10-Q 1 tm2029664-1_10q.htm FORM 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, 2020

 

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
organization)
  (I.R.S. Employer Identification No.)

 

 

Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, 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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which
registered
Common Stock TKAT NYSE American

  

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 13, 2020 is 11,271,379.

 

 

 

 

 

 

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. 32
     
  Item 4.  Controls and Procedures. 32
     
PART II. Other Information 33
     
  Item 6.  Exhibits. 33
     
  Signatures 34

 

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, 
   2020   2019 
   (Unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $4,934,049   $5,424,213 
Restricted cash   10,316,599    16,404,941 
Account receivables, net   154,839    - 
Prepayment and other current assets, net   392,584    451,248 
Amount due from related parties, net   5,982,532    5,834,554 
Loan receivables   2,061,977    2,010,974 
Total current assets   23,842,580    30,125,930 
           
Non-current assets          
Property and equipment, net   531,310    859,826 
Intangible assets   22,514    22,401 
Deferred tax assets, net   550,547    540,279 
Operating lease right-of-use assets   97,474    731,469 
Amount due from a related party   -    104,128 
Other non-current assets   53,703    57,470 
Total non-current assets   1,255,548    2,315,573 
Total assets  $25,098,128   $32,441,503 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
LIABILITIES          
Current liabilities          
Accrued expenses and other payables  $610,078   $629,666 
Customer deposits   10,316,599    16,404,941 
Advance from customers   6,191    8,788 
Short-term borrowings from a third party   1,977,976    1,868,345 
Amount due to related parties   6,457,910    6,862,713 
Operating lease liabilities – current   48,171    166,987 
Tax payables   101,181    6,050 
Total current liabilities   19,518,106    25,947,490 
           
Non-current liabilities          
Operating lease liabilities, non-current   38,257    48,856 
Total non-current liabilities   38,257    48,856 
Total liabilities   19,556,363    25,996,346 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Common stock (1,000,000,000 shares authorized; $0.001 par value; 11,271,379 shares issued and outstanding as of September 30, 2020; 11,255,129 shares issued and outstanding as of December 31, 2019)   11,271    11,255 
Additional paid-in capital   6,351,996    6,320,604 
(Accumulated deficit) retained earnings   (499,726)   386,327 
Accumulated other comprehensive loss   (321,776)   (273,029)
Total shareholders’ equity   5,541,765    6,445,157 
Total liabilities and shareholders’ equity  $25,098,128   $32,441,503 

 

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

 

3

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Revenue                    
Listing fee  $-   $-   $557,789   $284,090 
Commission   568,853    939,164    2,657,989    1,655,244 
Management fee   116,612    184,428    330,138    346,042 
Total revenue   685,465    1,123,592    3,545,916    2,285,376 
                     
Cost of revenue   (393,990)   (580,282)   (1,804,566)   (1,288,589)
                     
Gross profit   291,475    543,310    1,741,350    996,787 
                     
Operating expenses:                    
General and administrative expenses   (617,228)   (1,159,502)   (2,657,403)   (3,322,547)
Selling expenses   (174,379)   (108,458)   (278,953)   (143,054)
Total operating expenses   (791,607)   (1,267,960)   (2,936,356)   (3,465,601)
                     
Loss from operations   (500,132)   (724,650)   (1,195,006)   (2,468,814)
                     
Other income and expenses:                    
Other income (expenses)   55,497    13,125    158,941    (88,637)
Loan interest expense   (21,678)   (18,015)   (100,038)   (18,015)
Exchange gain (loss)   547,760    (515,808)   344,275    (564,233)
Total other income (expenses)   581,579    (520,698)   403,178    (670,885)
                     
Income (loss) before provision for income taxes   81,447    (1,245,348)   (791,828)   (3,139,699)
                     
Income tax (benefit) expense   (631)   (117,451)   94,225    (175,473)
                     
Net income (loss)  $82,078   $(1,127,897)  $(886,053)  $(2,964,226)
                     
Foreign currency translation adjustment   (38,371)   (12,750)   (48,747)   46,523 
                     
Comprehensive income (loss)  $43,707   $(1,140,647)  $(934,800)  $(2,917,703)
                     
Income (loss) per common share – basic  $0.01   $(0.10)  $(0.08)  $(0.26)
Income (loss) per common share – diluted  $0.01   $(0.10)  $(0.08)  $(0.26)
Weighted average number of common shares outstanding-basic   11,271,379    11,255,129    11,261,694    11,243,082 
Weighted average number of common shares outstanding-diluted   11,271,379    11,255,129    11,261,694    11,243,082 

 

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

 

4

 

 

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(UNAUDITED)

 

   Number   Common   Additional
Paid-in
   Retained
earnings
(accumulated
   Accumulated
other
comprehensive
     
   of shares   Stock   Capital   deficit)   Loss   Total 
Balance, December 31, 2019   11,255,129   $11,255   $6,320,604   $386,327   $(273,029)  $6,445,157 
Shared-based compensation   -    -    5,986    -    -    5,986 
Net loss   -    -    -    (953,362)   -    (953,362)
Foreign currency translation adjustment   -    -    -    -    (8,768)   (8,768)
Balance, March 31, 2020   11,255,129    11,255    6,326,590    (567,035)   (281,797)   5,489,013 
                               
Issuance of ordinary shares for restricted stock award   6,250    6    (6)   -    -    - 
Issuance of ordinary shares for professional services   10,000    10    13,240    -    -    13,250 
Shared-based compensation   -    -    6,053    -    -    6,053 
                               
Net loss   -    -    -    (14,769)   -    (14,769)
                               
Foreign currency translation adjustment   -    -    -    -    (1,608)   (1,608)
Balance, June 30, 2020   11,271,379    11,271    6,345,877    (581,804)   (283,405)   5,491,939 
                               
Share-based compensation   -    -    6,119    -    -    6,119 
                               
Net income   -    -    -    82,078    -    82,078 
                               
Foreign currency translation adjustment   -    -    -    -    (38,371)   (38,371)
                               
Balance, September 30, 2020   11,271,379   $11,271   $6,351,996   $(499,726)  $(321,776)  $5,541,765 

 

                   Accumulated     
           Additional       Other     
   Number   Common   Paid-in   Retained   Comprehensive     
   of shares   stock   Capital   Earnings   Loss   Total 
Balance, December 31, 2018   11,226,025   $11,226   $6,281,790   $4,479,133   $(302,702)  $10,469,447 
                               
Shared-based compensation   -    -    16,851    -    -    16,851 
                               
Net loss   -    -    -    (708,793)   -    (708,793)
                               
Foreign currency translation adjustment   -    -    -    -    (5,480)   (5,480)
                               
Balance, March 31, 2019   11,226,025    11,226    6,298,641    3,770,340    (308,182)   9,772,025 
                               
Issuance of ordinary shares for restricted stock award   29,104    29    4,012    -    -    4,041 
                               
Shared-based compensation   -    -    9,719    -    -    9,719 
                               
Net loss   -    -    -    (1,127,536)   -    (1,127,536)
                               
Foreign currency translation adjustment   -    -    -    -    64,753    64,753 
                               
Balance, June 30, 2019   11,255,129    11,255    6,312,372    2,642,804    (243,429)   8,723,002 
                               
Shared-based compensation   -         6,273    -    -    6,273 
                               
Net loss   -    -    -    (1,127,897)   -    (1,127,897)
                               
Foreign currency translation adjustment   -    -    -    -    (12,750)   (12,750)
                               
