The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars except Number
of Shares)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd
and Subsidiaries (“Takung”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Assets
and Equity of Artworks Exchange Co., Ltd. (“Hong Kong Takung”), a Hong Kong company and our wholly owned subsidiary,
operates an electronic online platform located at www.takungae.com for artists, art dealers and art investors to offer and trade
in valuable artwork.
HongKong Takung Assets
& Equity of Artworks Exchange Co., Ltd. (“Hong Kong Takung”) was incorporated in Hong Kong on September 17, 2012
and operates an electronic online platform for offering and trading artwork. For the period from September 17, 2012 (inception)
to December 31, 2012, there was no operation except the issuance of shares for subscription receivable. We generate revenue from
our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading
commissions, and management fees. We conduct our business primarily in Hong Kong, People’s Republic of China.
Takung (Shanghai) Co.,
Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai
Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company
HongKong Takung Assets and Equity of Artworks Exchange Co. Ltd. ("Hong Kong Takung") by receiving deposits from and making
payments to online artwork traders of Takung for and on behalf of Takung.
Shanghai Takung set
up a new office in Hangzhou, PRC on November 20, 2016 for technology development. Takung Cultural Development (Tianjin) Co.,
Ltd (“Tianjin Takung”) is a limited liability company, with a registered capital of $1 million located in Pilot Free
Trade Zone. Tianjin Takung was incorporated on January 27, 2016.
Tianjin Takung provides
technology development services to Hong Kong Takung and Shanghai Takung and also carries out marketing and promotion activities
in mainland China.
Hong Kong Takung
Art Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding
company to control an online platform for offering, selling and trading whole piece of artwork.
Art Era Internet Technology
(Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung
Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade
Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial
statements have been prepared in accordance with the generally accepted accounting principles in the United States ("U.S.
GAAP").
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.
Use of Estimates
The preparation of
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the amount of revenues and expenses during the reporting periods. Actual results could differ materially
from those results.
Basis of Consolidation
The consolidated
financial statements include the financial statements of the Company, and its subsidiaries, Hong Kong Takung, Shanghai Takung
and Tianjin Takung. All intercompany transactions and balances have been eliminated on
consolidation.
Fair Value Measurements
The Company applies
the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial
assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair
value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures
about fair value measurements.
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
ASC 820 establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are as follows:
|
·
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
·
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
There were no assets
or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 31,
2018 and 2017.
Comprehensive Income (Loss)
The Company follows
the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”)
220 “Reporting Comprehensive Income”, and establishes standards for the reporting and display of comprehensive income,
its components and accumulated balances in a full set of general purpose financial statements. For the year ended December 31,
2018 and 2017, the Company’s comprehensive loss includes net loss and foreign currency translation adjustment.
Foreign Currency Translation and Transaction
The functional currency
of Hong Kong Takung and Takung Art Holdings are the Hong Kong Dollar (“HKD”).
The functional currency
of Tianjin Takung, Shanghai Takung and Art Era are the Renminbi (“RMB”).
The reporting currency
of the Company is the United States Dollar (“USD”).
Transactions in currencies
other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction.
At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at
the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on re-translation of monetary
items at period-end are included in income statement of the period.
For the purpose of
presenting these financial statements, the Company’s assets and liabilities with functional currency of HKD are expressed
in USD at the exchange rate on the balance sheet’s dates, which is 7.8305 and 7.8128 as of December 31, 2018 and December
31, 2017, respectively; shareholder’s equity accounts are translated at historical rates, and income and expense items are
translated at the weighted average exchange rates during the year, which is 7.8376 and 7.7926 for the years ended December
31, 2018 and 2017, respectively. For Renminbi currency, the Company’s assets and liabilities are expressed in USD at the
exchange rate on the balance sheet date, which is 6.8755 and 6.5063 as of December 31, 2018 and December 31, 2017 respectively.
Shareholder’s equity accounts are translated at historical rates, and income and expense items are translated at the weighted
average exchange rates during the year, which is 6.6090 and 6.7569 for the years ended December 31, 2018 and December 31,
2017.
The resulting translation
adjustments are reported under accumulated other comprehensive loss in the shareholder’s equity section of the balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash on hand, cash in bank with no restrictions, as well as highly liquid investments which are unrestricted as to withdrawal
or use, and which have remaining maturities of three months or less when initially purchased.
A significant portion
of our cash and cash equivalents is denominated in RMB, and deposited in the financial institutions of China. Chinese governmental
policies were introduced in 1996 to allow the convertibility of RMB denominated cash into foreign currencies for current account
items, but conversion of RMB denominated cash into foreign exchange for most of the capital items, such as foreign direct investment,
loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however,
do not guarantee the availability of foreign currencies to fund our business activities outside China, or to repay non-RMB denominated
obligations.
Restricted Cash
Restricted cash represents
the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s
account”) in order to facilitate the trading shares of the artwork. The buyers are required to have their funds transferred
to the broker’s account before the trading take place. Upon the delivery of the shares, the seller will send instructions
to the bank, requesting the amount to be transferred to their personal account. After deducting the commission and the management
fee as per Takung, the bank will transfer the remainder to the seller’s personal account. Except for instructing the bank
to deduct the commission and management fee, Takung has no right to manipulate any funds in the broker’s account except the
Company statements of intention with regard to particular deposits.
Short-term investments
Short term investments consist of held-to-maturity
investments and available-for-sale investments.
The Company’s
held-to-maturity investments consist of financial products purchased from banks, which are not allowed for the early withdrawal.
The Company’s short term held-to-maturity investments are classified as short-term investments on the consolidated balance
sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.
Investments classified
as available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair
values are reported net of tax in accumulated other comprehensive income until realized.
The Company reviews
its investments for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Company
considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of
an investment exceeds the investment’s fair value, the Company considers, among other factors, general market conditions,
expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than
the cost, and the Company’s intent and ability to hold the investment. OTTI is recognized as a loss in the income statement.
As of December 31, 2018 and 2017, there were no short-term investment.
Accounts Receivables and Allowance for
Doubtful Accounts
Accounts receivable
are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates
for the allowance for doubtful accounts based upon our assessment of various factors, including historical, experience, the age
of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect
customers' ability to pay.
