Quarterly Report (10-q)

Date : 11/19/2018 @ 9:10PM
Source : Edgar (US Regulatory)
Stock : Takung Art Co., Ltd. (TKAT)
Quote : 0.65  -0.089 (-12.04%) @ 9:00PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2018

 

or

 

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

 

For the transition period from _________________________ to_________________________

 

Commission File Number: 001-38036

 

TAKUNG ART CO., LTD

(Exact name of registrant as specified in its charter)

 

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

 

Flat/RM 03-04 20/F Hutchison House 10 Harcourt Road, Central, Hong Kong
(Address of principal executive offices) (Zip Code)
 
+852 3158 0977
(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The number of shares of common stock issued and outstanding as of November 14, 2018 is 11,226,025.

 

 

 

 

 

 

 

FORM 10-Q

TAKUNG ART CO., LTD

INDEX

 

    Page
     
PART I. Financial Information 3
     
  Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited) 3
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation. 19
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 33
     
  Item 4.  Controls and Procedures. 33
     
PART II. Other Information 34
     
  Item 6.  Exhibits. 34
     
  Signatures 35

 

  2  

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

    September 30,     December 31,  
    2018     2017  
      (Unaudited)          
ASSETS                
Current assets                
Cash and cash equivalents   $ 8,418,818     $ 11,866,965  
Restricted cash     7,515,860       25,273,617  
Account receivables, net     971,480       2,291,698  
Prepayment and other current assets     2,257,181       2,300,207  
Inventories     14,859       -  
Amount due from a related party     5,914,240       -  
Short term investments, held to maturity     873,617       -  
Loan receivables     3,859,075       7,834,115  
Total current assets     29,825,130       49,566,602  
                 
Non-current assets                
Property and equipment, net     1,992,564       2,191,321  
Intangible assets     22,297       22,334  
Deferred tax assets     700,668       291,430  
Other non-current assets     394,555       757,235  
Total non-current assets     3,110,084       3,262,320  
Total assets   $ 32,935,214     $ 52,828,922  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
LIABILITIES                
Current liabilities                
Accrued expenses and other payables   $ 623,472     $ 1,461,858  
Customer deposits     7,515,860       25,273,617  
Advance from customers     14,355       170,078  
Short-term borrowings from third parties     3,950,099       7,208,761  
Amount due to related parties     6,389,042       483,822  
Tax payables     15,848       312,575  
Total current liabilities     18,508,676       34,910,711  
                 
Total liabilities   $ 18,508,676     $ 34,910,711  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ EQUITY                
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,226,025 shares issued and outstanding as of September 30, 2018;
11,188,882 shares issued and outstanding as of December 31, 2017)
  $ 11,226     $ 11,189  
Additional paid-in capital     6,298,910       6,116,216  
Retained earnings     8,568,638       12,111,096  
Accumulated other comprehensive loss     (452,236 )     (320,290 )
Total stockholders’ equity     14,426,538       17,918,211  
Total liabilities and stockholders’ equity   $ 32,935,214     $ 52,828,922  

 

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

 

  3  

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(UNAUDITED)

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenue                        
Listing fee   $ -     $ 1,455,498     $ 3,978,735     $ 4,606,649  
Commission     253,331       1,496,826       3,557,411       4,970,651  
Management fee     107,905       402,547       455,133       967,518  
Annual fee     54       140       378       859  
Authorized agent subscription revenue           -       191,623       -  
Online artwork sales     2,244       -       8,548       -  
Total revenue     363,534       3,355,011       8,191,828       10,545,677  
                                 
Cost of revenue     (299,482 )     (292,168 )     (2,173,296 )     (822,335 )
                                 
Gross profit     64,052       3,062,843       6,018,532       9,723,342  
                                 
Operating expenses:                                
General and administrative expenses     (2,208,264 )     (2,498,848 )     (7,791,747 )     (7,311,128 )
Selling expenses     (149,035 )     (624,151 )     (851,173 )     (1,272,010 )
Impairment loss – construction-in-progress     (326,227 )     -       (326,227 )     -  
Total operating expenses     (2,683,526 )     (3,122,999 )     (8,969,147 )     (8,583,138 )
                                 
(Loss) income from operations     (2,619,474 )     (60,156 )     (2,950,615 )     1,140,204  
                                 
Other income and expenses:                                
Other income     65,487       186,259       470,752       440,470  
Loan interest expense     (199,821 )     (152,059 )     (504,287 )     (455,762 )
Exchange gain (loss)     (870,218 )     177,652       (1,132,510 )     526,603  
Total other income (loss)     (1,004,552 )     211,852       (1,166,045 )     511,311  
                                 
(Loss) income before provision for income taxes     (3,624,026 )     151,696       (4,116,660 )     1,651,515  
                                 
Income tax benefit (expense)     742,670       (124,662 )     574,202       (594,377 )
                                 
Net (loss) income   $ (2,881,356 )   $ 27,034     $ (3,542,458 )   $ 1,057,138  
                                 
Foreign currency translation adjustment     (3,668 )     311,485       (131,946 )     787,660  
                                 
Comprehensive (loss) income   $ (2,885,024 )   $ 338,519     $ (3,674,404 )   $ 1,844,798  
                                 
(Loss) earnings per common share– basic   $ (0.26 )   $ 0.00     $ (0.32 )   $ 0.10  
(Loss) earnings per common share– diluted     (0.26 )     0.00       (0.32 )     0.09  
Weighted average number of common shares outstanding-basic     11,226,025       11,188,882       11,216,009       11,039,880  
Weighted average number of common shares outstanding-diluted     11,226,025       11,248,688       11,216,009       11,398,082  

 

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

 

  4  

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

 

    For the Nine Months     For the Nine Months  
    Ended     Ended  
    September 30,     September 30,  
    2018     2017  
             
Cash flows from operating activities:                
Net (loss) income     (3,542,458 )     1,057,138  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation     713,933       538,532  
Interest expense     262,561       181,341  
Bad debt expense     (76,402 )     241,248  
Changes in exchange rate     1,132,510       (526,603 )
Stock-based compensation     217,231       558,704  
Impairment loss on CIP     326,227       -  
Deferred tax liabilities     -       (17,317 )
Deferred tax assets     (409,238 )     (50,904 )
Changes in operating assets and liabilities:                
Account receivables     1,396,620       (915,249 )
Prepaid loan interest expense     -       (111,477 )
Prepayment and other current assets     (58,673 )     (64,440 )
Other non-current assets     362,680       (106,656 )
Customer deposits     (17,757,757 )     (2,685,627 )
Amount due to related party     -       53,675  
Tax payables     (296,727 )     544,988  
Advance from customer     (155,723 )     (360,248 )
Accrued expenses and other payables     (704,607 )     5,792  
Net cash used in operating activities     (18,589,823 )     (1,657,103 )
                 