Balance, September 30, 2019   11,255,129   $11,255   $6,318,645   $1,514,907   $(256,179)  $7,588,628 

 

5

 

 

  

TAKUNG ART CO., LTD AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in U.S. Dollars)

(UNAUDITED)

 

   Nine Months Ended 
   September 30,   September 30, 
   2020   2019 
Cash flows from operating activities:          
Net cash (used in) provided by operating activities  $(6,680,813)  $10,828,217 
           
Cash flows from investing activities:          
Purchase of property and equipment   (19,961)   (36,108)
Purchase of available-for-sale investments   -    (22,205,745)
Maturity and redemption of available-for-sale investments   -    22,205,745 
Loan to third parties   -    (2,093,555)
Loan repayment from a third party   -    2,443,251 
Net cash (used in) provided by investing activities   (19,961)   313,588 
           
Cash flows from financing activities:          
Proceeds from a related party’s loan   -    6,226 
Proceeds from a third party’s loan   -    1,955,669 
Loan repayment to a third party   -    (2,499,500)
Net cash used in financing activities   -    (537,605)
           
Effect of exchange rate change on cash, cash equivalents and restricted cash   122,268    (33,398)
Net (decrease) increase in cash, cash equivalents and restricted cash   (6,578,506)   10,570,802 
Cash, cash equivalents and restricted cash, beginning balance   21,829,154    12,524,086 
Cash, cash equivalents and restricted cash, ending balance  $15,250,648   $23,094,888 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets          
Cash and cash equivalents as of September 30, 2020 and 2019, respectively   4,934,049    6,086,637 
Restricted cash as of September 30, 2020 and 2019, respectively   10,316,599    17,008,251 
Total cash, cash equivalents, and restricted cash as of September 30, 2020 and 2019, respectively  $15,250,648   $23,094,888 
Supplemental cash flows information:          
Cash paid for interest  $-   $156,453 
Cash paid for income tax  $58,452   $- 

 

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

  

6

 

  

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”), a Delaware corporation (formerly Cardigant Medical Inc.) through Hong Kong Takung Art Co., Ltd. (“Hong Kong Takung”), a Hong Kong company and its 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 and trading artwork. 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 business primarily in Hong Kong, People’s Republic of China.

 

Takung (Shanghai) Co., Ltd (“Shanghai Takung”) is a limited liability company, with a registered capital of $1 million, located in the Shanghai Pilot Free Trade Zone. Shanghai Takung was incorporated on July 28, 2015. It is engaged in providing services to its parent company Hong Kong Takung by receiving deposits from and making payments to online artwork traders of Takung for and on behalf of Takung. Shanghai Takung was deregistered on May 8, 2020 and the Company merged the operations of Shanghai Takung with Takung Cultural Development (Tianjin) Co., Ltd.

 

Takung Cultural Development (Tianjin) Co., Ltd (“Tianjin Takung”) provides technology development services to Hong Kong Takung and also carries out marketing and promotion activities in mainland China. 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 when Shanghai Takung was deregistered.

 

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. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focused on developing its e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.

 

Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company. 

 

MQ (Tianjin) Enterprise Management Consulting Co., Ltd. (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ focused on exploring business opportunities and promoting its artwork trading business. Tianjin MQ was deregistered on August 10, 2020 due to the Company streamlining its operation. 

 

7

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 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, 2019, previously filed with the SEC.

 

Beginning in 2020, a strain of coronavirus (COVID-19) has spread globally. Although the Company’s operations have fully resumed in March 2020 and maintained an increasing trend of new trader accounts opening, the extent of the impact of the coronavirus on the Company's business and operations is highly uncertain and cannot be predicted with confidence. The Company’s business and operation will depend on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government. The Company is monitoring and assessing the evolving situation closely and evaluating its potential exposure. The operating results for the nine months ended September 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.

 

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 interim condensed consolidated financial position as of September 30, 2020, its interim condensed consolidated results of operations and cash flows for the three and nine months ended September 30, 2020 and 2019, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods. 

 

Recent Accounting Pronouncements

 

Except for the ASUs issued but not yet adopted disclosed in Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019, 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.  

 

8

 

 

3. PREPAYMENT AND OTHER CURRENT ASSETS, NET

 

Prepayment and other current assets mainly consist of the prepaid tax, prepaid service fees, as well as staff advance.

 

   September 30,   December 31, 
   2020   2019 
    (Unaudited)      
Prepaid tax  $34,854   $281,582 
Prepaid service fees   314,536    132,064 
Short-term borrowings to a third party   -    53,919 
Staff advance   2,209    18,380 
Other current assets   40,985    19,222 
Less: allowance for doubtful accounts   -    (53,919)
Prepayment and other current assets, net  $392,584   $451,248 

  

No provision for doubtful accounts was recognized for the three and nine months ended September 30, 2020 and 2019, respectively. The Company has written off the doubtful account balance and deducted from bad debt provision related to the short-term borrowings to a third party in an amount of $54,143 during the nine months ended September 30, 2020. 

 

4. ACCOUNT RECEIVABLES, NET

 

Account receivables consisted of the following:

 

   September 30,
2020
   December 31,
2019
 
    (Unaudited)      
Listing fee  $154,839   $- 
Authorized agent subscription revenue   -    560,780 
Monthly commission fee   -    1,385,420 
Others   -    53,909 
Less: allowance for doubtful accounts   -    (2,000,109)
Account receivables, net  $154,839   $- 

 

No provision for doubtful accounts was recognized for the three and nine months ended September 30, 2020 and 2019, respectively.

 

The Company has written off the doubtful accounts balance and deducted from bad debt provision in an amount of $2,008,385 during the nine months ended September 30, 2020.

 

9

 

 

5. LOAN RECEIVABLES

 

The following table sets forth a summary of the loan agreements in loan receivables balance:

 

Date  Borrower  Lender  Original
Amount
(RMB)
   Outstanding
Balance
(RMB)
   Amount in
Reporting
Currency
(USD)
   Annual 
Interest
Rate
   Repayment 
Due Date
7/18/2019  Chongqing Aoge Import and Export Co.  Tianjin
Takung
   5,000,000    5,000,000   $736,420          0%  4/1/2021
8/29/2019  Chongqing Aoge Import and Export Co.  Tianjin
Takung
   5,000,000    5,000,000   $736,420    0%  4/1/2021
9/20/2019  Chongqing Aoge Import and Export Co.  Tianjin
Takung
   4,000,000    4,000,000   $589,137    0%  4/1/2021
          Total        $2,061,977         

 

  The interest-free loans (the “RMB Loans”) entered into by Tianjin Takung were guaranteed by Mr. Daquan Wang who is a General Manager and legal representative of Chongqing Aoge Import and Export Co. (“Chongqing”). Mr. Daquan Wang is a citizen of the People’s Republic of China. Both Chongqing and Mr. Daquan Wang are non-related parties to the Company. On September 30, 2020, Tianjin Takung signed an extension agreement for the RMB Loans with the repayment due date being extended to April 1, 2021 without interest.

 

 

Hong Kong Takung entered into loan agreements (the “HKD Loans”) with Friend Sourcing Ltd, a Hong Kong company (“Friend Sourcing”) with interest accruing at a rate of 8% per annum (See Note 8). Friend Sourcing is a non-related party to the Company.  On September 30, 2020, Hong Kong Takung extended the due date of the HKD Loans with Friend Sourcing to April 1, 2021 with an interest rate of 3% of the total principal amount, or $63,358, for the period from September 30, 2020 to April 1, 2021. (See Note 8)

  

The transactions with Friend Sourcing were aimed to meet the Company’s working capital needs in Hong Kong Dollars.