Loan Receivables
Loan
to third parties is presented under current asset of the balance sheets based on the nature and loan period of time.
Prepayment and Other Current Assets
Prepayment and other
current assets mainly consist of the prepayment for, maintenance of online trading system, the advertising and promotional services,
prepaid financial advisory and banking services, as well as other current assets.
Other Non-current Assets
A portion of the deposits,
are presented under the non-current section of the balance sheets based on the nature of the amounts.
Property and Equipment
Property and equipment
are stated at cost less accumulated depreciation and impairment losses. Gains or losses on dispositions of property and equipment
are included in operating income or expense. Major additions, renewals and betterments are capitalized, while maintenance and repairs
are expensed as incurred.
Depreciation and amortization
are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in
service.
We develop systems
and solutions for solely internal use. Certain costs incurred in connection with developing or obtaining internal use software
are capitalized. Unamortized capitalized costs are included in computer trading and clearing system, within property and equipment,
net in the Consolidated Balance Sheets. Capitalized software costs are amortized on a straight-line basis over the estimated useful
lives of the software of 5 years. Amortization of these costs is included in depreciation and amortization expense in the Consolidated
Statements of Operations.
Estimated useful lives
are as follows, taking into account the assets' estimated residual value:
Classification
|
|
Estimated
useful life
|
Furniture, fixtures and equipment
|
|
5 years
|
Leasehold improvements
|
|
Shorter of the remaining lease terms and the estimated 3 years
|
Computer trading and clearing system
|
|
5 years
|
Long-lived Assets
The Company evaluates
its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. When these events occur, the Company assesses the recoverability of these long-lived assets by comparing
the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their
eventual disposition. If the future undiscounted cash flow is less than the carrying amount of the assets, the Company recognizes
an impairment equal to the difference between the carrying amount and fair value of these assets.
Intangible Assets
Intangible assets represent
the licensing cost for our trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible
assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the
carrying value exceeds the fair value. For intangible assets with definite lives, they are amortized over estimated useful lives,
and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 2018
and 2017.
Customer deposits
Customer deposits represent
the cash deposited by the traders (“buyers and sellers”) into a specific bank account under Takung (“the broker’s
account”) in order to facilitate the trading ownership units of the artwork. The buyers are required to have their funds
transferred to the broker’s account before the trading take place.
Advance from customers
Advance from customers
represent trading commissions one month in advance charge to the VIP traders. Starting from April 1, 2016, the Company charges
a monthly commission to VIP traders, instead of charging per transaction.
Short-term borrowings from third parties
The Company obtained
two short-term borrowings from third parties, both with 8% annual interest rate.
Revenue Recognition
The Company generates
revenue from its services in connection with the offering and trading of artwork on our system, primarily consisting of listing
fees, trading commissions, and management fees.
Effective January 1,
2018, the Company adopted Topic 606 using modified retrospective approach applied to its contracts which were not completed as
of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606,
while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605.
We recognize revenue
when control of the promised services is transferred to our traders and offering agents. Revenue is measured at the transaction
price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised
services to our traders and offering agents. Our revenue mainly falls into the following broad categories: (i) listing fees, (ii)
trading commissions, (iii) management fees, (iv) authorized agent subscription fee, (v) annual fee, and (vi) online artwork sales.
Listing fee
Using the output method,
we recognize the listing fee revenue at a point when the ownership units of the artwork are listed and successfully traded on our
system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance
of such units accounted as the listing fee revenue accordingly. When the ownership units of the artwork are listed and starts trading
on our system, the original owner and/or the offering agent pays us a one-time offering fee and a listing deposit.
Commission fee revenue
We generate commission
fee from non-VIP traders and selected traders. We measure the progress of performance obligations using the output method, as traders
obtain the benefits of receiving access to making transactions on our trading platform.
For non-VIP traders,
the commission revenue is calculated based on a percentage of transaction value of artworks, where we charge trading commissions
for the purchase and sale of the ownership shares of the artworks.
For selected traders,
starting from April 1, 2016, we charge a predetermined monthly fee which allows unlimited trades for specific artworks.
Commission rebate programs
are offered to traders and service agents. We pay to existing traders and service agents a commission rebate at a predetermined
referral rate of commission earned from the transactions of new traders referred by them. The commission rebate is recognized as
a reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting from January 1, 2018, we account for the
commission rebate as cost of revenue under Topic 606-10-32-26. Since this is a reclassification between revenue and cost of revenue,
it would have no impact on the opening balance for the year beginning January 1, 2018. Commission rebates were $1,214,912 and 412,215
for the years ended December 31, 2018 and 2017, respectively.
The rebates are
recognized in the same period the related revenue is recognized.
Management fee revenue
A custody and insurance
service are provided for each individual artwork on a daily basis. The cost of custody and insurance for each unit of artwork
is constant for all artworks. Using the cost-based input method, we charge traders a management fee to cover the costs of insurance,
storage and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per
100 artwork units daily. The management fee is accounted for as revenue, and immediately deducted from proceeds from the sale
of artwork ownership shares when a transaction is completed. A discount program is offered to waive the management fee during
certain promotion periods. Such discounts are recognized as a reduction of the revenue upon the completion of the transactions.
Authorized agent subscription revenue
We charge an authorized
agent subscription fee, which is an annual service fee paid by authorized agents to grant them the right to allow their network
of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period
for each agent.
Annual fee revenue
We charge an up-front
annual fee for providing traders with premium services, including in-depth information and tools on the trading platform. This
revenue is recognized ratably over the service agreement period for each trader.
Online artwork sales
From the second quarter
of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.
Sales of artwork: The
sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales
of their artworks, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does
not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since
the goods are shipped direct from third-party merchants to end customers. Upon successful sales on the Company's online platform,
the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission
fees are recognized on a net basis when the artwork sales order is completed.
Sales of artwork related
merchandise: The Company also offers its own artwork related merchandise through its online platform. Revenue is recognized when
control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.
For comparative purpose, we adjusted the
revenue and cost of revenue for year ended December 31, 2017 as if retrospectively adopted ASC 606.