Cash flows from investing activities:                
Purchase of property and equipment     (775,730 )     (455,255 )
Purchase of available-for-sales investment     (90,293,454 )     (53,501,874 )
Maturity and redemption of available-for-sales investment     90,293,454       53,501,874  
Loan to third parties     -       (3,518,325 )
Loan to related parties     (6,369,809 )     -  
Repayment from loan to third parties     3,641,871       3,412,070  
Repayment from loan to related parties     -       -  
Purchase of held-to-maturity investment     (873,617 )     -  
Net cash used in investing activities     (4,377,285 )     (561,510 )
 Cash flows from financing activities:                
Proceeds from related party loan     6,389,042       -  
Loan repayment to related party     (483,822 )     -  
Loan repayment to third party     (3,480,000 )     -  
Net cash provided by financing activities     2,425,220       -  
                 
Effect of exchange rate change on cash, cash equivalents and restricted cash     (664,016 )     1,025,539  
                 
Net decrease in cash, cash equivalents and restricted cash     (21,205,904 )     (1,193,074 )
                 
Cash, cash equivalents and restricted cash, beginning balance     37,140,582       35,138,697  
                 
Cash, cash equivalents and restricted cash, ending balance   $ 15,934,678     $ 33,945,623  
                 
Supplemental cash flows information:                
                 
Cash   $ 8,418,818     $ 14,887,890  
Restricted cash included in customer deposits     7,515,860       19,057,733  
Total cash and restricted cash   $ 15,934,678     $ 33,945,623  
                 
Cash paid during the period for:                
Interest   $ 241,727     $ 212,954  
Income tax   $ 111,917     $ 136,453  

 

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

 

  5  

 

 

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. Starting the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform. The offering is to further promote the artwork’s recognition.

  

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 Shanghai Takung and also carries out marketing and promotion activities in mainland China.

 

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

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”) 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 and copyright registration (Takung Online) with the use of blockchain technology.

 

  6  

 

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 2018 and for the three months ended and nine months ended September 30, 2018 and 2017 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, 2017, 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, 2018, its consolidated results of operations and cash flows for the nine-month periods ended September 30, 2018 and 2017, 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. 

 

  7  

 

 

Recently Adopted Accounting Standards

 

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

 

Effective January 1, 2018, the Company adopted Topic 606 using modified retrospective approach applied to its contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605.

 

We recognize revenue when control of the promised services is transferred to our traders and offering agents. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to our traders and offering agents. Our revenue mainly falls into the following broad categories: (i) listing fees, (ii) trading commissions, (iii) management fees, (iv) authorized agent subscription fee, (v) annual fee, and (vi) online artwork sales. 

 

Listing fee revenue

 

Using the output method, we recognize the listing fee revenue at a point when the ownership units of the artwork are listed and successfully traded on our system, based on the agreed percentage of the total offering price. This amount is collected from the money raised from the issuance of such units accounted as the listing fee revenue accordingly. When the ownership units of the artwork are listed and starts trading on our system, the original owner and/or the offering agent pays us a one-time offering fee and a listing deposit.

 

Commission fee revenue

 

We generate commission fee from non-VIP traders and selected traders. We measure the progress of performance obligations using the output method, as traders obtain the benefits of receiving access to making transactions on our trading platform.

 

For non-VIP traders, the commission revenue is calculated based on a percentage of transaction value of artworks, where we charge trading commissions for the purchase and sale of the ownership shares of the artworks. 

 

  8  

 

 

For selected traders, starting from April 1, 2016, we charge a predetermined monthly fee which allows unlimited trades for specific artworks. 

 

Commission rebate programs are offered to traders and service agents. We pay to existing traders and service agents a commission rebate at a predetermined referral rate of commission earned from the transactions of new traders referred by them. The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting from January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606-10-32-26. Since this is a reclassification between revenue and cost of revenue, it would have no impact on the opening balance for the year beginning January 1, 2018. Commission rebates were $1,207,104 and $201,524 for the nine months period ended September 30, 2018 and 2017, and were $2,094 and $103,742 for the three months ended September 30, 2018 and 2017.

 

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

 

Management fee revenue

 

A custody and insurance service are provided for each individual artwork on a daily basis. The cost of custody and insurance for each unit of artwork is constant for all artworks. Using the cost-based input method, we charge traders a management fee to cover the costs of insurance, storage and transportation for an artwork and trading management of artwork units, which are calculated at $0.0013 (HK$0.01) per 100 artwork units daily. The management fee is accounted for as revenue, and immediately deducted from proceeds from the sale of artwork ownership shares when a transaction is completed. A discount program is offered to waive the management fee during certain promotion periods. Such discounts are recognized as a reduction of the revenue upon the completion of the transactions.'

 

Authorized agent subscription revenue

 

We charge an authorized agent subscription fee, which is an annual service fee paid by authorized agents to grant them the right to allow their network of artwork owners to list their artwork on our trading platform. This revenue is recognized ratably over the annual agreement period for each agent.

 

Annual fee revenue

 

We charge an up-front annual fee for providing traders with premium services, including in-depth information and tools on the trading platform. This revenue is recognized ratably over the service agreement period for each trader.

 

Online artwork sales

 

From the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.

 

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped direct from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed. 

 

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through its online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.

 

  9  

 

 

For comparative purpose, we adjusted the revenue for three and nine months ended September 30, 2017 as if retrospectively adopted ASC 606.

 

The following tables identify the disaggregation of our revenue for the three months ended September 30, 2018 and 2017, respectively:

 

    Three months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
          As previously
reported
    Adjustments     Adjusted  
Listing fee revenue   $ -     $ 1,455,498       -     $ 1,455,498  
Commission     253,331       1,496,826       103,742       1,600,568  
Management fee revenue     107,905       402,547       -       402,547  
Annual fee revenue     54       140       -       140  
Online artwork sales     2,244       -       -       -  
Total   $ 363,534     $ 3,355,011     $ 103,742     $ 3,458,753  

 

The following tables identify the disaggregation of our revenue for the nine months ended September 30, 2018 and 2017, respectively:  

 

    Nine months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
          As previously
reported
    Adjustments     Adjusted  
Listing fee revenue   $ 3,978,735     $ 4,606,649       -     $ 4,606,649  
Commission     3,557,411       4,970,651       201,524       5,172,175  
Management fee revenue     455,133       967,518       -       967,518  
Authorized agent subscription revenue     191,623       -       -       -  
Annual fee revenue     378       859       -       859  
Online artwork sales     8,548       -       -       -  
Total   $ 8,191,828     $ 10,545,677     $ 201,524     $ 10,747,201  

 

The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

We do not have amounts of contract assets that the Company has right to consideration in exchange for services that the Company has transferred to customers when that right is conditioned on something other than the passage of time. Our contract liabilities are the Company’s obligation to transfer services to traders for which the Company has received consideration from the traders. All contract liabilities are expected to be recognized as revenue within one month and are presented in Advance from Customers in our Condensed Consolidated Balance Sheet.

 

Statement of Cash Flows:  In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, as a result, the Company no longer presents transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Furthermore, an additional reconciliation will be required to reconcile Cash, cash equivalents, and restricted cash reported within the Interim Condensed Consolidated Balance Sheets to sum to the total shown in the Interim Condensed Consolidated Statement of Cash Flows. The Company has already disclosed the restricted cash separately on its Interim Condensed Consolidated Statements of Financial Position. Beginning the first quarter of 2018, the Company has adopted and included the restricted cash balances on the Interim Condensed Consolidated Statement of Cash Flows and reconciliation of Cash, cash equivalent, and restricted cash within its Interim Condensed Consolidated Statements of Financial Positions that sum to the total of the same such amounts shown in Interim Condensed Consolidated Statement of Cash Flows. The Cash Flows of nine months ended September 30, 2017 has been applied retrospectively.

