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.
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 JUNE 30, 2019 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 2018
The following tables set forth our condensed
consolidated statements of income data with a percentage:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2019
|
|
|
%
of
Revenue
|
|
|
2018
|
|
|
%
of
Revenue
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
626,083
|
|
|
|
100
|
|
|
$
|
3,854,010
|
|
|
|
100
|
|
|
Cost of revenue
|
|
|
(441,028
|
)
|
|
|
(70
|
)
|
|
|
(940,221
|
)
|
|
|
(24
|
)
|
|
Selling expense
|
|
|
(3,784
|
)
|
|
|
(1
|
)
|
|
|
(458,547
|
)
|
|
|
(12
|
)
|
|
General
and administrative expenses
|
|
|
(888,460
|
)
|
|
|
(142
|
)
|
|
|
(2,574,598
|
)
|
|
|
(67
|
)
|
|
Total
costs and expenses
|
|
|
(1,333,272
|
)
|
|
|
(213
|
)
|
|
|
(3,973,366
|
)
|
|
|
(103
|
)
|
|
Loss from operations
|
|
|
(707,189
|
)
|
|
|
(113
|
)
|
|
|
(119,356
|
)
|
|
|
(3
|
)
|
|
Total
other expenses
|
|
|
(486,931
|
)
|
|
|
(78
|
)
|
|
|
(1,239,008
|
)
|
|
|
(32
|
)
|
|
(Loss)
income before income tax expenses
|
|
|
(1,194,120
|
)
|
|
|
(191
|
)
|
|
|
(1,358,364
|
)
|
|
|
(35
|
)
|
|
Income
tax benefit
|
|
|
66,584
|
|
|
|
11
|
|
|
|
273,972
|
|
|
|
7
|
|
|
Net
loss
|
|
$
|
(1,127,536
|
)
|
|
|
(180
|
)
|
|
$
|
(1,084,392
|
)
|
|
|
(28
|
)
|
Revenue
The following table sets forth our condensed
consolidated revenue by revenue source:
|
|
|
Three months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Listing fee revenue
|
|
$
|
-
|
|
|
$
|
2,000,068
|
|
|
Commission
|
|
|
532,740
|
|
|
|
1,668,563
|
|
|
Management fee revenue
|
|
|
93,343
|
|
|
|
178,913
|
|
|
Online artwork sales
|
|
|
-
|
|
|
|
6,304
|
|
|
Annual fee revenue
|
|
|
-
|
|
|
|
162
|
|
|
Total
|
|
$
|
626,083
|
|
|
$
|
3,854,010
|
|
As of June 30, 2019,
a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from
famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000); 35 pieces of jewelry
with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,835,824
(HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000); 4 pieces of antique mammoth ivory
carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value
of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797 (HK$8,500,000); 6 sets of Unit+ products
with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,505 (HK$1,000,000);
and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings),
24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth
ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the
7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7
pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months
ended June 30, 2019, there were no new artworks listed on our platform.
The listing fees
charged decreased to $0 during the three months ended June 30, 2019 compared to $2,000,068 for the same period ended June 30,
2018. During the second quarter of 2019, we did not have any new listings of artwork on our platform because we focused on
the promotion of transactions on our platform as opposed to new listings. We are also more discreet about the future listings
of more valuable artworks. Accordingly, new listings were put off during the three months ended June 30, 2019.
|
|
(ii)
|
Commission fee revenue
|
We generate commission
fee from non-VIP traders and selected traders as follows:
For non-VIP traders,
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 was a decrease in our trading volume and transaction value amounts during the second half of 2018 because
of the deteriorating economy in China due to the under-performance of its financial stock markets as well as the fall-out from
the P2P (peer-to-peer) lending market.
Total commission revenue decreased by $1,135,823 or 68% for the three months ended June 30, 2019 to $532,740
compared to $1,668,563 for the three months ended June 30, 2018 primarily because of there were no new listings of artwork during
the three months ended June 30, 2019, resulting in a decrease in trading activities on our platform.
|
|
(iii)
|
Management fee revenue
|
We charge traders a
management fee to cover the costs of insurance, storage, and transportation for artwork and trading management of artwork units,
which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. On November 7, 2018 we lowered the minimum charge to $0.0013
(HK$0.01). The management fee is deducted from proceeds from the sale of artwork units.
During the three-month period ended June 30, 2019, management fee revenue decreased by $85,570, from $178,913
for the three months ended June 30, 2018 to $93,343, due to the decrease in trading transactions.
