645 | 6,281,790 | 6,345,877 | 6,320,604 | ||||||||||||
Retained earnings | 1,514,907 | 4,479,133 | ||||||||||||||
(Accumulated deficit) retained earnings | (581,804 | ) | 386,327 | |||||||||||||
Accumulated other comprehensive loss | (256,179 | ) | (302,702 | ) | (283,405 | ) | (273,029 | ) | ||||||||
Total shareholders’ equity | 7,588,628 | 10,469,447 | 5,491,939 | 6,445,157 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 34,177,080 | $ | 24,569,225 | $ | 27,546,685 | $ | 32,441,503 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Listing fee | $ | - | $ | - | $ | 284,090 | $ | 3,978,735 | $ | 380,846 | $ | - | $ | 557,789 | $ | 284,090 | ||||||||||||||||
Commission | 939,164 | 253,331 | 1,655,244 | 3,557,411 | 1,188,313 | 532,740 | 2,089,136 | 716,080 | ||||||||||||||||||||||||
Management fee | 184,428 | 107,905 | 346,042 | 455,133 | 110,006 | 93,343 | 213,526 | 161,614 | ||||||||||||||||||||||||
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 | 1,679,165 | 626,083 | 2,860,451 | 1,161,784 | ||||||||||||||||||||||||
Cost of revenue | (580,282 | ) | (299,482 | ) | (1,288,589 | ) | (2,173,296 | ) | (754,062 | ) | (441,028 | ) | (1,410,576 | ) | (708,307 | ) | ||||||||||||||||
Gross profit | 543,310 | 64,052 | 996,787 | 6,018,532 | 925,103 | 185,055 | 1,449,875 | 453,477 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
General and administrative expenses | (1,159,502 | ) | (2,208,264 | ) | (3,322,547 | ) | (7,791,747 | ) | (929,728 | ) | (888,460 | ) | (2,040,175 | ) | (2,163,045 | ) | ||||||||||||||||
Selling expenses | (108,458 | ) | (149,035 | ) | (143,054 | ) | (851,173 | ) | (61,585 | ) | (3,784 | ) | (104,574 | ) | (34,596 | ) | ||||||||||||||||
Impairment loss-construction-in-progress | (326,227 | ) | - | (326,227 | ) | |||||||||||||||||||||||||||
Total operating expenses | (1,267,960 | ) | (2,683,526 | ) | (3,465,601 | ) | (8,969,147 | ) | (991,313 | ) | (892,244 | ) | (2,144,749 | ) | (2,197,641 | ) | ||||||||||||||||
Loss from operations | (724,650 | ) | (2,619,474 | ) | (2,468,814 | ) | (2,950,615 | ) | (66,210 | ) | (707,189 | ) | (694,874 | ) | (1,744,164 | ) | ||||||||||||||||
Other income and expenses: | ||||||||||||||||||||||||||||||||
Other income (expenses) | 13,125 | 65,487 | (88,637 | ) | 470,752 | 65,139 | (79,772 | ) | 103,444 | (101,762 | ) | |||||||||||||||||||||
Loan interest expense | (18,015 | ) | (199,821 | ) | (18,015 | ) | (504,287 | ) | (39,447 | ) | - | (78,360 | ) | - | ||||||||||||||||||
Exchange loss | (515,808 | ) | (870,218 | ) | (564,233 | ) | (1,132,510 | ) | ||||||||||||||||||||||||
Total other expenses | (520,698 | ) | (1,004,552 | ) | (670,885 | ) | (1,166,045 | ) | ||||||||||||||||||||||||
Exchange gain (loss) | 33,210 | (407,159 | ) | (203,485 | ) | (48,425 | ) | |||||||||||||||||||||||||
Total other income (expenses) | 58,902 | (486,931 | ) | (178,401 | ) | (150,187 | ) | |||||||||||||||||||||||||
Loss before provision for income taxes | (1,245,348 | ) | (3,624,026 | ) | (3,139,699 | ) | (4,116,660 | ) | (7,308 | ) | (1,194,120 | ) | (873,275 | ) | (1,894,351 | ) | ||||||||||||||||
Income tax benefit | 117,451 | 742,670 | 175,473 | 574,202 | ||||||||||||||||||||||||||||
Income tax (expense) benefit | (7,461 | ) | 66,584 | (94,856 | ) | 58,022 | ||||||||||||||||||||||||||
Net loss | $ | (1,127,897 | ) | $ | (2,881,356 | ) | $ | (2,964,226 | ) | $ | (3,542,458 | ) | $ | (14,769 | ) | $ | (1,127,536 | ) | $ | (968,131 | ) | $ | (1,836,329 | ) | ||||||||
Foreign currency translation adjustment | (12,750 | ) | (3,668 | ) | 46,523 | (131,946 | ) | (1,608 | ) | 64,753 | (10,376 | ) | 59,273 | |||||||||||||||||||
Comprehensive loss | $ | (1,140,647 | ) | $ | (2,885,024 | ) | $ | (2,917,703 | ) | $ | (3,674,404 | ) | $ | (16,377 | ) | $ | (1,062,783 | ) | $ | (978,507 | ) | $ | (1,777,056 | ) | ||||||||
Loss per common share – basic | $ | (0.10 | ) | $ | (0.26 | ) | $ | (0.26 | ) | $ | (0.32 | ) | $ | (0.001 | ) | $ | (0.100 | ) | $ | (0.086 | ) | $ | (0.163 | ) | ||||||||
Loss per common share – diluted | (0.10 | ) | (0.26 | ) | (0.26 | ) | (0.32 | ) | $ | (0.001 | ) | $ | (0.100 | ) | $ | (0.086 | ) | $ | (0.163 | ) | ||||||||||||
Weighted average number of common shares outstanding-basic | 11,255,129 | 11,226,025 | 11,243,082 | 11,216,009 | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||||||
Weighted average number of common shares outstanding-diluted | 11,255,129 | 11,226,025 | 11,243,082 | 11,216,009 | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUTIYEQUITY
(Stated in U.S. Dollars except Number of Shares)
(UNAUDITED)
Accumulated | Number | Common | Additional Paid-in | Retained earnings (accumulated | Accumulated other comprehensive | |||||||||||||||||||||||||||||||||||||||||||
Additional | other | of shares | Stock | capital | deficit) | loss | Total | |||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | 11,255,129 | $ | 11,255 | $ | 6,320,604 | $ | 386,327 | $ | (273,029 | ) | $ | 6,445,157 | ||||||||||||||||||||||||||||||||||||
Shared-based compensation | - | - | 5,986 | - | - | 5,986 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (953,362 | ) | - | (953,362 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (8,768 | ) | (8,768 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | 11,255,129 | 11,255 | 6,326,590 | (567,035 | ) | (281,797 | ) | 5,489,013 | ||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for restricted stock award | - | - | - | - | - | - | 6,250 | 6 | (6 | ) | - | - | - | |||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for professional services | 10,000 | 10 | 13,240 | - | - | 13,250 | ||||||||||||||||||||||||||||||||||||||||||
Shared-based compensation | - | - | 16,851 | - | - | 16,851 | - | - | 6,053 | - | - | 6,053 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (708,793 | ) | - | (708,793 | ) | - | - | - | (14,769 | ) | - | (14,769 | ) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (5,480 | ) | (5,480 | ) | - | - | - | - | (1,608 | ) | (1,608 | ) | ||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | 11,271,379 | $ | 11,271 | $ | 6,345,877 | $ | (581,804 | ) | $ | (283,405 | ) | $ | 5,491,939 |
Accumulated | ||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||
Number | Common | Paid-in | Retained | comprehensive | ||||||||||||||||||||
of shares | stock | capital | earnings | loss | Total | |||||||||||||||||||
Balance, December 31, 2018 | 11,226,025 | $ | 11,226 | $ | 6,281,790 | $ | 4,479,133 | $ | (302,702 | ) | $ | 10,469,447 | ||||||||||||
Shared-based compensation | - | - | 16,851 | - | - | 16,851 | ||||||||||||||||||
Net loss | - | - | - | (708,793 | ) | - | (708,793 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (5,480 | ) | (5,480 | ) | ||||||||||||||||
Balance, March 31, 2019 | 11,226,025 | 11,226 | 6,298,641 | 3,770,340 | (308,182 | ) | 9,772,025 | |||||||||||||||||
Issuance of ordinary shares for restricted stock award | 29,104 | 29 | 4,012 | - | - | 4,041 | ||||||||||||||||||
Shared-based compensation | - | - | 9,719 | - | - | 9,719 | ||||||||||||||||||
Net loss | - | - | - | (1,127,536 | ) | - | (1,127,536 | ) | ||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 64,753 | 64,753 | ||||||||||||||||||
Balance, June 30, 2019 | 11,255,129 | $ | 11,255 | $ | 6,312,372 | $ | 2,642,804 | $ | (243,429 | ) | $ | 8,723,002 |
Accumulated | ||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||
Number | Common | Paid-in | Retained | comprehensive | ||||||||||||||||||||
of shares | Stock | capital | Earnings | loss | Total | |||||||||||||||||||
Balance, December 31, 2017 | 11,188,882 | 11,189 | 6,116,216 | 12,111,096 | (320,290 | ) | 17,918,211 | |||||||||||||||||
Issuance of ordinary shares for restricted stock award | 20,000 | 20 | (20 | ) | - | - | - | |||||||||||||||||
Shared-based compensation | - | - | 73,749 | - | - | 73,749 | ||||||||||||||||||
Net income | - | - | - | 423,290 | - | 423,290 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (17,167 | ) | (17,167 | ) | ||||||||||||||||
Balance, March 31, 2018 | 11,208,882 | 11,209 | 6,189,945 | 12,534,386 | (337,457 | ) | 18,398,083 | |||||||||||||||||
Issuance of ordinary shares for restricted stock award | 17,143 | 17 | (17 | ) | - | - | - | |||||||||||||||||
Shared-based compensation | - | - | 55,672 | - | - | 55,672 | ||||||||||||||||||
Net 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.
