Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion
and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report
on Form 10-Q contains or may contain forward-looking statements and information that are based upon beliefs of, and information
currently available to, our management as well as estimates and assumptions made by our management. When used in the report the
words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”,
“plan” or the negative of these terms and similar expressions as they relate to us or our management identify forward-looking
statements. Such statements reflect the current view of our management with respect to future events and are subject to risks,
uncertainties, assumptions and other factors as they relate to our industry, our operations and results of operations, and any
businesses that we may acquire. Should one or more of the events described in these risk factors materialize, or should our underlying
assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended
or planned.
Although we believe
that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law, including the U.S. federal securities laws, we do
not intend to update any of the forward-looking statements to conform them to actual results unless required by applicable securities
regulations or rules. The following discussion should be read in conjunction with our financial statements and the related notes
filed herein.
Overview
We were incorporated
in Delaware under the name Cardigant Medical Inc. on April 17, 2009. Our initial business plan was to focus on the development
of novel biologic and peptide based compounds and enhanced methods for local delivery for the treatment of vascular disease including
peripheral artery disease and ischemic stroke.
Hong Kong Takung is
a limited liability company incorporated on September 17, 2012 under the laws of Hong Kong, Special Administrative Region, China.
Although Takung was incorporated in 2012, it did not commence business operations until late 2013.
As a result of the
transfer of the excluded assets pursuant to the Contribution Agreement and the acquisition of all the issued and outstanding shares
of Hong Kong Takung, we are no longer conducting the Cardigant Business and have now assumed Hong Kong Takung’s business
operations as it now our only operating wholly-owned subsidiary.
Hong Kong Takung operates
an electronic online platform located at http://eng.takungae.com for artists, art dealers and art investors to offer and trade
in valuable artwork.
Through Hong Kong
Takung, we offer on-line listing and trading services that allow artists/art dealers/owners to access a much bigger art trading
market where they can engage with a wide range of investors that they might not encounter without our platform. Our platform also
makes investment in high-end and expensive artwork more accessible to ordinary people without substantial financial resources.
We generate revenue
from our services in connection with the offering and trading of artwork on our system, primarily consisting of listing fees,
trading commissions, management fees and authorized agent subscription.
On July 28, 2015,
Hong Kong Takung incorporated a wholly owned subsidiary, Takung (Shanghai) Co., Ltd. (“Shanghai Takung”), in Shanghai
Free-Trade Zone (SFTZ) in Shanghai, China, with a registered capital of $1 million. Shanghai Takung assists in Hong Kong Takung’s
operations by receiving deposits from and making payments to online artwork traders in mainland China on behalf of Hong Kong Takung.
On January 27, 2016, Hong Kong Takung incorporated a wholly owned subsidiary, Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin
Takung”) in the Tianjin Free Trade Zone (TJFTZ) in Tianjin, China with a registered capital of $1 million. Tianjin Takung
provides technology development services to Hong Kong Takung and Shanghai Takung, and also carries out marketing and promotion
activities in mainland China. Management has recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s
and eventually dissolve Shanghai Takung in order to save costs.
Hong Kong Takung Art
Holdings Company Limited (“Takung Art Holdings”) was incorporated in Hong Kong on July 20, 2018 and operates as a
holding company to operate an e-commerce platform for offering, selling and trading whole pieces of artwork instead of units of
artwork.
Art Era Internet Technology
(Tianjin) Co., Ltd (“Art Era”) was incorporated in Tianjin, China on September 7, 2018, and is a directly wholly-owned
subsidiary of Takung Art Holdings. It is a limited liability company with a registered capital of $2 million located in the Pilot
Free Trade Zone in Tianjin. Art Era will focus on developing our e-commerce platform.
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. Recently, we set up a new office in Hangzhou to conduct technology development. Our principal
executive offices are located at Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, Hong Kong.
Our common stock began
trading on the NYSE American under the symbol “TKAT” on March 22, 2017.