The following tables identify the disaggregation
of our revenue for the years ended December 31, 2018 and 2017, respectively:
|
|
Year ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
Listing fee revenue
|
|
$
|
3,907,301
|
|
|
$
|
5,572,840
|
|
|
$
|
-
|
|
|
$
|
5,572,840
|
|
Commission
|
|
|
3,818,852
|
|
|
|
6,112,868
|
|
|
|
412,215
|
|
|
|
6,525,083
|
|
Management fee revenue
|
|
|
569,098
|
|
|
|
1,235,659
|
|
|
|
-
|
|
|
|
1,235,659
|
|
Annual fee revenue
|
|
|
378
|
|
|
|
1,021
|
|
|
|
-
|
|
|
|
1,021
|
|
Authorized agent subscription revenue
|
|
|
191,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Online artwork sales
|
|
|
8,409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,495,423
|
|
|
$
|
12,922,388
|
|
|
$
|
412,215-
|
|
|
$
|
13,334,603
|
|
Revenue by customer type
The following table presents our revenue
by customer type:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Artwork owners
|
|
$
|
3,907,301
|
|
|
$
|
5,572,840
|
|
Non - VIP traders
|
|
|
2,324,441
|
|
|
|
1,116,719
|
|
VIP traders
|
|
|
2,063,887
|
|
|
|
6,232,829
|
|
Authorized agents
|
|
|
191,385
|
|
|
|
-
|
|
Online artwork sales
|
|
|
8,409
|
|
|
|
-
|
|
Total
|
|
$
|
8,495,423
|
|
|
$
|
12,922,388
|
|
Cost of revenue
These costs of revenue primarily included
the following: commission rebate to service agent, depreciation, internet service charge, artwork insurance and artwork storage:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
Commission rebate to service agents
|
|
$
|
1,214,912
|
|
|
$
|
-
|
|
|
$
|
412,215
|
|
|
$
|
412,215
|
|
Depreciation
|
|
|
632,440
|
|
|
|
550,467
|
|
|
|
|
|
|
|
550,467
|
|
Internet service charge
|
|
|
396,254
|
|
|
|
455,361
|
|
|
|
|
|
|
|
455,361
|
|
Artwork insurance
|
|
|
220,089
|
|
|
|
170,816
|
|
|
|
|
|
|
|
170,816
|
|
Artwork storage
|
|
|
110,070
|
|
|
|
68,713
|
|
|
|
|
|
|
|
68,713
|
|
Others
|
|
|
4,999
|
|
|
|
1,929
|
|
|
|
|
|
|
|
1,929
|
|
Total
|
|
$
|
2,578,764
|
|
|
$
|
1,247,286
|
|
|
$
|
412,215
|
|
|
$
|
1,659,501
|
|
The Company has elected
to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations
that have original expected durations of one year or less.
We do not have amounts
of contract assets that the Company has right to consideration in exchange for services that the Company has transferred to customers
when that right is conditioned on something other than the passage of time. Our contract liabilities are the Company’s obligation
to transfer services to traders for which the Company has received consideration from the traders. All contract liabilities are
expected to be recognized as revenue within one month and are presented in Advance from Customers in our Condensed Consolidated
Balance Sheet.
Cost of Revenue
Our cost of revenue
consists primarily of expenses associated with the delivery of our service. These include expenses related to the operation of
our data centers, such as facility and lease of the server equipment, development and maintenance of our platform system, as well
as the cost of insurance, storage and transportation of the artworks. As discussed above, cost of revenue includes commission rebate
to service agent beginning January 1, 2018 under the adoption of ASC Topic 606.
Income Taxes
The Company accounts
for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets
based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future
deductibility is uncertain.
Under ASC 740, a tax
position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The
first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including
the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure
a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold
is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in
the year incurred. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
On December 22, 2017,
the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government which included a wide range of tax reform
affecting businesses including the corporate tax rates, international tax provisions, tax credits and deduction with majority of
the tax provision effective after December 31, 2017.
Certain activities
conducted in foreign jurisdictions may result in the imposition of U.S. corporate income taxes on Takung when its subsidiaries,
controlled foreign corporations (“CFCs”), generate income that is subject to Subpart F or GILTI under the U.S. Internal
Revenue Code beginning after December 31, 2017.
The Company did not accrue any liability,
interest or penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements
of operations for the year ended December 31, 2018 and 2017. The Company does not expect that its assessment regarding unrecognized
tax positions will materially change over the next 12 months.
Earnings per share
Basic earnings per
share is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income/(loss) by the weighted-average number of common shares and dilutive potential
common shares outstanding during the year.
Concentration
of Risks
Concentration
of credit risk
Financial instruments
that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted
cash, account receivables. The carrying values of the financial instruments approximate their fair values due to their short-term
maturities. The Company places its cash and cash equivalents and restricted cash with financial institutions with high-credit ratings
and quality. Account receivables primarily comprise of amounts receivable from the trader customers. With respect to the prepayment
to service suppliers, the Company performs on-going credit evaluations of the financial condition of these suppliers. The Company
establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific service providers
and other information.
Concentration
of customers
There are no revenues
from customers that individually represent greater than 10% of the total revenues during the year ended December 31, 2018 and 2017.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
Adoption of ASC Topic 606, “Revenue from Contracts
with Customers”
In May 2014, the Financial Accounting Standards
Board (FASB) issued Topic 606, which supersedes the revenue recognition requirements in Topic 605. We adopted Topic 606 as of January
1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1,
2018. See Note 2 “Revenue Recognition” above for further details.
Statement of
Cash Flows:
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted
Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period
in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This
update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted.
The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and
removal of the changes in restricted cash activity, as a result, the Company no longer presents transfers between cash and cash
equivalents and restricted cash in the statement of cash flows. Furthermore, an additional reconciliation will be required to
reconcile Cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown
in the Consolidated Statement of Cash Flows. The Company has already disclosed the restricted cash separately on its Consolidated
Statements of Financial Position. Beginning the first quarter of 2018, the Company has adopted and included the restricted cash
balances on the Consolidated Statement of Cash Flows and reconciliation of Cash, cash equivalent, and restricted cash within its
Consolidated Statements of Financial Positions that sum to the total of the same such amounts shown in Consolidated Statement
of Cash Flows. This guidance has been applied retrospectively to the Consolidated Statement of Cash Flows for the year ended December
31, 2017 which required the Company to recast each prior reporting period presented. As a result, the Company no longer discloses
transfers between cash and restricted cash in the consolidated cash flow statements.