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 |
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net cash (used in) provided by operating activities | $ | (3,782,887 | ) | $ | 21,615,744 | |||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (18,388 | ) | (33,792 | ) | ||||
Purchase of available-for-sale investments | - | (21,372,178 | ) | |||||
Maturity and redemption of available-for-sale investments | - | 21,372,178 | ||||||
Loan repayment from a third party | - | 2,443,251 | ||||||
Net cash (used in) provided by investing activities | (18,388 | ) | 2,409,459 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from a related party’s loan | - | 393,158 | ||||||
Loan repayment to a third party | - | (2,499,500 | ) | |||||
Net cash used in financing activities | - | (2,106,342 | ) | |||||
Effect of exchange rate change on cash, cash equivalents and restricted cash | (80,470 | ) | 10,090 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (3,881,745 | ) | 21,928,951 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 17,947,409 | $ | 34,453,037 | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||||||||
Cash and cash equivalents as of June 30, 2020 and 2019, respectively | 5,511,461 | 7,451,172 | ||||||
Restricted cash as of June 30, 2020 and 2019, respectively | 12,435,948 | 27,001,865 | ||||||
Total cash, cash equivalents, and restricted cash as of June 30, 2020 and 2019, respectively | $ | 17,947,409 | $ | 34,453,037 | ||||
Supplemental cash flows information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax | $ | 29,935 | $ | - |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd and subsidiariesSubsidiaries (“Takung” or the “Company”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Company Limited (formerly Co., Ltd. (“Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd.Takung”), a Hong Kong company (“Hong Kong Takung”) and ourits wholly owned subsidiary, operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong Takung was incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering 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”).China.
Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015 in the PRC.2015. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Takung Cultural Development (Tianjin) Co., Ltd.
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. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung when Shanghai Takung was deregistered.
Hong Kong Takung Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding company to control an online platform for offering, selling and trading whole piece of artwork. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.
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 ourits 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 ourits artwork trading business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet as of December 31, 2018,2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of SeptemberJune 30, 20192020 and for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 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, 2018,2019, previously filed with the SEC.
Beginning in 2020, a strain of coronavirus (COVID-19) has spread globally and at this point, the extent to which the COVID-19 may impact operations of the Company is uncertain. The extent of the impact of the coronavirus on the Company's business and operations will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the six months ended June 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. Dollars.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s interim condensed consolidated financial position as of SeptemberJune 30, 2019,2020, its interim condensed consolidated results of operations and cash flows for the nine-month periodsthree and six months ended SeptemberJune 30, 20192020 and 2018,2019, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Recent Accounting Pronouncements
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, 2018,2019, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial statements upon adoption.
3. PREPAYMENT AND OTHER CURRENT ASSETS, NET
Prepayment and other current assets consistedmainly consist of the following:prepaid tax, prepaid service fees, as well as staff advance.
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Prepaid tax | $ | 33,495 | $ | 281,582 | ||||
Prepaid service fees | 105,399 | 132,064 | ||||||
Short-term borrowings to a third party | - | 53,919 | ||||||
Staff advance | 42,944 | 18,380 | ||||||
Other current assets | 19,227 | 19,222 | ||||||
Less: allowance for doubtful accounts | - | (53,919 | ) | |||||
Prepayment and other current assets, net | $ | 201,065 | $ | 451,248 |
No provision for doubtful accounts was recognized for the three and six months ended June 30, 2020 and 2019, respectively. The Company has written off the doubtful account balance and deducted from bad debt provision related to the short-term borrowings to a third party in an amount of $54,193 during the six months ended June 30, 2020.
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 | June 30, 2020 | December 31, 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Listing fee | $ | - | $ | 568,757 | $ | 154,837 | $ | - | ||||||||
Authorized agent subscription revenue | 557,154 | 557,837 | - | 560,780 | ||||||||||||
Monthly commission fee | 1,376,460 | 1,378,148 | - | 1,385,420 | ||||||||||||
Others | 53,561 | 53,626 | - | 53,909 | ||||||||||||
Less: allowance for doubtful accounts | (1,987,175 | ) | (1,989,611 | ) | - | (2,000,109 | ) | |||||||||
Account receivables, net | $ | - | $ | 568,757 | $ | 154,837 | $ | - |
No provision for doubtful accounts was recognized for the three and six months ended June 30, 2020 and 2019, respectively.
The Company has written off the doubtful accounts balance and deducted from bad debt provision in an amount of $2,010,251 during the six months ended June 30, 2020.
5. LOAN RECEIVABLES
The following table sets forth a summary of the loan agreements in loan receivables balance:
Date | Borrower | Lender | Original | Outstanding | Amount in | Annual | Repayment Due 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 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 707,704 | 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 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 5,000,000 | 5,000,000 | $ | 707,704 | 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 | Chongqing Aoge Import and Export Co. | Tianjin Takung | 4,000,000 | 4,000,000 | $ | 566,163 | 0 | % | 9/19/2020 | |||||||||||||||||||||||||||
Total | $ | 1,958,672 | Total | $ | 1,981,571 |
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 DollarHKD Loans are “secured” by the RMB Loans. It is the understanding between the parties that the Hong Kong DollarHKD Loans and the RMB Loans will be repaid simultaneously.
One of the loan receivables with a repayment due date of July 17, 2020 was overdue. The Company and Chongqing are currently in the process of negotiating a loan extension agreement.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Furniture, fixtures and equipment | $ | 159,239 | $ | 156,656 | $ | 205,178 | $ | 201,093 | ||||||||
Leasehold improvements | 338,845 | 447,048 | 210,299 | 343,697 | ||||||||||||
Computer trading and clearing system | 3,339,155 | 3,382,168 | 3,390,531 | 3,379,654 | ||||||||||||
Transport equipment | 100,643 | 104,628 | 101,819 | 103,330 | ||||||||||||
Sub-total | 3,937,882 | 4,090,500 | 3,907,827 | 4,027,774 | ||||||||||||
Less: accumulated depreciation | (2,996,508 | ) | (2,644,821 | ) | (3,280,448 | ) | (3,167,948 | ) | ||||||||
Property and equipment, net | $ | 941,374 | $ | 1,445,679 | $ | 627,379 | $ | 859,826 |
Depreciation expense was $148,774$119,060 and $241,448$157,687 for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and $463,241$246,990 and $713,933$314,466 for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
7. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables as of SeptemberJune 30, 20192020 and December 31, 20182019 consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Accruals for professional fees | $ | 431,240 | $ | 168,040 | ||||||||||||
Accruals for consulting fees | $ | 264,469 | $ | 264,793 | 267,540 | 311,122 | ||||||||||
Accruals for professional fees | 110,442 | 49,518 | ||||||||||||||
Payroll payables | 70,231 | 104,437 | 38,642 | 79,710 | ||||||||||||
Trading and clearing system | 49,970 | 86,208 | ||||||||||||||
Payables for trading and clearing system | 50,550 | 50,295 | ||||||||||||||
Other payables | 27,817 | 136,736 | 27,776 | 20,499 | ||||||||||||
Total accrued expenses and other payables | $ | 522,929 | $ | 641,692 | $ | 815,748 | $ | 629,666 |
8. SHORT-TERM BORROWINGS FROM A THIRD PARTIESPARTY
In July 2019, Hong Kong Takung entered into a loan agreement (the “HKD Loan”)HKD Loans with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum. The HKD Loan isLoans are to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company.