During the three-month
period ended June 30, 2019, there is no annual fee revenue, compared to $162 for the three-month period ended June 30, 2018
During the three-month
period ended June 30, 2019, there is no online artwork sales, compared to $6,304 for the three-month period ended June 30, 2018
Revenue by customer type
The following table presents our revenue
by customer type:
|
|
|
Three months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Artwork owners
|
|
$
|
-
|
|
|
$
|
2,000,068
|
|
|
Non - VIP traders
|
|
|
481,162
|
|
|
|
993,674
|
|
|
VIP traders
|
|
|
144,921
|
|
|
|
853,964
|
|
|
Online artwork sales
|
|
|
-
|
|
|
|
6,304
|
|
|
Total
|
|
$
|
626,083
|
|
|
$
|
3,854,010
|
|
Cost of Revenue
|
|
|
Three months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Commission rebate to service agent
|
|
$
|
235,088
|
|
|
$
|
598,519
|
|
|
Depreciation
|
|
|
121,763
|
|
|
|
168,424
|
|
|
Internet service charge
|
|
|
47,104
|
|
|
|
94,051
|
|
|
Artwork insurance
|
|
|
11,971
|
|
|
|
50,958
|
|
|
Artwork storage
|
|
|
25,091
|
|
|
|
24,995
|
|
|
Others
|
|
|
11
|
|
|
|
3,274
|
|
|
Total
|
|
$
|
441,028
|
|
|
$
|
940,221
|
|
Cost
of revenue for the three months ended June 30, 2019 and June 30, 2018 was $441,028 and $940,221, respectively. The decrease in
cost of revenue for the three months ended June 30, 2019 compared to June 30, 2018, was mainly due to the decrease in the commission
rebates to service agents by $363,431. Management was focused on resuscitating interest in the existing listed artwork in the
second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of revenue was also due to a decrease
in the depreciation and amortization of hardware and software on our trading platform by $46,661 as a result of the suspension
of e-commerce activity and impairment of all online software development assets in 2018, the decrease in internet services charges
by $46,947 due to the termination of two network lines between Macau and Hong Kong, and the decrease in artwork insurance by $38,987
due to a negotiated discount in our new insurance contract for 2019.
Gross Profit
Gross
profit was $185,055 for the three months ended June 30, 2019, compared to $2,913,789 for the three months ended June 30, 2018.
The decrease was due to the decrease in total revenue.
Listing
fees contributed 0% of the total revenue for the quarter ended June 30, 2019 compared to 51.9% in the corresponding period in 2018,
while commission revenue contributed 85.1% for the quarter ended June 30, 2019 compared to 43.3% in the corresponding period in
2018. Compared to the same period in 2018, there was a significant decrease in listing fee revenue and commission revenue. Consequently,
we posted a gross profit margin of 29.6% for the three months ended June 30, 2019 compared to 75.6% for the same period in 2018.
Operating Expenses
General and
administrative expenses for the three months ended June 30, 2019 were $888,460 compared to $2,574,598 for the three months
ended June 30, 2018. The significant plunge in general and administrative expense by $1,686,138 was attributed to a decrease
in salary and welfare by $826,334 due to redundancies since July 2018, a decrease in insurance and rental expenses by
$297,275 due to the relocation of our Hong Kong office to a non-central district, a decrease in legal and professional fees
by $106,624, a decrease in traveling and accommodation expenses by $113,152 as a result of fewer marketing events, a decrease
in non-deductible input VAT by $88,699, a decrease in consultancy fees by $21,075, share-based compensation by $53,412,
depreciation by $39,434 and also other expenses by $140,133.
The following table
sets forth the main components of the Company’s general and administrative expenses for the three months ended June 30, 2019
and 2018.
