Item 1. Financial Statements
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE
SHEETS
(Stated in U.S. Dollars except Number
of Shares)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,086,637
|
|
|
$
|
7,974,884
|
|
Restricted cash
|
|
|
17,008,251
|
|
|
|
4,549,202
|
|
Account receivables, net
|
|
|
-
|
|
|
|
568,757
|
|
Prepayment and other current assets
|
|
|
579,107
|
|
|
|
955,249
|
|
Amount due from a related party
|
|
|
5,682,807
|
|
|
|
5,907,789
|
|
Loan receivables
|
|
|
1,958,672
|
|
|
|
2,391,350
|
|
Total current assets
|
|
|
31,315,474
|
|
|
|
22,347,231
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
941,374
|
|
|
|
1,445,679
|
|
Intangible assets
|
|
|
22,257
|
|
|
|
22,284
|
|
Operating lease right-of-use assets
|
|
|
904,836
|
|
|
|
-
|
|
Deferred tax assets, net
|
|
|
776,896
|
|
|
|
611,738
|
|
Amount due from a related party, non-current
|
|
|
101,420
|
|
|
|
-
|
|
Other non-current assets
|
|
|
114,823
|
|
|
|
142,293
|
|
Total non-current assets
|
|
|
2,861,606
|
|
|
|
2,221,994
|
|
Total assets
|
|
$
|
34,177,080
|
|
|
$
|
24,569,225
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses and other payables
|
|
$
|
522,929
|
|
|
$
|
641,692
|
|
Customer deposits
|
|
|
17,008,251
|
|
|
|
4,549,202
|
|
Advance from customers
|
|
|
10,227
|
|
|
|
8,995
|
|
Short-term
borrowings from third parties
|
|
|
1,816,837
|
|
|
|
2,499,500
|
|
Amount due to related parties
|
|
|
6,759,674
|
|
|
|
6,385,288
|
|
Operating lease liabilities – current
|
|
|
173,156
|
|
|
|
-
|
|
Tax payables
|
|
|
7,831
|
|
|
|
15,101
|
|
Total current liabilities
|
|
|
26,298,905
|
|
|
|
14,099,778
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Operating lease liabilities, non-current
|
|
|
92,027
|
|
|
|
-
|
|
Amount due to a related party, non-current
|
|
|
197,520
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,588,452
|
|
|
|
14,099,778
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,255,129 shares issued and outstanding as of September 30, 2019; 11,226,025 shares issued and outstanding as of December 31, 2018)
|
|
|
11,255
|
|
|
|
11,226
|
|
Additional paid-in capital
|
|
|
6,318,645
|
|
|
|
6,281,790
|
|
Retained earnings
|
|
|
1,514,907
|
|
|
|
4,479,133
|
|
Accumulated other comprehensive loss
|
|
|
(256,179
|
)
|
|
|
(302,702
|
)
|
Total shareholders’ equity
|
|
|
7,588,628
|
|
|
|
10,469,447
|
|
Total liabilities and shareholders’ equity
|
|
$
|
34,177,080
|
|
|
$
|
24,569,225
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
(Stated in U.S. Dollars except Number
of Shares)
(UNAUDITED)
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Listing fee
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
284,090
|
|
|
$
|
3,978,735
|
|
Commission
|
|
|
939,164
|
|
|
|
253,331
|
|
|
|
1,655,244
|
|
|
|
3,557,411
|
|
Management fee
|
|
|
184,428
|
|
|
|
107,905
|
|
|
|
346,042
|
|
|
|
455,133
|
|
Annual fee
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
378
|
|
Authorized agent subscription revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
191,623
|
|
Online artwork sales
|
|
|
-
|
|
|
|
2,244
|
|
|
|
-
|
|
|
|
8,548
|
|
Total revenue
|
|
|
1,123,592
|
|
|
|
363,534
|
|
|
|
2,285,376
|
|
|
|
8,191,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
(580,282
|
)
|
|
|
(299,482
|
)
|
|
|
(1,288,589
|
)
|
|
|
(2,173,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
543,310
|
|
|
|
64,052
|
|
|
|
996,787
|
|
|
|
6,018,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(1,159,502
|
)
|
|
|
(2,208,264
|
)
|
|
|
(3,322,547
|
)
|
|
|
(7,791,747
|
)
|
Selling expenses
|
|
|
(108,458
|
)
|
|
|
(149,035
|
)
|
|
|
(143,054
|
)
|
|
|
(851,173
|
)
|
Impairment loss-construction-in-progress
|
|
|
|
|
|
|
(326,227
|
)
|
|
|
-
|
|
|
|
(326,227
|
)
|
Total operating expenses
|
|
|
(1,267,960
|
)
|
|
|
(2,683,526
|
)
|
|
|
(3,465,601
|
)
|
|
|
(8,969,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(724,650
|
)
|
|
|
(2,619,474
|
)
|
|
|
(2,468,814
|
)
|
|
|
(2,950,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
13,125
|
|
|
|
65,487
|
|
|
|
(88,637
|
)
|
|
|
470,752
|
|
Loan interest expense
|
|
|
(18,015
|
)
|
|
|
(199,821
|
)
|
|
|
(18,015
|
)
|
|
|
(504,287
|
)
|
Exchange loss
|
|
|
(515,808
|
)
|
|
|
(870,218
|
)
|
|
|
(564,233
|
)
|
|
|
(1,132,510
|
)
|
Total other expenses
|
|
|
(520,698
|
)
|
|
|
(1,004,552
|
)
|
|
|
(670,885
|
)
|
|
|
(1,166,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(1,245,348
|
)
|
|
|
(3,624,026
|
)
|
|
|
(3,139,699
|
)
|
|
|
(4,116,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
117,451
|
|
|
|
742,670
|
|
|
|
175,473
|
|
|
|
574,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,127,897
|
)
|
|
$
|
(2,881,356
|
)
|
|
$
|
(2,964,226
|
)
|
|
$
|
(3,542,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(12,750
|
)
|
|
|
(3,668
|
)
|
|
|
46,523
|
|
|
|
(131,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,140,647
|
)
|
|
$
|
(2,885,024
|
)
|
|
$
|
(2,917,703
|
)
|
|
$
|
(3,674,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic
|
|
$
|
(0.10
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.32
|
)
|
Loss per common share – diluted
|
|
|
(0.10
|
)
|
|
|
(0.26
|
)
|
|
|
(0.26
|
)
|
|
|
(0.32
|
)
|
Weighted average number of common shares outstanding-basic
|
|
|
11,255,129
|
|
|
|
11,226,025
|
|
|
|
11,243,082
|
|
|
|
11,216,009
|
|
Weighted average number of common shares outstanding-diluted
|
|
|
11,255,129
|
|
|
|
11,226,025
|
|
|
|
11,243,082
|
|
|
|
11,216,009
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN EQUTIY
(Stated in U.S. Dollars except Number
of Shares)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Number
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
|
|
|
|
of shares
|
|
|
stock
|
|
|
capital
|
|
|
Earnings
|
|
|
Income (loss)
|
|
|
Total
|
|
Balance, December 31, 2018
|
|
|
11,226,025
|
|
|
|
11,226
|
|
|
|
6,281,790
|
|
|
|
4,479,133
|
|
|
|
(302,702
|
)
|
|
|
10,469,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares for restricted stock award
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
16,851
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(708,793
|
)
|
|
|
-
|
|
|
|
(708,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,480
|
)
|
|
|
(5,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
11,226,025
|
|
|
|
11,226
|
|
|
|
6,298,641
|
|
|
|
3,770,340
|
|
|
|
(308,182
|
)
|
|
|
9,772,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares for restricted stock award
|
|
|
29,104
|
|
|
|
29
|
|
|
|
4,012
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
9,719
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,127,536
|
)
|
|
|
-
|
|
|
|
(1,127,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,753
|
|
|
|
64,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
|
11,255,129
|
|
|
|
11,255
|
|
|
|
6,312,372
|
|
|
|
2,642,804
|
|
|
|
(243,429
|
)
|
|
|
8,723,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared-based compensation
|
|
|
-
|
|
|
|
|
|
|
|
6,273
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,127,897
|
)
|
|
|
-
|
|
|
|
(1,127,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,750
|
)
|
|
|
(12,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
|
11,255,129
|
|
|
|
11,255
|
|
|
|
6,318,645
|
|
|
|
1,514,907
|
|
|
|
(256,179
|
)
|
|
|
7,588,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
TAKUNG ART CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Takung Art Co., Ltd
and subsidiaries (“Takung” or the “Company”), a Delaware corporation (formerly Cardigant Medical Inc.)
through Hong Kong Takung Art Company Limited (formerly Hong Kong Takung Assets and Equity of Artworks Exchange Co., Ltd.), a Hong
Kong company (“Hong Kong Takung”) and our wholly owned subsidiary, operates an electronic online platform located at
www.takungae.com for artists, art dealers and art investors to offer and trade in valuable artwork.