 

Through an understanding between Chongqing and Friend Sourcing, the HKD Loans are “secured” by the RMB Loans. It is the understanding between the parties that the HKD Loans and the RMB Loans will be repaid simultaneously. 

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   September 30,   December 31, 
   2020   2019 
   (Unaudited)     
Furniture, fixtures and equipment  $212,431   $201,093 
Leasehold improvements   210,301    343,697 
Computer trading and clearing system   3,429,217    3,379,654 
Transport equipment   105,951    103,330 
Sub-total   3,957,900    4,027,774 
Less: accumulated depreciation   (3,426,590)   (3,167,948)
Property and equipment, net  $531,310   $859,826 

 

Depreciation expense was $109,766 and $148,774 for the three months ended September 30, 2020 and 2019, respectively, and $356,756 and $463,241 for the nine months ended September 30, 2020 and 2019, respectively.

 

7. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables as of September 30, 2020 and December 31, 2019 consisted of the following:

 

   September 30,   December 31, 
   2020   2019 
   (Unaudited)     
Accruals for professional fees  $232,760   $168,040 
Accruals for consulting fees   267,544    311,122 
Payroll payables   42,480    79,710 
Payables for trading and clearing system   50,551    50,295 
Other payables   16,743    20,499 
Total accrued expenses and other payables  $610,078   $629,666 

 

10

 

 

8. SHORT-TERM BORROWINGS FROM A THIRD PARTY

 

In July 2019, Hong Kong Takung entered into HKD Loans with Friend Sourcing with interest accruing at a rate of 8% per annum. The HKD Loans are to provide Hong Kong Takung with sufficient HKD currency to meet its working capital requirements. Friend Sourcing is a non-related party to the Company. On September 30, 2020, Hong Kong Takung extended the due date of the HKD Loans with Friend Sourcing to April 1, 2021 with an interest rate of 3% of the total loan amount, or $63,358, for the period from September 30, 2020 to April 1, 2021.

 

In the meantime, Tianjin Takung entered interest-free RMB Loans with another third party as a guarantee for the HKD Loans. The loan amount was $2,061,977 (RMB 14,000,000). Through an understanding between the two third parties, the HKD Loans are “secured” by the RMB Loans. It is an understanding between the parties that when the HKD Loans are repaid, the RMB Loans will be repaid at the same time. 

 

Date  Borrower  Lender  September 30, 
2020
(USD)
   December 31,
2019
(USD)
   Annual
Interest
Rate
   Repayment 
Due Date
7/18/2019  Hong Kong Takung  Friend Sourcing Ltd.  $718,442   $714,808    6~8%  4/1/2021
8/29/2019  Hong Kong Takung  Friend Sourcing Ltd.  $699,741   $696,202    6~8%  4/1/2021
9/20/2019  Hong Kong Takung  Friend Sourcing Ltd.  $559,793   $556,961    

6~8

%  4/1/2021
      Less: Discount loan payable  $-   $(99,626)        
      Total  $1,977,976   $1,868,345         

 

The weighted average interest rate of outstanding short-term borrowings was 8% per annum as of September 30, 2020. The fair value of the short-term borrowings approximates their carrying amounts.

 

9. RELATED PARTY BALANCES AND TRANSACTIONS

 

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

 

(a) Jianping Mao (“Mao”), the Human Resources Management Director of Hong Kong Takung.

 

(b) Shuhai Li (“Li”), the former legal representative of Tianjin Takung, resigned on April 3, 2020.

 

(c) Jing Wang (“Wang”), the Chief Financial Officer of the Company since June 1, 2020 and the former legal representative of Tianjin Takung during period from May 28, 2020 to September 24, 2020.

 

Amount due from related parties, net

 

Amount due from related parties consisted of the following as of the years indicated:

 

   September 30,
2020
   December 31,
2019
 
   (Unaudited)     
Li (b)(i)  $-   $5,834,554 
Wang (c)(i)   5,982,532    - 
Mao(a)(ii)   106,769    - 
Less: allowance for doubtful accounts (ii)   (106,769)   - 
Total current amount due from related parties, net  $5,982,532   $5,834,554 

 

   September 30,
2020
   December 31,
2019
 
   (Unaudited)     
Mao (a) (ii)  $          -   $104,128 
Total noncurrent amount due from a related party  $-   $104,128 

 

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Amount due to related parties

 

Amount due to related parties consisted of the following as of the years indicated:

 

   September 30,
2020
   December 31,
2019
 
    (Unaudited)      
Li (b) (i)  $-   $6,418,980 
Wang (c)(i)   6,451,613    - 
Mao (a) (ii)   6,297    443,733 
Total current amount due to related parties  $6,457,910   $6,862,713 

 

(i) Amount due to and due from Li and Wang

  

On September 16, 2019, Hong Kong Takung entered into an interest-free loan agreement (the "HK Dollar Working Capital Loan") with Li for the loan of $6,451,613 (HK$50,000,000) to Hong Kong Takung. The purpose of the loan is to provide Hong Kong Takung with sufficient Hong Kong Dollar-denominated currency to meet its working capital requirements with the maturity date of the loan as May 15, 2020. On May 15, 2020, Hong Kong Takung entered into an extension agreement with Li to extend the HK Dollar Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to Wang.

 

In the meantime, Tianjin Takung entered into an interest-free loan agreement (the "RMB Working Capital Loan") with Li for the loan of $5,982,532 (RMB40,619,000) with the maturity date of the loan as May 15, 2020. On May 15, 2020, Tianjin Takung entered into an extension agreement with Li to extend the RMB Working Capital Loan with a maturity date on May 15, 2021. On May 29, 2020, the loan was transferred to Wang.

 

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

 

(ii) Amount due to and due from Mao

 

The amount due to Mao is primarily related to the lease from Mao. On May 13, 2019, the Company entered into a non-cancellable lease agreement with a related party, Mao for its office location in Tianjin, PRC. The leased office location is approximately 2,090.61 square meters. The lease will expire on May 12, 2021. The Company is charged rent at a rate of $0.55 per square meter per day. The agreement requires a lump sum payment of $207,333 (RMB1,449,838) every six months and a deposit of $106,769(RMB724,919). On May 12, 2020, the Company terminated the lease early and recognized bad debt expense of $103,666 related to the deposit due to the remote likelihood of collecting the rent deposit. No related lease liability was recognized as of September 30, 2020.

 

On October 16, 2019, Tianjin MQ entered into a non-cancellable lease agreement with Ms. Mao for its office facility in Tianjin, PRC. The leased office location is approximately 1,475.67 square meters. The lease was terminated on February 15, 2020 and monthly rent payment is approximately $24,391 (RMB 170,563). As of September 30, 2020, the amount due to Mao pertinent to this lease agreement was $nil.

 

As of September 30, 2020, Mao also lent a startup deposit of $6,297 to Hong Kong MQ.

  

10. INCOME TAXES

 

Takung was incorporated in the State of Delaware and is therefore subject to United States income tax. Hong Kong Takung, Takung Art Holdings and Hong Kong MQ were incorporated in Hong Kong S.A.R. People’s Republic of China and are subject to Hong Kong profits tax. Shanghai Takung, Tianjin Takung and Tianjin MQ are PRC corporations and are subject to enterprise taxes in the PRC.