|
|
|
Three months ended
June
30, 2019
|
|
|
Three months ended
June
30, 2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Salary and welfare
|
|
|
430,369
|
|
|
|
48.4
|
|
|
|
1,256,703
|
|
|
|
48.8
|
|
|
Office, insurance and rental expenses
|
|
|
147,542
|
|
|
|
16.6
|
|
|
|
444,817
|
|
|
|
17.3
|
|
|
Legal and professional fees
|
|
|
108,542
|
|
|
|
12.2
|
|
|
|
215,166
|
|
|
|
8.4
|
|
|
Traveling and accommodation fees
|
|
|
30,985
|
|
|
|
3.5
|
|
|
|
144,137
|
|
|
|
5.6
|
|
|
Non-deductible input VAT expense
|
|
|
44,567
|
|
|
|
5.0
|
|
|
|
133,266
|
|
|
|
5.2
|
|
|
Consultancy fee
|
|
|
67,277
|
|
|
|
7.6
|
|
|
|
88,352
|
|
|
|
3.4
|
|
|
Share Based Compensation Expense
|
|
|
13,760
|
|
|
|
1.6
|
|
|
|
67,172
|
|
|
|
2.6
|
|
|
Depreciation
|
|
|
35,924
|
|
|
|
4.0
|
|
|
|
75,358
|
|
|
|
2.9
|
|
|
Others
|
|
|
9,494
|
|
|
|
1.1
|
|
|
|
149,627
|
|
|
|
5.8
|
|
|
Total general and administrative
expense
|
|
$
|
888,460
|
|
|
|
100
|
|
|
$
|
2,574,598
|
|
|
|
100
|
|
Other expenses
Other expenses for
the three-month period ended June 30, 2019 were $486,931, compared to other expenses of $1,239,008 for the same period in 2018.
There was a significant decrease in exchange loss by $848,028, arising from the appreciation of Renminbi against US dollar.
Income tax benefit
The Company’s
effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was subject
to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate at 8.25% for the first HKD 2 million
(approximately $255,010) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $255,010)(16.5%
prior to January 1, 2018) and PRC enterprise income tax rate at 25%.
The effective tax rates
for the three months ended June 30, 2019 and 2018 were 5.6% and 20.2%, respectively.
Income taxes benefit
for the three months ended June 30, 2019 and 2018 were $66,584 and $273,972, respectively.
Net Loss
We had a net loss for
the three months ended June 30, 2019 of $1,127,536 compared net loss of $1,084,392 for the three months ended June 30, 2018.
Increase in net
loss during the three months ended June 30, 2019 was predominately due to a fall in revenue by $3,227,927 at 84%, and a decrease
in operating expenses by $2,140,901, or 71% compared to the three months ended June 30, 2018 because of cost-cutting measures.
It was also affected by a decrease of exchange losses by $848,028.
We announced on August
13, 2018 the suspension of new listings of artwork. We were on the downside of a downturn in the online fine art and collectibles
platform space, a by-product of a downturn in A-shares on the Chinese markets tightening of liquidity in China, declines in both
the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We slowly resumed new
listings in January 2019 but there were no new listings this quarter. We are focusing on resuscitating interest in the trading
of our existing artwork and generating more commission revenue.
SIX-MONTH PERIOD ENDED JUNE 30, 2019
COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 2018
The following tables set forth our condensed consolidated statements
of income data:
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2019
|
|
|
% of
Revenue
|
|
|
2018
|
|
|
% of
Revenue
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
1,161,784
|
|
|
|
100
|
|
|
|
$
|
7,828,294
|
|
|
|
100
|
|
|
Cost of revenue
|
|
|
(708,307
|
)
|
|
|
(61
|
)
|
|
|
|
(1,873,814
|
)
|
|
|
(24
|
)
|
|
Selling expense
|
|
|
(34,596
|
)
|
|
|
(3
|
)
|
|
|
|
(702,138
|
)
|
|
|
(9
|
)
|
|
General and administrative expenses
|
|
|
(2,163,045
|
)
|
|
|
(186
|
)
|
|
|
|
(5,583,483
|
)
|
|
|
(71
|
)
|
|
Total costs and expenses
|
|
|
(2,905,948
|
)
|
|
|
(250
|
)
|
|
|
|
(8,159,435
|
)
|
|
|
(104
|
)
|
|
(Loss) income from operations
|
|
|
(1,744,164
|
)
|
|
|
(150
|
)
|
|
|
|
(331,141
|
)
|
|
|
(4
|
)
|
|
Interest and other (expenses) income, net
|
|
|
(150,187
|
)
|
|
|
(13
|
)
|
|
|
|
(161,493
|
)
|
|
|
(2
|
)
|
|
(Loss) income before income taxes
|
|
|
(1,894,351
|
)
|
|
|
(163
|
)
|
|
|
|
(492,634
|
)
|
|
|
(6
|
)
|
|
Income tax benefit (expense)
|
|
|
58,022
|
|
|
|
5
|
|
|
|
|
(168,468
|
)
|
|
|
(2
|
)
|
|
Net loss
|
|
$
|
(1,836,329
|
)
|
|
|
(158
|
)
|
|
|
$
|
(661,102
|
)
|
|
|
(8
|
)
|
Revenue
The following table sets forth our condensed
consolidated revenue by revenue source:
|
|
|
Six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Listing fee revenue
|
|
$
|
284,090
|
|
|
$
|
3,978,735
|
|
|
Commission
|
|
|
716,080
|
|
|
|
3,304,080
|
|
|
Management fee revenue
|
|
|
161,614
|
|
|
|
347,228
|
|
|
Authorized agent subscription revenue
|
|
|
-
|
|
|
|
191,623
|
|
|
Annual fee revenue
|
|
|
|
|
|
|
324
|
|
|
Online artwork sales
|
|
|
-
|
|
|
|
6304
|
|
|
Total
|
|
$
|
1,161,784
|
|
|
$
|
7,828,294