 

  10  

 

 

In January 2018, the FASB staff released guidance on accounting for the tax provisions of Global Intangible Low-Taxed Income (“GILTI”) as provided under the Tax Cuts and Jobs Act (“the Act”). GILTI refers to the tax on the excess of a United States shareholder’s total net foreign income over a deemed return on tangible assets. Based on the information available for the third quarter of 2018, the Company provisionally made a policy election and accounted for its potential GILTI tax as a period cost when incurred.

 

Accounting Pronouncements Issued But Not Yet Adopted

 

Codification Improvements: In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements . This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 are effective for periods beginning after December 15, 2018. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

 

Leases : In July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This guidance provides further clarification to the new lease standard ASC Topic 842 in certain aspects: residual value guarantees rates implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term, and purchase option variable lease payments that depend on an index or a rate investment tax credit.

 

This amendment affects the amendments in ASU 2016-12, which are not yet effective, but early adoption is allowed. For entities that adopted ASC Topic 842 early, the amendments are effective upon issuance of ASU No. 2018-10, and the transition requirements are identical to those in ASC Topic 842. For entities that have not adopted ASC Topic 842, the effective date and transition requirements will be identical to the effective date and transition requirements in ASC Topic 842. This amendment will be effective for the Company in March 2019 by which time ASC Topic 842 will be adopted. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

 

In July 2018, FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements. This guidance amends ASC 842, Leases in two major areas.First ASU 842 permits lessors to combine lease and non-lease components by class of underlying assets in agreements that meet certain criteria. For a lessor to qualify for this practical expedient, the lease and non-lease components must have the same timing and pattern of transfer, and the lease component, if accounted for on a stand-alone basis, would be classified as an operating lease. Second, this guidance provides entities with a transition option for adopting ASU 842. This transition option allows entities not to apply the new lease standard at the adoption date by recognizing a cumulative effect by adjusting the opening balance of the retained earnings rather than restate the comparative periods presented in the financial statements. The Company determined that the practical expedient to the lessors is not applicable while it is evaluating the transition option.

 

Except for the above ASUs issued but not yet adopted and the ones disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2017, 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.

 

  11  

 

 

3. PREPAYMENT AND OTHER CURRENT ASSETS

 

Prepayment and other current assets consisted of the following:

 

    September 30,
2018
    December 31, 
2017
 
      (Unaudited)          
Tax receivables   $ 1,286,415     $ 1,132,140  
Prepaid service fees     241,064       489,424  
Short-term borrowings to third party     436,809       461,092  
Staff advance     90,054       52,124  
Prepaid repair and maintenance     1,704       46,733  
Other current assets     201,135       118,694  
Prepayment and other current assets   $ 2,257,181     $ 2,300,207  

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

    September 30,
2018
    December 31,
2017
 
      (Unaudited)          
Listing fee   $ 971,134     $ 2,259,671  
Authorized agent subscription revenue    

558,165

      559,101  
Monthly commission fee     1,455,501       1,463,243  
Others    

54,004

      80,473  
Subtotal     3,038,804       4,362,488  
Less: allowance for doubtful accounts     (2,067,324 )     (2,070,790 )
Account receivables, net   $ 971,480     $ 2,291,698  

 

  12  

 

 

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
                                     
12/9/2016   Xiaohui Wang   Tianjin Takung     10,550,000       10,062,400     $ 1,465,114       0 %   11/30/2018
4/4/2017   Xiaohui Wang   Tianjin Takung     22,921,725       9,821,725     $ 1,430,071       0 %   12/31/2018
12/15/2017   Xiaohui Wang   Tianjin Takung     3,310,000       3,310,000     $ 481,945       0 %   12/14/2018
12/19/2017   Xiaohui Wang   Tianjin Takung     3,310,000       3,310,000     $ 481,945       0 %   12/18/2018
              Total             $ 3,859,075              

 

All the transactions were aimed to meet the Company’s working capital needs in U.S. Dollars, which are freely convertible to Hong Kong Dollar.

 

  The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Chongqing Wintus (New Star) Enterprises Group (“Chongqing”). Xiaohui Wang (“Ms. Wang”) is a citizen of the People’s Republic of China. Ms. Wang is a shareholder and the legal representative of Chongqing. Both Chongqing and Ms. Wang are non-related parties to the Company.

 

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

  

Through an understanding between Ms. Wang and Merit Crown, the U.S. Dollar Loans are “secured” by the RMB Loans. It is the understanding between the parties that the U.S. Dollar Loans and the RMB Loans will be repaid simultaneously.  

 

  13  

 

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

    September 30, 
2018
    December 31, 
2017
 
    (Unaudited)        
Furniture, fixtures and equipment   $ 332,529     $ 167,651  
Leasehold improvements     473,183       426,138  
Computer trading and clearing system     3,642,143       3,485,844  
Transport equipment     104,741       -  
Sub-total     4,552,596       4,079,633  
Less: accumulated depreciation     (2,560,032 )     (1,888,312 )
Property and equipment, net   $ 1,992,564     $ 2,191,321  

 

Depreciation expense was $241,448 and $190,626 for the three months ended September 30, 2018 and 2017, respectively, and $713,933 and $538,532 for the nine months ended September 30, 2018 and 2017, respectively.

 

As of September 30, 2018 and December 31, 2017, due to the close of Hangzhou branch office during the third quarter of 2018, the technology developments were downsized and the software projects were halted, we provide an impairment reserve for unamortized capitalized costs incurred in connection with developing or obtaining internal use software, which were included in computer and trading system, of $309,321 and $0, respectively.

 

7. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 2018 and December 31, 2017 consisted of the following:

 

    September 30,     December 31,  
    2018     2017  
    (Unaudited)        
Accruals for consulting fees   $ 264,949     $ 265,393  
Trading and clearing system     82,122       52,564  
Payroll payables     81,455       827,246  
Discount payable to traders     79,324       -  
Accruals for business trip expense     17,382       27,186  
Accruals for professional fees     33,215       192,067  
Other payables     65,025       97,402  
Total accrued expenses, account & other payables   $ 623,472     $ 1,461,858  

 

8. SHORT-TERM BORROWINGS FROM THIRD PARTIES

 

The following table sets forth a summary of the loan agreements in short-term borrowings:

 

Date   Borrower   Lender   September 30, 
2018
(USD)
    December 31,
2017
(USD)
    Annual
Interest
Rate
    Repayment 
Due Date
                               
7/15/2016   Hong Kong Takung   Merit Crown Limited   $ -     $ 1,500,000       8 %   12/31/2018
8/24/2016   Hong Kong Takung   Merit Crown Limited   $ 1,499,500     $ 1,999,500       8 %   12/31/2018
11/18/2016   Hong Kong Takung   Merit Crown Limited   $ -     $ 1,480,000       8 %   10/31/2018
12/9/2016   Hong Kong Takung   Merit Crown Limited   $ 1,520,000     $ 1,520,000       8 %   11/30/2018
12/19/2017   Hong Kong Takung   Merit Crown Limited   $ 500,000     $ 500,000       8 %   12/18/2018
12/22/2017   Hong Kong Takung   Merit Crown Limited   $ 500,000     $ 500,000       8 %   12/21/2018
    Less: Discount loan payable       $ (69,401 )   $ (290,739 )            
                                     
        Total   $ 3,950,099     $ 7,208,761              

 

  14  

 

 

The U.S. Dollar Loans are to provide Hong Kong Takung with sufficient U.S. Dollar-denominated currency to meet its working capital requirements. It is “secured” by the aforementioned RMB Loans (See Note 5) of equivalent amount by its subsidiary to an individual and guarantor affiliated with the lender of the U.S. Dollar Loans. It is the understanding between the parties that the U.S. Dollar Loans and the RMB Loans will be repaid simultaneously.