Hong Kong Takung was
incorporated in Hong Kong on September 17, 2012 and operates an electronic online platform for offering, selling and trading artwork.
For the period from September 17, 2012 (inception) to December 31, 2012, the company had no operation except for the issuance of
shares for subscription receivables. The Company generates revenue from its services in connection with the offering and trading
of artwork on its system, primarily consisting of listing fees, trading commissions, and management fees. The Company conducts
its business primarily in Hong Kong, People’s Republic of China (the “PRC”).
Takung (Shanghai) Co.,
Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai
Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015 in the PRC. It is engaged in providing services to its
parent company, Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on
behalf of Takung.
Takung Cultural Development
(Tianjin) Co., Ltd (“Tianjin Takung”) is a limited liability company, with a registered capital of $1 million located
in the Pilot Free Trade Zone in Tianjin. Tianjin Takung was incorporated on January 27, 2016 and is a direct wholly-owned subsidiary
of Hong Kong Takung.
Tianjin Takung provides technology development
services to Hong Kong Takung and also carries out marketing and promotion activities in mainland China.
Hong Kong Takung Art
Holdings Company Limited (“Takung Art Holdings”) was formed in Hong Kong on July 20, 2018 and operates as a holding
company to control an online platform for offering, selling and trading whole piece of artwork.
Art Era Internet Technology
(Tianjin) Co., Ltd (“Art Era”) was formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of
Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free
Trade Zone in Tianjin. Art Era mainly focuses on developing our e-commerce platform for art. Art Era was deregistered on June 18,
2019 due to Company’s plan to put off the e-commerce platform development. Art Era was deregistered on June 18, 2019 due
to Company’s plan to put off the e-commerce platform development.
Hong Kong MQ Group
Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19,
2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma
to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership
transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became
a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise Management Consulting
Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary
of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free
Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities and promoting our artwork trading business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated
balance sheet as of December 31, 2018, which has been derived from audited financial statements, and the unaudited interim condensed
consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and disclosures, which are normally included in financial statements prepared in accordance with United States (“U.S.”)
generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to such rules and regulations.
Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should
be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2018, previously filed with the SEC.
This basis of accounting
involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and
losses are recognized when incurred. The Company’s financial statements are expressed in U.S. Dollars.
In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated
financial position as of September 30, 2019, its consolidated results of operations and cash flows for the nine-month periods ended
September 30, 2019 and 2018, as applicable, have been made. The interim results of operations are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
On January 1, 2019,
the Company adopted ASC 842, Leases, using the modified retrospective method which allows for the application of the
transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period
presented in these condensed consolidated financial statements. As permitted by the guidance, the Company elected to retain the
original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date
and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize
ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original
term of twelve months or less.
As a result of the
adoption of the standard, the Company recognized operating lease right-of-use assets and operating lease liabilities on its
condensed consolidated balance sheet as of September 30, 2019. The assets and liabilities recognized upon application of the transition
provisions were primarily associated with existing office and storage leases. Please refer to footnote 9. Leases for details.
Except for the ASUs
issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31,
2018, previously filed with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed
consolidated financial statements upon adoption.
3. PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other
current assets consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Tax receivables
|
|
$
|
279,687
|
|
|
$
|
399,026
|
|
Staff advance
|
|
|
-
|
|
|
|
93,676
|
|
Prepaid service fee
|
|
|
192,435
|
|
|
|
140,934
|
|
Short-term borrowings to third party
|
|
|
53,571
|
|
|
|
-
|
|
Deposit
|
|
|
9,234
|
|
|
|
241,827
|
|
Other current assets
|
|
|
44,180
|
|
|
|
79,786
|
|
Prepayment and other current assets
|
|
$
|
579,107
|
|
|
$
|
955,249
|
|
4. ACCOUNT RECEIVABLES,
NET
Account receivables
consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Listing fee
|
|
$
|
-
|
|
|
$
|
568,757
|
|
Authorized agent subscription revenue
|
|
|
557,154
|
|
|
|
557,837
|
|
Monthly commission fee
|
|
|
1,376,460
|
|
|
|
1,378,148
|
|
Others
|
|
|
53,561
|
|
|
|
53,626
|
|
Less: allowance for doubtful accounts
|
|
|
(1,987,175
|
)
|
|
|
(1,989,611
|
)
|
Account receivables, net
|
|
$
|
-
|
|
|
$
|
568,757
|
|
5. LOAN RECEIVABLES
The following table
sets forth a summary of the loan agreements in loan receivables balance:
Date
|
|
Borrower
|
|
Lender
|
|
Original
Amount
(RMB)
|
|
|
Outstanding
Balance
(RMB)
|
|
|
Amount
in
Reporting
Currency
(USD)
|
|
|
Annual
Interest
Rate
|
|
|
Repayment
Due Date
|
7/18/2019
|
|
Chongqing Aoge Import and Export Co.
|
|
Tianjin
Takung
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
$
|
699,526
|
|
|
|
0
|
%
|
|
7/17/2020
|
8/29/2019
|
|
Chongqing Aoge Import and Export Co.
|
|
Tianjin
Takung
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
$
|
699,526
|
|
|
|
0
|
%
|
|
8/28/2020
|
9/20/2019
|
|
Chongqing Aoge Import and Export Co.
|
|
Tianjin
Takung
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
$
|
559,620
|
|
|
|
0
|
%
|
|
9/19/2020
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
1,958,672
|
|
|
|
|
|
|
|
|
•
|
The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company.
|
|
•
|
Hong Kong Takung entered into loan agreements (the “Hong Kong Dollar Loans”) with Friend Sourcing Ltd., a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum (See Note 8). Friend Sourcing is a non-related party to the Company.
|
The transactions with Friend Sourcing were aimed to meet the Company’s working capital needs in
Hong Kong Dollars.
Through an understanding
between Chongqing Aoge Import and Export Co. and Friend Sourcing, the Hong Kong Dollar Loans are “secured” by the RMB
Loans. It is the understanding between the parties that the Hong Kong Dollar Loans and the RMB Loans will be repaid simultaneously.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
159,239
|
|
|
$
|
156,656
|
|
Leasehold improvements
|
|
|
338,845
|
|
|
|
447,048
|
|
Computer trading and clearing system
|
|
|
3,339,155
|
|
|
|
3,382,168
|
|
Transport equipment
|
|
|
100,643
|
|
|
|
104,628
|
|
Sub-total
|
|
|
3,937,882
|
|
|
|
4,090,500
|
|
Less: accumulated depreciation
|
|
|
(2,996,508
|
)
|
|
|
(2,644,821
|
)
|
Property and equipment, net
|
|
$
|
941,374
|
|
|
$
|
1,445,679
|
|
Depreciation expense
was $148,774 and $241,448 for the three months ended September 30, 2019 and 2018, respectively, and $463,241 and $713,933 for the
nine months ended September 30, 2019 and 2018, respectively.
7. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and
other payables as of September 30, 2019 and December 31, 2018 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accruals for consulting fees
|
|
$
|
264,469
|
|
|
$
|
264,793
|
|
Accruals for professional fees
|
|
|
110,442
|
|
|
|
49,518
|
|
Payroll payables
|
|
|
70,231
|
|
|
|
104,437
|
|
Trading and clearing system
|
|
|
49,970
|
|
|
|
86,208
|
|
Other payables
|
|
|
27,817
|
|
|
|
136,736
|
|
Total accrued expenses and other payables
|
|
$
|
522,929
|
|
|
$
|
641,692
|
|
8. SHORT-TERM BORROWINGS FROM THIRD
PARTIES
In July 2019, Hong
Kong Takung entered into a loan agreement (the “HKD Loan”) with Friend Sourcing Ltd, a Hong Kong company (“Friend
Sourcing”) with interest accruing at a rate of 8% per annum. The HKD Loan is to provide Hong Kong Takung with sufficient
HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company.
In the meantime, Tianjin
Takung entered an interest-free loan (the “RMB Loan”) to another third party as a guarantee for the HKD Loan. The
loan amount was $ 1,955,245 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loan is “secured”
by the RMB Loan. It is an understanding between the parties that when the HKD Loans is repaid, the RMB Loan will be repaid at
the same time.
Date
|
|
Borrower
|
|
Lender
|
|
September 30,
2019
(USD)
|
|
|
December 31,
2018
(USD)
|
|
|
Annual
Interest
Rate
|
|
|
Repayment
Due Date
|
|
8/24/2016
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
1,499,500
|
|
|
|
8
|
%
|
|
|
1/2/2019
|
|
12/19/2017
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
|
8
|
%
|
|
|
1/2/2019
|
|
12/22/2017
|
|
Hong Kong Takung
|
|
Merit Crown Limited
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
|
8
|
%
|
|
|
1/2/2019
|
|
7/18/2019
|
|
Hong Kong Takung
|
|
Friend Sourcing Ltd.
|
|
$
|
710,186
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
7/17/2020
|
|
8/29/2019
|
|
Hong Kong Takung
|
|
Friend Sourcing Ltd.
|
|
$
|
691,699
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
8/28/2020
|
|
9/20/2019
|
|
Hong Kong Takung
|
|
Friend Sourcing Ltd.
|
|
$
|
553,360
|
|
|
$
|
-
|
|
|
|
8
|
%
|
|
|
9/19/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Discount loan payable
|
|
$
|
(138,408
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,816,837
|
|
|
$
|
2,499,500
|
|
|
|
|
|
|
|
|
|
The U.S. Dollar Loans of $2,499,500 as of December 31, 2018 was settled on January 2, 2019.
The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September
30, 2019. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings
were $256,074 and $7,319,041 for the nine months period ended September 30, 2019 and 2018, respectively. The interest expenses
for the short-term borrowings were $18,015 and $199,822 for the three months ended September 30, 2019 and 2018, respectively, and
$18,015 and $500,080 for the nine months ended September 30, 2019 and 2018, respectively.
9. RELATED PARTY BALANCES AND TRANSACTIONS
The following is a
list of director and related parties to which the Company has transactions with:
(a) Wang Song (“Wang”),
the General Manager of Tianjin Takung and Shanghai Takung, and Director of Hong Kong Takung, Tianjin Takung and Shanghai Takung.
(b) Liu Zhenying (“Liu”),
the former Vice President of Hong Kong Takung. Liu resigned from the Company on September 30, 2018.
(c) Mao Jianping (“Mao”),
the Human Resources Management Director of Hong Kong Takung.
(d) Li Shuhai (“Li”),
the legal representative of Tianjin Takung.
Amounts due from related parties consisted of the following as of the years indicated:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Wang (a)(i)
|
|
$
|
|
|
|
$
|
5,907,789
|
|
Li (d)(i)
|
|
|
5,682,807
|
|
|
|
-
|
|
Total current amount due from related parties
|
|
$
|
5,682,807
|
|
|
$
|
5,907,789
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Mao (c) (ii)
|
|
$
|
101,420
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent amount due from a related party
|
|
$
|
101,420
|
|
|
$
|
-
|
|
Amount due to related parties
Amount due to related
parties consisted of the following as of the years indicated:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Wang (a) (i)
|
|
$
|
-
|
|
|
$
|
6,385,288
|
|
Li (d) (i)
|
|
|
6,377,470
|
|
|
|
-
|
|
Mao (c) (ii)
|
|
|
382,204
|
|
|
|
-
|
|
Total current amount due to related parties
|
|
$
|
6,759,674
|
|
|
$
|
6,385,288
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Mao (c) (ii)
|
|
$
|
197,520
|
|
|
$
|
-
|
|
Total noncurrent amount due to a related party
|
|
$
|
197,520
|
|
|
$
|
-
|
|
(i)
|
Amount due from and due to Wang and Li
|
On May 16, 2018, Hong
Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with Liu that was transferred
to Wang on October 18, 2018 for the loan of $6,377,470 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide
Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity
date of the loan is May 15, 2019. On May 15, 2019, Hong Kong Takung entered into an extension agreement with Wang to extend the
HK Dollar Loan with a due date on May 15, 2020. On September 16, 2019, Wang transferred this loan to Li, Shuhai, the legal representative
of Tianjin Takung with the same extended maturity date.
In the meantime, Tianjin
Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Liu that was transferred to
Wang on October 18, 2018 for the loan of $5,682,807 (RMB40,619,000) with the maturity date of the loan is May 15, 2019. On May
15, 2019, Tianjin Takung entered into an extension agreement with Wang to extend the RMB Loan with a due date on May 15, 2020.
On September 16, 2019, Wang transferred this loan to Li, the legal representative of Tianjin Takung with the same extended maturity
date.
Through an understanding
between Li and the Company, the HK Dollar Working Capital Loan is "secured" by the RMB Working Capital Loan. It is the
understanding between the parties that the HK Dollar Working Capital Loan and the RMB Working Capital Loan will be repaid simultaneously.
(ii)
|
Amount due to / from Mao
|
The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, the Company entered
into a non-cancellable lease agreement with a related party, Mao for the office location in Tianjin, PRC. The leased office location
is approximately 2,090.61 square meters. The lease will be expired on May 12, 2021. The Company is charged rent at a rate of $0.55
per square meter per day. The agreement requires a lump sum payment of $202,840 (RMB1,449,838.04) every nine months and a deposit
of $101,420 (RMB724,919.02). The deposit is refundable to the Company. The total lease liability is $573,500, of which $375,980
and $197,520 were included in current and noncurrent portions, respectively, as of September 30, 2019.
As of September 30, 2019,
Mao also lent a startup deposit of $6,224 to Hong Kong MQ.
10. INCOME TAXES
Takung was incorporated in the State of Delaware and is subject to United States income tax. Hong Kong
Takung, Takung Art Holding and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject
to Hong Kong profits tax. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes
in the PRC.
United States
of America
Tax Cuts and Jobs Act Enacted in 2017
On December 22, 2017,
the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal
corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries; (3) generally eliminating U.S. federal corporate income taxes on dividends from foreign subsidiaries;
and (4) providing modification to subpart F provisions and new taxes on certain foreign earnings such as Global Intangible Low-Taxed
Income (GILTI). Except for the one-time transition tax, most of these provisions went into effect starting January 1, 2018.
On December 22, 2017,
Staff Accounting Bulletin No. 118 (“SAB118”) was issued to provide guidance on accounting for the tax effects of the
Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies
to complete the accounting under ASC 740. As of December 22, 2018, the Company has completed the assessment of the income tax effect
of the Tax Act and there were no adjustments recorded to the provisional amounts.