In the meantime, Tianjin Takung entered an interest-free loan (the “RMB Loan”)RMB Loans to another third party as a guarantee for the HKD Loan.Loans. The loan amount was $ 1,955,245$1,981,571 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan isLoans are “secured” by the RMB Loan.Loans. It is an understanding between the parties that when the HKD Loans isare repaid, the RMB LoanLoans 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 |
The U.S. Dollar Loans of $2,499,500 as of December 31, 2018 was settled on January 2, 2019.
Date | Borrower | Lender | June 30, 2020 (USD) | December 31, 2019 (USD) | Annual Interest Rate | Repayment Due Date | |||||||||||||
7/18/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 718,433 | $ | 714,808 | 8 | % | 7/17/2020 | ||||||||||
8/29/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 699,732 | $ | 696,202 | 8 | % | 8/28/2020 | ||||||||||
9/20/2019 | Hong Kong Takung | Friend Sourcing Ltd. | $ | 559,786 | $ | 556,961 | 8 | % | 9/19/2020 | ||||||||||
Less: Discount loan payable | $ | (21,664 | ) | $ | (99,626 | ) | |||||||||||||
Total | $ | 1,956,287 | $ | 1,868,345 |
The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of SeptemberJune 30, 2019.2020. 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
One of the short-term borrowings were $18,015with a repayment due date of July 17, 2020 was overdue. The Company and $199,822 forFriend Sourcing are currently in 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.process of negotiating a loan extension agreement.
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)Jianping Mao Jianping (“Mao”), the Human Resources Management Director of Hong Kong Takung.
(d)(b) Shuhai Li Shuhai (“Li”), the legal representative of Tianjin Takung.Takung, resigned on April 3, 2020.
Amounts(c) Jing Wang (“Wang”), the Chief Financial Officer of the Company since June 1, 2020 and the legal representative of Tianjin Takung since May 28, 2020.
Amount due from related parties, net
Amount 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 |
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b)(i) | $ | - | $ | 5,834,554 | ||||
Wang (c)(i) | 5,749,246 | - | ||||||
Mao (a) (ii) | 102,606 | - | ||||||
Less: allowance for doubtful accounts (ii) | (102,606 | ) | ||||||
Total current amount due from related parties, net | $ | 5,749,246 | $ | 5,834,554 |
September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Mao (c) (ii) | $ | 101,420 | $ | - | ||||||||||||
Mao (a) (ii) | $ | - | $ | 104,128 | ||||||||||||
Total noncurrent amount due from a related party | $ | 101,420 | $ | - | $ | - | $ | 104,128 |
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 | $ | - |
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Li (b) (i) | $ | - | $ | 6,418,980 | ||||
Wang (c)(i) | 6,451,530 | - | ||||||
Mao (a) (ii) | 6,297 | 443,733 | ||||||
Total current amount due to related parties | $ | 6,457,827 | $ | 6,862,713 |
(i) | Amount due |
On MaySeptember 16, 2018,2019, 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, 2018Li for the loan of $6,377,470$6,451,530 (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 isas May 15, 2019.2020. On May 15, 2019,2020, Hong Kong Takung entered into an extension agreement with WangLi to extend the HK Dollar Working Capital Loan with a duematurity date on May 15, 2020.2021. On September 16, 2019,May 29, 2020, the loan was transferred to Wang, transferred this loan to Li, Shuhai,the Chief Financial Officer of the Company and the legal representative of Tianjin Takung with the same extended maturity date.Takung.
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, 2018Li for the loan of $5,682,807$5,749,246 (RMB40,619,000) with the maturity date of the loan isas May 15, 2019.2020. On May 15, 2019,2020, Tianjin Takung entered into an extension agreement with WangLi to extend the RMB Working Capital Loan with a duematurity date on May 15, 2020.2021. On September 16, 2019, WangMay 29, 2020, the loan was transferred this loan to Li, the legal representative of Tianjin Takung with the same extended maturity date.Wang.
Through an understanding between LiWang 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 |
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 theits office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will be expiredexpire 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)$205,211 (RMB1,449,838) every ninesix months and a deposit of $101,420 (RMB724,919.02)$102,606 (RMB724,919). The deposit is refundableOn May 12, 2020, the Company terminated the lease early and recorded a $102,606 associated bad debt provision due to the Company. The totalremote likelihood of collecting the rent deposit. No related lease liability is $573,500, of which $375,980 and $197,520 were included in current and noncurrent portions, respectively,was recognized as of SeptemberJune 30, 2019.2020.
On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Ms. Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The lease was terminated on February 15, 2020 and monthly rent payment is approximately $24,254 (RMB 170,563). As of June 30, 2020, the amount due to Mao pertinent to this lease agreement was $nil.
As of SeptemberJune 30, 2019,2020, Mao also lent a startup deposit of $6,224$6,297 to Hong Kong MQ.
10. INCOME TAXES
Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art HoldingHoldings 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 CutsThe Coronavirus Aid, Relief and JobsEconomy Security (CARES) Act Enacted in 2017
On December 22, 2017, (“the U.S. governmentCARES Act, H.R. 748”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted comprehensive tax legislation commonly referred to asunder the Tax Cuts and Jobs Act (the "Tax Act"of 2017) for net operation loss (“NOL”). The Tax Act makes broad deductions for 2018-2020 tax years 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). Exceptreinstated NOL carrybacks for the one-time transition2018-2020 tax mostyears. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% 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 accountingadjusted taxable income for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from2019 and 2020 taxable year. Lastly, the Tax Act enactment datetechnical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed 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 ofsuch property retroactively as if it was included in the Tax Act and there were no adjustments recorded toat 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,time 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.enactment. 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; andanticipate a material impact on its financial statements as such, does not have additional provision amount recorded for GILTI tax.of June 30, 2020 due to the recent enactment.
As of SeptemberJune 30, 2019,2020 and December 31, 2018,2019, the Company in the United States had $1,886,422$2,570,094 and $1,332,438$2,167,494 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)$257,705) 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, bothU.S, these 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.profits tax return. The election is irrevocable. WeThe Company elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the currentnew tax 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 appliedapply the original tax rate of 16.5% for threeits provision for current income and nine months ended September 30, 2019.deferred taxes.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.
The income tax provision consists of the following components:
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 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Current: | ||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
State | - | - | - | - | ||||||||||||
Foreign | (131 | ) | - | (101,692 | ) | - | ||||||||||
Total Current | $ | (131 | ) | $ | - | $ | (101,692 | ) | $ | - | ||||||
Deferred: | ||||||||||||||||
Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
State | - | - | - | - | ||||||||||||
Foreign | (7,330 | ) | 66,584 | 6,836 | 58,022 | |||||||||||
Total Deferred | $ | (7,330 | ) | $ | 66,584 | $ | 6,836 | $ | 58,022 | |||||||
Total income tax (expense) benefit | $ | (7,461 | ) | $ | 66,584 | $ | (94,856 | ) | $ | 58,022 |
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, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Loss before income tax expense | $ | (1,245,348 | ) | $ | (3,624,026 | ) | $ | (3,139,699 | ) | $ | (4,116,660 | ) | $ | (7,308 | ) | $ | (1,194,120 | ) | $ | (873,275 | ) | $ | (1,894,351 | ) | ||||||||
Computed tax (benefit) expense with statutory tax rate | (205,484 | ) | (597,964 | ) | (518,050 | ) | (679,249 | ) | ||||||||||||||||||||||||
Computed tax benefit with statutory tax rate | 1,207 | 197,073 | 144,091 | 312,567 | ||||||||||||||||||||||||||||
Impact of different tax rates in other jurisdictions | 15,956 | (89,082 | ) | 125,056 | (51,274 | ) | (3,342 | ) | 12,427 | 1,677 | 16,794 | |||||||||||||||||||||
Impact of preferred tax rate | 2,666 | (82,047 | ) | (54,519 | ) | (125,895 | ) | |||||||||||||||||||||||||
Non-deductible items: | ||||||||||||||||||||||||||||||||
Tax effect of non-deductible expenses | 17,096 | (167,031 | ) | 34,982 | (163,701 | ) | (170,572 | ) | (11,061 | ) | (183,900 | ) | (17,886 | ) | ||||||||||||||||||
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 | 162,756 | (49,808 | ) | 134,157 | (127,558 | ) | ||||||||||||||||||||||
Others | (176 | ) | - | (136,362 | ) | - | ||||||||||||||||||||||||||
Total income tax benefit | $ | (117,451 | ) | $ | (742,670 | ) | $ | (175,473 | ) | $ | (574,202 | ) | ||||||||||||||||||||
Total income tax (expense) benefit | $ | (7,461 | ) | $ | 66,584 | $ | (94,856 | ) | $ | 58,022 |
The effective tax rate was 9.4%(102.1)% and 20.5%5.6% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, and 5.6%(10.9)% and 13.9%3.1% for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
Uncertain tax positions
The reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
June 30, 2020 | December 31, 2019 | |||||||
Uncertain tax liabilities, beginning of period | $ | - | $ | - | ||||
Additions for tax position of current period | 73,357 | - | ||||||
Uncertain tax liabilities, end of period | $ | 73,357 | $ | - |
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the interim condensed consolidated financial statements as of June 30, 2020. The Company anticipated that the settlements with the taxing authority are remitted within one year.
Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil as of June 30, 2020 and December 31, 2019, respectively.
Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended 31 December 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of June 30, 2020 and December 31, 2019, the Company had $73,357 and $nil, respectively, of uncertain tax liabilities related to the different methodology of certain tax non-deductible expenses applied by the IRD. The examination is currently in progress. Due to the uncertain tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in an adverse finding and we would be subject to additional liability which could be materially different from these estimates. In such circumstances, we will record additional tax expense or tax benefit in the period in which such the resolution occurs. The Company does not expect the position of uncertain tax liabilities will significantly fluctuate within the next twelve months.
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on which it was filed, whichever is later.
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
11. LEASES
The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately ninesix 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 SeptemberJune 30, 2019:2020:
Assets/liabilities | Classification | As of September 30, 2019 | Classification | As of June 30, 2020 | ||||||||
Assets | (Unaudited) | |||||||||||
Operating lease right-of-use assets | Operating lease assets | $ | 904,836 | Operating lease assets | $ | 241,034 | ||||||
Liabilities | ||||||||||||
Current | ||||||||||||
Operating lease liability - current | Current operating lease liabilities | $ | 173,156 | Current operating lease liabilities | $ | 152,954 | ||||||
Amount due to related parties | 375,980 | |||||||||||
Long-term | ||||||||||||
Operating lease liability - non-current | Long-term operating lease liabilities | 92,027 | Long-term operating lease liabilities | 80,040 | ||||||||
Amount due to related parties, non-current | 197,520 | |||||||||||
Total lease liabilities | $ | 838,683 | $ | 232,994 |
The operating lease expenses including lease from the related party, for the nine and three months and six months ended SeptemberJune 30, 2020 and 2019 were as follows:
Three months ended | Nine months ended | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
Lease Cost | Classification | September 30, 2019 | September 30, 2019 | Classification | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Operating lease cost | Cost of revenue, general and administrative expenses | $ | 145,313 | $ | 282,486 | Cost of revenue, general and administrative expenses | $ | 160,850 | $ | 86,395 | $ | 361,212 | $ | 137,173 | ||||||||||||||
Total lease cost | $ | 145,313 | $ | 282,486 | $ | 160,850 | $ | 86,395 | $ | 361,212 | $ | 137,173 |
Maturities of operating lease liabilities at SeptemberJune 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 |
Future minimum lease payments as of December 31, 20182020 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 |
Maturity of Lease Liabilities | Operating Leases | ||||
2020 (remaining) | $ | 131,141 | |||
2021 | 76,936 | ||||
2022 | 14,154 | ||||
2023 | 14,154 | ||||
2024 | 14,154 | ||||
Thereafter | - | ||||
Total lease payments | $ | 250,539 | |||
Less: interest | (17,545 | ) | |||
Present value of lease payments | $ | 232,994 |
(1) Amounts are based on ASC 840, Leases that was superseded upon our adoption of ASC 842, Lease on January 1, 2019.
Six Months Ended June 30, | ||||||||
Lease Term and Discount Rate | 2020 | 2019 | ||||||
(Unaudited) | (Unaudited) | |||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 2.32 | 2.06 | ||||||
Weighted-average discount rate (%) | ||||||||
Operating leases | 8 | % | 8 | % |
Six Months Ended June 30, | ||||||||||||
Other Information | September 30, 2019 | 2020 | 2019 | |||||||||
(Unaudited) | (Unaudited) | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||
Operating cash flows from operating leases | $ | 448,405 | $ | 111,303 | $ | 94,573 | ||||||
Leased assets obtained in exchange for new operating lease liabilities | 1,032,824 | 115,667 | 275,189 |
12. LOSS PER SHARE
Basic lossesloss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted lossesloss 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, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Net loss | $ | (1,127,897 | ) | $ | (2,881,356 | ) | $ | (2,964,226 | ) | $ | (3,542,458 | ) | $ | (14,769 | ) | $ | (1,127,536 | ) | $ | (968,131 | ) | $ | (1,836,329 | ) | ||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Weighted-average shares outstanding - Basic | 11,255,129 | 11,226,025 | 11,243,082 | 11,216,009 | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||||||
Stock options and restricted shares | - | - | - | - | - | - | ||||||||||||||||||||||||||
Weighted-average shares outstanding - Diluted | 11,255,129 | 11, 226,025 | 11,243,082 | 11,216,009 | 11,258,467 | 11,247,773 | 11,256,798 | 11,236,959 | ||||||||||||||||||||||||
Loss per share | ||||||||||||||||||||||||||||||||
-Basic | (0.10 | ) | (0.26 | ) | (0.26 | ) | (0.32 | ) | (0.001 | ) | (0.100 | ) | (0.086 | ) | (0.163 | ) | ||||||||||||||||
-Diluted | (0.10 | ) | (0.26 | ) | (0.26 | ) | (0.32 | ) | (0.001 | ) | (0.100 | ) | (0.086 | ) | (0.163 | ) |
Diluted earningsDue to the loss for the three and six months ended June 30, 2019, approximately 148,890 and 15,000 options and restricted shares, respectively, were excluded from the calculation of diluted net loss 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.share.
Due to the loss from continued operations for the three and ninesix months ended SeptemberJune 30, 2019,2020 approximately 130,890100,890 options were excluded from the calculation of diluted net loss per share.
13. CONTINGENCIES
Around May and June 2020, the Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, Tianjin Takung and Hong Kong Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by a certain service agent. The claims amounted to approximately $0.23 million. Subsequently, one of the plaintiffs with a claim amount of $0.15 million withdrew his claim against Tianjin Takung on July 1, 2020. The withdrawal was approved by the Shanghai Pudong People’s court on July 20, 2020. Meanwhile, the other litigation proceeding with a claim amount of approximately $0.08 million has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020.
The Company hired legal counsel to evaluate the cases. The Company believes that both these claims are both without merit and intends to vigorously defend itself. Currently, the outstanding case is under review by the Tianjin City Beicheng District People’s Court.
On or around July 2020, a third claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung on the basis of, alleged breaches of contract. The claim amount has yet to be determined.
In the opinion of management, it is not probable that the Company will incur any losses arising from the above litigation cases. As such, as of June 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings.
Except for the above, as of June 30, 2020 and through the issuance date of the condensed consolidated financial statements included in this Form 10-Q, the Company does not have any other significant indemnification claims.
14. SUBSEQUENT EVENTS
Management assessed and determinedThe Company has evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no significant and materialother subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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-lookingforward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do not intend to update any of the forward-looking statements to conform them to actual results 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
WeTakung Art Co., Ltd and Subsidiaries (“Takung”) were incorporated in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development of novel biologic and peptide-basedpeptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including peripheral artery disease and ischemic stroke.
Hong Kong Takung Art Co., Ltd. (“Hong Kong Takung”) is a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China. Although Takung was incorporated in 2012, it did not commence business operations until late 2013.
As a result of the transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operates an electronic online platform located at http://eng.takungae.comen.takungae.com/ for artists, art dealers and art investors to offer and trade in valuable artwork.
Through Hong Kong Takung, we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading commissions, management fees and authorized agent subscription.
On July 28, 2015, Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung 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. Shanghai Takung was deregistered on May 8, 2020.
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. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.
Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) was incorporated, formed in Tianjin China on September 7, 2018, and is a directly wholly-ownedwholly owned subsidiary of Takung Art Holdings. It isHoldings, 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 will focusmainly focuses on developing ourits e-commerce platform.platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.
Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ has beenwas 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.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 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.
Recent Impacts of COVID-19 on Our Business
While the ongoing coronavirus pandemic is spreading throughout the world, the Company’s operations have fully resumed in March 2020 and we have not identified any significant decrease in the number of transactions on our platform since then. We have also maintained a stable number of new account openings.
The extent to which the COVID-19 impacts our operations is highly uncertain and cannot be predicted with confidence. It will depend on various factors including the duration and severity of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, COVID-19 may eventually affect the Company's 2020 overall business performance. The operating results for the three and six months ended June 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.
Results of Operation of Takung
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.