 

12

 

 

United States of America

 

The Coronavirus Aid, Relief and Economy Security Act (“the CARES Act”) was signed into law on March 27, 2020. The CARES Act temporarily eliminates the 80% taxable income limitation (as enacted under the Tax Cuts and Jobs Act of 2017) for net operation loss (“NOL”) deductions for 2018-2020 tax years and reinstated NOL carrybacks for the 2018-2020 tax years. Moreover, the CARES Act also temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, the Tax Act technical correction classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactively as if it was included in the Tax Act at the time of enactment. The Company does not anticipate a material impact on its financial statements as of September 30, 2020 due to the recent enactment.

 

As of September 30, 2020 and December 31, 2019, the Company in the United States had $2,632,562 and $2,167,494 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. 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.

 

13

 

 

Hong Kong

 

The two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”) of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for the first HKD 2 million (approximately $257,822) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying on another sole proprietorship business. Since Hong Kong Takung, Takung Art Holdings and Hong Kong MQ are wholly owned and under the control of Takung U.S, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected Hong Kong Takung to be subject to the two-tier profits tax rates.

 

The provision for current income and deferred taxes of Hong Kong Takung has been calculated by applying the new tax rate of 8.25%. Takung Art Holdings and Hong Kong MQ still apply the original tax rate of 16.5% for its provision for current income and deferred taxes.

 

PRC

 

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income. All the PRC subsidiaries were subject to income tax at a rate of 25%.

 

The income tax provision consists of the following components:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Current:                  
Federal  $ -   $ -   $ -   $ - 
State    -     -     -     - 
Foreign   -    -    101,738    - 
Total Current  $-   $-   $101,738   $- 
                     
Deferred:                    
Federal  $-   $-   $-   $- 
State   -    -    -    - 
Foreign   (631)   (117,451)   (7,513)   (175,473)
Total Deferred  $(631)  $(117,451)  $(7,513)  $(175,473)
                     
Total income tax (benefit) expense  $(631)  $(117,451)  $94,225   $(175,473)

 

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,
 
   2020   2019   2020   2019 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Income (loss) before income tax expense  $81,447   $(1,245,348)  $(791,828)  $(3,139,699)
                     
Computed tax benefit with statutory tax rate   13,440    (205,484)   (130,651)   (518,050)
Impact of different tax rates in other jurisdictions   16,109    (38,958)   14,432    (55,752)
Impact of preferred tax rate   7,729    54,914    62,248    180,808 
                     
Non-deductible items:                    
Tax effect of non-deductible expenses   153,619    17,096    337,519    34,982 
Changes in valuation allowance   (204,420)   47,847    (338,577)   175,405 
Others   12,892    7,134    149,254    7,134 
                     
Total income tax (benefit) expense  $(631)  $(117,451)  $94,225   $(175,473)

 

14

 

 

The effective tax rate was (0.8)% and 9.4% for the three months ended September 30, 2020 and 2019, respectively, and (11.9)% and 5.6% for the nine months ended September 30, 2020 and 2019, respectively.

 

Uncertain tax positions

 

The reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:

 

   September 30,
2020
   December 31,
2019
 
Uncertain tax liabilities, beginning of period  $-   $- 
Additions for tax position of current period   73,459    - 
Uncertain tax liabilities, end of period  $73,459   $- 

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.

 

The amounts of uncertain tax liabilities listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as current liability in the interim condensed consolidated financial statements as of September 30, 2020. The Company anticipated that the settlements with the taxing authority are remitted within one year.

 

Our policy is to include interest and penalty charges related to uncertain tax liabilities as necessary in the provision for income taxes. The Company has a liability for accrued interest of $nil as of September 30, 2020 and December 31, 2019, respectively.

 

Our subsidiary, Hong Kong Takung, has been recently selected for routine examination for its tax years ended 31 December 2016 through 2018 by Hong Kong Inland Revenue Department (“IRD”). As of September 30, 2020 and December 31, 2019, the Company had $73,459 and $nil, respectively, of uncertain tax liabilities related to the different methodology of certain tax non-deductible expenses applied by the IRD. The examination is currently in progress. Due to the uncertain tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in an adverse finding and we would be subject to additional liability which could be materially different from these estimates. In such circumstances, we will record additional tax expense or tax benefit in the period in which such the resolution occurs. The Company does not expect the position of uncertain tax liabilities will significantly fluctuate within the next twelve months.

 

The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the profits tax return or the date on which it was filed, whichever is later.

 

In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.

 

In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.

 

15

 

 

11. LEASES

 

The Company has operating leases for its office facilities and artwork storages. The Company's leases have remaining terms of less than one year to approximately six years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes.

 

The following table provides a summary of leases by balance sheet location as of September 30, 2020:

 

Assets/liabilities  Classification  As of September
30, 2020
 
Assets      (Unaudited) 
Operating lease right-of-use assets  Operating lease assets  $97,474 
         
Liabilities        
Current        
Operating lease liability – current  Current operating lease liabilities  $48,171 
         
Long-term        
Operating lease liability - non-current  Long-term operating lease liabilities   38,257 
         
Total lease liabilities     $86,428 

 

The operating lease expenses for the three months and nine months ended September 30, 2020 and 2019 were as follows:

 

      Three Months Ended September 30,   Nine Months Ended September 30, 
Lease Cost  Classification  2020   2019   2020   2019 
      (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Operating lease cost  Cost of revenue, general and administrative expenses  $72,901   $145,313   $466,419   $282,486 
Total lease cost     $72,901   $145,313   $466,419   $282,486 

  

Maturities of operating lease liabilities at September 30, 2020 were as follows:

 

Maturity of Lease Liabilities   Operating
Leases
 
2020 (remaining)   $37,821 
2021    14,728 
2022    14,728 
2023    14,728 
2024    14,728 
Thereafter    - 
Total lease payments   $96,733 
Less: interest    (10,305)
Present value of lease payments   $86,428 

 

16

 

  

  

Nine Months Ended

September 30,

 
Lease Term and Discount Rate  2020   2019 
   (Unaudited)   (Unaudited) 
Weighted-average remaining lease term (years)          
Operating leases   2.81    1.86 
           
Weighted-average discount rate (%)          
Operating leases   8%   8%

 

  

 Nine Months Ended

September 30,

 
Other Information  2020   2019 
   (Unaudited)   (Unaudited) 
Cash paid for amounts included in the measurement of lease liabilities        
Operating cash flows from operating leases  $208,198   $448,405 
Leased assets obtained in exchange for new operating lease liabilities   -    1,032,824 

 

12. EARNINGS (LOSS) PER SHARE 

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Numerator:                
Net income (loss)  $82,078   $(1,127,897)  $(886,053)  $(2,964,226)
                     
Denominator:                    
Weighted-average shares outstanding - Basic   11,271,379    11,255,129    11,261,694    11,243,082 
Stock options and restricted shares   -    -    -    - 
Weighted-average shares outstanding - Diluted   11,271,379    11,255,129    11,261,694    11,243,082 
                     
Income (loss) per share                    
-Basic   0.01    (0.10)   (0.08)   (0.26)
-Diluted   0.01    (0.10)   (0.08)   (0.26)

  

17

 

   

Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.  

 

Due to the loss from continued operations for the three and nine months ended September 30, 2019, approximately 130,890 options, were excluded from the calculation of diluted net loss per share. 

 

Due to the options were out-of-money, approximately 100,890 options were excluded from the calculation of the diluted net income per share, for the three months ended September 30, 2020.

 

Due to the loss from continued operations for the nine months ended September 30, 2020 approximately 100,890 options were excluded from the calculation of diluted net loss per share.  