|
|
As of June 30, 2019, a total of 285 sets of artwork were listed for trade on our platform -comprising 60 sets of paintings
and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,768,858 (HK$202,100,000);
35 pieces of jewelry with a total listing value of $9,264,548 (HK$72,660,000); 134 pieces of precious stones with a total
listing value of $16,835,824 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,113,021 (HK$95,000,000);
4 pieces of antique mammoth ivory carvings with a total listing value of $663,029 (HK$5,200,000); 2 pieces of porcelain pastel
paintings with a total listing value of $331,514 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,797
(HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,092 (HK$10,314,000); 1 piece of Yixing collectable
with a listing value of $127,505 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,084,995 (HK$8,509,400),
of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces
of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for
the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+
products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were
charged as listing fees, respectively.
During the six months ended June 30, 2019,
there were 6 sets of paintings listed on our platform. Their total listing values were $1,147,549 (HK$9,000,000) for the paintings,
of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.
The listing fees charged
decreased to $284,090 during the six months ended June 30, 2019 compared to $3,978,735 for the same period ended June 30, 2018.
During the six months ended June 30, 2019, we have slowed down the listings of artwork on our platform because we focused on the
promotion of transactions on our platform as opposed to new listings. We will also be more discreet about the future listings of
more valuable artworks. Hence, new listings were put off during the six months ended June 30, 2019.
|
|
(ii)
|
Commission fee revenue
|
We generate a commission fee from non-VIP
traders and selected traders as follows:
For non-VIP traders,
the commission revenue was calculated based on a percentage of transaction value of artworks, which we charge trading commissions
for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each
transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both
buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). On November 7, 2018, we lowered
the minimum charge to $0.0013 (HK$0.01). The commission is accounted for as revenue and immediately deducted from the proceeds
from the sales of artwork units when a transaction is complete.
For selected traders, starting from April
1, 2016, we charged a predetermined monthly fee that allows unlimited trades for specific artworks. These traders are selected
by authorized agents and reviewed by us. After review, we negotiate individually with each reviewed traders to determine a fixed
monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the
output method, we recognize the monthly commission revenue upon the selected traders that receives access to our trading platform
to make unlimited trades for specific artworks.
We defined a selected trader as an inactive
trader who meets one of the following criteria:
|
|
·
|
The trader has been default in making monthly commission payment over three months.
|
|
|
·
|
The trader has not incurred any sales or purchase transactions in the month of reassessment.
|
|
|
·
|
The offering agent confirms that the respective selected trader is inactive.
|
Commission rebate 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 $2,588,000
or 78% for the six months ended June 30, 2019 to $716,080 compared to $3,304,080 for the six months ended June 30, 2018 primarily
because there were no new listings of artwork on our platform in the second quarter and this drove down trading activity during
the second quarter.
|
|
(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 six-month
period ended June 30, 2019, management fee revenue decreased by $185,614, from $347,228 for the six months ended June 30, 2018
to $161,614, due to the decrease in trading transactions in the current quarter.
During the six-month
period ended June 30, 2019, there is no annual fee revenue, compared to $324 for the six-month period ended June 30, 2018.
|
|
(v)
|
Authorized agent subscription revenue
|
During the six-month
period ended June 30, 2019, there are no authorized agent subscription revenue, compared to $191,623 for the six-month period ended
June 30, 2018.
During the six-month
period ended June 30, 2019, there are no online artwork sales, compared to $6,304 for the six-month period ended June 30, 2018
primarily because of shutting down of online artwork sales on our platform.