THREE-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20192020 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20182019
The following tables set forth our interim condensed consolidated statements of income data with a percentage:
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2019 | % of Revenue | 2018 | % of Revenue | 2020 | % of Revenue | 2019 | % of Revenue | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||
Revenue | $ | 1,123,592 | 100 | $ | 363,534 | 100 | $ | 1,679,165 | 100 | $ | 626,083 | 100 | ||||||||||||||||||||
Cost of revenue | (580,282 | ) | (52 | ) | (299,482 | ) | (82 | ) | (754,062 | ) | (45 | ) | (441,028 | ) | (70 | ) | ||||||||||||||||
Selling expense | (108,458 | ) | (10 | ) | (149,035 | ) | (41 | ) | (61,585 | ) | (4 | ) | (3,784 | ) | (1 | ) | ||||||||||||||||
General and administrative expenses | (1,159,502 | ) | (103 | ) | (2,208,264 | ) | (608 | ) | (929,728 | ) | (55 | ) | (888,460 | ) | (142 | ) | ||||||||||||||||
Impairment loss-construction-in-progress | - | (326,227 | ) | (90 | ) | |||||||||||||||||||||||||||
Total costs and expenses | (1,848,242 | ) | (165 | ) | (2,983,008 | ) | (821 | ) | (1,745,375 | ) | (104 | ) | (1,333,272 | ) | (213 | ) | ||||||||||||||||
Loss from operations | (724,650 | ) | (65 | ) | (2,619,474 | ) | (721 | ) | (66,210 | ) | (4 | ) | (707,189 | ) | (113 | ) | ||||||||||||||||
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 | ||||||||||||||||||||||||||||
Interest and other income (expenses), net | 58,902 | 4 | (486,931 | ) | (78 | ) | ||||||||||||||||||||||||||
Loss before income taxes | (7,308 | ) | 0 | (1,194,120 | ) | (191 | ) | |||||||||||||||||||||||||
Income tax (expense) benefit | (7,461 | ) | (1 | ) | 66,584 | 11 | ||||||||||||||||||||||||||
Net loss | $ | (1,127,897 | ) | (101 | ) | $ | (2,881,356 | ) | (793 | ) | $ | (14,769 | ) | (1 | ) | $ | (1,127,536 | ) | (180 | ) |
Revenue
The following table sets forth our interim condensed consolidated revenue by revenue source:
Three months ended September 30, | Three Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Listing fee revenue | $ | - | $ | - | $ | 380,846 | $ | - | ||||||||
Commission | 939,164 | 253,331 | ||||||||||||||
Commission revenue | 1,188,313 | 532,740 | ||||||||||||||
Management fee revenue | 184,428 | 107,905 | 110,006 | 93,343 | ||||||||||||
Online artwork sales | - | 2,244 | ||||||||||||||
Annual fee revenue | - | 54 | ||||||||||||||
Total | $ | 1,123,592 | $ | 363,534 | $ | 1,679,165 | $ | 626,083 |
(i) | Listing fee revenue |
As of SeptemberJune 30, 2019,2020, a total of 285292 sets of artwork were listed for trade on our platform —comprising 6067 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323$28,489,331 (HK$202,100,000)221,100,000); 35 pieces of jewelry with a total listing value of $9,269,749$9,362,437 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275$17,013,710 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820$12,241,006 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401$670,034 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700$335,017 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405$1,095,248 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$$1,328,987(HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577$128,853 (HK$1,000,000); and 7 pieces of sportsSports memorabilia with a listing value of $1,085,604$1,096,459 (HK$8,509,400), of which 22.5%-48% (for 6067 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 sportsSports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months ended June 30, 2020, there were 5 new sets of paintings listed on our platform. Their total listing values were $1,675,085 (HK$13,000,000) for the paintings, of which 22.90-23% (for the paintings) of the listed values were charged as listing fees.
As of June 30, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months ended SeptemberJune 30, 2019, there were no new artworks listed on our platform.
We had noThe listing fee revenuefees charged increased to $380,846 during the three months ended June 30, 2020 compared to $nil for the same period ended June 30, 2019. Compared to those for the three months ended SeptemberJune 30, 2019, the number of new listing of paintings and 2018. During the third quartervalue of 2019, we suspended and did not have anythe artworks were higher during the same period in 2020. There were five sets of paintings listed during the three months ended June 30, 2020 while there was no new listings of artworkartworks listed on our platform because we focused onduring 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.same period in 2019.
(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. |
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 offeredWe charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
We used to offer commissions to traders and service agents. We 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%, startingEffective January 1, 2017.2019, we no longer offered commission to our traders. For service agents, we rebateoffer 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
The commission earned from the transactions of new traders they referred, deduct such 5% of the commission from the rebates payablepaid to the service agents to which such individual referrers relate.
The rebates and discounts are recognized as a cost of revenue 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$655,573 or 123% for the three months ended SeptemberJune 30, 20192020 to $939,164$1,188,313 compared to $253,331$532,740 for the three months ended SeptemberJune 30, 2018 primarily because our transaction volume2019. For the three months ended June 30, 2020, the trading amount was approximately $2,215,309,610 (HK$17,192,574,819) compared to $825,532,976(HK$6,474,490,023) in the same period in 2019. The number of active traders increased as a result of our effortsby 27,171, from 38,786 in promoting our existing listed artworks.the three months ended June 30, 2019 to 65,957 in the same period in 2020.
(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 SeptemberJune 30, 2019,2020 management fee revenue increased by $76,523,$16,663, from $107,905$93,343 for the three months ended SeptemberJune 30, 20182019 to $184,428,$110,006 due to the increase in trading transactions.trading.
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
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
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 |
Three months ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Artwork owners | $ | 380,846 | $ | - | ||||
Non – VIP Traders | 1,078,701 | 481,162 | ||||||
VIP Traders | 219,618 | 144,921 | ||||||
Total | $ | 1,679,165 | $ | 626,083 |
Cost of Revenue
Three months ended September 30, | Three months ended June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Commission rebate to service agent | $ | 370,204 | $ | 2,094 | ||||||||||||
Commissions paid to service agents | $ | 601,704 | $ | 235,088 | ||||||||||||
Depreciation | 116,082 | 163,736 | 88,245 | 121,763 | ||||||||||||
Internet service charge | 62,104 | 53,676 | 36,303 | 47,104 | ||||||||||||
Artwork insurance | 12,192 | 50,983 | 12,151 | 11,971 | ||||||||||||
Artwork storage | 19,700 | 27,533 | 15,659 | 25,091 | ||||||||||||
Others | - | 1,460 | - | 11 | ||||||||||||
Total | $ | 580,282 | $ | 299,482 | $ | 754,062 | $ | 441,028 |
Cost of revenue for the three months ended SeptemberJune 30, 2020 and June 30, 2019 was $754,062 and September 30, 2018 was $580,282 and $299,482,$441,028, respectively. The increase in cost of revenue by $280,800$313,034, for the three months ended SeptemberJune 30, 20192020 compared to SeptemberJune 30, 20182019, was mainly due to higher commission rebatesan increase in commissions paid to service agents. Theagents by $366,616 because of increase in commission rebates by $368,110 correlated to the higher commission revenue earned fromtrading transactions during the three months ended SeptemberJune 30, 2019.2020 as discussed above. Such an increase was primarily offset by thea 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$33,518 due to some of our computer equipment and trading systems having been fully depreciated, a negotiated discountdecline in our new insurance contract for 2019.internet service charges by $10,801 and a decrease of artwork storage costs by $9,432.
Gross Profit
Gross profit was $543,310$925,103 or 55.1% of the total revenue for the three months ended SeptemberJune 30, 2019,2020 compared to $64,052$185,055 or 29.6% of the total revenue for the three months ended SeptemberJune 30, 2018. The increase was due to the increase in our total revenue.2019.
As previously discussed,Listing fees contributed 22.7% of the spike in total revenue was largely attributablefor the three months ended June 30, 2020 compared to 0% in the risecorresponding period in our2019, while commission revenue earned from transactionscontributed 70.8% for the three months ended June 30, 2020 compared to 85.1% in the corresponding period in 2019. Our management fee contributed to 6.5% of the total revenue for the three months ended June 30, 2020 compared to 14.9% in the same period in 2019. Although the percentages of commission and management fee revenues were higher for the three months ended June 30, 2019 compared to those in the same period in 2020, the dollar amount of those revenue were higher in the three months ended SeptemberJune 30, 2019. Our2020. Particularly, 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 SeptemberJune 30, 2020 increased by $655,573 from $532,740 for the three months ended June 30, 2019 to $1,188,313 in same period in 2020. Moreover, our cost of revenue for the three months ended June 30, 2020 was 44.9% of the total revenue compared to 17.6%70.4% for the same period in 2018.2019. Consequently, we posted a higher gross profit and gross profit margin of $925,103 or 55.1%, respectively, for the three months ended June 30, 2020 compared to $185,055 or 29.6%, respectively, for the same period in 2019.