Results of Operation of Takung
Hong Kong Takung operates
a platform for offering and trading artwork. We generate revenue from our services in connection with the offering and trading
of artwork ownership units on our system, primarily consisting of listing fees, trading commissions, and management fees.
THREE-MONTH
PERIOD ENDED MARCH 31, 2019 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2018
The following tables set forth our condensed
consolidated statements of income data with a percentage:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2019
|
|
|
% of
Revenue
|
|
|
2018
|
|
|
% of
Revenue
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
535,701
|
|
|
|
100
|
|
|
$
|
3,974,284
|
|
|
|
100
|
|
|
Cost of revenue
|
|
|
(267,279
|
)
|
|
|
(50
|
)
|
|
|
(933,593
|
)
|
|
|
(23
|
)
|
|
Selling expense
|
|
|
(30,812
|
)
|
|
|
(6
|
)
|
|
|
(243,591
|
)
|
|
|
(6
|
)
|
|
General and administrative expenses
|
|
|
(1,274,585
|
)
|
|
|
(238
|
)
|
|
|
(3,008,885
|
)
|
|
|
(76
|
)
|
|
Total costs and expenses
|
|
|
(1,572,676
|
)
|
|
|
(294
|
)
|
|
|
(4,186,069
|
)
|
|
|
(105
|
)
|
|
Loss from operations
|
|
|
(1,036,975
|
)
|
|
|
(194
|
)
|
|
|
(211,785
|
)
|
|
|
(5
|
)
|
|
Interest and other income, net
|
|
|
336,744
|
|
|
|
63
|
|
|
|
1,077,515
|
|
|
|
27
|
|
|
(Loss) income before income tax expenses
|
|
|
(700,231
|
)
|
|
|
(131
|
)
|
|
|
865,730
|
|
|
|
22
|
|
|
Income tax expenses
|
|
|
(8,562
|
)
|
|
|
(2
|
)
|
|
|
(442,440
|
)
|
|
|
(11
|
)
|
|
Net (loss) income
|
|
$
|
(708,793
|
)
|
|
|
(133
|
)
|
|
$
|
423,290
|
|
|
|
11
|
|
Revenue
Beginning January
1, 2018, we adopted the modified retrospective approach under Topic 606 to all uncompleted contracts as of that date. 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. The Company assessed the adoption of this standard
to have a material impact on its consolidated financial statements, primarily related to the accounting for rebating commission
earned from the transaction to the relevant referrer, including both traders and service agents. The Company recorded the rebate
as a reduction of revenue under ASC 605, while under the new standard, the Company records the rebate as a cost of revenue. As
this is a classification between revenue and cost of revenue, it would have no impact on the opening balances for the year beginning
January 1, 2018. The discussion of our adoption of ASC606 contained in Note 2 to our consolidated financial statements, “Summary
of Significant Accounting Policies”, on Form 10-K for the fiscal year ended December 31, 2018, previously filed with the
SEC, is incorporated herein by reference.
The following table sets forth our condensed
consolidated revenue by revenue source:
|
|
|
Three
months ended
March
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Listing fee revenue
|
|
$
|
289,072
|
|
|
$
|
1,978,667
|
|
|
Commission
|
|
|
178,358
|
|
|
|
1,635,517
|
|
|
Management fee revenue
|
|
|
68,271
|
|
|
|
168,315
|
|
|
Authorized agent subscription revenue
|
|
|
-
|
|
|
|
191,623
|
|
|
Annual fee revenue
|
|
|
-
|
|
|
|
162
|
|
|
Total
|
|
$
|
535,701
|
|
|
$
|
3,974,284
|
|
As of March 31, 2019,
a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies
from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,758,348 (HK$202,100,000); 35 pieces of jewelry
with a total listing value of $9,260,770 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,828,957
(HK$132,040,000); 29 pieces of amber with a total listing value of $12,108,081 (HK$95,000,000); 4 pieces of antique mammoth ivory
carvings with a total listing value of $662,758 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value
of $331,379 (HK$2,600,000); 7 pieces of porcelains with a total listing value of $1,083,355 (HK$8,500,000); 6 sets of Unit+ products
with a total listing value of $1,314,555 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,453 (HK$1,000,000);
and 7 pieces of Sports memorabilia with a listing value of $1,084,553 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings),
24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth
ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for
the 7 pieces of porcelains), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the
7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.