The Global Intangible
Low-taxed Income (GILTI) is a new provision introduced by the Tax Cuts and Jobs Act. U.S. shareholders, who are domestic corporations,
of controlled foreign corporations (CFCs) are eligible for up to an 80% deemed paid foreign tax credit (FTC) and a 50% deduction
of the current year inclusion with the full amount of the Section 78 gross-up subject to limitation. This new provision is effective
for tax years of foreign corporations beginning after December 31, 2017. The Company has evaluated whether it has additional provision
amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The Company has
made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable amount related to GILTI as a current
period expense when incurred. For the three and nine months ended September 30, 2019 and 2018, the Company does not have any aggregated
positive tested income; and as such, does not have additional provision amount recorded for GILTI tax.
As of September 30,
2019, and December 31, 2018, the Company in the United States had $1,886,422 and $1,332,438 in net operating loss carry forwards
available to offset future taxable income, respectively. For net operating losses arising after December 31, 2017, the Tax Act
limits the Company’s ability to utilize NOL carryforwards to 80% of taxable income and carryforward the NOL indefinitely.
Carrybacks are now prohibited. NOLs generated prior to January 1, 2018 will not be subject to the taxable income limitation and
will begin to expire in 2033 if not utilized.
Hong Kong
The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance
2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax
rates regime, the profits tax rate for the first HKD 2 million (approximately $255,154) of assessable profits of a corporation
will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%.
The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit.
An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the
control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person
carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business.
Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung Art Co., Ltd, both
entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject
to the two-tier profits tax rates on its Profits Tax Return. The election is irrevocable. We elected Hong Kong Takung to be subject
to the two-tier profits tax rates.
The provision for current
income taxes of Hong Kong Takung has been calculated by applying the current rate of taxation of 8.25% for three and nine months
ended September 30, 2019, 16.5% for three and nine months ended September 30, 2018, if applicable. Takung Art Holdings and
Hong Kong MQ still applied the original tax rate of 16.5% for three and nine months ended September 30, 2019.
PRC
In accordance with
the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at
the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.
The income tax provision
consists of the following components:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
(332,918
|
)
|
|
|
-
|
|
|
|
(160,548
|
)
|
Total Current
|
|
$
|
-
|
|
|
$
|
(332,918
|
)
|
|
$
|
-
|
|
|
$
|
(160,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,398
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(117,451
|
)
|
|
|
(409,752
|
)
|
|
|
(175,473
|
)
|
|
|
(451,052
|
)
|
Total Deferred
|
|
$
|
(117,451
|
)
|
|
$
|
(409,752
|
)
|
|
$
|
(175,473
|
)
|
|
$
|
(413,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
(117,451
|
)
|
|
$
|
(742,670
|
)
|
|
$
|
(175,473
|
)
|
|
$
|
(574,202
|
)
|
A reconciliation between
the Company’s actual provision for income taxes and the provision at the Hong Kong statutory rate is as follows:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loss before income tax expense
|
|
$
|
(1,245,348
|
)
|
|
$
|
(3,624,026
|
)
|
|
$
|
(3,139,699
|
)
|
|
$
|
(4,116,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed tax (benefit) expense with statutory tax rate
|
|
|
(205,484
|
)
|
|
|
(597,964
|
)
|
|
|
(518,050
|
)
|
|
|
(679,249
|
)
|
Impact of different tax rates in other jurisdictions
|
|
|
15,956
|
|
|
|
(89,082
|
)
|
|
|
125,056
|
|
|
|
(51,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of non-deductible expenses
|
|
|
17,096
|
|
|
|
(167,031
|
)
|
|
|
34,982
|
|
|
|
(163,701
|
)
|
Previous years unrecognized taxation effect
|
|
|
7,134
|
|
|
|
6,870
|
|
|
|
7,134
|
|
|
|
6,870
|
|
Changes in valuation allowance
|
|
|
47,847
|
|
|
|
104,537
|
|
|
|
175,405
|
|
|
|
313,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
(117,451
|
)
|
|
$
|
(742,670
|
)
|
|
$
|
(175,473
|
)
|
|
$
|
(574,202
|
)
|
The effective tax rate was 9.4% and 20.5% for the three months ended September 30, 2019 and 2018, respectively,
and 5.6% and 13.9% for the nine months ended September 30, 2019 and 2018, respectively.
11. LEASES
The Company has operating
leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately
nine years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease
expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from
the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with
that lease component as a single lease component for all underlying asset classes.
The following table
provides a summary of leases by balance sheet location as of September 30, 2019:
Assets/liabilities
|
|
Classification
|
|
As of September 30,
2019
|
|
Assets
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
Operating lease assets
|
|
$
|
904,836
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating lease liability - current
|
|
Current operating lease liabilities
|
|
$
|
173,156
|
|
|
|
Amount due to related parties
|
|
|
375,980
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
Operating lease liability - non-current
|
|
Long-term operating lease liabilities
|
|
|
92,027
|
|
|
|
Amount due to related parties, non-current
|
|
|
197,520
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
838,683
|
|
The operating lease
expenses, including lease from the related party, for the nine and three months ended September 30, 2019 were as follows:
|
|
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
Lease Cost
|
|
Classification
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Operating lease cost
|
|
Cost of revenue, general and administrative expenses
|
|
$
|
145,313
|
|
|
$
|
282,486
|
|
Total lease cost
|
|
|
|
$
|
145,313
|
|
|
$
|
282,486
|
|
Maturities of operating
lease liabilities at September 30, 2019 were as follow:
Maturity of Lease Liabilities
|
|
Operating Leases
|
|
2019 (remainder)
|
|
$
|
255,774
|
|
2020
|
|
|
582,171
|
|
2021
|
|
|
13,991
|
|
2022
|
|
|
13,991
|
|
2023
|
|
|
13,991
|
|
Thereafter
|
|
|
20,986
|
|
Total lease payments
|
|
$
|
900,904
|
|
Less: interest
|
|
|
(62,221
|
)
|
Present value of lease payments
|
|
$
|
838,683
|
|
Future minimum lease
payments as of December 31, 2018 were as follows:
|
|
Lease (1)
|
|
Year ending December 31, 2019
|
|
$
|
396,243
|
|
|
|
|
|
|
Year ending December 31, 2020
|
|
|
230,683
|
|
|
|
|
|
|
Year ending December 31, 2021
|
|
|
14,737
|
|
|
|
|
|
|
Year ending December 31, 2022
|
|
|
14,737
|
|
|
|
|
|
|
Year ending December 31, 2023 and thereafter
|
|
|
37,457
|
|
|
|
|
|
|
Total
|
|
$
|
693,857
|
|
(1) Amounts are based
on ASC 840, Leases that was superseded upon our adoption of ASC 842, Lease on January 1, 2019.
Lease Term and Discount Rate
|
|
September 30,
2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
1.86
|
|
|
|
|
|
|
Weighted-average discount rate (%)
|
|
|
|
|
Operating leases
|
|
|
8
|
%
|
Other Information
|
|
September 30,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
448,405
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
|
1,032,824
|
|
12. LOSS PER SHARE
Basic losses per share
is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted losses
per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares
outstanding during the period.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,127,897
|
)
|
|
$
|
(2,881,356
|
)
|
|
$
|
(2,964,226
|
)
|
|
$
|
(3,542,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - Basic
|
|
|
11,255,129
|
|
|
|
11,226,025
|
|
|
|
11,243,082
|
|
|
|
11,216,009
|
|
Stock options and restricted shares
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Weighted-average shares outstanding - Diluted
|
|
|
11,255,129
|
|
|
|
11, 226,025
|
|
|
|
11,243,082
|
|
|
|
11,216,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
(0.10
|
)
|
|
|
(0.26
|
)
|
|
|
(0.26
|
)
|
|
|
(0.32
|
)
|
-Diluted
|
|
|
(0.10
|
)
|
|
|
(0.26
|
)
|
|
|
(0.26
|
)
|
|
|
(0.32
|
)
|
Diluted earnings per
share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised
and converted into common stock.
Due to the loss from continued operations for the three and nine months ended September 30, 2019, approximately 130,890
options were excluded from the calculation of diluted net loss per share.