Accounting Pronouncements Issued But Not Yet Adopted
Financial Instruments - Credit Losses
:
In June 2017, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate
for assets measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2017-13 is
effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. The Company is still evaluating the impact of this standard on the Company’s consolidated financial statements and
related disclosures.
Codification Improvements:
In July 2018, the FASB issued ASU No. 2018-09,
Codification Improvements
. This amendment makes changes to a variety of
topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the
amendments in ASU 2018-09 are effective for periods beginning after December 15, 2018. The Company is currently evaluating this
guidance and the impact it may have on the Company's consolidated financial statements.
Leases
:
In February 2016,
the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which amends the existing accounting standards for lease accounting,
including requiring lessees to recognize most leases on their balance sheets as right-of-use assets and lease liabilities, as well
as making targeted changes to lessor accounting. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less will be accounted
for similar to the previous guidance for operating leases. The standard requires a modified retrospective transition approach for
all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief.
In January 2018, the FASB issued ASU No. 2018-01,
Leases (Topic 842), Land Easement Practical Expedient for Transition
to Topic 842
, which provides further transition relief by including an option to not evaluate land easements that exist or
have expired prior to the date of adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.
In
July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases,
which includes amendments
that affect narrow aspects of the guidance issued in ASU No. 2016-02, and ASU No. 2018-11,
Leases (Topic 842), Targeted Improvements,
which
gives entities another option for transition and provides lessors with a practical expedient. Under ASU No. 2018-11, entities are
provided an additional (and optional) transition method, which the Company elected, to adopt Topic 842 by recognizing a cumulative-effect
adjustment to the opening balance of retained earnings for the effects of initially applying Topic 842 in the period of adoption.
Consequently, an entity’s reporting for periods presented prior to adoption of the new lease requirements in the consolidated
financial statements would continue in accordance with current GAAP,
Leases (Topic 840)
, including disclosures. In
December 2018, the FASB issued ASU No. 2018-20,
Leases (Topic 842), Narrow-Scope Improvements for Lessors,
which
clarifies the accounting by lessors for taxes collected from lessees, certain lessor costs either paid by lessees directly to third
parties or paid by the lessor and reimbursed by the lessee, and variable payments received by lessors for contracts with lease
and non-lease components. The standard is effective for annual and interim periods beginning after December 15, 2018 with early
adoption permitted.
We adopted the new
standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods. We will elect the
package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease
classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that
exist prior to adoption of the new standard. We will also elect to combine lease and non-lease components and to keep leases with
an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements
of income on a straight-line basis over the lease term. We estimate approximately $495,432 would be recognized as total
right-of-use assets and total lease liabilities on our consolidated balance sheet as of January 1, 2019.
The Company does not
believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on
the consolidated financial position, statements of operations and cash flows.
3. PREPAYMENT AND OTHER CURRENT
ASSETS
Prepayment and other
current assets mainly consist of the short-term borrowing to the third party and the prepaid services for maintenance of online
trading system, the advertising and promotional services, prepaid financial advisory and banking services, as well as other current
assets.
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Prepaid tax
|
|
$
|
399,026
|
|
|
$
|
1,132,140
|
|
Deposit
|
|
|
241,827
|
|
|
|
14,471
|
|
Prepaid service fees
|
|
|
140,934
|
|
|
|
489,424
|
|
Short-term borrowings to third party
|
|
|
-
|
|
|
|
461,092
|
|
Staff advance
|
|
|
93,676
|
|
|
|
52,124
|
|
Prepaid repair and maintenance
|
|
|
1,201
|
|
|
|
46,733
|
|
Other current assets
|
|
|
78,585
|
|
|
|
104,223
|
|
Prepayment and other current assets
|
|
$
|
955,249
|
|
|
$
|
2,300,207
|
|
4. ACCOUNT RECEIVABLES, NET
Account receivables
consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Listing fee
|
|
$
|
568,757
|
|
|
$
|
2,259,671
|
|
Authorized agent subscription revenue
|
|
|
557,837
|
|
|
|
559,101
|
|
Monthly commission fee
|
|
|
1,378,148
|
|
|
|
1,463,243
|
|
Others
|
|
|
53,626
|
|
|
|
80,473
|
|
Less: allowance for doubtful accounts
|
|
|
(1,989,611)
|
|
|
|
(2,070,790)
|
|
Account receivables, net
|
|
$
|
568,757
|
|
|
$
|
2,291,698
|
|
As of December 31,
2018 and 2017, the Company recorded provision for doubtful accounts of $1,989,611 and $2,070,790, respectively. During the year
ended December 31, 2018, the Company recovered the provision for doubtful accounts approximately $76,429.
5. LOAN RECEIVABLES
The following table
sets forth a summary of the loan agreements in loan receivables balance:
Date
|
|
Borrower
|
|
Lender
|
|
Original
Amount
(RMB)
|
|
|
Outstanding
Balance
(RMB)
|
|
|
Amount in
Reporting Currency
(USD)
|
|
|
Annual
Interest Rate
|
|
|
Repayment
Due Date
|
4/4/2017
|
|
Xiaohui Wang
|
|
Tianjin Takung
|
|
|
22,921,725
|
|
|
|
9,821,725
|
|
|
$
|
1,428,510
|
|
|
|
0
|
%
|
|
12/31/2018
|
12/15/2017
|
|
Xiaohui Wang
|
|
Tianjin Takung
|
|
|
3,310,000
|
|
|
|
3,310,000
|
|
|
$
|
481,420
|
|
|
|
0
|
%
|
|
12/14/2018
|
12/19/2017
|
|
Xiaohui Wang
|
|
Tianjin Takung
|
|
|
3,310,000
|
|
|
|
3,310,000
|
|
|
$
|
481,420
|
|
|
|
0
|
%
|
|
12/18/2018
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
2,391,350
|
|
|
|
|
|
|
|
All the transactions
were aimed to meet the Company’s working capital needs in U.S. Dollars, which are freely convertible to Hong Kong Dollar.