During the three months
ended March 31, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,147,081 (HK$9,000,000)
for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees.
The listing fees charged
decreased to $289,072 during the three months ended March 31, 2019 compared to $1,978,667 for the same period ended March 31, 2018.
During the second quarter of 2018, we announced the temporary suspension of all new listings of artwork on our platform because
of a decrease in trading volume and customer deposits, leading indicators of available cash from our traders for investment in
new offerings. We attribute this depressed market sentiment to the recent under-performance of financial stock markets in China
as well as the fall-out from the P2P (peer-to-peer) lending market. We have since resumed new listings in January 2019 with six
new listings in the first quarter of 2019.
|
|
(ii)
|
Commission fee revenue
|
We generate commission
fee from non-VIP traders and selected traders as follows:
For non-VIP traders,
the commission revenue was calculated based on a percentage of transaction value of artworks, where we charge trading commissions
for the purchase and sale of the ownership shares of the artworks. The commission is typically 0.3% of the total amount of each
transaction, but as an initial promotion, we currently charge a reduced fee of 0.2% (resulting in an aggregate of 0.4% for both
buy and sell transactions) of the total transaction amount with the minimum charge of $0.13 (HK$1). The commission is accounted
for as revenue and immediately deducted from the proceeds from the sales of artwork units when a transaction is completed. On
November 7, 2018 we lowered the minimum charge to $0.0013 (HK$1).
For selected traders,
starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks.
These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them
to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee
is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our
trading platform to make unlimited trades for specific artwork.
We define traders
as “inactive” if they meet the following criteria;
|
|
·
|
The trader defaults in payment over three months;
|
|
|
·
|
The trader did not incur any transactions in the month of reassessment;
|
|
|
·
|
The service agent has confirmed with the relevant trader that
he/she was inactive.
|
Once an inactive trader
has been assessed and identified, his/her contract will be reassessed pursuant to ASC 606-10-25-5 because there has been a significant
change in fact and circumstances and pursuant to ASC 606-10-25-1)e), his/her contract will not be deemed to exist and revenue
will not be recognized until consideration is received in accordance with ASC 606-10-25-7(a) as we would have already performed
our obligations ahead of receiving consideration.
Commission rebate
programs are offered to traders and service agents. We pay to existing traders 5% of the commission earned from the transactions
of new traders referred by them. The rebate was adjusted from 15% to 5%, starting January 1, 2017. For service agents, we rebate
a total of 40% to 75% of the commission earned from transactions with new traders to the service agents when they bring in an
agreed number of traders to the trading platform. For service agents who have individual referrers referring traders to us, we
will, after rebating such individual referrers 5% of the commission earned from the transactions of new traders they referred,
deduct such 5% of the commission from the rebates payable to the service agents to which such individual referrers relate. The
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.
Our trading volume
and transaction value amounts increased significantly from 2016 when we commenced operations in Shanghai and consequently added
a significant number of traders from mainland China as they could now settle their trades in Renminbi. This trend continued into
2017. However, there was a decrease in our trading volume and transaction value amounts during the second half of 2018 because
of the deteriorating economy in China due to the under-performance of its financial stock markets as well as the fall-out from
the P2P (peer-to-peer) lending market.
Total commission
revenue decreased by $1,457,159 or 89% for the three months ended March 31, 2019 to $178,358 compared to $1,635,517 for the
three months ended March 31, 2018 primarily because of the suspension of new listings of artwork and decreased trading
activity on our platform.
|
|
(iii)
|
Management fee revenue
|
We charge traders
a management fee to cover the costs of insurance, storage, and transportation for artwork and trading management of artwork units,
which are calculated at $0.0013 (HK$0.01) per 100 artwork units per day. On November 7, 2018 we lowered the minimum charge to
$0.0013 (HK$1). The management fee is deducted from proceeds from the sale of artwork units.