Revenue by customer type
The following table presents our revenue
by customer type:
|
|
|
Six months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Artwork owners
|
|
$
|
284,090
|
|
|
$
|
3,978,735
|
|
|
Non - VIP traders
|
|
|
640,789
|
|
|
|
2,095,208
|
|
|
VIP traders
|
|
|
236,905
|
|
|
|
1,556,424
|
|
|
Authorized agents
|
|
|
-
|
|
|
|
191,623
|
|
|
Online artwork sales
|
|
|
-
|
|
|
|
6,304
|
|
|
Total
|
|
$
|
1,161,784
|
|
|
$
|
7, 828,294
|
|
Cost of Revenue
|
|
|
Six months ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Commission rebate to service agent
|
|
$
|
290,004
|
|
|
$
|
1,205,010
|
|
|
Depreciation
|
|
|
243,795
|
|
|
|
327,561
|
|
|
Internet service charge
|
|
|
97,778
|
|
|
|
186,489
|
|
|
Artwork insurance
|
|
|
23,933
|
|
|
|
104,652
|
|
|
Artwork storage
|
|
|
52,333
|
|
|
|
46,577
|
|
|
Others
|
|
|
464
|
|
|
|
3,525
|
|
|
Total
|
|
$
|
708,307
|
|
|
$
|
1,873,814
|
|
Cost of revenue for the six months ended June 30, 2019 and June 30, 2018 was $708,307 and $1,873,814, respectively.
The decrease in cost of revenue for the six months ended June 30, 2019 compared to June 30, 2018, was mainly due to the decrease
in the commission rebates to service agents by $915,006. Management was focused on resuscitating interest in the listed artwork
and no new artwork was listed in the second quarter of 2019. Besides the decrease in commission rebates, the decrease in cost of
revenue was also due to a decrease in the depreciation and amortization of hardware and software on our trading platform by $83,766
as a result of the suspension of e-commerce activity and impairment of all online software development assets in 2018, the decrease
in internet services charges by $88,711 due to the termination of two network lines between Macau and Hong Kong, and the decrease
in artwork insurance by $80,719 due to a negotiated discount in our new insurance contract for 2019.
Gross Profit
Gross profit was
$453,477 for the six months ended June 30, 2019, compared to $5,954,480 for the six months ended June 30, 2018. The decrease was
mainly due to the decrease in total revenue.
Overall total revenue for the six months ended June 30, 2019 dropped by $6,666,510 or 85.2% 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 39.0% for the six months ended June 30, 2019 compared to 76.1% for the same period in 2018.
Operating Expenses
General and administrative
expenses for the six months ended June 30, 2019 were $2,163,045, compared to $5,583,483 for the six months ended June 30, 2018.
The significant plunge in general and administrative expense by $3,420,438 was attributed to a decrease in salary and welfare by
$1,786,374 due to redundancies since July 2018, a decrease in insurance and rental expenses by $534,273 due to the relocation of
our Hong Kong office to a non-central district, a decrease in legal and professional fees by $206,548, a decrease in traveling
and accommodation expenses by $415,331 as a result of fewer marketing events, a decrease in non-deductible input VAT by $203,622,
a decrease in consultancy fees by $42,155, share-based compensation by $121,810, depreciation by $74,253 and also other expenses
by $36,072.
The following table sets forth the main
components of the Company’s general and administrative expenses for the six months ended June 30, 2019 and June 30, 2018.
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
|
30-Jun-19
|
|
|
30-Jun-18
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Amount($)
|
|
|
% of Total
|
|
|
Salary and welfare
|
|
|
877,866
|
|
|
|
40.6
|
|
|
|
2,664,240
|
|
|
|
47.7
|
|
|
Legal and professional fees
|
|
|
382,640
|
|
|
|
17.7
|
|
|
|
589,188
|
|
|
|
10.6
|
|
|
Office, insurance and rental expenses
|
|
|
327,682
|
|
|
|
15.1
|
|
|
|
861,955
|
|
|
|
15.4
|
|
|
Consultancy fee
|
|
|
172,435
|
|
|
|
8.0
|
|
|
|
214,590
|
|
|
|
3.8
|
|
|
Non-deductible input VAT expense
|
|
|
89,598
|
|
|
|
4.1
|
|
|
|
293,220
|
|
|
|
5.3
|
|
|
Depreciation
|
|
|
70,671
|
|
|
|
3.3
|
|
|
|
144,924
|
|
|
|
2.6
|
|
|
Traveling and accommodation fees
|
|
|
52,343
|
|
|
|
2.4
|
|
|
|
467,674
|
|
|
|
8.4
|
|
|
Share Based Compensation Expense
|
|
|
30,611
|
|
|
|
1.4
|
|
|
|
152,421
|
|
|
|
2.7
|
|
|
Others
|
|
|
159,199
|
|
|
|
7.4
|
|
|
|
195,271
|
|
|
|
3.5
|
|
|
Total general and administrative expense
|
|
$
|
2,163,045
|
|
|
|
100
|
|
|
$
|
5,583,483
|
|
|
|
100
|
|
Other income and expenses
Other expenses for the six months ended
June 30, 2019 was $150,187, compared to $161,493 for the six months ended June 30, 2018. The amount was comparable between two periods.