|
•
|
The
interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Chongqing Wintus (New Star)
Enterprises Group (“Chongqing”). Xiaohui Wang (“Ms. Wang”) is a citizen of the People’s Republic
of China. Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms. Wang are non-related parties
to the Company. Ms. Wang repaid the loan balance, $1,316,268 (RMB 9,050,000) on January 31, 2019 and $1,075,082 (RMB 7,391,725)
on February 14, 2019.
|
|
•
|
Hong Kong Takung entered into loan agreements (the “U.S. Dollar Loans”) with Merit Crown Limited, a Hong Kong company (“Merit Crown”) with interest accruing at a rate of 8% per annum (See Note 8). Merit Crown is a non-related party to the Company.
|
Through an understanding
between Ms. Wang and Merit Crown, the U.S. Dollar Loans are “secured” by the RMB Loans. It is the understanding between
the parties that the U.S. Dollar Loans and the RMB Loans will be repaid simultaneously.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
156,656
|
|
|
$
|
167,651
|
|
Leasehold improvements
|
|
|
447,048
|
|
|
|
426,138
|
|
Computer trading and clearing system
|
|
|
3,382,168
|
|
|
|
3,287,383
|
|
Construction in progress
|
|
|
-
|
|
|
|
198,461
|
|
Transport equipment
|
|
|
104,628
|
|
|
|
-
|
|
Sub-total
|
|
|
4,090,500
|
|
|
|
4,079,633
|
|
Less: accumulated depreciation
|
|
|
(2,644,821
|
)
|
|
|
(1,888,312
|
)
|
Property and equipment, net
|
|
$
|
1,445,679
|
|
|
$
|
2,191,321
|
|
Depreciation expense
was $895,267 and $742,272 for the year ended December 31, 2018 and 2017, respectively.
Due to the close of
Hangzhou branch office during the third quarter of 2018, the technology developments were downsized and the software projects
were halted, the Company has impaired the unamortized portion of capitalized costs incurred in connection with developing or obtaining
internal use software, as well as those software and hardware used in E-commerce business, which were included in computer and
trading system, in amount of $352,669, as the Company deemed that no sufficient future economic benefits would be generate
from these assets The amounts were charged to impairment loss under operating expenses for the year ended December 31, 2018.
7. INTANGIBLE ASSETS
Intangible assets consist
of the Company’s trademarks with indefinite useful life. The intangible asset was $22,284 and $22,334 as of December 31,
2018 and 2017, respectively.
8. OTHER NON-CURRENT ASSETS
Other non-current assets
as of December 31, 2018 and 2017 consisted of:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Deposit – non-current
|
|
$
|
57,965
|
|
|
$
|
316,273
|
|
Prepayment – non-currents
|
|
|
84,328
|
|
|
|
440,962
|
|
Total other non-current assets
|
|
$
|
142,293
|
|
|
$
|
757,235
|
|
9. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and
other payables as of December 31, 2018 and 2017 consisted of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accruals for consulting fees
|
|
$
|
264,793
|
|
|
$
|
265,393
|
|
Payroll payables
|
|
|
104,437
|
|
|
|
827,246
|
|
Trading and clearing system
|
|
|
86,208
|
|
|
|
52,564
|
|
Accruals for professional fees
|
|
|
49,518
|
|
|
|
192,067
|
|
Other payables
|
|
|
136,736
|
|
|
|
124,588
|
|
Total accrued expenses and other payables
|
|
$
|
641,692
|
|
|
$
|
1,461,858
|
|
10. SHORT-TERM BORROWINGS FROM THIRD
PARTIES
The following table
sets forth a summary of the loan agreements in short-term borrowing balances:
Date
|
|
Borrower
|
|
Lender
|
|
December
31,
2018
(USD)
|
|
|
December
31,
2017
(USD)
|
|
|
Annual
Interest
Rate
|
|
|
Repayment
Due Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2016
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
|
|
8
|
%
|
|
12/31/2018
|
8/24/2016
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
1,499,500
|
|
|
$
|
1,999,500
|
|
|
|
8
|
%
|
|
12/31/2018
|
11/18/2016
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
1,480,000
|
|
|
|
8
|
%
|
|
10/31/2018
|
12/9/2016
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
1,520,000
|
|
|
|
8
|
%
|
|
11/30/2018
|
12/19/2017
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
|
8
|
%
|
|
12/18/2018
|
12/22/2017
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
|
8
|
%
|
|
12/21/2018
|
|
|
Less: Discount loan payable
|
|
|
|
$
|
-
|
|
|
$
|
(290,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,499,500
|
|
|
$
|
7,208,761
|
|
|
|
|
|
|
|
The U.S. Dollar Loans
are to provide Hong Kong Takung with sufficient U.S. Dollar-denominated currency to meet its working capital requirements. It is
“secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and
guarantor affiliated with the lender of the U.S. Dollar Loans. It is the understanding between the parties that the U.S. Dollar
Loans and the RMB Loans will be repaid simultaneously.
On July 4, 2018, July
20, 2018 and November 30, 2018, Hong Kong Takung repaid $2,000,000, $1,480,000 and $1,520,000 to Merit Crown, respectively, The
remaining balance, $2,499,500 was repaid to Merit Crown Limited on January 2, 2019.
Meanwhile, during
the year ended December 31, 2018, Chongqing repaid RMB 10,062,400 (equals to US$1,520,000), RMB13,100,000 (equals to US$2,000,000),
RMB9,827,200 (equals to US$1,480,000) and RMB 1,539,780 (approximately US$223,952) to Shanghai Takung and Tianjin Takung, respectively.
The weighted average
interest rate of outstanding short-term borrowings was 8% per annum as of December 31, 2018 and 2017. The fair values of the short-term
borrowings approximate their carrying amounts. The interest expenses for short-term borrowings were $569,556 and $524,638 for the
year ended December 31, 2018 and 2017, respectively. The weighted average short-term borrowing was $2,499,500 and $6,315,799 for
the year ended December 31, 2018 and 2017, respectively.