During the three-month
period ended March 31, 2019, management fee revenue decreased by $100,044, from $168,315 for the three months ended March 31,
2018 to $68,271, due to the decrease in trading transactions in the current quarter.
During the three-month
period ended March 31, 2019, there is no annual fee revenue, compared to $162 for the three-month period ended March 31, 2018
|
|
(v)
|
Authorized agent subscription revenue
|
During the three-month
period ended March 31, 2019, there is no authorized agent subscription revenue, compared to $191,623 for the three-month period
ended March 31, 2018
Revenue by customer type
The following table presents our revenue
by customer type:
|
|
|
Three
months ended
March
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Artwork owners
|
|
$
|
289,072
|
|
|
$
|
1,978,667
|
|
|
Non - VIP traders
|
|
|
154,645
|
|
|
|
1,101,535
|
|
|
VIP traders
|
|
|
91,984
|
|
|
|
702,459
|
|
|
Authorized agents
|
|
|
-
|
|
|
|
191,623
|
|
|
Total
|
|
$
|
535,701
|
|
|
$
|
3,974,284
|
|
Cost of Revenue
|
|
|
Three months
ended
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Commission rebate to service agent
|
|
$
|
54,916
|
|
|
$
|
606,491
|
|
|
Depreciation
|
|
|
122,032
|
|
|
|
159,137
|
|
|
Internet service charge
|
|
|
50,674
|
|
|
|
92,438
|
|
|
Artwork insurance
|
|
|
11,962
|
|
|
|
53,694
|
|
|
Artwork storage
|
|
|
27,242
|
|
|
|
21,582
|
|
|
Others
|
|
|
453
|
|
|
|
251
|
|
|
Total
|
|
$
|
267,279
|
|
|
$
|
933,593
|
|
Cost
of revenue for the three months ended March 31, 2019 and March 31, 2018 was $267,279 and $933,593, respectively. The decrease in
cost of revenue for the three months ended March 31, 2019 compared to March 31, 2018, was mainly due to the decrease in the commission
rebates to service agents by $551,575. Management was focused on resuscitating interest in the listed artwork and only listed six
new artwork the first quarter of 2019.Besides the decrease in commission rebates, the decrease in cost of revenue was also due
to a decrease in the depreciation and amortization of hardware and software on our trading platform by $37,105 as a result of the
suspension of e-commence and impairment of all online software development assets in 2018, the decrease in internet services charges
by $41,764 due to the termination of two network lines between Macau and Hong Kong, the decrease in artwork insurance by $41,732
due to a negotiated discount in our new insurance contract for 2019, offset by an increase in artwork storage costs by $5,660.
Gross Profit
Gross
profit was $268,422 for the three months ended March 31, 2019, compared to $3,040,691 for the three months ended March 31, 2018.
The decrease was due to the decrease in total revenue.
Listing
fees contributed 54% of the total revenue for the quarter ended March 31, 2019 compared to 49.8% in the corresponding period in
2018, while commission revenue contributed 33.3% for the quarter ended March 31, 2019 compared to 41.2% in the corresponding period
in 2018. Compared to the same period in 2018, there was a significant decrease in listing fee revenue and commission revenue.
Consequently, we posted a gross profit margin of 50.1% for the three months ended March 31, 2019 compared to 76.5% for the same
period in 2018.
Operating Expenses
General and administrative
expenses for the three months ended March 31, 2019 were $1,274,585 compared to $3,008,885 for the three months ended March 31,
2018. The significant plunge in general and administrative expense by $1,734,300 was attributed a decrease in salary and welfare
by $960,040 due to redundancies since July 2018, a decrease in insurance and rental expenses by $236,998 due to the relocation
of our Hong Kong office to a non-central district, a decrease in legal and professional fees by $99,924, a decrease in traveling
and accommodation expenses by $302,179 as a result of fewer marketing events, a decrease in non-deductible input VAT by $114,923,
a decrease in consultancy fees by $21,080, share-based compensation by $68,398, depreciation by $34,819 and also other expenses
by $23,003. The decrease in general and administrative expenses is offset by an increase in the following expense items: research
and development expenses by $50,540 and bad debt expenses by $76,524.