 

On July 4, 2018 and July 20, 2018, Hong Kong Takung repaid $2,000,000 and $1,480,000, respectively, to Merit Crown. Meanwhile, Ms. Wang repaid RMB13,100,000 (equals to USD 2,000,000) and RMB9,827,200 (equals to USD 1,480,000), respectively, to Shanghai Takung and Tianjin Takung, respectively.

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2018 and December 31, 2017. The fair value of the short-term borrowings approximates their carrying amounts. The weighted average short-term borrowings were $7,319,041 and $6,315,799 for the nine months period ended September 30, 2018 and the year ended December 31, 2017, respectively. The interest expenses for the short-term borrowings were $199,822 and $133,174 for the three months ended September 30, 2018 and 2017, respectively, and $500,080 and $394,295 for the nine months ended September 30, 2018 and 2017, respectively.

 

9. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

(a) Jianping Mao (“Mao”), the wife of the Vice General Manager of Hong Kong Takung.

(b) Liu Zhenying (“Liu”), the Vice President of Hong Kong Takung

 

Amount due from a related party

 

 

    September 30,
2018
    December 31,
2017
 
      (Unaudited)          
Liu (b)   $ 5,914,240     $ -  
Total     5,914,240       -  

 

Amount due to related parties

 

    September 30,
2018
    December 31,
2017
 
      (Unaudited)          
Mao (a)   $ -     $ 483,822  
Liu (b)     6,389,042       -  
Total     6,389,042       483,822  

 

The Company fully repaid the amount due to Mao on March 13, 2018.

 

On May 16, 2018, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Loan") with Liu for the loan of $6,389,042 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements. The maturity date of the loan is May 15, 2019.

 

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Loan") with Liu for the loan of $5,914,240 (RMB40,619,000) to Liu. The maturity date of the loan is May 15, 2019.

 

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

 

  15  

 

 

10. INCOME TAXES

 

Takung was incorporated in the State of Delaware and is subject to United States income tax. Hong Kong Takung was incorporated in Hong Kong S.A.R. People’s Republic of China and is subject to Hong Kong profits tax. Shanghai Takung and Tianjin Takung 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.

 

Under the Tax Act, the Company is subject to tax on GILTI earned by its foreign subsidiaries and made a reasonable estimate of the impact for the nine months ended September 30, 2018. The GILTI provision requires the Company to include the excess of the U.S. shareholder’s net controlled foreign corporations’ earnings over the U.S. shareholder’s deemed tangible income return. The Company provisionally made a policy election and accounted for its estimated tax on GILTI for the nine months ended September 30, 2018 as a period cost when incurred since the Company does not anticipate any deferred tax impact around GILTI due to its current period impact on the U.S. tax payable.

  

As of September 30, 2018 and December 31, 2017, the Company in the United States had $1,003,852 and $250,590 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.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of September 30, 2018, the Company has not completed its accounting for all tax effects of the Tax Act and has made reasonable estimates during 2017. The Company will monitor future guidance set forth by the Department of Treasury with regard to the tax provisions under the Act that are applicable and will revise relevant estimates as appropriate within the one year measurement period.

 

  16  

 

 

Hong Kong

 

The provision for current income taxes of the subsidiary operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the nine months ended September 30, 2018 and the year ended December 31, 2017, if applicable.

 

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:

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Current:                        
Federal   $ -     $ -     $ -     $ -  
State     -       -       -       -  
Foreign     (332,918 )     159,281       (160,548     662,598  
Total Current   $ (332,918 )   $ 159,281     $ (160,548 )   $ 662,598  
                                 
Deferred:                                
Federal   $ -     $ -     $ 37,398     $ -  
State     -       -       -       -  
Foreign     (409,752 )     (34,619 )     (451,052 )     (68,221 )
Total Deferred   $ (409,752 )   $ (34,619 )   $ (413,654 )   $ (68,221 )
                                 
Total income tax (benefit) expense   $ (742,670 )   $ 124,662     $ (574,202 )   $ 594,377  

 

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,
 
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Income (loss) before income tax expense   $ (3,624,026 )   $ 151,696     $ (4,116,660 )   $ 1,651,515  
                                 
Computed tax expense with statutory tax rate     (597,964 )     25,030       (679,249 )     271,806  
Impact of different tax rates in other jurisdictions     (89,082 )     (73,258 )     (51,274 )     (230,651 )
                                 
Non-deductible items:                                
Tax effect of non-deductible expenses     (167,031 )     25,896       (163,701 )     100,789  

Previous years unrecognized taxation effect

    6,870       -       6,870          
Changes in valuation allowance     104,537       146,994       313,152       452,433  
                                 
Total income tax (benefit) expense   $ (742,670 )   $ 124,662     $ (574,202 )   $ 594,377  

 

The effective tax rate was 20.5% and 82.2% for the three months ended September 30, 2018 and 2017, respectively, and 13.9% and 36.0% for the nine months ended September 30, 2018 and 2017, respectively.

 

  17  

 

 

11. COMMITMENTS AND CONTINGENCIES

 

Operation Commitments

 

The total future minimum lease payments under the non-cancellable operating lease with respect to the office and the dormitory as of September 30, 2018 are payable as follows: 

 

Nine months ending December 31, 2018   $ 205,025  
         
Year ending December 31, 2019     170,022  
         
Year ending December 31, 2020     39,736  
         
Year ending December 31, 2021     14,560  
         
Year ending December 31, 2022 and thereafter     51,568  
         
Total   $ 480,911  

 

Rental expense of the Company was $276,246 and $293,338 for the three months ended September 30, 2018 and 2017, respectively, and $831,308 and $721,492 for the nine months ended September 30, 2018 and 2017, respectively.

12. EARNINGS PER SHARE

 

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

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Numerator:                        
Net (loss) income   $ (2,881,356 )   $ 27,034     $ (3,542,458 )   $ 1,057,138  
                                 
Denominator:                                
Weighted-average shares outstanding - Basic     11,226,025       11,188,882       11,216,009       11,039,880  
Stock options and restricted shares     -       59,806       -       358,202  
Weighted-average shares outstanding - Diluted     11,226,025       11,248,688       11,216,009       11,398,082  
                                 
(Loss) earnings per share                                
-Basic     (0.26 )     0.00       (0.32 )     0.10  
-Diluted     (0.26 )     0.00       (0.32 )     0.09  

 

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 continuing operations, approximately 29,104 restricted shares for the three months ended September 30, 2018 and 34,915 restricted shares for the nine months ended September 30, 2018, were excluded from the calculation of diluted earnings (loss) per share, because their effect would have been antidilutive.