13. SUBSEQUENT EVENTS
Management assessed
and determined there were no significant and material subsequent events occurred that would require recognition or disclosure in
the interim condensed consolidated financial statements.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
The following discussion
and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This Quarterly Report
on Form 10-Q contains or may contain forward-looking statements and information that are based upon beliefs of, and information
currently available to, our management as well as estimates and assumptions made by our management. When used in the report the
words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”,
“plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking
statements. Such statements reflect the current view of our management with respect to future events and are subject to risks,
uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any
businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying
assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended
or planned.
Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do
not intend to update any of the forward-looking statements to conform them to actual results unless required by applicable securities
regulations or rules. The following discussion should be read in conjunction with our financial statements and the related notes
filed herein.
Overview
We were incorporated
in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development
of novel biologic and peptide-based compounds and enhanced methods for local delivery for the treatment of vascular disease including
peripheral artery disease and ischemic stroke.
Hong Kong Takung is
a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China.
Although Takung was incorporated in 2012, it did not commence business operations until late 2013.
As a result of the
transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares
of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business
operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operates
an electronic online platform located at http://eng.takungae.com for artists, art dealers and art investors to offer and trade
in valuable artwork.
Through Hong Kong Takung,
we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading market
where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also makes
investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue
from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees, trading
commissions, management fees and authorized agent subscription.
On July 28, 2015, Hong
Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai Free-Trade
Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s operations
by receiving deposits from and making payments to online artwork traders in mainland China on behalf of Hong Kong Takung. On January
27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin
Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung
provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion
activities in mainland China. Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s
and eventually dissolve Shanghai Takung in order to save costs.
Hong Kong Takung Art
Holdings Company Limited (“Takung Art Holdings”) was incorporated in Hong Kong on July 20, 2018 and operates as a holding
company to operate an e-commerce platform for offering, selling and trading whole pieces of artwork instead of units of artwork.
Art Era Internet Technology
(Tianjin) Co., Ltd (“Art Era”) was incorporated in Tianjin, China on September 7, 2018, and is a directly wholly-owned
subsidiary of Takung Art Holdings. It is a limited liability company with a registered capital of $2 million located in the Pilot
Free Trade Zone in Tianjin. Art Era will focus on developing our e-commerce platform. Art Era was deregistered on June 18, 2019
due to Company’s plan to put off the e-commerce platform development.
Hong Kong MQ Group
Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19,
2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ has been transferred from Ms. Hiu Ngai
Ma to the Company. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share
capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.
MQ (Tianjin) Enterprise
Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin on July 9, 2019 and is a directly wholly
owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located
in the Pilot Free Trade Zone in Tianjin. Tianjin MQ will focus on exploring business opportunities for and promoting our artwork
trading business.
Our headquarters are
located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in
Hong Kong, Shanghai and Tianjin. Our principal executive offices are located at Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha
Tsui, Kowloon, Hong Kong.
Our common stock began
trading on the NYSE American under the symbol “TKAT” on March 22, 2017.
Results of Operation of Takung
Hong Kong Takung operates
a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading
of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees.
THREE-MONTH PERIOD ENDED SEPTEMBER 30,
2019 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2018
The following tables set
forth our condensed consolidated statements of income data with a percentage:
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
% of
Revenue
|
|
|
2018
|
|
|
% of
Revenue
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Revenue
|
|
$
|
1,123,592
|
|
|
|
100
|
|
|
$
|
363,534
|
|
|
|
100
|
|
Cost of revenue
|
|
|
(580,282
|
)
|
|
|
(52
|
)
|
|
|
(299,482
|
)
|
|
|
(82
|
)
|
Selling expense
|
|
|
(108,458
|
)
|
|
|
(10
|
)
|
|
|
(149,035
|
)
|
|
|
(41
|
)
|
General and administrative expenses
|
|
|
(1,159,502
|
)
|
|
|
(103
|
)
|
|
|
(2,208,264
|
)
|
|
|
(608
|
)
|
Impairment loss-construction-in-progress
|
|
|
-
|
|
|
|
|
|
|
|
(326,227
|
)
|
|
|
(90
|
)
|
Total costs and expenses
|
|
|
(1,848,242
|
)
|
|
|
(165
|
)
|
|
|
(2,983,008
|
)
|
|
|
(821
|
)
|
Loss from operations
|
|
|
(724,650
|
)
|
|
|
(65
|
)
|
|
|
(2,619,474
|
)
|
|
|
(721
|
)
|
Total other expenses
|
|
|
(520,698
|
)
|
|
|
(46
|
)
|
|
|
(1,004,552
|
)
|
|
|
(276
|
)
|
Loss before income tax expenses
|
|
|
(1,245,348
|
)
|
|
|
(111
|
)
|
|
|
(3,624,026
|
)
|
|
|
(997
|
)
|
Income tax benefit
|
|
|
117,451
|
|
|
|
10
|
|
|
|
742,670
|
|
|
|
204
|
|
Net loss
|
|
$
|
(1,127,897
|
)
|
|
|
(101
|
)
|
|
$
|
(2,881,356
|
)
|
|
|
(793
|
)
|
Revenue
The following table sets
forth our condensed consolidated revenue by revenue source:
|
|
Three months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Listing fee revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Commission
|
|
|
939,164
|
|
|
|
253,331
|
|
Management fee revenue
|
|
|
184,428
|
|
|
|
107,905
|
|
Online artwork sales
|
|
|
-
|
|
|
|
2,244
|
|
Annual fee revenue
|
|
|
-
|
|
|
|
54
|
|
Total
|
|
$
|
1,123,592
|
|
|
$
|
363,534
|
|
As of September 30,
2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies
from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry
with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275
(HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory
carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value
of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products
with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000);
and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings),
24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth
ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the
7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces
of sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months
ended September 30, 2019, there were no new artworks listed on our platform.
We had no listing fee revenue for the three months ended September 30, 2019 and 2018. During the third
quarter of 2019, we suspended and did not have any new listings of artwork on our platform because we focused on the promoting
the trading of our existing listed artwork as opposed to new listings. We also felt that any new listings would be unfavorably
impacted by current market conditions. We will be more discreet about the future listings of more valuable artworks.
|
(ii)
|
Commission fee revenue
|
We generate commission
fee from non-VIP traders and selected traders as follows:
For non-VIP traders,
the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions
for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each
transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both
buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted
for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. On November
7, 2018 we lowered the minimum charge to $0.0013 (HK$0.01).
For selected traders,
starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks.
These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them
to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee
is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our
trading platform to make unlimited trades for specific artwork.
We define traders as
“inactive” if they meet the following criteria;
|
•
|
The trader defaults in payment over three months;
|
|
•
|
The trader did not incur any transactions in the month of reassessment;
|
|
•
|
The service agent has confirmed with the relevant trader that he/she was inactive.
|
Once an inactive trader
has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant
change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue
will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed
our obligations ahead of receiving consideration.
Commission rebate programs
are offered to traders and service agents. We pay to existing traders 5% of the commission earned from the transactions of new
traders referred by them. The rebate was adjusted from 15% to 5%, starting January 1, 2017. For service agents, we rebate a total
of 40% to 75% of the commission earned from transactions with new traders to the service agents when they bring in an agreed number
of traders to the trading platform. For service agents who have individual referrers referring traders to us, we will, after rebating
such individual referrers 5% of the commission earned from the transactions of new traders they referred, deduct such 5% of the
commission from the rebates payable to the service agents to which such individual referrers relate.
The rebates and
discounts are recognized in the same period the related revenue is recognized.
Our trading volume
and transaction value amounts increased significantly from 2016 when we commenced operations in Shanghai and consequently added
a significant number of traders from mainland China as they could now settle their trades in Renminbi. This trend continued into
2017. However, there has been a decrease in our trading volume and transaction value amounts since the second half of 2018 because
of the deteriorating economy in China due to the under-performance of its financial stock markets as well as the fall-out from
the P2P (peer-to-peer) lending market. The situation has continued into 2019.