The following table
sets forth the main components of the Company’s general and administrative expenses for the three months ended March 31,
2019 and September 30, 2018.
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
|
31-Mar-19
|
|
|
31-Mar-18
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Amount ($)
|
|
|
% of Total
|
|
|
Amount ($)
|
|
|
% of Total
|
|
|
Salary and welfare
|
|
|
447,497
|
|
|
|
35.1
|
|
|
|
1,407,537
|
|
|
|
46.8
|
|
|
Office, insurance and rental expenses
|
|
|
180,140
|
|
|
|
14.1
|
|
|
|
417,138
|
|
|
|
13.9
|
|
|
Legal and professional fees
|
|
|
274,098
|
|
|
|
21.5
|
|
|
|
374,022
|
|
|
|
12.4
|
|
|
Traveling and accommodation fees
|
|
|
21,358
|
|
|
|
1.7
|
|
|
|
323,537
|
|
|
|
10.7
|
|
|
Non-deductible input VAT expense
|
|
|
45,031
|
|
|
|
3.5
|
|
|
|
159,954
|
|
|
|
5.3
|
|
|
Consultancy fee
|
|
|
105,158
|
|
|
|
8.3
|
|
|
|
126,238
|
|
|
|
4.2
|
|
|
Share based compensation expense
|
|
|
16,851
|
|
|
|
1.3
|
|
|
|
85,249
|
|
|
|
2.8
|
|
|
Depreciation
|
|
|
34,747
|
|
|
|
2.7
|
|
|
|
69,566
|
|
|
|
2.3
|
|
|
R&D expense
|
|
|
50,540
|
|
|
|
4.0
|
|
|
|
0
|
|
|
|
0.0
|
|
|
Bad debt expense
|
|
|
-
|
|
|
|
0.0
|
|
|
|
(76,524
|
)
|
|
|
-2.5
|
|
|
Others
|
|
|
99,165
|
|
|
|
7.8
|
|
|
|
122,168
|
|
|
|
4.1
|
|
|
Total general and administrative expense
|
|
$
|
1,274,585
|
|
|
|
100.0
|
|
|
$
|
3,008,885
|
|
|
|
100.0
|
|
Other income
Other income for the
three-month period ended March 31, 2019 was $336,744, compared to other income of $1,077,515 for the same period in 2018. There
was a significant decrease in exchange gain by $634,161, arising from the appreciation of Renminbi against US dollar.
Income tax expenses
The Company’s
effective tax rate varies due to its multiple jurisdictions in which the pretax book incomes or losses incur. The Company was
subject to a U.S. income tax rate of 21% (34 % prior to January 1, 2018), Hong Kong profits tax rate at 8.25% for the first HKD
2 million (approximately $254,907) assessable profits and at 16.5% for assessable profits above HKD 2 million (approximately $254,907)
(16.5% prior to January 1, 2018) and PRC enterprise income tax rate at 25%.
The effective tax
rates for the three months ended March 31, 2019 and 2018 were (1.2)% and 51.1%, respectively.
Income taxes expenses
for the three months ended March 31, 2019 and 2018 were $8,562 and $442,440, respectively.
Net (Loss) Income
We had a net loss
for the three months ended March 31, 2019 of $708,793 compared to net income of $423,290 for the three months ended March 31,
2018.
The decrease in net
income during this current period was predominately due to a fall in revenue by $3,438,583, an increase cost-cutting on operating
expenses by $1,947,079 and an increase of exchange losses by $634,161.
We announced on August
13, 2018 the suspension of new listings of artwork. We were on the downside of a downturn in the online fine art and collectibles
platform space, a by-product of a downturn in A-shares on the Chinese markets tightening of liquidity in China, declines in both
the Shanghai and Shenzhen stock exchanges and the fallout from increased peer-to-peer (P2P) loan defaults. We slowly resumed new
listings in January 2019 but there is no guarantee that we will never suspend them again.