 

13. SUBSEQUENT EVENT

 

Pursuant to the notice of termination of tenancy for redevelopment from the landlord of the Hong Kong office on July 31, 2018, the Company will be required to vacate the Hong Kong office on or by January 31, 2019. Meanwhile, the Company is in process of the tenancy search for the new Hong Kong office.

  

  18  

 

 

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 this 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.

 

  19  

 

 

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 an on-line listing and trading services that allows artists, art dealers and owners to access a larger artwork trading market where they can engage with a wide range of investors that they may not encounter without access of our platform. Our platform also makes investments 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 is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders for and on behalf of Hong Kong Takung.

 

On January 27, 2016, Hong Kong Takung incorporated another subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”), a limited liability company, with a registered capital of $1 million in Tianjin Pilot Free Trade Zone in Tianjin, People’s Republic of China. Tianjin Takung provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion activities in mainland China.

 

Since July 28, 2016, we have expanded access to our trading platform to residents of Russia, Mongolia, Australia and New Zealand – our first major expansion of operations outside of China. To further stimulate trading interest, we have added selected portfolios from these countries to our platform, which now numbers 199 artworks including three Russian painting portfolios and fifteen Mongolian paintings.  

 

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 Flat/RM 03-04, 20/F, Hutchison House, 10 Harcourt Road, Central Hong Kong.

 

Our common stock began trading on the NYSE American under the symbol “TKAT” on March 22, 2017.

 

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 and copyright registration (Takung Online) with the use of blockchain technology.

 

Shanghai Takung closed its office in Hangzhou, used for technology development on September 13, 2018.

 

On October 1, 2018, Wang Song (Marketing Manager) was appointed as Hong Kong Takung’s new CEO and President and Xiao Di resigned therefrom effective as of the same day. As from October 1, 2018, Xiao Di is mainly responsible for the e-commerce business, with a focus on the Company’s new subsidiary, Takung Art Holdings and diversity in the new e-commerce business, such as combining Takung Online, the development of the application of blockchain and the use of intellectual property among others.

 

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. Starting in the second quarter of 2018, Shanghai Takung launched an offering of artwork and artwork related merchandise for sales on our online platform. The offering is to further promote the artwork’s recognition.

 

  20  

 

 

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2018 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2017

 

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

 

    Three Months Ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Revenue   $ 363,534     $ 3,355,011  
Cost of revenue     (299,482 )     (292,168 )
Selling expense     (149,035 )     (624,151 )
General and administrative expenses     (2,208,264 )     (2,498,848 )
Impairment loss – construction-in-progress     (326,227 )     -  
Total costs and expenses     (2,983,008 )     (3,415,167 )
Loss from operations     (2,619,474 )     (60,156 )
Interest and other (expenses) income, net     (1,004,552 )     211,852  
(Loss) income before income taxes     (3,624,026 )     151,696  
Income tax benefit (expense)     742,670       (124,662 )
Net (loss) income   $ (2,881,356 )   $ 27,034  

 

The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue):

 

    Three Months Ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Revenue     100 %     100 %
   Cost of revenue – Direct revenue     (82 )     (9 )
   Selling expense     (41 )     (18 )
   General and administrative expenses     (608 )     (74 )
   Impairment loss – construction-in-progress     (90 )     -  
Total costs and expenses     (821 )     (101 )
(Loss) income from operations     (721 )     (1 )
Interest and other (expenses) income, net     (276 )     6  
(Loss) income before income taxes     (997 )     5  
Income tax benefit (expense)     204       (4 )
Net (loss) income     (793 )%     1 %

  

Revenue

 

For comparative purpose, we adjusted the revenue for three months ended September 30, 2017 as if retrospectively adopting ASC 606. 

 

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

 

    Three months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
          As previously
reported
    Adjustments     Adjusted  
Listing fee revenue   $ -     $ 1,455,498       -     $ 1,455,498  
Commission     253,331       1,496,826       103,742       1,600,568  
Management fee revenue     107,905       402,547       -       402,547  
Annual fee revenue     54       140       -       140  
Online artwork sales     2,244       -       -       -  
Total   $ 363,534     $ 3,355,011     $ 103,742     $ 3,458,753  

 

  21  

 

 

  (i) Listing fee revenue

 

As of September 30, 2018, a total of 278 sets of artwork were listed for trade on our platform —comprising 54 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $24,628,845 (HK$193,100,000); 35 pieces of jewelry with a total listing value of $9,267,384 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,267,027 (HK$127,540,000); 29 pieces of amber with a total listing value of $12,690,679 (HK$99,500,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,231 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,616 (HK$2,600,000); 6 pieces of porcelains with a total listing value of $956,584 (HK$7,500,000); 6 sets of Unit+ products with a total listing value of $1,315,494 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,545 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,085,327 (HK$8,509,400), of which 22.5%-48% (for 54 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), 44.94%-48% (for the 6 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 September 30, 2018, there were no more artworks listed on our platform.

 

The decrease in listing fees charged during the three months ended September 30, 2018 compared to the same period ended September 30, 2017 due to the downsizing of online fine art and collectibles platforms, tightening of liquidity in China, and the Company’s decision of suspending the new artwork listing activities that was announced in a press release furnished in the current report on Form 8-K dated August 13, 2018.

   

  (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 complete.

 

For selected traders, starting April 1, 2016, we charged a predetermined monthly fee allowing unlimited trades for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each reviewed trader 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, whereby the selected traders receive access to our trading platform where they can make unlimited trades for specific artworks.

 

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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 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 commission rebate is recognized as reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606.  

 

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

  

Total commission revenue decreased by $1,243,495 or 83% for the three months ended September 30, 2018 to $253,331 compared to $1,496,826 for the three months ended September 30, 2017 primarily because of the suspension of new listings of products, with the decrease of trading activity on the artwork 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. The management fee is deducted from proceeds from the sale of artwork units.

 

During the three-month period ended September 30, 2018, management fee revenue decreased by $294,642, from $402,547 for the three months ended September 30, 2017 to $107,905, due to the decrease in trading transactions in the current quarter.

 

  (iv) Annual fee revenue

 

During the three-month period ended September 30, 2018, annual fee revenue decreased by $86, from $140 for the three-month period ended September 30, 2017 to $54.

 

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  (v) Online artwork sales

 

Since the second quarter of 2018, we have provided an offering of artwork and artwork related merchandise for sale on our online platform.

 

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks ,which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped directly from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed.

 

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through its online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.

 

During the three-month period ended September 30, 2018, online artwork sales were $2,244.