Total commission revenue
increased by $685,833 for the three months ended September 30, 2019 to $939,164 compared to $253,331 for the three months ended
September 30, 2018 primarily because our transaction volume increased as a result of our efforts in promoting our existing listed
artworks.
|
(iii)
|
Management fee revenue
|
We charge traders a
management fee to cover the costs of insurance, storage, and transportation for artwork and trading management of artwork units,
which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. On November 7, 2018 we lowered the minimum charge to $0.0013
(HK$0.01). The management fee is deducted from proceeds from the sale of artwork units.
During the three-month
period ended September 30, 2019, management fee revenue increased by $76,523, from $107,905 for the three months ended September
30, 2018 to $184,428, due to the increase in trading transactions.
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
|
|
Cost of Revenue
|
|
Three months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Commission rebate to service agent
|
|
$
|
370,204
|
|
|
$
|
2,094
|
|
Depreciation
|
|
|
116,082
|
|
|
|
163,736
|
|
Internet service charge
|
|
|
62,104
|
|
|
|
53,676
|
|
Artwork insurance
|
|
|
12,192
|
|
|
|
50,983
|
|
Artwork storage
|
|
|
19,700
|
|
|
|
27,533
|
|
Others
|
|
|
-
|
|
|
|
1,460
|
|
Total
|
|
$
|
580,282
|
|
|
$
|
299,482
|
|
Cost
of revenue for the three months ended September 30, 2019 and September 30, 2018 was $580,282 and $299,482, respectively. The increase
in cost of revenue by $280,800 for the three months ended September 30, 2019 compared to September 30, 2018 was mainly due to higher
commission rebates to service agents. The increase in commission rebates by $368,110 correlated to the higher commission revenue
earned from transactions during the three months ended September 30, 2019. Such an increase was offset by the decrease in depreciation
expense and artwork insurance expense by $47,654 and $38,791, respectively. The fall in depreciation expense was a result of the
suspension of e-commerce activity and impairment of all online software development assets in 2018. The reduction in the artwork
insurance expense was due to a negotiated discount in our new insurance contract for 2019.
Gross Profit
Gross
profit was $543,310 for the three months ended September 30, 2019, compared to $64,052 for the three months ended September 30,
2018. The increase was due to the increase in our total revenue.
As
previously discussed, the spike in total revenue was largely attributable to the rise in our commission revenue earned from transactions
in the three months ended September 30, 2019. Our commission revenue contributed 83.6% for the quarter ended September 30, 2019
compared to 69.7% in the corresponding period in 2018. Consequently, we posted a gross profit margin of 48.4% for the three months
ended September 30, 2019 compared to 17.6% for the same period in 2018.
Operating Expenses
General and administrative expenses for the three months ended September 30, 2019 were $1,159,502 compared to $2,208,264 for the three months ended September 30, 2018. The significant plunge in general and administrative expenses by $1,048,762 was attributed to a decrease in salary and welfare by $829,072 due to reduction in force since July 2018, a decrease in traveling and accommodation expenses by $48,427 as a result of fewer marketing events, a decrease in non-deductible input VAT by $4,027, a decrease in consultancy fees by $29,698, share-based compensation by $58,537, depreciation by $45,020 and other expenses by $89,927.
The following table
sets forth the main components of our general and administrative expenses for the three months ended September 30, 2019 and 2018.
|
|
Three months ended
September 30, 2019
|
|
|
Three months ended
September 30, 2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Amount($)
|
|
|
% of Total
|
|
Salary and welfare
|
|
|
405,620
|
|
|
|
35.0
|
|
|
|
1,234,692
|
|
|
|
55.9
|
|
Office, insurance and rental expenses
|
|
|
369,947
|
|
|
|
31.9
|
|
|
|
361,402
|
|
|
|
16.4
|
|
Legal and professional fees
|
|
|
213,263
|
|
|
|
18.4
|
|
|
|
165,862
|
|
|
|
7.5
|
|
Traveling and accommodation fees
|
|
|
28,939
|
|
|
|
2.5
|
|
|
|
77,366
|
|
|
|
3.5
|
|
Non-deductible input VAT expense
|
|
|
40,718
|
|
|
|
3.5
|
|
|
|
44,745
|
|
|
|
2.0
|
|
Consultancy fee
|
|
|
46,494
|
|
|
|
4.0
|
|
|
|
76,192
|
|
|
|
3.5
|
|
Share based compensation expense
|
|
|
6,273
|
|
|
|
0.5
|
|
|
|
64,810
|
|
|
|
2.9
|
|
Depreciation
|
|
|
32,692
|
|
|
|
2.8
|
|
|
|
77,712
|
|
|
|
3.5
|
|
Others
|
|
|
15,556
|
|
|
|
1.4
|
|
|
|
105,483
|
|
|
|
4.8
|
|
Total general and administrative expense
|
|
$
|
1,159,502
|
|
|
|
100
|
|
|
$
|
2,208,264
|
|
|
|
100
|
|
Other expenses
Other expenses for the three-month period ended September 30, 2019 were $520,698 compared to other expenses
of $1,004,552 for the same period in 2018. The decrease in other expenses by $483,854 was predominately resulted from a significant
decrease in exchange loss by $354,410, arising from the depreciation of Renminbi against US dollar and a decrease in loan interest
by $181,806 due to the loan due to a third party paid off in January 2019. Such decrease was offset by decrease in bank interest
income by $49,266.
Income tax benefit
The Company’s
effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject
to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate at 8.25% for the first HKD 2 million
(approximately $255,154) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,154) (16.5%
prior to January 1, 2018) and PRC enterprise income tax rate at 25%.
The effective tax
rates for the three months ended September 30, 2019 and 2018 were 9.4% and 20.5%, respectively.
Income taxes benefit for the three months ended September 30, 2019 and 2018 were $117,451 and $742,670,
respectively.
Net Loss
We had a net loss for
the three months ended September 30, 2019 of $1,127,897 compared net loss of $2,881,356 for the three months ended September 30,
2018.
The decrease in net
loss during the three months ended September 30, 2019 was predominately due to a rise in revenue by $760,058, and a decrease in
operating expenses by $1,415,566, compared to the three months ended September 30, 2018 as a result of cost-cutting measures. It
was also affected by a decrease in exchange losses by $354,410.
We announced on August
13, 2018 the suspension of new listings of artwork. We were on the downside of a downturn in the online fine art and collectibles
platform space, a by-product of a downturn in A-shares on the Chinese markets tightening of liquidity in China, declines in both
the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We slowly resumed new
listings in January 2019 but there were no new listings this quarter. We were focused on resuscitating interest in the trading
of our existing artwork and generating more commission revenue.
NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2019 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018
The following tables set
forth our condensed consolidated statements of income data:
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2019
|
|
|
% of
Revenue
|
|
|
2018
|
|
|
% of
Revenue
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Revenue
|
|
$
|
2,285,376
|
|
|
|
100
|
|
|
$
|
8,191,828
|
|
|
|
100
|
|
Cost of revenue
|
|
|
(1,288,589
|
)
|
|
|
(56
|
)
|
|
|
(2,173,296
|
)
|
|
|
(27
|
)
|
Selling expense
|
|
|
(143,054
|
)
|
|
|
(6
|
)
|
|
|
(851,173
|
)
|
|
|
(10
|
)
|
General and administrative expenses
|
|
|
(3,322,547
|
)
|
|
|
(146
|
)
|
|
|
(7,791,747
|
)
|
|
|
(95
|
)
|
Impairment loss – construction-in-progress
|
|
|
-
|
|
|
|
-
|
|
|
|
(326,227
|
|
|
|
(4
|
)
|
Total costs and expenses
|
|
|
(4,754,190
|
)
|
|
|
(208
|
)
|
|
|
(11,142,443
|
)
|
|
|
(136
|
)
|
Loss from operations
|
|
|
(2,468,814
|
)
|
|
|
(108
|
)
|
|
|
(2,950,615
|
)
|
|
|
(36
|
)
|
Interest and other expenses, net
|
|
|
(670,885
|
)
|
|
|
(29
|
)
|
|
|
(1,166,045
|
)
|
|
|
(14
|
)
|
Loss before income taxes
|
|
|
(3,139,699
|
)
|
|
|
(137
|
)
|
|
|
(4,116,660
|
)
|
|
|
(50
|
)
|
Income tax benefit
|
|
|
175,473
|
|
|
|
8
|
|
|
|
574,202
|
|
|
|
7
|
)
|
Net loss
|
|
$
|
(2,964,226
|
)
|
|
|
(129
|
)
|
|
$
|
(3,542,458
|
)
|
|
|
(43
|
)
|
Revenue
The following table sets
forth our condensed consolidated revenue by revenue source:
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Listing fee revenue
|
|
$
|
284,090
|
|
|
$
|
3,978,735
|
|
Commission
|
|
|
1,655,244
|
|
|
|
3,557,411
|
|
Management fee revenue
|
|
|
346,042
|
|
|
|
455,133
|
|
Authorized agent subscription revenue
|
|
|
-
|
|
|
|
191,623
|
|
Annual fee revenue
|
|
|
-
|
|
|
|
378
|
|
Online artwork sales
|
|
|
-
|
|
|
|
8,548
|
|
Total
|
|
$
|
2,285,376
|
|
|
$
|
8,191,828
|
|
As of September 30,
2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies
from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry
with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275
(HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory
carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value
of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products
with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000);
and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings),
24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth
ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the
7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces
of sports memorabilia) of the listed values were charged as listing fees, respectively.
During the nine months
ended September 30, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,148,194 (HK$9,000,000)
for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.
The listing fees charged
decreased to $284,090 during the nine months ended September 30, 2019 compared to $3,978,735 for the same period ended September
30, 2018. During the nine months ended September 30, 2019, we suspended new listings of artwork on our platform because we
were more focused on promoting the trading of our existing listed artworks and felt that any new listings would be unfavorably
impacted by current market conditions. We will also be more discreet about future listings of more valuable artworks. Accordingly,
there were no listings during the nine months ended September 30, 2019.
|
(ii)
|
Commission fee revenue
|
We generate a commission
fee from non-VIP traders and selected traders as follows:
For non-VIP traders,
the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions
for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each
transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both
buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). On November 7, 2018, we lowered
the minimum charge to $0.0013 (HK$0.01). The commission is accounted for as revenue and immediately deducted from the proceeds
from the sales of artwork units when a transaction is complete.
For selected traders,
starting from April 1, 2016, we charged a predetermined monthly fee that allows unlimited trades for specific artworks. These traders
are selected by authorized agents and reviewed by us. After review, we negotiate individually with each reviewed traders to determine
a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using
the output method, we recognize the monthly commission revenue upon the selected traders that receives access to our trading platform
to make unlimited trades for specific artworks.
We defined a selected
trader as an inactive trader who meets one of the following criteria:
|
·
|
The trader has been default in making monthly commission payment over three months.
|
|
·
|
The trader has not incurred any sales or purchase transactions in the month of reassessment.
|
|
·
|
The offering agent confirms that the respective selected trader is inactive.
|
Commission rebate programs
are offered to traders and service agents. We pay to existing traders 5% of the commission earned from the transactions of new
traders referred by them. The rebate was adjusted from 15% to 5%, starting from January 1, 2017. For service agents, we rebate
a total of 40% to 68% of the commission earned from transactions with new traders to the service agents when they bring in an agreed
number of traders to the trading platform. For service agents who have individual referrers referring traders to us, we will, after
rebating such individual referrers 5% of the commission earned from the transactions of new traders they referred, deduct such
5% of the commission from the rebates payable to the service agents to which such individual referrers relate.
The rebates and discounts
are recognized in the same period the related revenue is recognized.
Total commission revenue
decreased by $1,902,167 for the nine months ended September 30, 2019 to $1,655,244 compared to $3,557,411 for the nine months ended
September 30, 2018 primarily because there were no new listings of artwork on our platform in the second and third quarters and
this drove down overall trading activity during this period compared to last year.
|
(iii)
|
Management fee revenue
|
We charge traders a
management fee to cover the costs of insurance, storage, and transportation for an artwork and trading management of artwork units,
which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. The management fee is deducted from proceeds from the
sale of artwork units.
During the nine-month
period ended September 30, 2019, management fee revenue dropped by $109,091, from $455,133 for the nine months ended September
30, 2018 to $346,042, due to the decrease in overall trading transactions this period compared to last year.
During the nine-month
period ended September 30, 2019, there was no annual fee revenue, compared to $378 for the nine-month period ended September 30,
2018.
|
(v)
|
Authorized agent subscription revenue
|
During the nine-month period ended September 30, 2019, there was no authorized agent subscription revenue,
compared to $191,623 for the nine-month period ended September 30, 2018.
|
(vi)
|
Online artwork sales
|
During the nine-month period ended September 30, 2019, there were no online artwork sales, compared to
$8,548 for the nine-month period ended September 30, 2018 because we shut down online artwork sales on our platform.
Revenue by customer type
The following table
presents our revenue by customer type:
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Artwork owners
|
|
$
|
284,090
|
|
|
$
|
3,978,735
|
|
Non - VIP traders
|
|
|
1,494,066
|
|
|
|
2,235,789
|
|
VIP traders
|
|
|
507,220
|
|
|
|
1,777,133
|
|
Authorized agents
|
|
|
-
|
|
|
|
191,623
|
|
Online artwork sales
|
|
|
-
|
|
|
|
8,548
|
|
Total
|
|
$
|
2,285,376
|
|
|
$
|
8,191,828
|
|
Cost of Revenue
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Commission rebate to service agent
|
|
$
|
660,208
|
|
|
$
|
1,207,104
|
|
Depreciation
|
|
|
359,878
|
|
|
|
491,297
|
|
Internet service charge
|
|
|
159,882
|
|
|
|
240,165
|
|
Artwork insurance
|
|
|
36,124
|
|
|
|
155,635
|
|
Artwork storage
|
|
|
72,033
|
|
|
|
74,110
|
|
Others
|
|
|
464
|
|
|
|
4,985
|
|
Total
|
|
$
|
1,288,589
|
|
|
$
|
2,173,296
|
|
Cost of revenue for the nine months ended September 30, 2019 and September 30, 2018 was $1,288,589 and
$2,173,296, respectively. The decrease in cost of revenue for the nine months ended September 30, 2019 compared to September 30,
2018, was mainly due to the decrease in the commission rebates to service agents by $546,896. Management focused on resuscitating
interest in listed artwork and no new artwork had been listed since the second quarter of 2019. Besides the decrease in commission
rebates, the decrease in cost of revenue was also due to a fall in the depreciation and amortization of hardware and software on
our trading platform by $131,419 as a result of the suspension of e-commerce activity and impairment of all online software development
assets in 2018, the decline in internet services charges by $80,283 due to the termination of two network lines between Macau and
Hong Kong, the decrease in artwork insurance expense by $119,511 due to a negotiated discount in our new insurance contract for
2019, the decrease in artwork storage fee by $2,077 and the drop in other expenses by $4,521.
Gross Profit
Gross profit was $996,787
for the nine months ended September 30, 2019, compared to $6,018,532 for the nine months ended September 30, 2018. The decrease
was mainly due to the significant decline in total revenue.
Overall total revenue
for the nine months ended September 30, 2019 dropped by $5,906,452 or 72.1% compared to the same period in 2018. Compared to the
same period in 2018, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a
gross profit margin of 43.6% for the nine months ended September 30, 2019 compared to 73.5% for the same period in 2018.