Liquidity and Capital Resources
The following tables
set forth our consolidated statements of cash flow:
|
|
|
Three months ended
|
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net cash provided by operating activities
|
|
$
|
6,175,680
|
|
|
$
|
3,039,614
|
|
|
Net cash provided by investing activities
|
|
|
2,416,019
|
|
|
|
7,878
|
|
|
Net cash used in financing activities
|
|
|
(2,499,500
|
)
|
|
|
-
|
|
|
Effect of exchange rate change on cash
and cash equivalents
|
|
|
(503,119
|
)
|
|
|
726,355
|
|
|
Net increase in cash, cash equivalents
and restricted cash
|
|
|
5,589,080
|
|
|
|
3,773,847
|
|
|
Cash, cash equivalents and restricted cash,
beginning balance
|
|
|
12,524,086
|
|
|
|
37,140,582
|
|
|
Cash, cash equivalents and restricted cash,
ending balance
|
|
$
|
18,113,166
|
|
|
$
|
40,914,429
|
|
Sources of Liquidity
During the three
months ended March 31, 2019, net cash generated from operating activities totaled $6,175,680, which resulted from the
implementation of ASU2016-18 since the beginning of 2018. In fact, there was an increase in client deposits by $5,823,253
placed by the customers for upcoming transactions which influenced the increased amounts due to clients simultaneously. The
Company assessed and evaluated that it was really a presentation issue and there should be no actual impact to the operating
activities. Net cash generated from investing activities totaled $2,416,019. Net cash used in financing activities totaled
$2,499,500. The resulting change in cash for the period was an increase of $5,589,080. The cash balance at the beginning of
the period was $12,524,086. The cash balance on March 31, 2019 was $18,113,166.
During the three months
ended March 31, 2018, net cash generated from operating activities totaled $3,039,614. Net cash generated from investing activities
totaled $7,878. No cash was generated from financing activities during the period. The resulting change in cash for the period
was an increase of $3,773,847. The cash balance at the beginning of the period was $37,140,582. The cash balance on March 31,
2018 was $40,914,429.
.
As of March 31, 2019,
the Company had $17,520,565 in total current liabilities, which comprised of $569,754 in accrued expense and other payables, $10,372,455
in customers’ deposits, $13,376 in advance from customer, $6,369,589 in amount due to related party, $181,126 in lease liabilities
and $14,265 in tax payables. As of December 31, 2018, the Company had $14,099,778 in total current liabilities, which included
$641,692 in accrued expenses and other payables $8,995 in advance from customers, $4,549,202 in customers’ deposits, $2,499,500
in short-term borrowings from third parties, $6,385,288 in amount due to related party, and $15,101 in VAT payable.
The Company is aware
of events or uncertainties which may affect its future liquidity because of capital controls in the PRC. The RMB is only currently
convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions,
but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure
from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises,
may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us,
without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural
requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies
in the future for current account transactions. The existing and future restrictions on currency exchange may limit our ability
to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies
to our stockholders, including holders of our shares of common stock. Foreign exchange transactions under the capital account
remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.
This could affect our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries.
Applicable PRC law
permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in
accordance with PRC accounting standards and regulations. Our operating subsidiaries in China are also required to set aside a
portion of their net income, if any, each year to fund general reserves for appropriations until such reserves have reached 50%
of the subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share
capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each
operating subsidiary. In contrast, there is no foreign exchange control or restrictions on capital flows into and out of Hong
Kong. Hence, our Hong Kong operating subsidiary is able to transfer cash without any limitation to the U.S. under normal circumstances.
If our operating subsidiaries
were to incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of
our operating subsidiaries to transfer cash to our U.S. investors.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit
risk support or other benefits.
Future Financings
Although we are suffering
downside business including a decrease in trading volume and customer deposits, we are also undergoing a company restructuring,
including re-evaluating the company’s 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 2 to the
financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December
31, 2018, previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the
financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December
31, 2018, previously filed with the SEC.