 

Revenue by customer type

 

The following table presents our revenue by customer type:

 

   

Three months ended

September 30,

 
    2018     2017  
    (Unaudited)     (Unaudited)  
Artwork owners   $ -     $ 1,455,498  
Non - VIP  traders     140,581       199,929  
VIP  traders     220,709       1,699,584  
Online artwork sales     2,244       -  
Total   $ 363,534     $ 3,355,011  

  

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Cost of Revenue

 

    Three months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Commission rebate to service agent   $ 2,094     $ -  
Depreciation     163,736       100,769  
Internet service charge     53,676       139,174  
Artwork insurance     50,983       43,818  
Artwork storage     27,533       8,407  
Others     1,460       -  
Total   $ 299,482     $ 292,168  

 

Cost of revenue for the three months ended September 30, 2018 and September 30, 2017 was $299,482 and $292,168, respectively. The increase in cost of revenue, for the three months ended September 30, 2018 compared to September 30, 2017, was mainly due to the increase in the commission rebates to service agents by $2,094, subject to the new trader transaction, which is pursuant to the commission rebate program. During the three months ended September 30, 2017, the Company paid to existing traders and service agents a referral rebate of $103,742 at a predetermined referral rate of commission earned from the transactions of new traders referred by those existing traders and service agents. (See Adoption of ASC Topic 606, “Revenue from Contracts with Customers”) The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605.  Despite the increase in commission rebate, the increase in cost of revenue was also due to increases in the depreciation and amortization of hardware and software for our trading platform by $62,967 due to the termination of the software development team and amortization of all of the “work in process” items at one time during the third quarter of 2018, the decrease in the internet services charge by $85,498 due to the termination of two network lines between Macau and Hong Kong; the increase in artwork insurance by $7,165; and the increase in artwork storage by $19,126, because of the number of artwork listed increased. Our cost of revenue primarily includes the commission rebate to service agents, internet service charge, artwork insurance, artwork storage and depreciation and amortization of hardware and software for our trading platform.

 

Gross Profit

 

Gross profit was $64,052 for the three months ended September 30, 2018, compared to $3,062,843 for the three months ended September 30, 2017. The decrease was due to the significant decrease in listing fee revenue and commission revenue earned in the three months ended September 30, 2018.

 

Listing fees contributed 0% of the total revenue for the quarter ended September 30, 2018 compared to 43.4% in the corresponding period in 2017, while commission revenue contributed 69.7% for the quarter ended September 30, 2018 compared to 44.6% in the corresponding period in 2017. Compared to the same period in 2017, there was a significant decrease in listing fee revenue and commission revenue. Consequently, we posted a comparable gross profit margin of 17.6% for the three months ended September 30, 2018 compared to 91.3% for the same period in 2017.

 

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Operating Expenses

 

General and administrative expenses for the three months ended September 30, 2018 were $2,208,264 compared to $2,498,848 for the three months ended September 30, 2017. A slight decrease in general and administrative expense by $290,584 was primarily due to a decrease in the following items: legal and professional fees by $52,204, office expenses and rental by $68,645, traveling and accommodation by $110,414, stock-based compensation by $73,351, depreciation by $12,145, bad debt expense by $241,226 and others by $26,509,which was offset by an increase in consultancy fee of $30,133, salary and welfare of $225,956 and non-deductible input VAT expense of $37,821. In the three months ended September 30, 2017, the Company wrote off the receivables related to listing revenue. In the three months ended September 30, 2018, the increase in salary and welfare was driven by the severance packages paid during the reduction in the workforce.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2018 and September 30, 2017.

 

    Three months ended
September 30, 2018
    Three months ended
September 30, 2017
 
    (Unaudited)     (Unaudited)  
    Amount($)     % of Total     Amount($)     % of Total  
Consultancy fee     76,192       3 %     46,059       2 %
Legal and professional fees     165,862       8 %     218,066       9 %
Salary and welfare     1,234,692       56 %     1,008,736       40 %
Office, insurance and rental expenses     361,402       16 %     430,047       17 %
Non-deductible input VAT expenses     44,745       2 %     6,924       0 %
Traveling and accommodation fees     77,366       4 %     187,780       8 %
Share-based compensation     64,810       3 %     138,161       6 %
Depreciation     77,712       4 %     89,857       3 %
Bad debt expenses     22       0 %     241,248       10 %
Other     105,461       4 %     131,970       5 %
Total general and administrative expense   $ 2,208,264       100.0 %   $ 2,498,848       100.0 %

  

Other income (loss) and expenses

 

Other loss and expenses for the three months ended September 30, 2018 were $1,004,552, compared to other income of $211,852 for the three months ended September 30, 2017. The significant increase in other expenses was primarily attributable to the exchange loss incurred in the three months ended September 30, 2018 by $870,218. The exchange loss arose from the fluctuation of exchange rate between the Renminbi and the US dollar.

 

Income tax benefit (expense)

 

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 of 16.5%, PRC enterprise income tax rate of 25% and U.S. income tax rate of 34% prior to January 1, 2018, whereas 21% after January 1, 2018 due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

 

The effective tax rates for the three months ended September 30, 2018 and 2017 were 20.5% and 82.2%, respectively.  

 

Income tax benefit for the three months ended September 30, 2018 was $742,670 and income tax expense for the three months ended September 30, 2017 was $124,662.

 

Net (Loss) Income

 

We had a net loss for the three months ended September 30, 2018 of $2,881,356 compared to net income of $27,034 for the three months ended September 30, 2017.

 

The decrease in net income during this current period was predominately due to a fall in revenue by $2,991,477, an increase in impairment loss on CIP by $326,227 and an increase of exchange loss by $1,047,870, as discussed in the previous paragraphs.

 

The reason for the decrease in revenue is because of the following: the Company announced, on August 13, 2018, the suspension of new listings of its art products, the company faced the downside of a downturn in the online fine art and collectibles platforms space, downturns in A-shares, and the tightening of liquidity in China.

 

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NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2017

 

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

 

    Nine Months Ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Revenue   $ 8,191,828     $ 10,545,677  
Cost of revenue     (2,173,296 )     (822,335 )
Selling expense     (851,173 )     (1,272,010 )
General and administrative expenses     (7,791,747 )     (7,311,128 )
Impairment loss – construction-in-progress     (326,227 )     -  
Total costs and expenses     (11,142,443 )     (9,405,473 )
(Loss) income from operations     (2,950,615 )     1,140,204  
Interest and other (expenses) income, net     (1,166,045 )     511,311  
(Loss) income before income taxes     (4,116,660 )     1,651,515  
Income tax benefit (expense)     574,202       (594,377 )
Net (loss) income   $ (3,542,458 )   $ 1,057,138  

 

The following tables set forth our condensed consolidated statements of income data (as a percentage of revenue):

 

    Nine Months Ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Revenue     100 %     100 %
   Cost of revenue – Direct revenue     (27 )     (8 )
   Selling expense     (10 )     (12 )
   General and administrative expenses     (95 )     (69 )
       Impairment loss – construction-in-progress     (4 )     -  
Total costs and expenses     (136 )     (89 )
(Loss) income from operations     (36 )     11  
Interest and other (expenses) income, net     (14 )     5  
(Loss) income before income taxes     (50 )     16  
Income tax benefit (expense)     7       (6 )
Net (loss) income     (43 )%     10 %

 

Revenue

 

For comparative purpose, we adjusted the revenue for nine months ended September 30, 2017 as if retrospectively adopting ASC 606. 