 

13. CONTINGENCIES 

 

Around May and June 2020, the Company received two summonses regarding the institution of two individual proceedings against Shanghai Takung, Tianjin Takung and Hong Kong Takung in the Shanghai Pudong People’s Court, China, as a result of contractual disputes and misrepresentations over ownership units made by a certain service agent. The claims amounted to approximately $0.23 million. Subsequently, one of the plaintiffs with a claim amount of $0.15 million withdrew his claim against Tianjin Takung on July 1, 2020. The withdrawal was approved by the Shanghai Pudong People’s Court on July 20, 2020. Meanwhile, the other litigation proceeding with a claim amount of approximately $0.08 million has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020. On October 12, 2020, a court hearing was held, and a ruling has not been issued by the Tianjin City Beicheng District People’s Court by the date of the issuance of the interim condensed consolidated financial statements. The Company hired legal counsel to evaluate the case and believes that the claim is without merit and intends to vigorously defend itself.

 

On or around July 2020, a third claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung on the basis of alleged breaches of contract. The claim amount has yet to be determined.

  

In the opinion of management, it is not probable that the Company will incur any losses arising from the above litigation cases. As such, as of September 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings. 

 

Except for the above, as of September 30, 2020 and through the issuance date of the condensed consolidated financial statements included in this Form 10-Q, the Company does not have any other significant indemnification claims.

  

14. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date of issuance of the interim condensed consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the interim condensed consolidated financial statements. 

 

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 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

 

Takung Art Co., Ltd (“Takung”) 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 Art Co., Ltd. (“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://en.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 recently determined to merge the operations of Shanghai Takung with Tianjin Takung’s and dissolved Shanghai Takung in order to save costs on May 8, 2020.

 

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. Takung Art Holdings was deregistered on April 29, 2020 due to deregistration of Art Era Internet Technology (Tianjin) Co., Ltd as discussed below.

 

Art Era Internet Technology (Tianjin) Co., Ltd (“Art Era”), formed in Tianjin on September 7, 2018, is a directly wholly owned subsidiary of Takung Art Holdings, and formed as a limited liability company with a registered capital of $2 million located in the Pilot Free Trade Zone in Tianjin. Art Era mainly focused on developing its e-commerce platform for art. Art Era was deregistered on June 18, 2019 due to Company’s plan to put off the e-commerce platform development.

 

Hong Kong MQ Group Limited (“Hong Kong MQ”) was formed in Hong Kong on November 27, 2018 and currently has no operations. On June 19, 2019, as a result of a private transaction, one (1) share of common stock of Hong Kong MQ was transferred from Ms. Hiu Ngai Ma to the Company. The net asset of Hong Kong MQ was $nil as of the acquisition date. The consideration paid for the ownership transfer, which represent 100% of the issued and outstanding share capital of Hong Kong MQ, was $0.13 (HK$1). Hong Kong MQ became a direct wholly-owned subsidiary of the Company.

 

MQ (Tianjin) Enterprise Management Consulting Co., Ltd (“Tianjin MQ”) was incorporated in Tianjin, PRC on July 9, 2019 and is a directly wholly owned subsidiary of Hong Kong MQ. It was established as a limited liability company with a registered capital of $100,000 located in the Pilot Free Trade Zone in Tianjin. Tianjin MQ focused on exploring business opportunities and promoting our artwork trading business. Tianjin MQ was deregistered on August 10, 2020 due to the Company’s streamlining its operation.

  

Our headquarters are located in Hong Kong, Special Administrative Region, People’s Republic of China and we conduct our business primarily in Hong Kong and Tianjin. Our principal executive offices are located at Room 1105 Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, Hong Kong.

 

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

 

Recent Impacts of COVID-19 on Our Business

  

While the ongoing coronavirus pandemic is spreading throughout the world, the Company’s operations have fully resumed in March 2020 and we have not identified any significant decrease in the number of transactions on our platform since then. We have also maintained a stable number of new account openings.

 

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The extent to which the COVID-19 impacts our operations is highly uncertain and cannot be predicted with confidence. It will depend on various factors including the duration and severity of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

 

Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, COVID-19 may eventually affect the Company's 2020 overall business performance. The operating results for the three and nine months ended September 30, 2020 may not be indicative of the future operating results for the fiscal year ending December 31, 2020 or other future periods, particularly in light of the uncertain impact COVID-19 could have on the Company's business.

  

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. 

 

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THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2020 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2019

 

The following tables set forth our interim condensed consolidated statements of income data with a percentage:

  

   Three Months Ended September 30, 
   2020   % of
Revenue
   2019   % of
Revenue
 
   (Unaudited)       (Unaudited)     
Revenue  $685,465    100   $1,123,592    100 
Cost of revenue   (393,990)   (58)   (580,282)   (52)
Selling expense   (174,379)   (25)   (108,458)   (10)
General and administrative expenses   (617,228)   (90)   (1,159,502)   (103)
Total costs and expenses   (1,185,597)   (173)   (1,848,242)   (165)
Loss from operations   (500,132)   (73)   (724,650)   (65)
Other income (expenses), net   581,579    85    (520,698)   (46)
Income (loss) before income taxes   81,447    12    (1,245,348)   (111)
Income tax benefit   (631)   (0)   (117,451)   (10)
Net income (loss)  $82,078    12   $(1,127,897)   (101)

 

Revenue

   

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

 

  

Three Months Ended

September 30,

 
   2020   2019 
   (Unaudited)   (Unaudited) 
Listing fee revenue  $-   $- 
Commission revenue   568,853    939,164 
Management fee revenue   116,612    184,428 
Total  $685,465   $1,123,592 

 

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  (i) Listing fee revenue

 

As of September 30, 2020, a total of 292 sets of artwork were listed for trade on our platform —comprising 67 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $28,502,185 (HK$221,100,000); 35 pieces of jewelry with a total listing value of $9,366,661 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,021,386 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,246,529 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,336 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,168 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,095,742 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,329,586 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,911 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,096,954 (HK$8,509,400), of which 22.5%-48% (for 67 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.

 

During the three months ended September 30, 2020, there were no new artworks listed on our platform because of the uncertain economic climate and tepid investor interest. We however plan to resume new listings in the last quarter of the year.

 

As of September 30, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of sports memorabilia) of the listed values were charged as listing fees, respectively.  

 

During the three months ended September 30, 2019, there were no new artworks listed on our platform.

  

There was no change to the listing revenue for the three months ended September 30, 2020 and 2019 as there was no new artwork listed on our platform during those periods.

 

  (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, 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 $0.0013 (HK$0.01).

  

For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.

 

We define traders as “inactive” if they meet the following criteria;

 

  · The trader defaults in payment over three months;

 

  · The trader did not incur any transactions in the month of reassessment;

 

  · The service agent has confirmed with the relevant trader that he/she was inactive.

 

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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.

 

We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.

 

We used to offer commissions to traders and service agents. Effective January 1, 2019, we no longer offer commissions to our traders. For service agents, we offer 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.

 

The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.

 

Total commission revenue decreased by $370,311 or 39% for the three months ended September 30, 2020 to $568,853 compared to $939,164 for the three months ended September 30, 2019, which was mainly the result of a decrease in trading amounts of non-VIP trader from $363,676,117 for the three months ended September 30, 2019 to $225,925,736 for the same period in 2020. Additionally, decreased non-transactional transfers also led to decreased commission revenue.

 

  (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, 2020 management fee revenue fell by $67,816, from $184,428 for the three months ended September 30, 2019 to $116,612 due to a decrease in trading artwork units.