Operating Expenses
General and administrative expenses for the nine months ended September 30, 2019 were $3,322,547, compared to $7,791,747 for the nine months ended September 30, 2018. The significant plunge in general and administrative expense by $4,469,200 was attributed to a decrease in salary and welfare by $2,615,446 due to reduction in force since July 2018, a decrease in insurance and rental expenses by $525,728 due to the relocation of our Hong Kong office to a non-central district, a decrease in legal and professional fees by $159,147, a decrease in traveling and accommodation expenses by $463,758 as a result of fewer marketing events, a decrease in non-deductible input VAT by $207,649, a decrease in consultancy fees by $71,853, share-based compensation by $180,347, depreciation by $119,273 and also other expenses by $202,401.
The following table
sets forth the main components of our general and administrative expenses for the nine months ended September 30, 2019 and September
30, 2018.
|
|
Nine months ended
September 30, 2019
|
|
|
Nine months ended
September 30, 2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Amount($)
|
|
|
% of Total
|
|
Salary and welfare
|
|
|
1,283,486
|
|
|
|
38.6
|
%
|
|
|
3,898,932
|
|
|
|
50.0
|
%
|
Office, insurance and rental expenses
|
|
|
697,629
|
|
|
|
21.0
|
%
|
|
|
1,223,357
|
|
|
|
15.7
|
%
|
Legal and professional fees
|
|
|
595,903
|
|
|
|
18.0
|
%
|
|
|
755,050
|
|
|
|
9.7
|
%
|
Traveling and accommodation fees
|
|
|
81,282
|
|
|
|
2.4
|
%
|
|
|
545,040
|
|
|
|
7.0
|
%
|
Non-deductible input VAT expense
|
|
|
130,316
|
|
|
|
3.9
|
%
|
|
|
337,965
|
|
|
|
4.3
|
%
|
Consultancy
|
|
|
218,929
|
|
|
|
6.6
|
%
|
|
|
290,782
|
|
|
|
3.7
|
%
|
Share based compensation
|
|
|
36,884
|
|
|
|
1.1
|
%
|
|
|
217,231
|
|
|
|
2.8
|
%
|
Depreciation
|
|
|
103,363
|
|
|
|
3.1
|
%
|
|
|
222,636
|
|
|
|
2.9
|
%
|
Bad debt expense
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(76,402
|
)
|
|
|
(1.0
|
)%
|
Other
|
|
|
174,755
|
|
|
|
5.3
|
%
|
|
|
377,156
|
|
|
|
4.9
|
%
|
Total general and administrative expense
|
|
$
|
3,322,547
|
|
|
|
100.0
|
%
|
|
$
|
7,791,747
|
|
|
|
100.0
|
%
|
Other expenses
Other expenses for
the nine months ended September 30, 2019 were $670,885, compared to $1,166,045 for the nine months ended September 30, 2018. The
decrease in other expenses by $495,160 was primarily driven by the decrease in exchange loss by $568,277, due to the appreciation
of Renminbi against US dollar and drop in loan interest by $486,272 due to a third-party loan being paid off in January 2019, offset
by an increase in sundry expense by $357,053, a decrease in bank interest income by $132,218 and a loss in fixed asset disposal
incurred in the nine months ended September 30, 2019 by $57,295.
Income tax benefit (expenses)
The Company's effective tax rate varies due to its multiple jurisdictions where pre-tax income or losses occur. The Company is subject to a Hong Kong profits tax rate at 8.25% for the first HKD 2 million (approximately $255,154) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,154) (16.5% prior to January 1, 2018), PRC enterprise income tax rate at 25% and U.S. income tax rate of 21% (34% prior to January 1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017).
The effective tax rates
for the nine months ended September 30, 2019 and 2018 were 5.6% and 13.9%, respectively.
Income taxes benefit
for the nine months ended September 30, 2019 and 2018 were $175,473 and $574,202, respectively.
Net loss
We had a net loss for the nine months ended September 30, 2019 of $2,964,226 compared to a net loss of
$3,542,458 for the nine months ended September 30, 2018. The lower net loss incurred in the nine months ended September 30, 2019,
compared to the same period in 2018, resulted from a lower operating expenses and exchange loss in the current period.
Liquidity and Capital Resources
The following tables
set forth our consolidated statements of cash flow:
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
10,828,217
|
|
|
$
|
(18,589,823
|
)
|
Net cash provided by (used in) investing activities
|
|
|
313,588
|
|
|
|
(4,377,285
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(537,605
|
)
|
|
|
2,425,220
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(33,398
|
)
|
|
|
(664,016
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
10,570,802
|
|
|
|
(21,205,904
|
)
|
Cash, cash equivalents and restricted cash, beginning balance
|
|
|
12,524,086
|
|
|
|
37,140,582
|
|
Cash, cash equivalents and restricted cash, ending balance
|
|
$
|
23,094,888
|
|
|
$
|
15,934,678
|
|
Sources of Liquidity
During the nine months ended September 30, 2019, net cash generated from operating activities totaled
$10,828,217 which resulted from the implementation of ASU2016-18 since the beginning of 2018. In fact, there was an increase in
client deposits by $12,459,049 placed by the customers for upcoming transactions which influenced the increased amounts due to
clients simultaneously. The Company assessed and evaluated that it was truly a presentation issue and there should be no actual
impact to the operating activities. Net cash generated from investing activities totaled $313,588. Net cash used in financing activities
totaled $537,605. The resulting change in cash for the period was an increase of $10,570,802. The cash balance at the beginning
of the period was $12,524,086. The cash balance on September 30, 2019 was $23,094,888.
During the nine months
ended September 30, 2018, net cash used in operating activities totaled $18,589,823 and it was resulted in the inclusion of the
restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity due to the adoption
of ASU2016-18 since beginning of 2018. The reduction in net cash in operating activities was predominately triggered by a decline
in client deposits by $17,757,757 which influenced the fall in the amount due to clients simultaneously. The Company assessed and
evaluated it was rather a presentation issue and there should have no actual impact to the operating activities. Net cash
used in investing activities totaled $4,377,285. Net cash generated from financing activities totaled $2,425,220. The resulting
change in cash for the period was a decrease of $21,205,904. The cash balance at the beginning of the period was $37,140,582. The
cash balance on September 30, 2018 was $15,934,678.
As of September 30, 2019, the Company had $26,298,905 in total current liabilities, which comprised of
$522,929 in accrued expense and other payables, $17,008,251 in customers’ deposits, $10,227 in advance from customer, $6,759,674
in amount due to related parties, $1,816,837 in loan from a third party, $173,156 in lease liabilities and $7,831 in tax payables.
As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included $641,692 in accrued expenses
and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500 in short-term borrowings
from third parties, $6,385,288 in amount due to related party, and $15,101 in tax payables.
The Company is aware
of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RMB is only currently
convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions,
but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure
from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly foreign owned enterprises,
may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us,
without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural
requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies
in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability
to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies
to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account remain
subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.
This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
Applicable PRC law
permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance
with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a portion of
their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50% of the subsidiary's
registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve
accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. In contrast,
there is no foreign exchange control or restrictions on capital flows into and out of Hong Kong. Hence, our Hong Kong operating
subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.
If our operating subsidiaries
were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of
our operating subsidiaries to transfer cash to our U.S. investors.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit
risk support or other benefits.
Future Financings
Although we are suffering
downside business including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring,
including re-evaluating the Company’s core business and a downsizing of its workforce. Our management forecasts that we have
sufficient cash from our operations to fund our business organically. However, we may conduct equity sales of our shares of common
stock in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to
existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other
activities, and if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence,
we do not need to rely on equity sales to fund our business operations.
Critical Accounting Policies
We regularly evaluate
the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of
these policies is included in the notes to our financial statements. In general, management's estimates are based on historical
experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable
under the facts and circumstances. Actual results could differ from those estimates made by management.
See Note 2 to the financial
statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2018, previously
filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial
statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2018, previously
filed with the SEC.