 

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

 

    Nine months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
          As previously
reported
    Adjustments     Adjusted  
Listing fee revenue   $ 3,978,735     $ 4,606,649       -     $ 4,606,649  
Commission     3,557,411       4,970,651       201,524       5,172,175  
Management fee revenue     455,133       967,518       -       967,518  
Authorized agent subscription revenue     191,623       -       -       -  
Annual fee revenue     378       859       -       859  
Online artwork sales     8,548       -       -       -  
Total   $ 8,191,828     $ 10,545,677     $ 201,524     $ 10,747,201  

 

  27  

 

 

  (i) Listing fee revenue

 

As of September 30, 2018, a total of 278 sets of artwork were listed for trade on our platform —comprising 54 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $24,628,845 (HK$193,100,000); 35 pieces of jewelry with a total listing value of $9,267,384 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,267,027 (HK$127,540,000); 29 pieces of amber with a total listing value of $12,690,679 (HK$99,500,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,231 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,616 (HK$2,600,000); 6 pieces of porcelains with a total listing value of $956,584 (HK$7,500,000); 6 sets of Unit+ products with a total listing value of $1,315,494 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,545 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,085,327 (HK$8,509,400), of which 22.5%-48% (for 54 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), 44.94%-48% (for the 6 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 nine months ended September 30, 2018, there were 14 sets of paintings, 8 pieces of precious stones, 4 pieces of porcelains, 5 sets of Unit+ products and 6 pieces of Sports memorabilia listed on our platform. Their total listing values were $5,229,325 (HK$41,000,000) for the paintings, $984,644 (HK$7,720,000) for the precious stones, $854,548 (HK$6,700,000) for the porcelains, $1,163,971 (HK$9,126,000) for the Unit+ products, and $957,202 (HK$7,505,000) for the Sports memorabilia, of which 41.67%-47.3% (for the paintings), 24%-46% (for the precious stones), 44.94%-48% (for porcelains), 45% (for the Unit+ products), and 45% (for the Sports memorabilia) of the listed values were charged as listing fees, respectively.

 

The decrease in the listing of artworks during the nine months ended September 30, 2018, compared to the same period ended September 30, 2017, resulted in a decrease in the listing fee value in the current period, the cause of which was announced in a press release furnished in the Company’s current report on Form 8-K dated August 13, 2018.

  

  (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). 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.

 

  28  

 

 

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 commission rebate is recognized as reduction of the commission revenue prior to January 1, 2018 under Topic 605. Starting January 1, 2018, we account for the commission rebate as cost of revenue under Topic 606.  

 

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

  

Total commission revenue decreased by $1,413,240 or 28.4% for the nine months ended September 30, 2018 to $3,557,411 compared to $4,970,651 for the nine months ended September 30, 2017 primarily because of a decrease in selected traders commission revenue by $3,309,553 and an increase in transaction commission revenue by $1,700,029 resulting from the implementation of an A-tier model, which led to an increase in the number of traders and new product categories.

   

(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, 2018, management fee revenue decreased by $512,385, from $967,518 for the nine months ended September 30, 2017 to $455,133, due to the promotions we conducted during that period. We waived management fees for certain VIP traders. We recognized these promotions as a reduction of revenue, which was recognized upon the completion of the transactions.

 

  (iv) Annual fee revenue

 

During the nine-month period ended September 30, 2018, annual fee revenue decreased by $481, from $859 for the nine-month period ended September 30, 2017 to $378.

 

(v) Authorized agent subscription revenue

 

During the nine-month period ended September 30, 2018, authorized agent subscription revenue was $191,623, compared to $0 for the same period ended in 2017.

 

(vi) Online artwork sales

 

From the second quarter of 2018, we launched an offering of artwork and artwork related merchandise for sales on our online platform.

 

Sales of artwork: The sale of artwork consists of fees charged to third-party merchants that the Company provides access to the online platform for sales of their artworks, which are primarily paintings. The Company is not the primary obligor on these transactions, the Company does not bear the inventory risk, does not have the ability to establish prices, and does not provide any fulfillment services since the goods are shipped directly from third-party merchants to end customers. Upon successful sales on the Company's online platform, the Company charges the third-party merchants commission fees based on the agreed percentage of the total selling price. Commission fees are recognized on a net basis when the artwork sales order is completed. 

 

Sales of artwork related merchandise: The Company also offers its own artwork related merchandise through the online platform. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to the carrier or the customer.

 

During the nine-month period ended September 30, 2018, online artwork sales was $8,548 comparing to $0 for the nine months ended September 30, 2017.

 

Revenue by customer type

 

The following table presents our revenue by customer type:

 

   

Nine months ended

September 30,

 
    2018     2017  
    (Unaudited)     (Unaudited)  
Artwork owners   $ 3,978,735     $ 4,606,649  
Non - VIP  traders     2,235,789       779,208  
VIP  traders     1,777,133       5,159,820  
Authorized agents     191,623       -  
Online artwork sales     8,548       -  
Total   $ 8,191,828     $ 10,545,677  

 

  29  

 

 

Cost of Revenue

 

    Nine months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Commission rebate to service agent   $ 1,207,104     $ -  
Depreciation     491,297       301,538  
Internet service charge     240,165       344,986  
Artwork insurance     155,635       126,789  
Artwork storage     74,110       49,022  
Others     4,985       -  
Total   $ 2,173,296     $ 822,335  

 

Cost of revenue for the nine months ended September 30, 2018 and September 30, 2017 was $2,173,296 and $822,335, respectively. The increase in cost of revenue by $1,350,961 was mainly due to the increase in commission rebates to service agents by $1,207,104, subject to the trader transaction, which is pursuant to the commission rebate program. During the nine months ended September 30, 2017, the Company paid to existing traders and service agents a referral rebate of $201,524 at a predetermined referral rate of commission earned from the transactions of new traders referred by those existing traders and service agents. (See Adoption of ASC Topic 606, “Revenue from Contracts with Customers” .) The commission rebate is recognized as a reduction of the commission revenue prior to January 1, 2018 under Topic 605.  Despite the increase in commission rebates, the increase in cost of revenue was also due to increases in the depreciation and amortization of hardware and software for our trading platform by $189,759, due to the termination of the software development team and amortization of all of the “work in process” items at one time during the third quarter of 2018; the decrease in the internet services charge by $104,821, due to the termination of two network lines between Macau and Hong Kong; the increase in artwork insurance by $28,846; and the increase in artwork storage by $25,088, because of the number of artwork listed increased. Our cost of revenue primarily includes the commission rebates to service agents, the internet services charge, artwork insurance, artwork storage, and depreciation and amortization of hardware and software for our trading platform.

 

Gross Profit

 

Gross profit was $6,018,532 for the nine months ended September 30, 2018, compared to $9,723,342 for the nine months ended September 30, 2017. The decrease was mainly due to the increase in service agent rebates and a decrease in listing fee and commission revenue.

 

Overall total revenue for the nine months ended September 30, 2018 reduced by $2,353,849 or 22% compared to the same period in 2017. The decrease in revenue was chiefly attributable to fewer listing of artwork and lower trading transactions in the third quarter of 2018. The shrinkage in gross profit was also triggered by the rise in the cost of revenue for the nine months ended September 30, 2018. In the current period, the cost of revenue increased by $1,350,961 or 164% compared to the same period in 2017. Consequently, we posted a comparable gross profit margin of 73% for the nine months ended September 30, 2018 compared to 92% for the same period in 2017.