The US Dollar Loans
are to provide Hong Kong Takung with sufficient US Dollar-denominated currency to meet its working capital requirements. It is
“secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and
guarantor affiliated with the lender of the US Dollar Loans. It is the understanding between the parties that when the US Dollar
Loans are repaid, the RMB Loans will similarly be repaid.
The whole U.S. Dollar
Loans of $2,499,500 was subsequently settled on January 2, 2019.
11. RELATED PARTY BALANCES AND TRANSACTIONS
The following is a
list of director and related parties to which the Company has transactions with:
(a) Jianping Mao (“Mao”),
the wife of the Vice General Manager of Hong Kong Takung.
(b) Liu Zhenying (“Liu”),
the Vice President of Hong Kong Takung. Liu resigned from the Company on September 30, 2018.
(c) Wang Song (“Wang”),
the General Manager of Tianjin Takung and Shanghai Takung, and Director of Hong Kong Takung, Tianjin Takung and Shanghai Takung.
(d) Xiao Di (“Xiao”),
Former Chief Executive Officer who resigned from this on November 19, 2018. Xiao remained as the Director of Takung Art Holdings.
Amount due from a related party
Amount due from a related
party consisted of the following as of the years indicated:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Wang (c)
|
|
$
|
5,907,789
|
|
|
$
|
-
|
|
Total
|
|
|
5,907,789
|
|
|
|
-
|
|
Amount due to related party
Amount due to related
party consisted of the following as of the years indicated:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Mao (a)
|
|
$
|
-
|
|
|
$
|
483,822
|
|
Wang (c)
|
|
|
6,385,288
|
|
|
|
|
|
Total
|
|
|
6,385,288
|
|
|
|
483,822
|
|
Related party transactions
The expenses incurred
to the related parties consisted of the following for the years indicated:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Mao (a) – interest expenses
|
|
$
|
4,209
|
|
|
$
|
76,181
|
|
Xiao (d) – consulting fee expenses
|
|
|
278,146
|
|
|
|
-
|
|
Total
|
|
$
|
282,355
|
|
|
$
|
76,181
|
|
The Company fully repaid the amount due
to Jianping Mao on March 13, 2018.
On May 16, 2018, Hong Kong Takung entered
into an interest-free loan agreement (the "HK Dollar Loan") with Liu that was transferred to Wang on October 18, 2018
for the loan of $6,385,288 (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. The maturity date of the loan is May 15, 2019.
In the meantime, Tianjin Takung entered
into an interest-free loan agreement (the "RMB Loan") with Liu that was transferred to Wang on October 18, 2018 for the
loan of $5,907,789 (RMB40,619,000) to Wang. The maturity date of the loan is May 15, 2019.
Through an understanding between Wang and
the Company, the HK Dollar Loan is "secured" by the RMB Loan. It is the understanding between the parties that the HK
Dollar Loan and the RMB Loan will be repaid simultaneously.
During the year ended December 31, 2018,
the Company has engaged Xiao for consulting services, and accrued service fee of $278,146.
12. INCOME TAXES
Takung was incorporated
in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung and Takung Art Holdings were incorporated
in Hong Kong S.A.R. People’s Republic of China and is subject to Hong Kong profits tax. Shanghai Takung and Tianjin Takung
and Art Era are PRC corporations and are subject to enterprise taxes in the PRC.
United States
of America
Tax Cuts and Jobs Act Enacted in 2017
On December 22, 2017,
the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal
corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries; (3) generally eliminating U.S. federal corporate income taxes on dividends from foreign subsidiaries;
(4) providing modification to subpart F provisions and new taxes on certain foreign earnings such as Global Intangible Low-Taxed
Income (GILTI). Except for the one-time transition tax, most of these provisions go into effect starting January 1, 2018.
On December
22, 2017, Staff Accounting Bulletin No. 118 ("SAB118") was issued to provide guidance on accounting for the tax effects
of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for
companies to complete the accounting under ASC 740. The Company has completed the assessment of the income tax effect of the Tax
Act and there were no adjustments recorded to the provisional amounts.
The Deemed Repatriation
Transition Tax ("Transition Tax") is a tax on unrepatriated earnings of our foreign subsidiaries. To determine the amount
of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 undistributed earnings
and profits (E&P) of its foreign subsidiaries, as well as the amount of foreign income taxes paid on such earnings and profits.
The portion of earnings and profits comprised of cash and liquid assets is taxed at a rate of 15.5 percent and any remaining amount
of earnings and profits from non-liquid assets is taxed at a rate of 8 percent. Based on the post 1986 untaxed accumulated earnings
of $17.5 million, the Company included $9.9 million toll-charge income, which was fully offset by the current year loss, available
federal NOL carryforwards and foreign tax credits. As a result, there was no incremental income tax expense in connection to the
toll-charge.
The Global Intangible
Low-taxed Income (GILTI) is a new provision introduced by the Tax Cuts and Jobs Act. U.S. shareholders, who are domestic corporations,
of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction
of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective
for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision
amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has
made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current
period expense when incurred. As of December 31, 2018, the Company does not have any aggregated positive tested income; and as
such, does not have additional provision amount recorded for GILTI tax.
As of December
31, 2018 and 2017, the Company in the United States had $1,332,438 and $250,590 in net operating loss carry forwards
available to offset future taxable income, respectively. Net operating loss generated from the tax year 2018. These net
operating loss will be carryforward indefinitely under the Tax Act.
As of December 31,
2017, the Company has re-measured its deferred taxes with new tax rate of 21% according to the Tax Act. This re-measurement has
resulted in a reduction in net deferred tax assets totaling $46,327.
Hong Kong
Two-tier Profits Tax Rates
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 $255,180) 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 and Takung
Art Holdings are wholly owned and under the control of Takung U.S, both entities are connected entities. Under the Ordinance,
it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its Profits
Tax Return. The election is irrevocable. We elected Hong Kong Takung to be subject to the two-tier profits tax rates.