 

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Revenue by customer type

 

The following table presents our revenue by customer type:

 

  

Three Months Ended

September 30,

 
   2020   2019 
   (Unaudited)   (Unaudited) 
Non – VIP Traders  $427,373   $853,276 
VIP Traders   258,092    270,316 
Total  $685,465   $1,123,592 

 

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Cost of Revenue

 

   Three Months Ended
September 30,
 
   2020   2019 
   (Unaudited)   (Unaudited) 
Commissions paid to service agents  $233,784   $370,204 
Depreciation   79,518    116,082 
Internet service charge   51,591    62,104 
Artwork insurance   12,152    12,192 
Artwork storage   15,802    19,700 
Others   1,143    - 
Total  $393,990   $580,282 

 

Cost of revenue for the three months ended September 30, 2020 and September 30, 2019 was $393,990 and $580,282, respectively. The decline in cost of revenue by $186,292, for the three months ended September 30, 2020 compared to September 30, 2019, was mainly due to a decrease in commissions paid to service agents by $136,420 because of the decrease in trading amounts during the three months ended September 30, 2020 as discussed above. Overall decrease in cost of revenue was further contributed by the decrease in depreciation by $36,564 due to some of our computer equipment and trading systems having been fully depreciated, a decline in internet service charges by $10,513 and a reduction of artwork storage costs by $3,898.

 

Gross Profit

 

Gross profit was $291,475 or 42.5% of the total revenue for the three months ended September 30, 2020 compared to $543,310 or 48.4% of the total revenue for the three months ended September 30, 2019.

 

Commission fees contributed 83.0% of the total revenue for the three months ended September 30, 2020 compared to 83.6% in the corresponding period in 2019. Our management fee contributed to 17.0% of the total revenue for the three months ended September 30, 2020 compared to 16.4% in the same period in 2019. Although the percentages of commission and management fee revenues were approximately identical for the three months ended September 30, 2020 compared to those in the same period in 2019, the dollar amount of those revenue was lower in the three months ended September 30, 2020. Particularly, our commission revenue for the three months ended September 30, 2020 decreased by $370,311 from $939,164 for the three months ended September 30, 2019 to $568,853 in same period in 2020. Moreover, our cost of revenue for the three months ended September 30, 2020 was 57.5% of the total revenue compared to 51.6% for the same period in 2019. Consequently, we posted a lower gross profit and gross profit margin of $291,475 or 42.5%, respectively, for the three months ended September 30, 2020 compared to $543,310 or 48.4%, respectively, for the same period in 2019.

 

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Operating Expenses

 

General and administrative expenses for the three months ended September 30, 2020 were $617,228 compared to $1,159,502 for the three months ended September 30, 2019. The decline in general and administrative expenses by $542,274 or 46.8% was attributable to a significant reduction in office, insurance and rental expenses by $287,832 due to early lease terminations by Tianjin Takung and Tianjin MQ in July 2020, a decrease in salary and welfare by $124,373 as a result of lower employee headcount and salary reduction of our executives, a decrease in legal and professional fees by $102,950 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in consultancy fees by $19,587 attributable to lower consulting fees charged by our consultants of Tianjin Takung, a decrease in depreciation by $2,444, and a decrease in travel and accommodation fees by $26,922 due to fewer overseas travel and accommodation during the three months ended September 30, 2020 compared to the same period in 2019. The overall decline in general and administrative expenses was offset by an increase in non-deductible input VAT expense by $20,461 as a result of an increase in service fees paid to Tianjin Takung.

 

The following table sets forth the main components of the Company’s general and administrative expenses for the three months ended September 30, 2020 and September 30, 2019.

 

   Three Months Ended 
   September 30, 
   2020   % of Total   2019   % of Total 
   (Unaudited)       (Unaudited)     
Salary and welfare  $281,247    45.6   $405,620    35.0 
Office, insurance and rental expenses   82,115    13.3    369,947    31.9 
Legal and professional fees   110,313    17.9    213,263    18.4 
Non-deductible input VAT expense   61,179    9.9    40,718    3.5 
Travel and accommodation fees   2,017    0.3    28,939    2.5 
Consultancy fee   26,907    4.4    46,494    4.0 
Depreciation   30,248    4.9    32,692    2.8 
Share based compensation expense   6,119    1.0    6,273    0.5 
Others   17,083    2.7    15,556    1.4 
Total general and administrative expense  $617,228    100.0   $1,159,502    100.0 

  

Other income (expenses)

 

Other income for the three months ended September 30, 2020 was $581,579, compared to other expenses of $520,698 for the same period in 2019. The significant increase in other income for the three months ended September 30, 2020 is predominantly due to a significant increase in foreign currency exchange gain by $547,760, arising from the appreciation of the Renminbi against the US dollar and sundry income by $34,656.

 

Income tax expense (benefits)

 

The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,822) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,822) and PRC enterprise income tax rate of 25%.

 

The effective tax rates for the three months ended September 30, 2020 and 2019 were (0.8)% and 9.4%, respectively.  

 

The income tax benefits were $631 and $117,451 for the three months ended September 30, 2020 and 2019, respectively. Although the Company generated net income before income tax for the three months ended September 30, 2020, it incurred income tax benefit which was primarily driven by the tax loss incurred by our subsidiary, Hong Kong Takung.

  

Net income (loss)

 

We recorded a net income of $82,078 and net loss of $1,127,897 for the three months ended September 30, 2020 and 2019, respectively.

 

The net income of $82,078 incurred in this current period compared to the net loss, $1,127,897, incurred in the same period in 2019 was predominantly due to an increase in exchange gain by $1,063,568.

 

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NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2020 COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2019

 

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

 

   Nine Months Ended 
   September 30, 
   2020   % of
Revenue
   2019   % of
Revenue
 
   (Unaudited)       (Unaudited)     
Revenue  $3,545,916    100   $2,285,376    100 
Cost of revenue   (1,804,566)   (51)   (1,288,589)   (56)
Selling expense   (278,953)   (8)   (143,054)   (6)
General and administrative expenses   (2,657,403)   (75)   (3,322,547)   (146)
Total costs and expenses   (4,740,922)   (134)   (4,754,190)   (208)
Loss from operations   (1,195,006)   (34)   (2,468,814)   (108)
Other income (expenses), net   403,178    11    (670,885)   (29)
Loss before income taxes   (791,828)   (23)   (3,139,699)   (137)
Income tax expense (benefit)   94,225    3    (175,473)   (8)
Net loss  $(886,053)   (26)  $(2,964,226)   (129)

 

Revenue

 

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

 

   Nine Months Ended 
   September 30, 
   2020   2019 
   (Unaudited)   (Unaudited) 
Listing fee revenue  $557,789   $284,090 
Commission   2,657,989    1,655,244 
Management fee revenue   330,138    346,042 
Total  $3,545,916   $2,285,376 

  

  (i) Listing fee revenue

 

As of September 30, 2020, a total of 292 sets of artwork were listed for trade on our platform —comprising 67 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $28,502,185 (HK$221,100,000); 35 pieces of jewelry with a total listing value of $9,366,661 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $17,021,386 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,246,529 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $670,336 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $335,168 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,095,742 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,329,586 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $128,911 (HK$1,000,000); and 7 pieces of Sports memorabilia with a listing value of $1,096,954 (HK$8,509,400), of which 22.5%-48% (for 67 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of Sports memorabilia) of the listed values were charged as listing fees, respectively.

 

During the nine months ended September 30, 2020, there were 7 new sets of paintings listed on our platform. Their total listing values were $2,449,306(HK$19,000,000) for the paintings, of which 22.83-23% (for the paintings) of the listed values were charged as listing fees.