 

  30  

 

 

Operating Expenses

 

General and administrative expenses for the nine months ended September 30, 2018 were $7,791,747 compared to $7,311,128 for the nine months ended September 30, 2017. The significant increase in general and administrative expense of $480,619 was primarily due to increases in the following items: salary and welfare by $732,253, non-deductible input VAT expense by $321,596, consultancy fee by $103,552, legal and professional fees by $21,584, and others by $142,709, which was offset by a decrease in stock-based compensation by $344,953, bad debt expense by $317,650, traveling and accommodation by $134,910, office expenses and rental by $29,204, and depreciation by $14,358. In the nine months ended September 30, 2017, the Company wrote off the receivables related to listing revenue. In the nine months ended September 30, 2018, the increase in salary and welfare was driven by the severance packages paid during the reduction in the workforce.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the nine months ended September 30, 2018 and September 30, 2017.

 

    Nine months ended
September 30, 2018
    Nine months ended
September 30, 2017
 
    (Unaudited)     (Unaudited)  
    Amount($)     % of Total     Amount($)     % of Total  
Salary and welfare     3,898,932       50.0 %     3,166,679       43.3 %
Office, insurance and rental expenses     1,223,357       15.7 %     1,252,561       17.1 %
Legal and professional fees     755,050       9.7 %     733,466       10.0 %
Traveling and accommodation fees     545,040       7.0 %     679,950       9.3 %
Non-deductible input VAT expense     337,965       4.3 %     16,369       0.2 %
Consultancy     290,782       3.7 %     187,230       2.6 %
Share based compensation     217,231       2.8 %     562,184       7.7 %
Depreciation     222,636       2.9 %     236,994       3.2 %
Bad debt expense     (76,402 )     (1.0 )%     241,248       3.3 %
Other     377,156       4.9 %     234,447       3.3 %
Total general and administrative expense   $ 7,791,747       100.0 %   $ 7,311,128       100.0 %

 

Other income (loss) and expenses

 

Other loss and expenses for the nine months ended September 30, 2018 was $1,166,045, compared to other income of $511,311 for the nine months ended September 30, 2017. The significant increase in other expenses for the nine months ended September 30, 2018 was primarily attributed to the exchange loss arising from the fluctuation of the exchange rate between Renminbi and the US dollar. Such increase was slightly offset by the interest earned from the short-term investments in the current period.

 

Income Taxes 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 of 16.5%, 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 nine months ended September 30, 2018 and 2017 were 13.9% and 36.0%, respectively.

 

Income taxes benefit for the nine months ended September 30, 2018 was $574,202 and income taxes expense for the nine months ended September 30, 2017 was $594,377.

 

Net Income

 

We had a net loss for the nine months ended September 30, 2018 of $3,542,458 compared to a net income of $1,057,138 for the nine months ended September 30, 2017.

 

The net loss after income tax expense incurred during this current period was predominantly driven by a decrease in gross profit by $3,704,810, an increase of general and administrative expense of $480,619, an increase of impairment loss on CIP of $326,227, and an increase of exchange loss of $1,659,113, as discussed in the previous paragraphs.

 

  31  

 

 

Liquidity and Capital Resources

 

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

 

    Nine months ended
September 30,
 
    2018     2017  
    (Unaudited)     (Unaudited)  
Net cash used in operating activities   $ (18,589,823 )   $ (1,657,103 )
Net cash used in investing activities     (4,377,285 )     (561,510 )
Net cash provided by financing activities     2,425,220       -  
Effect of exchange rate change on cash and cash equivalents     (664,016 )     1,025,539  
Net decrease in cash, cash equivalents and restricted cash     (21,205,904 )     (1,193,074 )
Cash, cash equivalents and restricted cash, beginning balance     37,140,582       35,138,697  
Cash, cash equivalents and restricted cash, ending balance   $ 15,934,678     $ 33,945,623  

 

Sources of Liquidity

 

During the nine months ended September 30, 2018, net cash used in operating activities totaled $18,589,823,which resulted from the implementation of ASU2016-18 since the beginning of 2018. In fact, there was a decline in client deposits by $17,757,757 which influenced the drop of the amount 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 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.

 

During the nine months ended September 30, 2017, net cash used in operating activities totaled $1,657,103. Net cash used in investing activities totaled $561,510. No cash was generated from financing activities during the period. The resulting change in cash for the period was a decrease of $1,193,074. The cash balance at the beginning of the period was $35,138,697. The cash balance on September 30, 2017 was $33,945,623.

 

As of September 30, 2018, the Company had $18,508,676 in total current liabilities, which comprised of $623,472 in accrued expense and other payables, $7,515,860 in customers’ deposits, $14,355 in advance from customer, $3,950,099 in short-term borrowings from third parties, $6,389,042 in amount due to related party, and $15,848 in tax payables. As of December 31, 2017, the Company had $34,910,711 in total current liabilities, which included $1,461,858 in accrued expense and other accruals, $25,273,617 in customers’ deposits, $170,078 in advance from customers, $7,208,761 in short-term borrowings from third parties, $483,822 in amount due to related party, and $312,575 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.

 

  32  

 

 

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 Unit business and a downsize of the 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 common shares 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 3 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2017, previously filed with the SEC. 

 

Recent Accounting Pronouncements

 

See Note 3 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2017, previously filed with the SEC.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, which presently comprises our Chief Executive Officer, Mr. Di Xiao and our Chief Financial Officer, Mr. Chun Hin Leslie Chow. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the nine months ended September 30, 2018 were effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  33  

 

 

PART II - OTHER INFORMATION

 

Item 6. Exhibits.

 

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

 

Exhibit
No.
  Description
     
3.1   Certificate of Incorporation (1)
3.2   By-laws of the Company (2)
3.3   Certificate of Amendment of the Certificate of Incorporation (1)
3.4   Certificate of Amendment of the Certificate of Incorporation (1)
3.5   Certificate of Amendment (2)
3.6   Certificate of Amendment of the Certificate of Incorporation (4)
3.7   Certificate of Incorporation of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
3.8   Articles of Association of Hong Kong Takung Assets and Equity Artworks Exchange Co., Ltd.(3)
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
     
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Label Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*

  

(1)   Incorporated by reference to the exhibit to our registration statement on Form S-1 filed with the SEC on August 16, 2011.

 

(2)   Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on March 7, 2013.

 

(3)   Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on October 22, 2014.

 

(4)   Incorporated by reference to the exhibit to our current report on Form 8-K filed with the SEC on November 6, 2014.

 

*Filed herewith.

**Furnished herewith.

 

  34  

 

 

SIGNATURES

 

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

 

  TAKUNG ART CO., LTD
     
Date: November 19 , 2018 By: /s/ Di Xiao
    Di Xiao
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 19 , 2018 By: /s/ Chun Hin Leslie Chow
    Chun Hin Leslie Chow
    Chief Financial Officer
    (Principal Financial Officer)

 

  35  

 

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