The provision for
current income and deferred taxes of the Hong Kong Takung has been calculated by applying the new tax rate, 8.25% and original
tax rate of 16.5% for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, Hong Kong Takung re-measured
its deferred taxes with new tax rate of 8.25% according to the Ordinance. Takung Art Holdings still applies the original tax rate
of 16.5% for its provision for current income and deferred taxes. As of December 31, 2018 and 2017, our subsidiaries in Hong Kong
had $5,501,087 and nil in net operating loss carry forwards available to offset future taxable income, respectively. These net
operating loss will be carryforward indefinitely under Hong Kong Profits Tax regulation.
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 that are not entitled to any tax holiday were subject to income
tax at a rate of 25% for the year ended December 31, 2018 and 2017. As of December 31, 2018 and 2017, the Company in PRC had $760,660
and $540,913 in net operating loss carryforwards available to offset future taxable income, respectively. According to PRC tax
regulations, the PRC net operating loss can generally carry forward for no longer than five years starting from the year subsequent
to the year in which the loss was incurred. Carryback of losses is not permitted. If not utilized, the PRC net operating loss of
$488,231, $21,871 and $250,557 will expire in 2021, 2022 and 2023, respectively.
The income tax (benefit)
expense was $(479,901) and $342,856 for the year ended December 31, 2018 and 2017, respectively, related primarily to our subsidiaries
located outside of the U.S. Our income (loss) before provision for income taxes for the years ended December 31, 2018 and
2017 was as follows:
The income tax provision
consists of the following components:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(145,910
|
)
|
|
|
435,551
|
|
Total Current
|
|
$
|
(145,910
|
)
|
|
$
|
435,551
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
37,398
|
|
|
$
|
(37,398
|
)
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(371,389
|
)
|
|
|
(55,297
|
)
|
Total Deferred
|
|
$
|
(333,991
|
)
|
|
$
|
(92,695
|
)
|
Total provision for income taxes
|
|
$
|
(479,901
|
)
|
|
|
342,856
|
|
A reconciliation between
the Company’s actual provision for income taxes and the provision at the Hong Kong statutory rate is as follow:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Loss before income tax expense
|
|
$
|
(8,111,864
|
)
|
|
$
|
(718,719
|
)
|
Computed tax benefit with statutory tax rate
|
|
|
(1,338,456
|
)
|
|
|
(118,588
|
)
|
Impact of different tax rates in other jurisdictions
|
|
|
207,524
|
|
|
|
(255,701
|
)
|
Tax effect of non-deductible expenses
|
|
|
188,538
|
|
|
|
281,867
|
|
Toll-charge from the Tax Act
|
|
|
-
|
|
|
|
3,006,508
|
|
Foreign tax credits
|
|
|
-
|
|
|
|
(1,615,515
|
)
|
Changes in valuation allowance
|
|
|
505,433
|
|
|
|
(909,388
|
)
|
Previous years unrecognized tax effects
|
|
|
(42,940
|
)
|
|
|
-
|
|
Tax Act U.S. federal rate change
|
|
|
-
|
|
|
|
(46,327
|
)
|
Total Provision for Income Taxes
|
|
$
|
(479,901
|
)
|
|
$
|
342,856
|
|
The toll-charge of
$9.9 million from the Tax Act subject to taxable income, was fully offset by the current year loss, available federal NOL carryforwards
and foreign tax credits. As a result, there was no provisional transition tax accrued as of December 31, 2017.
The effective tax rate was 5.9% and (47.7%) for the years ended December 31, 2018 and 2017, respectively.
The approximate tax
effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:
|
|
As of
December 31,
|
|
|
As of
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Tax loss carried forward
|
|
$
|
997,880
|
|
|
$
|
187,826
|
|
Unvested restricted share carried forward
|
|
|
7,721
|
|
|
|
37,398
|
|
Deferred advertising expenses
|
|
|
55,921
|
|
|
|
157,262
|
|
Provision for doubtful accounts
|
|
|
109,083
|
|
|
|
-
|
|
Others
|
|
|
465
|
|
|
|
518
|
|
Total deferred tax assets
|
|
|
1,171,070
|
|
|
|
383,004
|
|
Less: valuation allowance
|
|
|
(553,442
|
)
|
|
|
(52,624
|
)
|
Total Deferred tax assets, net of valuation allowance
|
|
|
617,628
|
|
|
|
330,380
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
PPE, due to difference in depreciation
|
|
|
(5,890
|
)
|
|
|
(38,950
|
)
|
Total Deferred tax liabilities
|
|
$
|
(5,890
|
)
|
|
$
|
(38,950
|
)
|
Deferred tax assets, net of valuation allowance and deferred tax liabilities
|
|
|
611,738
|
|
|
|
291,430
|
|
Valuation Allowance
During the fiscal
year ended December 31, 2017, the company recognized a valuation allowance release of $0.9 million as the company were able to
utilize the federal net operating loss to offset the toll-charge income.
The management determines
it is more likely than not that part of deferred tax assets could not be utilized, so allowance was provided as of December 31,
2018 and 2017. The net valuation allowance increased by approximately $0.5 million and decreased by approximately $0.9 million
during the years ended December 31, 2018 and 2017, respectively
The amount of the
deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward
period are reduced or increased or if objective negative evidence in the form of cumulative losses no longer exist and additional
weight is given to other evidences such as the Company’s projections of growth.
13. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company purchased
property, plant and equipment which the payment was due within one year. As of December 31, 2018 and 2017, the Company has capital
commitments of $53,920 and $162,021, respectively.
The total future minimum
lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of December 31,
2018 are payable as follows:
Operating Lease
Commitments
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
|
|
Rental expense of
the Company was $1,059,083 and $1,004,494 for the year ended December 31, 2018 and 2017, respectively.