 

As of September 30, 2019, a total of 285 sets of artwork were listed for trade on our platform —comprising 60 sets of paintings and calligraphies from famous Chinese, Russian and Mongolian artists, with a total listing value of $25,783,323 (HK$202,100,000); 35 pieces of jewelry with a total listing value of $9,269,749 (HK$72,660,000); 134 pieces of precious stones with a total listing value of $16,845,275 (HK$132,040,000); 29 pieces of amber with a total listing value of $12,119,820 (HK$95,000,000); 4 pieces of antique mammoth ivory carvings with a total listing value of $663,401 (HK$5,200,000); 2 pieces of porcelain pastel paintings with a total listing value of $331,700 (HK$2,600,000); 7 pieces of porcelain with a total listing value of $1,084,405 (HK$8,500,000); 6 sets of Unit+ products with a total listing value of $1,315,830 (HK$10,314,000); 1 piece of Yixing collectable with a listing value of $127,577 (HK$1,000,000); and 7 pieces of sports memorabilia with a listing value of $1,085,604 (HK$8,509,400), of which 22.5%-48% (for 60 sets of paintings), 24%-48.5% (for the 134 pieces of precious stones), 29%-48% (for the 35 pieces of jewelry), 47%-48.5% (for 4 piece of antique mammoth ivory carvings), 32%-48% (for the 29 pieces of amber), 45%-46% (for the 2 pieces of porcelain pastel paintings), 25%-48% (for the 7 pieces of porcelain), 30.25%-45% (for the 6 sets of Unit+ products), 45% (1 piece of Yixing collectable) and 45% (for the 7 pieces of sports memorabilia) of the listed values were charged as listing fees, respectively. 

 

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During the nine months ended September 30, 2019, there were 6 sets of paintings listed on our platform. Their total listing values were $1,148,194 (HK$9,000,000) for the paintings, of which 22.9%-28% (for the paintings) of the listed values were charged as listing fees. 

 

The listing fees revenue rose to $557,789 during the nine months ended September 30, 2020 compared to $284,090 for the same period ended September 30, 2019. The higher listing fee revenue for the nine months ended September 30, 2020 compared to that for the same period in 2019 was due to the higher total listing values of the artworks listed during the nine months ended September 30, 2020. Our listing fee was charged based on the listing value of an artwork.

 

  (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, 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 $0.0013 (HK$0.01).

  

For selected traders, starting from April 1, 2016, we charged a predetermined monthly fee (unlimited trades for specific artworks) for specific artworks. These traders are selected by authorized agents and reviewed by us. After review, we negotiate individually with each one of them to determine a fixed monthly fee. Different traders may have different rates but once negotiated and agreed to, the monthly fee is fixed. Using the output method, we recognize the monthly commission revenue when the selected traders receive access to our trading platform to make unlimited trades for specific artwork.

 

We 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.

 

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.

 

We charge a non-transactional transfer commission on the transfer of the ownership of an artwork. The commission amount is calculated based on 0.3% of the close value of the artwork and each artwork unit. For the large volume of transfer or under certain special circumstances, we charge at an agreed-upon percentage of artworks units.

 

We used to offer commissions to traders and service agents. Effective January 1, 2019, we no longer offered commission to our traders. For service agents, we offer 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.

 

The commission paid to the service agents and discounts are recognized as a cost of revenue in the same period the related revenue is recognized.

 

Total commission revenue grew by $1,002,745 or 60.6% for the nine months ended September 30, 2020 to $2,657,989 compared to $1,655,244 for the nine months ended September 30, 2019 mainly due to higher trading transaction amount incurred and more traders involved in the first and second quarters of 2020. Total transaction amounts for the nine months ended September 30, 2020 and 2019 were $6,082,049,702 (HK$47,171,899,387) and $1,958,853,980 (HK$15,341,601,522), respectively. Total active traders for the nine months ended September 30, 2020 and 2019 were 167,345 and 104,307, respectively.

 

  (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 months ended September 30, 2020, management fee revenue decreased by $15,904, from $346,042 for the nine months ended September 30, 2019 to $330,138, due to the lower trading units in the current period.

 

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Revenue by customer type

 

The following table presents our revenue by customer type:

 

   Nine Months Ended
September 30,
 
   2020   2019 
   (Unaudited)   (Unaudited) 
Artwork owners  $557,789   $284,090 
Non – VIP  traders   2,362,204    1,494,066 
VIP  traders   625,923    507,220 
Total  $3,545,916   $2,285,376 

 

Cost of Revenue

 

   Nine Months ended
September 30,
 
   2020   2019 
   (Unaudited)   (Unaudited) 
Commissions paid to service agents  $1,333,089   $660,208 
Depreciation   263,954    359,878 
Internet service charge   122,226    159,882 
Artwork insurance   36,423    36,124 
Artwork storage   47,731    72,033 
Others   1,143    464 
Total  $1,804,566   $1,288,589 

 

Cost of revenue for the nine months ended September 30, 2020 and September 30, 2019 was $1,804,566 and $1,288,589, respectively. The rise in cost of revenue for the nine months ended September 30, 2020 compared to September 30, 2019 was mainly due to an increase in the commissions paid to service agents by $672,881. This increase was driven by a higher trading transaction amounts during the nine months ended September 30, 2020 as discussed above. Such increase was offset by a decrease in depreciation by $95,924 due to some of our computer equipment and trading systems having been fully depreciated, a decline in internet service charges by $37,656 and a decrease of artwork storage costs by $24,302. 

 

Gross Profit

 

Gross profit was $1,741,350 or 49.1% of the total revenue for the nine months ended September 30, 2020, compared to $966,787 or 43.6% of the total revenue for the nine months ended September 30, 2019. The increase in gross profit and margin was mainly due to the growth in total revenue.

 

Overall total revenue for the nine months ended September 30, 2020 rose by $1,260,540 or 55.2% compared to the same period in 2019. Compared to the same period in 2019, there was a significant increase in commission revenue for the nine months ended September 30, 2020 by $1,002,745 or 60.6%. Consequently, we posted a gross profit margin of 49.1% for the nine months ended September 30, 2020 compared to 43.6% for the same period in 2019.

 

Operating Expenses

 

General and administrative expenses for the nine months ended September 30, 2020 were $2,657,403, compared to $3,322,547 for the same period in 2019. The reduction in general and administrative expense by $665,144 or 20.0% was attributed to a significant decrease in salary and welfare by $383,472 due to lower employee headcount and salary reduction of our executives, a decrease in consultancy fees by $121,717 due to lower consulting fees charged by our consultants of Tianjin Takung, a decrease in legal and professional fees by $141,468 due to reduced audit and legal fees incurred by Hong Kong Takung, a decrease in travel and accommodation fees by $35,134 due to fewer overseas travel and accommodation, a fall in share-based compensation by $5,476 as there were no additional stock options granted, a decrease in office, insurance and rental expenses by $105,038 due to early lease terminations by Tianjin Takung and Tianjin MQ in July 2020 and a decrease in depreciation by $10,561 as some of our furniture and fixtures and computer equipment had been fully depreciated. The overall decline in general and administrative expenses was offset by an increase in non-deductible input VAT expense by $83,442 as a result of an increase in service fees paid to Tianjin Takung and other expense by $54,280.

 

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The following table sets forth the main components of the Company’s general and administrative expenses for the nine months ended September 30, 2020 and September 30, 2019.