Operating Expenses
General and administrative expenses for the three months ended SeptemberJune 30, 20192020 were $1,159,502$929,728 compared to $2,208,264$888,460 for the three months ended SeptemberJune 30, 2018.2019. The significant plungeincrease in general and administrative expenses by $1,048,762$41,268 or 5% was attributedattributable to an increase in office, insurance and rental expenses by $38,155 due to a decreasenew office being leased by Tianjin Takung in salarymid-May 2019, an increase in legal and welfareprofessional fees by $829,072$46,362 due to reductionhigher audit fee, an increase in force since July 2018, a decreaseshare-based compensation expense by $5,543 due to the additional shares issued for legal fees, an increase in traveling and accommodationnon-deductible input VAT expenses by $48,427$35,919 as a result of fewer marketing events,an increase in service fees paid to Tianjin Takung and an increase in others by $112,515. The overall increase was offset by a decreasefall in non-deductible input VATsalaries and welfare by $4,027,$136,333 as a decreaseresult of salary reductions for our executives, a reduction in consultancy fees by $29,698, share-based compensation$32,089 attributable to lower consulting fee charged by $58,537,our consultants of Tianjin Takung, a decrease in depreciation by $45,020$5,109 and other expensesa decrease in travel and accommodation fees by $89,927.
$23,695 due to lower overseas travel and accommodation during the three months ended June 30, 2020 compared to the same period in 2019.
The following table sets forth the main components of ourthe Company’s general and administrative expenses for the three months ended SeptemberJune 30, 20192020 and 2018.June 30, 2019.
Three months ended | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2019 | Three months ended September 30, 2018 | June 30, | ||||||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | 2020 | % of Total | 2019 | % of Total | |||||||||||||||||||||||||||
Amount($) | % of Total | Amount($) | % of Total | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Salary and welfare | 405,620 | 35.0 | 1,234,692 | 55.9 | $ | 294,036 | 31.6 | $ | 430,369 | 48.4 | ||||||||||||||||||||||
Office, insurance and rental expenses | 369,947 | 31.9 | 361,402 | 16.4 | 185,697 | 20.0 | 147,542 | 16.6 | ||||||||||||||||||||||||
Legal and professional fees | 213,263 | 18.4 | 165,862 | 7.5 | 154,904 | 16.7 | 108,542 | 12.2 | ||||||||||||||||||||||||
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 | 80,486 | 8.7 | 44,567 | 5.0 | ||||||||||||||||||||||||
Travel and accommodation fees | 7,290 | 0.8 | 30,985 | 3.5 | ||||||||||||||||||||||||||||
Consultancy fee | 46,494 | 4.0 | 76,192 | 3.5 | 35,188 | 3.8 | 67,277 | 7.6 | ||||||||||||||||||||||||
Depreciation | 30,815 | 3.3 | 35,924 | 4.0 | ||||||||||||||||||||||||||||
Share based compensation expense | 6,273 | 0.5 | 64,810 | 2.9 | 19,303 | 2.0 | 13,760 | 1.6 | ||||||||||||||||||||||||
Depreciation | 32,692 | 2.8 | 77,712 | 3.5 | ||||||||||||||||||||||||||||
Others | 15,556 | 1.4 | 105,483 | 4.8 | 122,009 | 13.1 | 9,494 | 1.1 | ||||||||||||||||||||||||
Total general and administrative expense | $ | 1,159,502 | 100 | $ | 2,208,264 | 100 | $ | 929,728 | 100.0 | $ | 888,460 | 100.0 |
Other expensesincome (expenses)
Other expensesincome for the three-month periodthree months ended SeptemberJune 30, 2019 were $520,6982020 was $58,902, compared to other expenses of $1,004,552$486,931 for the same period in 2018.2019. The decreasesignificant increase in other expenses by $483,854 was predominately resulted fromincome for the three months ended June 30, 2020 is predominantly due to a significant decreaseincrease in foreign currency exchange lossgain by $354,410,$440,369, arising from the depreciation of the Renminbi against the US dollar and a decrease insundry income by $159,343, slightly offset by loan interest by $181,806 due to the loan due to afor our third party paid off in Januaryfinancing since the third quarter 2019. Such decrease was offset by decrease in bank interest income by $49,266.
Income tax benefit(expenses) benefits
The Company’s effective tax rate varies due to itsthe multiple jurisdictions in which theit books its pretax book incomesincome or losses incur.losses. The Company was subject to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate atof 8.25% for the first HKDHK$ 2 million (approximately $255,154)$257,705) assessable profits and at 16.5% for assessable profits above HKDHK$ 2 million (approximately $255,154) (16.5% prior to January 1, 2018)$257,705) and PRC enterprise income tax rate atof 25%.
The effective tax rates for the three months ended SeptemberJune 30, 2020 and 2019 were (102.1)% and 2018 were 9.4% and 20.5%5.6%, respectively.
Income taxesThe income tax expense and income tax benefit were $7,461 and $66,584 for the three months ended SeptemberJune 30, 2020 and 2019, and 2018 were $117,451 and $742,670, respectively. The income tax expense was due to Hong Kong Takung generating operating income before tax for the three months ended June 30, 2020, while all subsidiaries incurred losses before income tax in the same period in 2019.
Net Lossloss
We hadrecorded a net loss of $14,769 and $1,127,536 for the three months ended SeptemberJune 30, 2020 and 2019, of $1,127,897 compared net loss of $2,881,356 for the three months ended September 30, 2018.respectively.
The decrease in the net loss by $1,112,767 during this current period compared to the three months ended September 30,same period in 2019 was predominatelypredominantly due to a risegrowth in revenuetotal revenues by $760,058,$1,053,082 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 decreasean increase in exchange lossesgain 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.$440,369.
NINE-MONTHSIX-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20192020 COMPARED TO NINE-MONTHSIX-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20182019
The following tables set forth our condensed consolidated statements of income data:
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||||||||||
2019 | % of Revenue | 2018 | % of Revenue | 2020 | % of Revenue | 2019 | % of Revenue | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||
Revenue | $ | 2,285,376 | 100 | $ | 8,191,828 | 100 | $ | 2,860,451 | 100 | $ | 1,161,784 | 100 | ||||||||||||||||||||
Cost of revenue | (1,288,589 | ) | (56 | ) | (2,173,296 | ) | (27 | ) | (1,410,576 | ) | (49 | ) | (708,307 | ) | (61 | ) | ||||||||||||||||
Selling expense | (143,054 | ) | (6 | ) | (851,173 | ) | (10 | ) | (104,574 | ) | (4 | ) | (34,596 | ) | (3 | ) | ||||||||||||||||
General and administrative expenses | (3,322,547 | ) | (146 | ) | (7,791,747 | ) | (95 | ) | (2,040,175 | ) | (71 | ) | (2,163,045 | ) | (186 | ) | ||||||||||||||||
Impairment loss – construction-in-progress | - | - | (326,227 | (4 | ) | |||||||||||||||||||||||||||
Total costs and expenses | (4,754,190 | ) | (208 | ) | (11,142,443 | ) | (136 | ) | (3,555,325 | ) | (124 | ) | (2,905,948 | ) | (250 | ) | ||||||||||||||||
Loss from operations | (2,468,814 | ) | (108 | ) | (2,950,615 | ) | (36 | ) | (694,874 | ) | (24 | ) | (1,744,164 | ) | (150 | ) | ||||||||||||||||
Interest and other expenses, net | (670,885 | ) | (29 | ) | (1,166,045 | ) | (14 | ) | (178,401 | ) | (6 | ) | (150,187 | ) | (13 | ) | ||||||||||||||||
Loss before income taxes | (3,139,699 | ) | (137 | ) | (4,116,660 | ) | (50 | ) | (873,275 | ) | (30 | ) | (1,894,351 | ) | (163 | ) | ||||||||||||||||
Income tax benefit | 175,473 | 8 | 574,202 | 7 | ) | |||||||||||||||||||||||||||
Income tax (expense) benefit | (94,856 | ) | (3 | ) | 58,022 | 5 | ||||||||||||||||||||||||||
Net loss | $ | (2,964,226 | ) | (129 | ) | $ | (3,542,458 | ) | (43 | ) | $ | (968,131 | ) | (33 | ) | $ | (1,836,329 | ) | (158 | ) |
Revenue
The following table sets forth our condensed consolidated revenue by revenue source:
Nine months ended | Six months ended | |||||||||||||||
September 30, | June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Listing fee revenue | $ | 284,090 | $ | 3,978,735 | $ | 557,789 | $ | 284,090 | ||||||||
Commission | 1,655,244 | 3,557,411 | 2,089,136 | 716,080 | ||||||||||||
Management fee revenue | 346,042 | 455,133 | 213,526 | 161,614 | ||||||||||||
Authorized agent subscription revenue | - | 191,623 | ||||||||||||||
Annual fee revenue | - | 378 | ||||||||||||||
Online artwork sales | - | 8,548 | ||||||||||||||
Total | $ | 2,285,376 | $ | 8,191,828 | $ | 2,860,451 | $ | 1,161,784 |
(i) | Listing fee revenue |
As of SeptemberJune 30, 2019,2020, a total of 285292 sets of artwork were listed for trade on our platform —comprising 6067 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323$28,489,331 (HK$202,100,000)221,100,000); 35 pieces of jewelry with a total listing value of $9,269,749$9,362,437 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275$17,013,710 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820$12,241,006 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401$670,034 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700$335,017 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405$1,095,248 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$$1,328,987(HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577$128,853 (HK$1,000,000); and 7 pieces of sportsSports memorabilia with a listing value of $1,085,604$1,096,459 (HK$8,509,400), of which 22.5%-48% (for 6067 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 sportsSports memorabilia) of the listed values were charged as listing fees, respectively.