Income tax benefit (expenses)
The Company’s
effective tax rate varies due to its multiple jurisdictions where pre-tax income or losses occur. The Company is subject to a Hong
Kong profits tax rate at 8.25% for the first HKD 2 million (approximately $255,010) assessable profits and at 16.5% for assessable
profits above HKD 2 million (approximately $255,010) (16.5% prior to January 1, 2018) and PRC enterprise income tax rate
at 25%. PRC enterprise income tax rate of 25% and U.S. income tax rate of 34% prior to January 1, 2018 while 21% after January
1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017.
The effective tax rates for the six months
ended June 30, 2019 and 2018 were 3.1% and (34.2)%, respectively.
Income taxes benefit (expense) for the
six months ended June 30, 2019 and 2018 were $58,022 and $(168,468), respectively.
Net loss
We had a net loss for the six months ended
June 30, 2019 of $1,836,329 compared to net loss of $661,102 for the six months ended June 30, 2018.
The net loss after income tax expense incurred
during this current period was predominantly driven by a decrease in gross profit by $5,501,003.
Liquidity and Capital Resources
The following tables
set forth our consolidated statements of cash flow:
|
|
|
Six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
21,615,744
|
|
|
$
|
(5,625,065
|
)
|
|
Net cash provided by (used in) investing activities
|
|
|
2,409,459
|
|
|
|
(6,920,612
|
)
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,106,342
|
)
|
|
|
5,888,608
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
10,090
|
|
|
|
(239,255
|
)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
21,928,951
|
|
|
|
(6,896,324
|
)
|
|
Cash, cash equivalents and restricted cash, beginning balance
|
|
|
12,524,086
|
|
|
|
37,140,582
|
|
|
Cash, cash equivalents and restricted cash, ending balance
|
|
$
|
34,453,037
|
|
|
$
|
30,244,258
|
|
Sources of Liquidity
During the six months
ended June 30, 2019, net cash generated from operating activities totaled $21,615,744, which resulted from the implementation
of ASU2016-18 since the beginning of 2018. In fact, there was an increase in client deposits by $22,452,663 placed by the customers
for upcoming transactions which influenced the increased amounts due to clients simultaneously. The Company assessed and evaluated
that it was really a presentation issue and there should be no actual impact to the operating activities. Net cash generated from
investing activities totaled $2,409,459. Net cash used in financing activities totaled $2,106,342. The resulting change in
cash for the period was an increase of $21,928,951. The cash balance at the beginning of the period was $12,524,086. The cash balance
on June 30, 2019 was $34,453,037.
During the six months
ended June 30, 2018, net cash used in operating activities totaled $5,625,065 and it was resulted in the inclusion of the restricted
cash balances within the overall cash balance and removal of the changes in (approximately $5.3M provided by) restricted cash activity
due to the adoption of ASU2016-18 since beginning of 2018. Actually, there was a decline in client deposits by $5,357,186 in which
influenced the drop of the amount due to clients simultaneously. The Company assessed and evaluated it was rather a presentation
issue and there should have no actual impact to the operating activities. Net cash used in investing activities totaled $6,920,612.
Net cash generated from financing activities totaled $5,888,608. The resulting change in cash for the period was a decrease of
$6,896,324. The cash balance at the beginning of the period was $37,140,582. The cash balance on June 30, 2018 was $30,244,258.
.
As of June 30, 2019, the Company
had $34,608,620 in total current liabilities, which comprised of $618,014 in accrued expense and other payables, $27,001,865 in
customers’ deposits, $7,043 in advance from customer, $6,790,399 in amount due to related parties, $178,917 in lease liabilities
and $12,382 in tax payables. As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included
$641,692 in accrued expenses and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500
in short-term borrowings from third parties, $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.