 

   Nine Months Ended 
   September 30, 
   2020   % of Total   2019   % of Total 
   (Unaudited)       (Unaudited)     
Salary and welfare  $900,014    33.9   $1,283,486    38.6 
Legal and professional fees   454,435    17.1    595,903    18.0 
Office, insurance and rental expenses   592,591    22.3    697,629    21.0 
Consultancy fee   97,212    3.7    218,929    6.6 
Non-deductible input VAT expense   213,758    8.0    130,316    3.9 
Depreciation   92,802    3.5    103,363    3.1 
Traveling and accommodation fees   46,148    1.7    81,282    2.4 
Share Based Compensation Expense   31,408    1.2    36,884    1.1 
Others   229,035    8.6    174,755    5.3 
Total general and administrative expense  $2,657,403    100.0   $3,322,547    100.0 

  

Other income (expenses)

 

Other income for the nine months ended September 30, 2020 was $403,178 compared to other expenses $670,885 for the nine months ended September 30, 2019. The significant increase in other income for the nine months ended September 30, 2020 is predominantly due to a significant increase in foreign currency exchange gain by $908,508, arising from the appreciation of the Renminbi against the US dollar.

 

Income tax (expense) benefit

 

The Company’s effective tax rate varies due to the multiple jurisdictions in which it books its pretax income or losses. The Company was subject to a U.S. income tax rate of 21%, Hong Kong profits tax rate of 8.25% for the first HK$ 2 million (approximately $257,822) assessable profits and at 16.5% for assessable profits above HK$ 2 million (approximately $257,822) and PRC enterprise income tax rate of 25%.

 

The effective tax rates for the nine months ended September 30, 2020 and 2019 were (11.9)% and 5.6%, respectively.

 

The income tax expense and income tax benefit were $94,225 and $175,473 for the nine months ended September 30, 2020 and 2019, respectively. The increase in income tax expense by $269,698 primarily due to a recognition of uncertain tax position driven by the income tax examination of our subsidiary in Hong Kong and a decrease in deferred tax attributable to less net operating loss incurred by the Company.

 

Net loss

 

We recorded a net loss for the nine months ended September 30, 2020 of $886,053 compared to net loss of $2,964,226 for the nine months ended September 30, 2019.

 

The decrease in the net loss by $2,078,173 during this current period compared to the same period in 2019 was predominantly triggered by the growth in total revenue and foreign exchange gain for the nine months ended September 30, 2020 as discussed above.

 

Liquidity and Capital Resources

 

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

 

   Nine Months Ended 
   September 30, 
   2020   2019 
   (Unaudited)   (Unaudited) 
Net cash (used in) provided by operating activities  $(6,680,813)  $10,828,217 
Net cash (used in) provided by investing activities   (19,961)   313,588 
Net cash used in financing activities   -    (537,605)
Effect of exchange rate change on cash, cash equivalents and restricted cash   122,268    (33,398)
Net (decrease) increase in cash, cash equivalents and restricted cash   (6,578,506)   10,570,802 
Cash, cash equivalents and restricted cash, beginning balance   21,829,154    12,524,086 
Cash, cash equivalents and restricted cash, ending balance  $15,250,648   $23,094,888 

 

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Sources of Liquidity

 

During the nine months ended September 30, 2020, net cash used in operating activities totaled $6,680,813, which predominantly resulted from the net loss of $886,053 and a decline in net change in operating assets and liabilities of $5,931,174 and offset by non-cash adjustments to net loss of $136,414. Net cash used in investing activities included purchase of furniture and computer equipment by Tianjin Takung. There was no net cash used in or provided by financing activities for the nine months ended September 30, 2020. The resulting change in cash for the period was a decrease of $6,578,506. The cash balance at the beginning of the period was $21,829,154. The cash balance as of September 30, 2020 was $15,250,648.

 

During the nine months ended September 30, 2019, net cash generated from operating activities totaled $10,828,217 which primarily resulted from an increase in client deposits by $12,459,049 placed by the customers for upcoming transactions and offset by net loss of $2,964,226. Net cash generated from investing activities totaled $313,588. Net cash used in financing activities totaled $537,605. The resulting change in cash for the period was an increase of $10,570,802. The cash balance at the beginning of the period was $12,524,086. The cash balance on September 30, 2019 was $23,094,888.

  

As of September 30, 2020, the Company had $19,518,106 in total current liabilities, which included $610,078 in accrued expenses and other payables, $10,316,599 in customer deposits, $1,977,976 in short-term borrowings from a third party, $6,457,910 in amount due to related parties, $6,191 in advances from customers, $48,171 in lease liabilities and $101,181 in tax payables.

 

As of December 31, 2019, the Company had $25,947,490 in total current liabilities, which included $629,666 in accrued expenses and other payables, $16,404,941 in customer deposits, $1,868,345 in short-term borrowings from a third party, $6,862,713 in amount due to related parties, $8,788 in advances from customers, $166,987 in lease liabilities and $6,050 in VAT 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.

 

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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

 

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 stock in order to fund further expansion and growth of our business. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any sales of the equity securities to fund expansion and other activities, and if we are able to, there is no guarantee that existing shareholders will not be substantially diluted. In essence, we do not need to rely on equity sales to fund our business operations.

 

Critical Accounting Policies

 

We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K for the fiscal year ended December 31, 2019, 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, 2019, 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, Mrs. Zhihua Yang and our Chief Financial Officer, Mrs. Jing Wang. 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 September 30, 2020 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, 2020 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

 

On or around May and June 2020, plaintiffs Chunji Zhao and Guangming Su commenced legal proceedings against Takung (Shanghai) Co., Ltd (“Shanghai Takung”) over a contract dispute relating to the Company’s trading platform use agreement and misrepresentations over ownership units made by a certain service agent amounting to an aggregate of approximately $0.23 million.

 

Both cases originated in the Shanghai Pudong People’s Court. However, because Shanghai Takung was subsequently deregistered on May 8, 2020, both plaintiffs requested the defendant in their respective cases be re-named Hong Kong Takung Art Co. Ltd, its parent company. The plaintiffs also requested that Takung Cultural Development (Tianjin) Co., Ltd be named as additional defendant. In addition to damages, plaintiffs Chunji Zhao and Guangming Su were also claiming litigation costs of RMB1,090,000 (approximately, $0.16 million) and RMB 536,025 (approximately, $0.08 million) respectively.

 

On July 1, 2020, Chunji Zhao withdrew his claim against Tianjin Takung. The withdrawal was approved by the court on July 20, 2020. The other litigation proceeding from Guangming Su has been transferred to the Tianjin City Beicheng District People’s Court on July 22, 2020 and is presently under review. On October 12, 2020, a court hearing was held, and a ruling has not been issued by the Tianjin City Beicheng District People’s Court by the date of the issuance of the interim condensed consolidated financial statements. The Company hired legal counsel to evaluate the case and believes that the claim is without merit and intends to vigorously defend itself.

 

On or around July 2020, a third filing claim was filed in the Shanghai Pudong People’s Court, China against Hong Kong Takung Art Co. Ltd in the Shanghai Pudong People’s Court, China, on the basis of alleged breaches of contract. The claim amount has yet to be determined. In our management’s opinion, it is not probable that we will incur any losses arising from this litigation case. As such, as of September 30, 2020 the Company has not accrued any liability in connection with potential losses from the legal proceedings.

 

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 (1)
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.

 

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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 13, 2020 By: /s/ Zhihua Yang
    Zhihua Yang
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 13, 2020 By: /s/ Jing Wang
    Jing Wang
    Chief Financial Officer
    (Principal Financial Officer)

 

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