During the ninesix months ended SeptemberJune 30, 2019,2020, there were 67 new sets of paintings listed on our platform. Their total listing values were $1,148,194$2,448,201 (HK$19,000,000) for the paintings, of which 22.83-23% (for the paintings) of the listed values were charged as listing fees.
As of June 30, 2019, a total of 285 sets of artwork were listed for trade on our platform -comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the six months ended June 30, 2019, there were 6 new sets of paintings listed on our platform. Their total listing values were $1,147,549 (HK$9,000,000) for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.
The listing fees charged decreasedrevenue rose to $284,090$557,789 during the ninesix months ended SeptemberJune 30, 20192020 compared to $3,978,735$284,090 for the same period ended SeptemberJune 30, 2018.2019. During the ninesix months ended SeptemberJune 30, 2019,2020, we suspendedhad 7 new listingssets of artworkpaintings listed 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.online platform.
(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, whichwhere we charge trading commissions for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). 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(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 reviewed tradersone 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 uponwhen the selected traders that receivesreceive access to our trading platform to make unlimited trades for specific artworks. artwork.
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 offeredOnce an inactive trader has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed our obligations ahead of receiving consideration.
We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.
We used to offer commissions to traders and service agents. We 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 fromEffective January 1, 2017.2019, we no longer offered commission to our traders. For service agents, we rebateoffer a total of 40% to 68%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
The commission earned from the transactions of new traders they referred, deduct such 5% of the commission from the rebates payablepaid to the service agents to which such individual referrers relate.
The rebates and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.
Total commission revenue decreasedgrew by $1,902,167$1,373,056 or 192% for the ninesix months ended SeptemberJune 30, 2020 to $2,089,136 compared to $716,080 for the six months ended June 30, 2019 chiefly due to $1,655,244 compared to $3,557,411higher trading transaction amount incurred and more active traders involved during the six months ended June 30, 2020. Total transaction amounts for the ninesix months ended SeptemberJune 30, 2018 primarily because there2020 and 2019 were no new listings of artwork on our platform in$3,884,557,747 (HKD30,163,968,248) and $989,151,757 (HKD7,757,719,400), respectively. Total active traders involved for the secondsix months ended June 30, 2020 and third quarters2019 were 126,334 and this drove down overall trading activity during this period compared to last year.53,860, respectively.
(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-monthsix-month period ended SeptemberJune 30, 2019,2020, management fee revenue droppedincreased by $109,091,$51,912, from $455,133$161,614 for the ninesix months ended SeptemberJune 30, 20182019 to $346,042,$213,526, due to the decrease in overallhigher trading transactions this period compared to last year.
Duringin 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.current quarter.
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.
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, | Six months ended June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Artwork owners | $ | 284,090 | $ | 3,978,735 | $ | 557,789 | $ | 284,090 | ||||||||
Non - VIP traders | 1,494,066 | 2,235,789 | ||||||||||||||
Non – VIP traders | 1,934,832 | 640,789 | ||||||||||||||
VIP traders | 507,220 | 1,777,133 | 367,830 | 236,905 | ||||||||||||
Authorized agents | - | 191,623 | ||||||||||||||
Online artwork sales | - | 8,548 | ||||||||||||||
Total | $ | 2,285,376 | $ | 8,191,828 | $ | 2,860,451 | $ | 1,161,784 |
Cost of Revenue
Nine months ended September 30, | Six months ended June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Commission rebate to service agent | $ | 660,208 | $ | 1,207,104 | ||||||||||||
Commissions paid to service agents | $ | 1,099,305 | $ | 290,004 | ||||||||||||
Depreciation | 359,878 | 491,297 | 184,436 | 243,795 | ||||||||||||
Internet service charge | 159,882 | 240,165 | 70,635 | 97,778 | ||||||||||||
Artwork insurance | 36,124 | 155,635 | 24,271 | 23,933 | ||||||||||||
Artwork storage | 72,033 | 74,110 | 31,929 | 52,333 | ||||||||||||
Others | 464 | 4,985 | - | 464 | ||||||||||||
Total | $ | 1,288,589 | $ | 2,173,296 | $ | 1,410,576 | $ | 708,307 |
Cost of revenue for the ninesix months ended SeptemberJune 30, 2020 and June 30, 2019 was $1,410,576 and September 30, 2018 was $1,288,589 and $2,173,296,$708,307, respectively. The decreaserise in cost of revenue for the ninesix months ended SeptemberJune 30, 20192020 compared to SeptemberJune 30, 2018,2019 was mainly due to the decreasean increase in the commission rebatescommissions paid to service agents by $546,896. Management focused on resuscitating interest$809,301. This increase was driven by an increase in listed artwork and no new artwork had been listed sincetrading transactions during the second quarter of 2019. Besides thesix months ended June 30, 2020 as discussed above. Such increase was offset by a decrease in commission rebates, the decrease in cost of revenue was alsodepreciation by $59,359 due to a fall in the depreciationsome of our computer equipment and amortization of hardware and software on our trading platform by $131,419 assystems having been fully depreciated, a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decline in internet servicesservice charges by $80,283 due to the termination$27,143 and a decrease 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 feecosts by $2,077 and the drop in other expenses by $4,521.$20,404.
Gross Profit
Gross profit was $996,787$1,449,875 or 50.7% of the total revenue for the ninesix months ended SeptemberJune 30, 2019,2020, compared to $6,018,532$453,477 or 39.0% of the total revenue for the ninesix months ended SeptemberJune 30, 2018.2019. The decreaseincrease in gross profit and margin was mainly due to the significant declinegrowth in total revenue.
Overall total revenue for the ninesix months ended SeptemberJune 30, 2019 dropped2020 rose by $5,906,452$1,698,667 or 72.1%146.2% compared to the same period in 2018.2019. Compared to the same period in 2018,2019, there was a significant decreaseincrease in listing feecommission revenue and commission revenue.for the six months ended June 30, 2020 by $1,373,056 or 191.7%. Consequently, we posted a gross profit margin of 43.6%50.7% for the ninesix months ended SeptemberJune 30, 20192020 compared to 73.5%39.0% for the same period in 2018.2019.
Operating Expenses
General and administrative expenses for the ninesix months ended SeptemberJune 30, 20192020 were $3,322,547,$2,040,175, compared to $7,791,747$2,163,045 for the ninesix months ended SeptemberJune 30, 2018.2019. The significant plungereduction in general and administrative expense by $4,469,200$122,870 or 5.7% was attributed to a decrease in salary and welfare by $2,615,446$259,098 due to reduction in force since July 2018,salary reductions for our executives, a decrease in insurance and rental expensesconsultancy fee by $525,728$102,130 due to the relocationlower consulting fee charged by our consultants of our Hong Kong office to a non-central district,Tianjin Takung, a decrease in legal and professional fees by $159,147,$38,518 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in travelingtravel and accommodation fees by $8,212 due to lower overseas travel and accommodation, a fall in share-based compensation by $5,322 as there were no additional stock options granted and a decrease in depreciation by $8,117 as some of our furniture and fixtures and computer equipment had been fully depreciated. The overall decline in general and administrative expenses was offset by an increase in office, insurance and rental expenses by $463,758$182,794 due to a new office being leased by Tianjin Takung in mid-May 2019 and an increase in non-deductible input VAT expense by $62,981 as a result of fewer marketing events, a decreasean increase in non-deductible input VAT by $207,649, a decrease in consultancyservice fees by $71,853, share-based compensation by $180,347, depreciation by $119,273 and also other expenses by $202,401.paid to Tianjin Takung.
The following table sets forth the main components of ourthe Company’s general and administrative expenses for the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019.