14. EARNINGS PER SHARE
Basic earnings per
share is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential
common shares outstanding during the period.
|
|
Year ended
December 31, 2018
|
|
|
Year ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,631,963
|
)
|
|
$
|
(1,061,575
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-Basic
|
|
|
11,218,534
|
|
|
|
11,077,845
|
|
Stock options and restricted shares
|
|
|
-
|
|
|
|
-
|
|
Weighted-average shares outstanding-Diluted
|
|
|
11,218,534
|
|
|
|
11,077,845
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
(0.68
|
)
|
|
|
(0.10
|
)
|
-Diluted
|
|
|
(0.68
|
)
|
|
|
(0.10
|
)
|
Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into
common stock.
Due to the loss from
continued operations for the year ended December 31, 2017, approximately 418,760 and 33,809 options and restricted shares,
respectively, were excluded from the calculation of diluted net loss per share.
Due to the loss from
continued operations for the year ended December 31, 2018, approximately 254,238 and 22,438 options and restricted shares,
respectively, were excluded from the calculation of diluted net loss per share.
15. SHAREHOLDERS’
EQUITY
On August 26, 2015,
the 2015 Incentive Share Plan (“2015 Plan”) was approved by the Board of Directors for rewarding the Company’s
directors, executives and selected employees and consultants for making major contributions to the success of the Company. 1,037,000
shares were registered on August 27, 2015.
On November 20, 2015,
we entered into a Consulting Agreement with Regeneration for the provision of certain consulting and advisory services, including
without limitation, assisting in the preparation of Company financial projections, business plans, executive summaries and website,
and recruiting qualified directors and officers. In consideration for providing such services, the Company issued to Regeneration
the Compensation Shares which are placed in an escrow account maintained with the Company’s attorneys until either (i) the
Company has successfully listed its securities on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, whereupon
the Compensation Shares shall be forthwith delivered to Regeneration or (ii) if the Company is unsuccessful in listing its securities
on the NASDAQ or other U.S. securities exchange on or before March 31, 2017, the Compensation Shares shall be returned to the
Company for cancellation. Regeneration shall be entitled to “piggy-back” registration rights with respect to the Compensation
Shares. The Compensation Shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities
Act. Pursuant to ASC 505-50-30, this transaction was measured based on the fair value of the equity instruments issued as the
Company determined that the fair value of the equity instruments issued in a share-based payment transaction with nonemployees
was more reliably measurable than the fair value of the consideration received. The Company measured the fair value of the equity
instruments in these transactions using the share price and other measurement assumptions on the date at which Regeneration’s
commitment for performance is reached. The Company recognized (as appropriate relative to the periods and manner that Company
would recognize cash payments under the same arrangement) the cost of the appropriate number of the 487,000 shares at the current
fair value as of November 20, 2015, and subsequently each financial reporting date until Regeneration has completed its performance.
The stock-based compensation related to this consulting agreement was $144,274 for the year ended December 31, 2017.
On October 2, 2017,
the company entered into a prepaid retainer contract with Regeneration to render consulting and advisory services in connection
with investor relations. The Company recognized the cost of the 20,000 shares at the current fair value of $46,000 as of October
2, 2017 as prepayment, and amortized the cost subsequently in a straight-line method until Regeneration has completed its performance
for one year ended October 2, 2018. Accordingly, the share-based compensation related to this consulting agreement was $34,500
and $11,500 for the years ended December 31, 2018 and 2017, respectively. On January 22, 2018, we issued 20,000 restricted shares
of our common share to Regeneration.
Share-based Compensation Plans
On March 1, 2017, November
23, 2017 and December 1, 2017, 15,000, 2,143, 16,667 of restricted share-based awards were granted. 18,942 of restricted stock-based
awards were vested during the fiscal year ended December 31, 2017.
On March 1, 2018, 12,438
of restricted share-based awards were granted. 17,143 of restricted stock-based awards were vested during the fiscal year ended
December 31, 2018.
On December 1, 2018,
10,000 of restricted share-based awards were granted
The exercise price
of share options ranged from $2.91 to $3.65 and the requisite service period ranged from two to five years. 130,419 share options
have been vested and 9,765 share options were cancelled during the fiscal year ended December 31, 2017, and no share options were
exercised in the year ended December 31, 2017.
47,600 share options
have been vested and 164,522 share options were forfeited or expired during the fiscal year ended December 31, 2018, and no share
options were exercised in the year ended December 31, 2018.
Share Options:
The number of share
options as of December 31, 2018 is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Terms
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
418,760
|
|
|
|
3.15
|
|
|
|
2.42
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(164,522
|
)
|
|
|
3.18
|
|
|
|
2.15
|
|
|
|
-
|
|
Outstanding, end of year
|
|
|
254,238
|
|
|
|
3.13
|
|
|
|
1.30
|
|
|
|
-
|
|
Exercisable, end of year
|
|
|
194,514
|
|
|
|
3.15
|
|
|
|
1.05
|
|
|
|
-
|
|
Expected to vest
|
|
|
59,724
|
|
|
|
3.08
|
|
|
|
2.13
|
|
|
|
-
|
|
The following table
sets forth changes in compensation-related restricted share awards during year ended December 31, 2018, and 17,143 shares are
exercisable as of December 31, 2018. The Company uses fair market value of its common share publicly traded on the date of the
grant to determine the fair value of restricted shares.
|
|
Number of
|
|
|
Weighted
Average
Grant Date
|
|
|
Weighted
Average
Remaining
Contractual
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Term
|
|
Unvested at December 31, 2017
|
|
|
16,111
|
|
|
$
|
3.27
|
|
|
|
0.88 years
|
|
Granted
|
|
|
22,438
|
|
|
|
1.43
|
|
|
|
0.50 year
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
(27,309
|
)
|
|
|
-
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
11,240
|
|
|
|
0.95
|
|
|
|
0.78 year
|
|
As of December 31,
2018, the unrecognized share-based compensation expenses under the 2015 Stock Incentive Plan were $152,683, which is expected
to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive
income (loss) before February 2021.
The share-based compensation
expenses recognized, including the forfeiture of share option, were $200,111 and $751,117 during the years ended December 31, 2018
and 2017, respectively.
16. SUBSEQUENT EVENT
The Company has evaluated
subsequent events through the date of issuance of the consolidated financial statements, other than the debt settlement disclosed
in Note 5 and Note 10, there were no other subsequent events occurred that would require recognition or disclosure in the consolidated
financial statements.