Six months ended | ||||||||||||||||||||||||||||||||
Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | June 30, | ||||||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | 2020 | % of Total | 2019 | % of Total | |||||||||||||||||||||||||||
Amount($) | % of Total | Amount($) | % of Total | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Salary and welfare | 1,283,486 | 38.6 | % | 3,898,932 | 50.0 | % | $ | 618,768 | 30.3 | $ | 877,866 | 40.6 | ||||||||||||||||||||
Legal and professional fees | 344,122 | 16.9 | 382,640 | 17.7 | ||||||||||||||||||||||||||||
Office, insurance and rental expenses | 697,629 | 21.0 | % | 1,223,357 | 15.7 | % | 510,476 | 25.0 | 327,682 | 15.1 | ||||||||||||||||||||||
Legal and professional fees | 595,903 | 18.0 | % | 755,050 | 9.7 | % | ||||||||||||||||||||||||||
Consultancy fee | 70,305 | 3.4 | 172,435 | 8.0 | ||||||||||||||||||||||||||||
Non-deductible input VAT expense | 152,579 | 7.5 | 89,598 | 4.1 | ||||||||||||||||||||||||||||
Depreciation | 62,554 | 3.1 | 70,671 | 3.3 | ||||||||||||||||||||||||||||
Traveling and accommodation fees | 81,282 | 2.4 | % | 545,040 | 7.0 | % | 44,131 | 2.2 | 52,343 | 2.4 | ||||||||||||||||||||||
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 | % | ||||||||||||||||||||||||||
Share Based Compensation Expense | 25,289 | 1.2 | 30,611 | 1.4 | ||||||||||||||||||||||||||||
Others | 211,951 | 10.4 | 159,199 | 7.4 | ||||||||||||||||||||||||||||
Total general and administrative expense | $ | 3,322,547 | 100.0 | % | $ | 7,791,747 | 100.0 | % | $ | 2,040,175 | 100.0 | $ | 2,163,045 | 100.0 |
Other expenses
Other expenses for the ninesix months ended SeptemberJune 30, 2019 were $670,885,2020 was $178,401 compared to $1,166,045$150,187 for the ninesix months ended SeptemberJune 30, 2018.2019. The decrease in other expenses by $495,160amount 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 $57,295.
Income tax benefit (expenses)comparable between two periods.
Income tax (expense) benefits
The Company'sCompany’s effective tax rate varies due to itsthe multiple jurisdictions where pre-taxin which it books its pretax income or losses occur.losses. The Company iswas subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate atof 8.25% for the first HKDHK$ 2 million (approximately $255,154)$257,705) assessable profits and at 16.5% for assessable profits above HKDHK$ 2 million (approximately $255,154) (16.5% prior to January 1, 2018),$257,705) and PRC enterprise income tax rate atof 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 ninesix months ended SeptemberJune 30, 2020 and 2019 were (10.9)% and 2018 were 5.6% and 13.9%3.1%, respectively.
Income taxesThe income tax expense and income tax benefit were $94,856 and $58,022 for the ninesix months ended SeptemberJune 30, 20192020 and 2018 were $175,473 and $574,202,2019, respectively.
Net loss
We hadrecorded a net loss for the ninesix months ended SeptemberJune 30, 20192020 of $2,964,226$968,131 compared to a net loss of $3,542,458$1,836,329 for the ninesix months ended SeptemberJune 30, 2018. 2019.
The lowerdecrease in the net loss incurred in the nine months ended September 30, 2019,by $868,198 during this current period compared to the same period in 2018, resulted from a lower operating expenses and exchange loss2019 was predominantly triggered by the growth in total revenue for the current period.six months ended June 30, 2020 as discussed above.
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 |
Six months ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net cash (used in) provided by operating activities | $ | (3,782,887 | ) | $ | 21,615,744 | |||
Net cash (used in) provided by investing activities | (18,388 | ) | 2,409,459 | |||||
Net cash used in financing activities | - | (2,106,342 | ) | |||||
Effect of exchange rate change on cash and cash equivalents | (80,470 | ) | 10,090 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (3,881,745 | ) | 21,928,951 | |||||
Cash, cash equivalents and restricted cash, beginning balance | 21,829,154 | 12,524,086 | ||||||
Cash, cash equivalents and restricted cash, ending balance | $ | 17,947,409 | $ | 34,453,037 |
30
Sources of Liquidity
During the ninesix months ended SeptemberJune 30, 2020, net cash used in operating activities totaled $3,782,887, which predominantly resulted from the net loss of $968,131 and a decline in net change in operating assets and liabilities of $3,462,397 and offset by non-cash adjustments to net loss of $647,641. Net cash used in investing activities included purchase of furniture and computer equipment by Tianjin Takung. There was no net cash used in or provided by financing activities for the six months ended June 30, 2020. The resulting change in cash for the period was a decrease of $3,881,745. The cash balance at the beginning of the period was $21,829,154. The cash balance as of June 30, 2020 was $17,947,409.
During the six months ended June 30, 2019, net cash generated from operating activities totaled $10,828,217 which resulted from$21,615,744. Although the implementationCompany incurred a net loss of ASU2016-18 since$1,836,329 during the beginning of 2018. In fact, theresix months ended June 30, 2019, such net loss was offset by an increase in client deposits by $12,459,049 placed by the customers for upcoming transactions which influenced the increased amounts duenet change in operating assets and liabilities of $23,063,582 and non-cash adjustments 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 loss of $388,491. Net cash generated from investing activities totaled $313,588.$2,409,459. Net cash used in financing activities totaled $537,605.$2,106,342. The resulting change in cash for the period was an increase of $10,570,802.$21,928,951. The cash balance at the beginning of the period was $12,524,086. The cash balance on SeptemberJune 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.$34,453,037.
As of SeptemberJune 30, 2019,2020, the Company had $26,298,905$21,974,706 in total current liabilities, which comprised of $522,929included $815,748 in accrued expenseexpenses and other payables, $17,008,251$12,435,948 in customers’customer deposits, $10,227$1,956,287 in advanceshort-term borrowings from customer, $6,759,674a third party, $6,457,827 in amount due to related parties, $1,816,837$13,612 in loanadvances from a third party, $173,156customers, $152,954 in lease liabilities and $7,831$142,330 in tax payables.
As of December 31, 2018,2019, the Company had $14,099,778$25,947,490 in total current liabilities, which included $641,692$629,666 in accrued expenses and other payables, $8,995$16,404,941 in advance from customers, $4,549,202 in customers’customer deposits, $2,499,500$1,868,345 in short-term borrowings from a third parties, $6,385,288party, $6,862,713 in amount due to related party,parties, $8,788 in advances from customers, $166,987 in lease liabilities and $15,101$6,050 in taxVAT 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 foreignwholly-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.
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 downturn including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring, including re-evaluating the Company’s corecompany’s Unit business and a downsizingdownsize of itsthe 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 stockshares 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, 2018,2019, previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2018,2019, previously filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Ms. Fang Mu and our Chief Financial Officer, Mr. Jehn Ming Lim.Mrs. Jing Wang. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of SeptemberJune 30, 20192020 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended SeptemberJune 30, 20192020 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 1. Legal Proceedings.
On or around May and June 2020, plaintiffs Chunji Zhao and Guangming Su commenced legal proceedings against Takung (Shanghai) Co., Ltd (“Shanghai Takung”) over a contract dispute relating to the Company’s trading platform use agreement and misrepresentations over ownership units made by a certain service agent amounting to an aggregate of approximately $0.23 million.
Both cases originated in the Shanghai Pudong People’s Court. However, because Shanghai Takung was subsequently deregistered on May 8, 2020, both plaintiffs requested the defendant in their respective cases be re-named Hong Kong Takung Art Co. Ltd, its parent company. The plaintiffs also requested that Takung Cultural Development (Tianjin) Co., Ltd be named as additional defendant. In addition to damages, plaintiffs Chunji Zhao and Guangming Su were also claiming litigation costs of RMB1,090,000 (approximately, $0.15 million) and RMB 536,025 (approximately, $0.08 million) respectively.
On July 1, 2020, Chunji Zhao withdrew his claim against Tianjin Takung. The withdrawal was approved by the court on July 20, 2020. The other litigation proceeding from Guangming Su has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020 and is presently under review. We do not believe that the proceedings have any merit and intend to vigorously defend against them.
On or around July 2020, a third filing claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung Art Co. Ltd in the Shanghai Pudong People’s Court, China, on the basis of alleged breaches of contract. The claim amount has yet to be determined. In our management’s opinion, it is not probable that we will incur any losses arising from this litigation case. As such, as of June 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings.
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
(1) Incorporated by reference to the exhibit to our registration statement on Form S-1 filed with the SEC on August 16, 2011.
(2) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013.
(3) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014.
(4) Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014.
*Filed herewith.
**Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAKUNG ART CO., LTD | ||
Date: | By: | /s/ Fang Mu |
Fang Mu | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | By: | /s/ |
Chief Financial Officer | ||
(Principal Financial Officer) |